All undistributed corporate profits are tax exempt. This exemption covers both active (e.g. trading) and passive (e.g. dividends, interest, royalties) types of income. It also covers capital gains from the sale of all types of assets, including shares, securities, and immovable property. This tax regime is available to Estonian resident companies and permanent establishments (PEs) of non-resident companies that are registered in Estonia.
The taxation of corporate profits is postponed until the profits are distributed as dividends or deemed to be distributed, such as in the case of transfer pricing adjustments, expenses and payments that do not have a business purpose, fringe benefits, gifts, donations, and representation expenses.
Distributed profits are generally subject to the 20% CIT at 20/80 of the net amount of profit distribution. For example, a company that has profits of 100 euros (EUR) available for distribution can distribute dividends of EUR 80, on which it must pay CIT of EUR 20.
From the Estonian perspective, this tax is considered a CIT and not a WHT, so the tax rate is not affected by an applicable tax treaty. Certain distributions are exempt from such tax (see the Income determination section).
From 2018 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 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% WHT rate will apply unless a tax treaty provides for a lower WHT rate (5% or 0%). 2018 is the first year to be taken into consideration for the purposes of determining the average dividend.
In Estonia, resident companies are taxed on profits distributed from their worldwide income, while PEs of non-residents are taxed only on profits distributed from income derived from Estonian sources. Other Estonian-source income derived by non-residents may be subject to final WHT or CIT by way of assessment.
Local income taxes
There are no municipal or local income taxes in Estonia.