Estonia: key changes to corporate income tax rules enacted

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The Estonian Minister of Finance submitted the Bill on Amendments to the Income Tax Act (the bill) for consultation on 17 April 2017, which was approved by the Parliament on 19 June 2017.

Significant changes in the Income Tax Act include a reduced tax rate for regular dividend payments, an increased burden of proof for intra-group lending and a specific tax regime for credit institutions.

Instead of the standard 20% rate, a lower income tax rate of 14% will be available for regular profit distributions. Profit distributions will be considered as regular if the amount of the distribution does not exceed the company’s last three years’ average profit distributions in Estonia.  For all amounts exceeding the last three years’ average profit distribution, the previous rate of 20% will apply.

The first year to be included in these income tax calculations will be 2018, but to a limited extent the tax rate of 14% before 2021 can be applied as follows:

  • In 2019 to one-third of taxable profit distributions of 2018; and
  • In 2020 one-third of the taxable profit distributions of 2018 and 2019;

The tax-free dividends received by the subsidiaries are not included in the calculations of the lower tax rate.

Dividends received by a natural persons (including nonresident natural persons) will be subject to an additional 7% income tax withholding if those dividends are paid by an Estonian company and are subject to the 14% corporate income tax rate.

Currently intra-group loans granted to shareholders are subject to corporation tax when the circumstances of the loan transaction indicate a hidden profit. In this case, the loan amount will be treated as net profit and therefore will have to be divided by 0.8 before multiplying with a 20% tax rate. According to the approved amendments, special attention will be given to all loans granted to other group entities in Estonia and abroad (except for down-stream subsidiaries) with a term exceeding four years.

The burden of proof will be applicable to all loans granted on or after 1 July 2017 and to those loans for which the amount has been increased, the agreement has been extended or other essential conditions have been amended on or after that date.

The most important change brought by the Bill is to enact advance corporate income tax to credit institutions at the tax rate of 14%, which will be calculated and paid quarterly on accrued profits. From 1 January 2018, credit institutions are required to report their quarterly payments to the Estonian Tax and Customs Board by the 10th day of the third month of the following quarter. First due date for such payments shall be 10 September 2018, calculated from the profits earned in the second quarter of 2018.

Also, according to the Bill, losses can be carried forward for five years.

The amendments to the Income Tax Act will enter into force on 1 January 2018.

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