Why do dividends received from an Estonian company with a holding of less than 101% result in double taxation and how can this be avoided?
Estonian companies are increasingly investing in the stock market and in the holdings of other companies. Unfortunately, this creates an important tax difference that many are not aware of: if an Estonian legal entity owns less than 101% of a 10% stake in an Estonian company or an Estonian listed company, then the income tax section 50(1) of the Income Tax Act does not apply to these dividends. 11 exemption and dividends cannot be declared in Part II of Annex 7 to the TSD.
This means that dividends are taxed twice:
- dtaxpayer the company has already paid income tax in Estonia (at a rate of 22/78)
- dividend recipient, An Estonian company, however, must re-tax the dividends it receives if it wishes to pay them out to its owners.
Part II of Appendix 7 of the TSD declaration, or the exemption method, is intended only for situations where the recipient of dividends has at least 101% of the holding.
How to avoid double taxation if the holding is less than 10%?
Here are the most effective and practical solutions:
- Keep 10% Estonian stock investments in a private investment account
Reasons why it is wise to make small investments in Estonian listed companies through a private investment account rather than through a company:
- A listed company pays income tax on dividends already at the company level
- Taxed dividends received in a private investment account are considered a contribution, so no additional income tax is incurred.
- When investing through a company, the same dividend is taxed again later when it is paid out of the company
- If the company still invests in Estonian stocks, prefer growth companies (that do not pay dividends)
If a company invests in a growth company that does not pay dividends (such as Funderbeam investments), there is no double taxation. When realizing a profit (selling a company), the investor pays income tax only when distributions are made from the profit.
However, think carefully about whether buying shares through a company is still more beneficial: although from a purely tax perspective it may seem better to invest through a company, it should be borne in mind that payroll taxes when withdrawing money from the company may be higher than some double taxation. For large investors, investing through a company may still be sensible, but it is worth making accurate calculations.
For foreign dividends, a company can use the credit method (but only for foreign countries!)
This does not help with Estonian dividends, but it is important to remember that if dividends are received from a foreign company with a stake of less than 101%, it is possible to use the credit method of Section 54(5) of the Income Tax Act, i.e. income tax withheld in a foreign country can be deducted from Estonian income tax.
Kokkuvõte
Dividends received from an Estonian company with a holding of less than 101% are the most inefficient type of dividend income for the company in terms of tax risk, because the exemption method in Appendix 7 of the TSD does not apply.
Double taxation can be avoided by:
✔ Using a private investment account for investing in Estonian stocks with small holdings.
✔ By investing through the company only growth companies, which does not pay dividends.
✔ If possible, increase stake to at least 10%, for the release method to be applied.
✔ For foreign dividends, use credit method (Section 54(5) of the Tax Code).