As an e-resident founder, you’re probably unfamiliar with the basics of Estonian corporate dividend distribution. After building a profitable company, you would probably like to transfer some of the profits to your personal account in addition to the regular salary or director’s fee.
In this article, we explain the legalities and best practices for distributing dividends from Estonian companies to non-resident shareholders.
In a nutshell, shareholders have the sole right to distribute corporate profits, and while profit is an opinion based on accounting principles applied, cash is a fact. This means that even if your company had a profitable financial year, it needs to have enough free cash available to pay it to shareholders and also pay tax on it the next calendar month.
What are dividends?
The tax authority in Estonia sees dividends as a passive income rewarded for owning a stake in a business entity. The procedures for paying dividends for various types of business entities, such as cooperatives, partnerships, limited liability companies, and joint-stock companies are regulated in the Estonian Income Tax Act (TuMS).
There is no limit to the number of times dividends can be declared and paid out during a year, although it is generally expected that it will be done in a single payment just like most public companies listed on the stock market do. If the company does not have sufficient funds, payments can be made in instalments.
So if you are one of the founders who has a successful business model that generates excess cash, you may want to pay some of it to yourself, even though the Estonian tax system awards founders who reinvest or accumulate their profits. Estonia is one of the few EU countries where you pay no annual corporate income tax on retained profit.
What are the legalities of paying dividends?
If you want to pay dividends, there are some preconditions for doing so correctly. Shareholders must pay the full amount of company share capital, and there should be shareholder-approved annual accounts and a resolution with the amount of profit allocated for distribution to shareholders.
Only shareholder meetings can decide to distribute dividends. If a company has only one shareholder, this is a formality that doesn’t really matter much. There are currently no sanctions for distributing dividends before the submission of annual accounts.
Before the board can submit annual accounts to the public register, the profit distribution decision must be submitted, though it is not made public. Companies that have been profitable in previous financial years and have allocated funds for distribution without actually paying dividends have a line in their balance sheet called “undistributed profit from previous periods”. Shareholders can then easily decide when and how much they want to distribute dividends if other requirements are met.
One more thing to remember is that the distribution of dividends must not impair the company’s solvency. The board is responsible for ensuring that the company can pay cash to shareholders without going bankrupt or insolvent and that net equity does not fall below the permitted limit, which is half of the registered share capital.
If you are wondering what equity is, it is the money that would be returned to a company’s shareholders if all of the company’s assets were sold and debts were paid off in the case of liquidation. It is called net equity because all liabilities must be deducted from assets to get the figure. Profitable companies should have positive net equity as free cash from business operations is available on bank accounts.
For example, if you have a company with 2500 euro share capital and no liabilities outside of the 2500 euros deposited by you, but your company bank account has 10 000 euros after the first year of trading, the net equity is assets (€10 000) minus liabilities (€2500) which is 7500 euros. Paying out 7500 euros of dividends looks ok, but income tax liability (€7500*0.25=€1875) would already show your balance sheet with net equity below half of the registered share capital (€2500-€1875=€625). Luckily companies balance sheet is ever-changing with every transaction and it is more important to have it within legal limits by the closing balance date of 31 December.
What are the taxes payable on distributed dividends?
Dividends paid in Estonia are not taxed on the individual level, so the corporate income tax withheld in Estonia on your paid dividends normally does not offset your personal income tax liability in your country of tax residency. You would most probably pay personal income tax on your foreign dividend income according to the local rules.
2024 tax year has 20% tax deducted from gross dividend, so every 800 euros of net dividend received means 200 euros paid the next month as a corporate income tax (so the effective rate on net dividends is 25% we used in our formula). You should be aware though that the profits generated by Estonian companies may be taxable in other jurisdictions based on international agreements.
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