What sets Estonia apart is its unique deferred corporate tax system – corporate income tax is only payable when profits are distributed, not when they are earned. This allows investors to reinvest profits tax-free, compounding gains within the company and optimizing long-term returns.
In this article, we’ll walk you through 6 Key Points to consider when paying dividends from your Estonia Co. Understanding these factors is crucial to making informed decisions that align with both Estonian regulations and your personal or international tax situation. These insights will help you plan smarter and distribute profits efficiently.
Sooner or later, most of our clients operating through an Estonian company will reach a point where they wish to withdraw the income earned and enjoy the fruits. This typically takes the form of a dividend distribution. Understanding how to do it efficiently while staying compliant with both Estonian and international tax rules is essential for smart financial planning. Six key tips to keep in mind when you’re about to pay dividends from your Estonia Co:
1. Dividends can only be paid out if the company has retained earnings
A dividend is essentially the distribution of a company’s profit to its owners.
Therefore, to pay dividends, the company must have generated profit in the past.
It’s not advisable to distribute the entire retained earnings as dividends, especially if you run an investment company. The reason is that financial investment values fluctuate over time, and if there is a significant drop in the value of the company’s investments in the following year, the company’s equity could turn negative. Maintaining a buffer helps safeguard financial stability.
2. Dividend payments trigger corporate tax in Estonia
When paying dividends from your Estonian company, you need to have enough funds not only for the dividend amount itself, but also to cover the corporate income tax payable to the state.
From January 1, 2025, the deferred corporate income tax rate in Estonia is 22%.
This means the effective tax rate on net dividends will be 22/78, or 28.2%. If you plan to pay out a net dividend of €10,000, you should account for an additional tax obligation of €2,820.
3. Participation exemption on foreign dividends
Some of our clients operate foreign subsidiaries under their Estonian company, meaning the Estonian entity holds participations in foreign companies. If the Estonian company owns 10% or more of a foreign subsidiary, the full participation exemption applies on foreign qualified dividend income. This allows incoming dividends from such holdings to be fully tax-exempt in Estonia. In other words, tax-free dividends. These dividends must still be reported in a special tax declaration, but no corporate income tax is due in Estonia on the amount received.
In Estonia, there is no dividend withholding tax on such distributions when foreign dividends are paid out from the Estonia Co. to its shareholders.
This means that once the tax-exempt foreign dividends are received by the Estonian company under the participation exemption, they can be distributed further to the owners completely tax-free, making Estonia Co. an efficient vehicle for holding and distributing international dividend income.
4. Foreign Tax Credit Method – More Money in Your Pocket
Many clients use their Estonian company (OÜ) to hold portfolio investments in well-known foreign dividend-paying companies like Apple, Coca-Cola, Facebook, Microsoft, and others. Since participation in these companies is typically below 10%, the participation exemption doesn’t apply, but there’s a smart alternative: the foreign tax credit method. Under the Estonian Income Tax Act, if an Estonian company holds less than 10% in a foreign company, it can claim a credit for the withholding tax paid abroad. This allows the Estonian company to reduce its Estonian corporate income tax liability on dividends distributed to shareholders by the amount of foreign tax already paid.
If you’ve chosen an Estonian company as your investment vehicle, make sure your accountant always declares foreign dividend income and taxes withheld properly. This can save you from losing your hard-earned money!
5. The Order for Withdrawing Money from Your Company Matters
From a tax efficiency standpoint, it’s important how and in what order you withdraw money from your company. Here’s a simple rule of thumb:
If you’ve issued a shareholder loan to your company, it’s wise to repay that loan first. A shareholder (as a private individual) can lend money to their company without interest and with no fixed term. From the perspective of the individual, this means no income is generated – there’s no interest income and thus nothing to be taxed. Likewise, loan repayments are not treated as income either.
That’s why, before paying dividends from your Estonian company, it often makes sense to repay any outstanding shareholder loans first.
6. Dividends can be paid out multiple times per year
If you wish, you can pay yourself dividends twice a year, quarterly, or even weekly. What’s not recommended is paying dividends every month i.e., 12x per year. Doing so may raise red flags, as it can suggest a disguised employment relationship and an attempt to avoid payroll taxes.
That said, monthly dividend payments without drawing a salary can be acceptable in certain cases – particularly when your company generates steady foreign dividend income, passive income like rental income or dividends from other investments, which provide consistent cash flow to support regular distributions.
We’re here to help!
If you need any support with your tax declarations and international tax advice, the InCorpora team is ready to help. Accounting and declaration of dividends requires knowledge of local and international laws and regulations. This is a competence that we’ve curated over many years in business.
Our expert team is highly experienced in navigating the nuances of both local and international laws and regulations. Estonia offers a unique and highly attractive corporate tax system, and we know exactly how to make it work to your advantage. We’ll help you build an efficient corporate structure that not only meets compliance standards but also maximizes financial benefits for you. Speak soon!
Team InCorpora
CONTACT US NOW to learn more. We would be happy to consult you!
