Starting from January 1, 2025, changes in dividend taxation in Estonia will take effect. These updates will impact both residents and non-residents, as well as the profit distribution process.
This article explores the key changes, including new tax rates, issues of double taxation, and the conditions for dividend payments. We will also analyze how these changes will affect various categories of companies and investors.
For companies planning to start operations in Estonia, it is essential to consider these changes already at the business creation stage. We offer services for company registration in Estonia and expert assistance in accounting services to help you efficiently organize your business processes and prepare in advance for the changes in tax legislation.
Features of the Estonian Tax System
Estonia offers a unique taxation system where corporate tax on profits is only levied when profits are distributed as dividends. If profits remain within the company, no tax is charged, creating a strong incentive for capital accumulation, reinvestment, and long-term business growth. This approach will remain unchanged despite the upcoming changes in dividend taxation in 2025.
This principle makes Estonia particularly attractive to both foreign and local investors, allowing tax obligations to be deferred until profits are distributed. It gives companies flexibility in managing their financial resources, effectively planning growth, and avoiding additional tax burdens while funds are used for business development. Retaining this principle in the tax system continues to support Estonia as one of the leading countries for doing business in Europe.
New Taxation Rules from 2025
One of the main changes will be the increase in the dividend tax rate for legal entities from 20/80 to 22/78. This means that the dividend tax will be 22% of the gross income (or 22/78 of the net amount). The preferential rate of 14/86 and the 7% withholding tax on dividends paid to individuals will also be abolished.
Starting from 2025, all dividends will be taxed at a unified rate of 22/78, which will increase the tax burden on companies and investors who previously benefited from the lower rate. These changes are enshrined in the Income Tax Act and will come into effect on January 1, 2025.
- How will dividend tax rates change?
Starting in 2025, all dividends will be taxed at a unified rate of 22/78. The preferential rate of 14/86 will be abolished.
- How can you take advantage of the transition period?
In 2024, companies can still use the 14/86 preferential rate. It’s important to plan dividend payments in advance and prepare for the new conditions.
- How will the new rules affect profit withdrawal?
In countries without a double taxation agreement with Estonia, profits will be taxed at a rate of 22/78, which could increase the tax burden.
Transition Period in 2024
To simplify adaptation to the new rules, a transition period will last until the end of 2024. During this time, companies can continue to apply the 14/86 preferential rate for regular dividends. However, to prevent abuse, a mandatory 7% tax withholding will apply to dividends paid to individuals if the profits taxed at the 14% rate are used for these payments.
Recommendations for Businesses During the Transition
During the transition period, it is recommended that companies conduct a thorough financial analysis and assess the impact of the new rates on future dividend payments. Consider paying dividends before the end of 2024 to benefit from the preferential rate. This will help minimize tax risks and better prepare for the new tax regime.
Conditions for Dividend Distribution
Dividend distribution in Estonia is subject to strict rules governed by both commercial and tax law. Meeting these conditions is necessary to ensure the legitimacy of payments and protect the interests of both the company and its shareholders. Adhering to these requirements helps avoid financial and legal risks associated with improper profit distribution.
- Available undistributed profit
Dividends can only be paid if the company has sufficient undistributed profit. This means that the profit distributed as dividends must have been earned by the company in previous reporting periods.
- Approval of annual financial statements
Dividend distribution requires the approval of the annual financial statements. According to the Estonian Commercial Code (Äriseadustik), the company’s shareholders must approve the annual report at a general meeting. Only then can a decision be made to distribute dividends.
- Full contribution of share capital
Another important condition is the full contribution of the company’s share capital. Share capital represents the funds that the company’s founders are required to contribute when establishing the business. If the share capital is not fully paid in, the company is not entitled to distribute dividends.
Complying with all conditions for dividend distribution in Estonia not only ensures the legality of payments but also contributes to the sustainable development of the business. Fulfilling financial and legal obligations allows the company to maintain its reputation and ensure investor trust. In light of the upcoming tax changes in 2025, it is crucial for companies to adhere to these rules and timely adapt their financial processes.
Double Taxation of Dividends
Estonia has a broad network of international double taxation avoidance agreements with countries such as Germany, France, Finland, Sweden, Latvia, Lithuania, and other EU countries. These agreements allow for reduced tax rates for non-residents, making profit distribution between countries more equitable. Under these agreements, investors can receive tax benefits or exemptions from double taxation by providing the appropriate documents to the tax authorities of both countries.
Conclusion
Changes in dividend taxation in Estonia in 2025 could significantly impact companies and investors, particularly those who previously enjoyed the preferential rate. However, companies that adapt in advance to the new conditions will be able to minimize risks and take advantage of the transition period.
The accounting services offered by Eesti Firma OÜ will help companies adapt to these changes, maintain competitiveness, and effectively manage tax obligations. Estonia remains one of the most business-friendly jurisdictions, offering attractive tax conditions and digital solutions for business.
