Dividend payments taxation
Brief description of Estonian corporate income tax system
According to Estonian corporate income tax system the taxation of earned profits is deferred to the moment of profit distribution (dividend payment).
A company that does not distribute profit does not have to pay income tax on the profit it has earned until the distribution.
The general corporate income tax rate is 20% (the amount of tax payable on a dividend distribution is calculated as 20/80 of the net dividend, i.e. effectively 25% of the net dividend).
From 1 January 2018 there is a new favourable regime for the companies distributing profits regularly — median of its three (3) previous years’ taxable profits can be taxed at a rate of 14% (14/86 on the net amount of payment) if distributed to the legal entity, and with additional 7% withholding tax if dividends are distributed to the individual (both residents and non-residents). The residual amount of profit distribution (i.e. excess of the median of three previous year’s taxable profits) is taxed at the 20/80 rate.
Questions & Answers
- Q: How much dividends does Tallink pay in 2019?
A: Tallink Grupp’s management board will propose to the Shareholders General Meeting to distribute dividends of 0.05 per share (correspondingly also per FDR) for the year 2018, as per the company’s dividend policy. In addition to the dividends, to improve the company’s capital structure, as per the supervisory board’s proposal, the management board will also propose to the Shareholders General Meeting to reduce the company’s share capital by EUR 0.07 per share (i.e. also per FDR) and make a corresponding payment to the shareholders.
- Q: When distributing dividends does Tallink withhold any additional taxes from the payments made to the shareholder?
A: Generally, Tallink distributes dividends in the amounts noted in the dividend distribution decision. However, based on the current regulations and taking into account that Tallink is the company distributing dividends on the regular basis, there are cases when Tallink is obliged to withhold 7% from the dividend payments made to the individuals. The lower tax rate of 5% may be applied if the shareholder is the resident of Bulgaria or North Macedonia, and the dividends would be exempt from withholding tax for the residents of UAE, Bahrein, Georgia, Jersey, Cyprus, Island of Man and Mexico. Please note, for application of lower tax rate or exemption a certificate confirming tax residency is required.
- Q: Is there any option to use the tax withheld from the dividend payment in Estonia in the shareholder’s country, i.e. Finland?
A: Generally, such option is given by the tax treaties concluded between Estonia and other countries in the form of exemption or deduction. However, we strongly advise to turn to the shareholder’s country of residence tax authorities with this question, as local regulation may vary and provide different options.
- Q: Is there an option to obtain the certificate of taxes withheld and paid in Estonia and to whom should the individual shareholder turn to?
A: Such option is available and the respective certificates would be issued by Tallink, with the tax authorities’ confirmation, if needed. However, please note that this option is available on the separate request only (i.e. certificates are not issued automatically). In order to obtain such certificate, please send a request to firstname.lastname@example.org.
- Q: What should the individual shareholder do if he/she discovers that there was an option for lower withholding tax application or exemption?
A: Shareholder should present the certificate of residency to Tallink, based on which changes would be made into the respective tax returns and the refund of the overpaid taxes provided by the tax authorities. Please note, that the correction of the tax return of the dividend payment can be done only within three (3) years from the moment of dividend payment.
- Q: Are the dividends and share capital reduction paid out to shareholder at the same time?
A: The payment procedures for dividends and share capital reduction payments are different and while the standard practice has been to have same fixing date for the eligible investors to both dividends and share capital reduction, the payments take place at substantially different times. The key difference is that the procedures and time-limits of the reduction of the share capital arise from Estonian Commercial Code, which requires several steps before the payment. For example, in the past, as a result, the share capital reduction which was approved at the Shareholders annual meeting in June 2016, was paid out in December 2016. However, dividend payments takes place within a shorter period following the decision.
- Q: How would taxation of share capital reduction payments look like?
A: The shareholder should pay attention, that share capital reduction payments in his/her country of residence may be treated as capital gain to some extent and therefore be taxable. Therefore, we highly recommend to contact your local tax authorities for more specific information.
From the corporate taxation side, share capital reduction is taxable in Estonia only in cases where amount of capital paid out exceeds initial contributions. However, in case of Tallink Grupp AS this is not applicable for the share capital reduction payments in 2019 as current reduction is not exceeding initial contributions.
- Q: If I bought Tallink’s shares/FDRs in this January at price of EUR 1.05 per share/FDR what is my initial contribution and how does that affect the share capital reduction payment taxation from the shareholders’ perspective?
A: According to Estonian legislation in this particular case, the initial contribution is EUR 1.05 per share/FDR to which documented expenses related to purchase of the shares/FDR’s can be added. Furthermore, when share capital reduction takes place shareholder can take into account its initial contribution up to the amount of the contribution. All amounts received from share capital reduction exceeding initial contribution are taxable.
However, in terms of taxation of share capital reduction from shareholders’ perspective in other jurisdictions than Estonia, please turn to your local tax authorities.
- Q: If I received Tallink’s FDRs as a work related bonus, what is my initial contribution and how does that affect the share capital reduction payment taxation from my perspective?
A: According to the Estonian legislation when an employee has acquired securities (including shares and FDR’s) from his or her employer free of charge or at the preferential price, and the employer has paid fringe benefits, income and social tax on these securities, or a natural person has acquired from a legal person a security as a gift, where income tax is charged by a legal person, then upon transfer of such securities also a sum of securities on which income tax was charged by the employer or legal person shall be added to the acquisition cost. In such case you should contact the employer or a legal person who gave you securities and ask them to issue for you a certificate in free form, where the name of the issuer of securities and the registration code, type of the securities, quantity and value, and the sum on which income tax was charged by the legal person are entered.
However, in case of other jurisdiction, we strongly advise to turn to your local tax authorities as local regulations may vary.