Paying Dividends From Your Company in Estonia

Key points:

More and more investors are using the opportunity to invest through their own company. If, in the early years, the investor directs money into investments through the company, sooner or later there will be a desire to withdraw the earned income.

Dividends Can Only Be Paid If the Company Has Retained Earnings

A dividend is essentially a distribution of a company’s profits to its owners. To pay dividends, the company must have made a profit in the past. The easiest way is to examine the balance sheet of the last financial year, which comes with the company’s annual report, and make sure that the sum of the balance sheet’s equity entries “Undistributed profit (loss) of previous periods” and “Reporting year profit (loss)” is positive. In this case, the company has profits to distribute.

Example: A company’s balance sheet as of December 31, 2023.

 The equity entries of the balance sheet show that the company made a profit in previous periods (until December 31, 2022) and left it undistributed in the amount of 120,268 euros. In 2023, an additional profit of 39,625 euros was earned. The total undistributed profit of the company is 159,893 euros. The company can pay out dividends to the extent of this amount.

However, most of the time, it is not worth paying out all the retained earnings as dividends. Especially in the case of companies mainly engaged in investment. This is due to the fact that the prices of investments change over time, and in the event that the next year brings a significant drop in the value of investments, the company’s equity may become negative.

The Income Tax Expense is Added to the Dividend Amount

It is often forgotten that when paying out dividends from a company, there must be both the amount we pay out as dividends and the amount of income tax paid to the state. The amount of income tax on dividends can cause confusion.

Until December 31, 2024, the income tax in Estonia is 20%. When paying dividends from the company, income tax at the rate of 20/80 applies to the distribution of the profit, i.e., the payment of the dividend.

From 2025, the reduced 14/86 rate for regularly distributed dividends was abolished. Dividends are generally taxed at 22/78 of the net distribution, equivalent to approximately 28.21% of the net dividend.

If the owner of the company wants to pay out 10,000 euros in dividends, the income tax amount can be calculated as follows:

income tax on dividends = 10,000 euros x 22/78 = 2,820.51 euros.

If the company wants to pay out 10,000 euros as a net dividend, the corporate income tax is 2,820.51 euros, meaning that the company must have 12,820.51 euros available for the dividend and related corporate income tax.

From January 1, 2025, the corporate income tax rate on distributed profits is 22/78 of the net distribution. On a net dividend of 10,000 euros, the corporate income tax is 2,820.51 euros.

The Order in Which Money is Withdrawn From the Business is Important

From the point of view of tax efficiency, it is important in what order and in what way money is withdrawn from the company. The rule of thumb is simple: if you have given the company an owner’s loan, pay back the owner’s loan first.

The owner can give the company a loan for an indefinite period and without interest, which means that from the owner’s (private person’s) point of view, no income is generated, no interest income is received, and there is nothing to be taxed. Loan repayment is also not considered as income. Therefore, it is reasonable to pay back the owner’s loan before paying dividends from the limited company.

Dividends May be Paid out More Than Once a Year

It has become a standard among Estonian listed companies to pay out dividends once a year, mostly in the spring. In fact, dividends can be paid several times a year. If you wish, you can pay dividends several times a year.

It is not recommended to pay out dividends once a calendar month, as such an activity may suggest the practice of a hidden employment relationship and evasion of labour taxes.

Dividend payments may be made more than once a year where there is sufficient distributable profit and a valid shareholders’ resolution. Dividends should not be used to replace remuneration for active work performed for the company. For example, it can be dividend income or rental income, which in turn can be paid out monthly as dividends from the company.