Dividends in kind in Estonian CIT

Lump-sum tax on corporate income [Estonian CIT], as a very attractive form of taxation for individuals, is steadily gaining popularity. This is evidenced by the fact that the number of taxpayers subject to Estonian CIT is increasing every year. One interesting aspect of Estonian CIT concerns dividends in kind.

When is tax payable under Estonian CIT?

Estonian CIT defers taxation of profits until the date of adoption of a resolution on the allocation of such profits or the occurrence of events equivalent thereto.

The CIT Act contains a closed list of income subject to Estonian CIT, including, among others, income from distributed profits and income allocated to cover losses, income from hidden profits or expenses not related to business activities.

Dividend payment

In Estonian CIT, as in the classic settlement, the PIT on dividends received by shareholders is 19%, with the possibility of reducing this tax by:

• 90% of the amount corresponding to the multiplication of the shareholder’s percentage share in the company’s profit, calculated on the date of acquisition of the right to receive the distributed profit, if this profit was taxed at a lump-sum rate of 10% of the tax base.
• 70% of the amount corresponding to the multiplication of the shareholder’s percentage share in the company’s profit, calculated on the date of acquisition of the right to receive the distributed profit, if this profit was taxed at lump-sum rate of 20% of the tax base.

In practice, the payment of dividends may take two forms, namely:

• classic, which essentially involves the payment of cash and is a commonly used solution,
• in kind, where the payment is made in the form of a benefit in kind (e.g. real estate, machinery).

Dividends in kind and tax?

Taxpayers who have made a profit during the Estonian CIT tax period and have decided to distribute it through the payment of dividends in kind should classify it as a net profit distribution referred to in Article 28(1)(1) of the CIT Act.

As indicated by the Director of National Tax Information [DKIS] in one of his tax rulings, the payment of profits earned during the period of taxation under Estonian CIT, regardless of whether it takes the form of a cash payment or a payment in kind, will be subject to Estonian CIT[1].

Is a dividend in kind a hidden profit?

Under the CIT Act, hidden profits are understood as monetary or non-monetary benefits, whether paid or unpaid, in connection with the right to participate in profits, other than distributed profits, where the beneficiary, directly or indirectly, is a shareholder, shareholder or partner or an entity directly or indirectly related to the taxpayer or to that shareholder, shareholder or partner (Article 28m(3) of the CIT Act).

Furthermore, in the tax explanations of the Minister of Finance of 23 December 2021, entitled ‘Guide to the lump sum tax on company income’ [MF explanations], it was indicated that any benefit may in fact constitute hidden profit, and the statutory catalogue is only an illustrative list of transactions that may be considered hidden profit.

However, the DKIS presents a position favourable to taxpayers in this respect, indicating that if the value of the dividend in kind corresponds to the market value, then no income from hidden profits will arise[1].

In practice, the market value of a dividend in kind may be documented by an expert opinion or an external valuation in order to minimise the risk of such a dividend being considered a hidden profit.

Taxable income and dividends in kind?

In practice it arises another question whether the payment of a dividend in kind will constitute income from the settlement of a liability by a non-cash payment, in accordance with Article 14a of the CIT Act.

Due to the fact that Estonian CIT is an alternative form of taxation to classic CIT, the rules set out in the Accounting Act should be referred to in order to determine the tax base for Estonian CIT. However, the regulations relating to classic CIT will not apply in this respect, and therefore also Article 14a of the CIT Act, which provides for the generation of taxable income in the event of full or partial settlement of a liability through a non-cash payment.

Thus, the payment of a dividend in kind may prove more advantageous for taxpayers subject to Estonian CIT than in the case of a classic CIT settlement.

Summary

A dividend in kind is a legally permissible form of profit distribution, which, as a rule, is subject to Estonian CIT, just like a cash dividend. What is more, the payment of a dividend in kind may prove to be more advantageous than under classic CIT. Before deciding on the payment of a dividend in kind, it is necessary to estimate its value so that it corresponds to the market value.

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[1] Interpretation of 15 March 2024, DKIS, ref. no. 0111-KDIB2-1.4010.605.2023.1.AS.