Until now, the Estonian tax system has been quite simple. Starting 2018, things will, however, get a bit more complicated, since under certain conditions a lower tax rate is also to be used. This article will shed a bit of light on the details surrounding the corporate income tax – who pays what?
While the income tax has been a flat tax rate 20% until now, staring next year companies will have tax rates of 20% and 14% for taxable distributable profit and non-taxable profit. Much like anything new, the new tax rate will take some getting used to and will initially certainly create more work for accountants.
When does the 14% income tax rate apply?
Companies can use it to the extent of the average sum of dividends from the previous 3 years, whereby only distributed profit, taxable in Estonia, is taken into account. Disbursements exempt from taxation in Estonia, such as received dividend income, shall not count.
The 14% preferential tax rate will apply to a maximum of the sum of distributed profit from the previous 3 years, everything above that will be taxed at a rate of 20%.
When will the change be implemented?
The legal amendment will enter into force on 01.01.2018 and the first financial year taken into account will be 2018. In 2019 the 14% tax rate will be applied to a third of the distributed profit from 2018. In 2020 the 14% tax rate will be applied to a third of the distributed profit from 2018 and 2019.
In case the company distributes profit taxed at a preferential rate to a shareholder who is a natural person, an additional 7% withholding income tax shall apply. If profit is being distributed at standard rate 20%, withholding income tax 7% will not be charged.
In case of shareholders who are non-residents the rate of withholding income tax is dependent on bilateral tax treaties.
Taxation of concealed profit shifting
The law also specifies the taxation of concealed profit shifting from Estonian company. If a company lends money to a group company for longer than 48 months, the company must be able to prove that the recipient is able and willing to reimburse the company. If proof cannot be given, income tax has to be paid on the loan. Loans to the owner and group companies have to be declared.
The requirement of proof and declaration applies to loans issued after 01.07.2017, but also to loans issued earlier if essential conditions are changed after 01.07.2017.
Detailed guidelines will be published on the homepage of the Tax and Customs Board.