Estonia

Estonia is regarded as offering a relatively favourable income tax regime, as all undistributed corporate profits are tax exempt. Estonia levies a corporate income tax (CIT) only on profits that are distributed as dividends, share buy-backs, capital reductions, liquidation proceeds, or deemed profit distributions. Distributed profits are generally subject to 20% corporate tax (20/80 on the net amount of the profit distribution).

Two significant amendments to the Income Tax Act entered into force on 1 January 2018.

Firstly, a new anti-tax avoidance clause was introduced, which obligates a resident company to pay income tax on a loan issued to a shareholder or a partner if the 'circumstances of the transaction indicate that it might be a hidden profit distribution'. If the due date of an outbound loan exceeds 48 months, then the Ministry of Finance assumes that certain loans issued to related parties may constitute hidden profit distributions, and, once the deadline is met, the burden to prove the opposite lies with the taxpayer. This amendment is applicable on qualifying loans granted onwards from 1 July 2017.

As a second amendment, from 2019 onwards, a lower CIT at the rate of 14% for those companies making regular profit distributions is available. The payment of dividends in the amount that is below or equal to the extent of taxed dividends paid during the three preceding years (20%) will be taxed with a rate of 14% (the tax rate on the net amount being 14/86 instead of the regular 20/80). In cases where the recipient of the 14% dividend is either a resident or non-resident individual, a 7% withholding tax (WHT) rate will apply unless a tax treaty provides for a lower WHT rate (5% or 0%).

From 1 January 2019, amendments based on the anti-tax avoidance rules from the European Union (EU) 2016/1164 Anti-Tax Avoidance Directive (ATAD) were transposed into Estonian legislation. These amendments introduced controlled foreign company (CFC) rules, a new general anti-abuse rule (GAAR), and thin capitalisation rules in the form of taxation of 'exceeding borrowing costs'.

From 1 January 2020, a set of rules are added to the Income Tax Act to prevent double non-taxation (so-called 'hybrid mismatches'), which transpose the measures against hybrid mismatches from Directive 2017/952 into domestic legislation.

From 1 January 2025, the general CIT rate will rise to 22% and the existing lower rate of 14% will be abolished.