The following comments are about the taxation of the Estonian company and its taxation only in Estonia.
And please note that these are general guidelines. We strongly advise consulting with a tax specialist and an accountant to ensure your tax affairs are in order.
First things first
Until you start distributing dividends, there are no rules forcing you to pay yourself a taxable salary or fee. Once you do decide to make dividend payments, your role in the company (active employee/director vs passive shareholder), should be analysed in more detail to make sure that each role you carry out is compensated and taxed appropriately. This is because salaries are usually also taxed with social tax while dividends are not but opting for dividends to save on taxes is not allowed.
To sum up this convenient feature of the Estonian tax system, you can operate your company without registering yourself as an employee or board member and you don’t have to pay any Estonian tax until your company starts making sufficient profit to pay salary or dividends.
As a shareholder, it is reasonable to expect dividend income from your profit-making company. As mentioned in Estonian tax basics, all retained earnings of an Estonian company are tax-exempt and only when you decide to distribute dividends, is the 20/80 Corporate Income Tax (CIT) on the payment triggered. When you pay out dividends regularly, an even lower CIT (14/86) may apply.
The formal procedure for effecting a dividend distribution is regulated by the Commercial Code, more specifically by Chapter 19.
In order to distribute dividends, you should usually follow these steps and formalities:
- If your company was founded before 01.02.2023, make sure that you have paid in the mandatory share capital; For companies founded after 01.02.2023, the share capital contribution must be made when founding the company, deferring this payment was not possible and so should have no effect on your ability to pay dividends.
- The latest Annual Report of the company should be approved with a digitally signed resolution of the sole shareholder;
- When deciding on the dividend amount, make sure it does not exceed the retained earnings/undistributed profit according to the Annual Report of the company. Secondly, the net assets of the company may not fall below half of the share capital or the mandatory minimum share capital of the company as a result of the dividend payment – whichever is higher.
- General meeting of the shareholders (that would be you) decides to distribute dividends on the basis of the approved Annual Report in the form of a sole shareholder’s resolution;
- As the sole shareholder, draft and sign the decision to distribute dividends;
- The company should pay the cash dividends to the shareholder’s current account;
- Respective entries should be made in accounting.
- The dividend payment should be declared on TSD Annex 7 and tax due on the dividend distribution remitted by the 10th day of the month following the actual payment.
And then, of course, declare and pay taxes. Dividends trigger 20% CIT on the gross distribution which equals 25% on the net distribution. The Estonian CIT rate is formally expressed as 20/80.
The monthly combined income tax and the social tax return is called “TSD” in Estonia. It comprises of seven different annexes, each for declaring different types of payments. For declaring dividend payments, you should use Annex 7.
For declaring purposes, as an e-resident you have already been assigned a personal ID code along with your digital identity card – this is also your “tax identification number”.
Once you have settled the corporate income tax side, then additional tax obligations should be looked into. In a lot of countries, the net dividend payment might be subject to a dividend withholding tax (WHT).
Most likely you should declare this dividend income in your annual personal income tax return in your state of residence and also disclose the amount of tax that has been paid in Estonia. If necessary, a certificate can be requested from the tax authorities confirming the tax amount in Estonia.
Depending on the rules of your state of residence, this Estonian dividend income may also be subject to tax there, but there could be a possibility to credit the tax cost against your domestic tax liability or exempt it all together in order to eliminate any double taxation.
For the purposes of the following guidelines, a director = management board member of the Company.
Estonian rules provide that directors’ fees paid by an Estonian company to a non-resident director are always subject to 20% personal income tax. Tax treaties follow the same logic and normally allocate the taxing rights to the country where the company resides. This means that since the company is established in Estonia, then all directors’ fees are taxed in Estonia, no exceptions.
Social tax gets trickier depending on where you live, whether you are covered by a social security scheme and whether your country has an agreement for social security with Estonia or is part of the EU or European Economic Area or in Switzerland. All of these factors have to be considered.
In some cases, such double contributions can, therefore, be avoided.
1) You live and are secured for social benefits in an EU Member State, Norway, Iceland, Liechtenstein or Switzerland
To avoid having the company pay 33% social tax in Estonia, you should obtain an A1 certificate proving your coverage from the local competent authorities and submit it to the Estonian tax authorities- The A1 and other forms regarding social security rights are listed here, but more specific information is most likely available in your home country.
2) If you live and are insured for social security in Canada, Ukraine or Australia - countries that have concluded an Agreement on Social Security with Estonia
You can present the respective certificate demonstrating your social security coverage issued by your local competent authorities to allow the company to exempt directors’ fees from social tax in Estonia.
3) Directors’ fees paid to residents of third countries or those persons not covered by a social security scheme in EU or treaty countries will not be able to get an exemption from Estonian social tax.
Payments made to non-residents must be declared on TSD Annex 2 and remitted by the 10th day of the month when the payment was made.
The employee register kept by the tax authorities should also be filled in separately if the director receives pay – this can be done via the e-tax authorities.
Normally an Estonian company is liable to withhold 20% personal income tax (PIT) and apply 33% social tax on salary payments for work performed physically in Estonia. Unemployment contribution of 1.6% is withheld and 0.8% applied to the gross salary.
If the work, however, is not physically performed in Estonia, then no Estonian PIT nor Estonian social tax or unemployment contributions apply to salary payments as these are not considered to be sourced in Estonia. The income is taxable in the state of residence of the employee.
If you have a non-resident employee who does not work physically in Estonia, then you don’t have to report anything to the employee register. However, payments made to non-residents must be declared on tax return TSD Annex 2.
It is important, that you would not focus only on the Estonian side of taxation. To really understand your rights and obligations, read also Individual tax residency and Personal taxes, considerations in the country of residence.
This article is part of a Business Guide
This article is a part of larger set of guidelines that e-Residency project team has requested for you and that has been compiled in cooperation with AS PwC. Download the full version of the Business Guide.
Articles in the Knowledge Base and the Business Guide are intended solely to provide general guidance on matters of interest for the personal use of the reader, who accepts full responsibility for its use. This information should not be used as a substitute for consultation with professional accounting, tax, legal or other competent advisers.