The essence of the lump sum tax on corporate income (Estonian CIT) is that tax liability arises only when profits are transferred outside the company for purposes other than reinvestment. This liability arises, among other things, from dividend payments. Contrary to popular belief, dividend payments from a company subject to Estonian CIT benefit from preferential tax treatment. However, this preference is also present in personal income tax, i.e., the tax on the shareholder receiving the dividend. A dividend is usually understood as cash paid by the company to its shareholders. However, nothing prevents dividends from being paid in kind. But how is it taxed in a company subject to Estonian CIT?
A company that wanted to pay out a dividend in the form of real estate from profits earned before and after switching to Estonian CIT faced this issue. The company requested an interpretation with the following questions:
- Will paying such a dividend constitute a hidden profit?
- Will the payment of such a dividend constitute income for the company from settling an obligation by providing a non-cash benefit?
In its position, the company indicated that dividends in kind, provided they are valued at their fair market value, will be taxed in the same way as cash dividends. Regarding the second question, the company stated that while the Estonian corporate income tax regulations do not explicitly exclude the application of Article 14a of the Corporate Income Tax Act, which provides for separate taxation of, among other things, dividends in kind, the structure of the regulations on the lump sum tax on corporate income excludes its application. This exclusion applies to both profits generated before and after the transition to Estonian corporate income tax.
The Director of the National Tax Information Service (KNI) found the company's position correct. In its justification, it stated that, pursuant to Article 28m, Section 1, Item 1, Letter a of the Corporate Income Tax Act, income corresponding to the amount of net profit generated during the period of lump-sum taxation is subject to lump-sum taxation, in that portion of that profit designated for distribution to shareholders, stockholders, or partners pursuant to a resolution on the distribution or coverage of the net financial result (income from distributed profit). The definition of hidden profits clearly indicates that they can only include profits generated during the period of lump-sum taxation. Therefore, a dividend for the period before the transition to Estonian CIT, regardless of the form, will not be considered hidden profit. However, a dividend in kind from profit generated after the transition to Estonian CIT will be taxed according to the rules for taxation of dividends, not hidden profits.
Regarding the taxation of the obligation to pay dividends in kind, the authority stated that a taxpayer subject to lump sum taxation, for the purposes of determining the tax base, is not subject to the existing CIT taxation regime under general principles. However, the Accounting Act applies to recording economic events. According to this, the difference between the market value of the property and the value resulting from the company's books at the time of transfer of ownership will result in a profit/loss recognized in the profit and loss account for the period of ownership transfer. Consequently, transferring the property to the company's shareholders as a dividend in kind will not result in the generation of income for the company, as referred to in Article 14a, Section 1 of the CIT Act. In such a case, the principles of the Accounting Act will apply, with all their consequences, and the dividend payment transaction in kind will be reflected in the financial result. Also in this case, the period for which the dividend is paid is irrelevant.
(Individual interpretation of March 15, 2024, reference number 0111-KDIB2-1.4010.605.2023.1.AS)
This article is for informational purposes only and does not constitute legal advice.
Legal status as of May 19, 2025
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