The Estonian taxation system is unique in terms of corporate taxation which is why foreign investors will be very interested in setting up companies. Taxation in Estonia is applied at national and local level and it is comprised of: income tax on personal earnings, the value-added tax, taxation of corporations, land value tax and social and insurance taxes.
The corporate tax in Estonia has a flat rate of 21% and its uniqueness comes from the fact that profits, including dividends are not taxed until they are distributed. Dividends earned outside the country and distributed by an Estonian company to its shareholders are not taxed, which is the main reason Estonia is an appealing destination for foreign investors. Another important aspect of dividend taxation in Estonia is that the flat rate of 21% applies to gross payments and a rate of 21/79 (in percent it means almost 26,6%) applies to net payments. Starting 2009, dividends paid to foreign shareholders will be exempt from the additional 21% rate.
Residents and foreign legal representatives from Estonian companies benefit from dividend tax exemptions. Dividends are not taxed in Estonia if the share capital or contributions are reduced, if the company’s representative liquidates or redeemed according to the Estonian Income Tax Act. The limit for participation exemption is set at 10%. If Estonian companies and foreign legal entities receive dividends from abroad, the tax paid outside the country can be deducted from the tax on dividends paid in Estonia.
Estonian companies are not required to pay taxes on dividends if one of following conditions are met:
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