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Estonian holding company for international financing

Profits can be distributed:

  • to your parent company via dividends or interest on loan
  • to non-associated company as interest on loan

Dividends are generally subject to a flat rate of corporate income tax. Corporate income tax is calculated on the net amount of dividends distributed, or on other profit allocations, at a rate of 20/80, or 20% of the gross of distribution (distribution + income tax). There is no withholding tax.

Double taxation is avoided through exemption and credit methods depending on whether the redistributed dividends have been received from the company located in EEA and Switzerland or from other countries.

If the dividends have been received from subsidiary located in EEA or in Switzerland, the exemption is granted to outbound dividends at the same amount, if:

  • Estonian Company held in subsidiary at least 10% of the shares and;
  • Subsidiary is a taxable person as such (i.e subject to taxation with income tax there).

Please note that in this case, it is not important whether the dividends or profit was taxed at the subsidiary!

If dividends have been received from subsidiaries located in other countries, the exemption is granted to outbound dividends at the same amount, if:

  • Estonian Company held in subsidiary at least 10% of the shares and;
  • Dividends distributed by subsidiary were subject to WHT or the profit from which the dividends were paid was taxed.

There is no income tax withholding (mentioned in Art-s 10 of DTT and PS Directive) regardless to whom the dividends are paid!

In several countries there is no personal income tax on pass-through dividends. Interest payments from Estonian company to mother company are not subject to taxation and withholding in Estonia unless exceed arm’s length interest.

Interest payments from Estonian company to non-associated company are not subject to taxation and withholding in Estonia unless exceed arm’s length interest. Estonian local law is more favourable than Interest-Royalty Directive.

There are no thin capitalization rules.

How does it work?

  • Invest through an Estonian holding company;
  • Collect dividends or interest in an Estonian holding company;
  • Dividends or interest collected from your investment are not taxed until distributed;
  • Redistribution of dividends received is generally exempted from tax;
  • Interest paid to the parent company of an Estonian holding company or a third party is not subject to with-holding tax unless it exceeds arm’s length interest;
  • Inbound interest is not subject to taxation until distributation.

Thus, the total cost of pass-through dividends and interest is often the tax paid at the source
country.

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