Upcoming Changes to Estonia’s Tax System : What You Should Know About Profit Distribution in 2024

Learn how upcoming tax rate increases and profit distribution options will impact your business strategy in Estonia for 2024 and beyond

Estonia has long been known for its business-friendly tax environment, particularly its unique system that allows companies to defer taxes on reinvested profits. However, significant changes are coming in 2025 that will affect how businesses distribute profits. While the ability to reinvest profits without immediate taxation remains intact, distributing profits will soon become more costly.

Here’s what you need to know about these changes and how to prepare.

What’s Changing in 2025?

Starting next year, Estonia will raise its corporate tax rate on distributed profits from 20% to 22%. Additionally, the reduced 14% tax rate that applied to regular dividends will no longer be available. This means businesses that regularly distribute profits will face a higher tax burden from 2024 onward.

Because of these upcoming increases, companies may want to consider distributing any available profits before the end of 2023 while the lower tax rate is still in effect.

Distributing 2023 Profits: A Simple Process

If your company has profits from the 2023 financial year, distributing them before the tax rate increases is relatively straightforward. Once the company’s financial statements for 2023 are approved and confirm the availability of profits, the business can distribute those profits as dividends. If your company has enough cash on hand, you can issue cash dividends; if not, non-cash distributions are possible, though taxes on any profit distribution must still be paid in cash.

Distributing 2024 Profits: What Are Your Options?

Typically, profits earned in 2024 cannot be distributed until the company files its financial report in 2025. By that time, the new 22% tax rate will apply. Unfortunately, there are limited options for distributing profits earned in 2024 before the higher tax rate kicks in.

Pre-Dividend Payments: Are They Possible?

In some countries, it’s possible for companies to issue pre-dividend payments—distributing profits before the end of the fiscal year. Unfortunately, this is not an option in Estonia. Dividends can only be distributed after the fiscal year ends and the financial statements are approved, meaning pre-dividends for 2024 profits cannot be issued.

Capital Reduction: An Alternative for Profit Distribution

Another option for distributing profits is through capital reduction. This involves the company buying back shares or reducing share capital, returning cash to shareholders in the process. Up to a certain amount, these payments can be made tax-free, as long as they don’t exceed the shareholder’s original capital contribution. If the payment exceeds this amount, it is subject to the same tax rates as dividends—20% this year, rising to 22% in 2024.

One key detail to note is that companies cannot choose the order in which profits are distributed. Tax-free amounts are always used first, and any remaining payment is then subject to taxation.

Preparing for the Changes

With the tax landscape shifting, businesses should plan carefully to minimize the impact of the upcoming rate increases. Key steps include:

• Distributing Profits in 2023: Maximize the distribution of profits before the end of 2024 to take advantage of the current lower tax rate.

• Exploring Capital Reduction: For companies seeking an alternative method to return profits to shareholders, capital reduction can be a viable option, especially given its partial tax-free benefits.

Conclusion

Estonia’s tax system remains one of the most favorable for businesses, particularly with its deferred tax structure on reinvested profits. However, the upcoming changes in 2024 will raise the cost of profit distributions, making it essential for businesses to act now to optimize their tax strategy. Whether through profit distribution or capital reduction, there are steps companies can take to mitigate the impact of these changes.

If you’re unsure about the best approach for your company, it might be a good idea to consult with a tax advisor to make sure you’re taking the right steps for your business. A little planning now can save you from higher costs down the line.

To ensure your business stays ahead of the upcoming changes, explore tailored tax strategies and company registration services with eFinance. Visit www.efinance.ee to learn more about how we can help you navigate Estonia's evolving tax landscape with expert support.

Don't wait—start planning today!