Estonian CIT – is reducing PIT advances by the company’s partial CIT tax safe?

Companies subject to the so-called Estonian CIT will not have to delay paying advances on account of dividends. The regulations allow for deducting part of the company’s tax due from the shareholder’s income tax advance. This follows from the interpretation of the Director of the National Tax Information dated 2 June, ref. no. 0115-KDIT1.4011.176.2022.1.MR.

Issue with income tax advances

Until December, according to the tax authorities’ position, the regulations did not allow reducing the PIT advance on the shareholder’s income by the part of the CIT due from the company. As a result, the effective tax rate on advances paid to shareholders on account of dividends during the year amounted to 39% (20% from the company and 19% from the shareholder).

The regulations enable companies subject to Estonian CIT to deduct part (70% or 90% if the company has small taxpayer status) of the company’s tax due attributable to the shareholder from the shareholder’s PIT due. The effective tax rate on profit distribution is thus 20% for small taxpayers and 25% for others. After the introduction of the above regulations, an opinion emerged that such deduction could not be made at the stage of withholding advances but only after dividend payment and in the annual tax settlement. This raised concerns among taxpayers and experts, pointing out that in such a case, advances on account of dividends paid during the year lead to tax overpayment, which is only settled at the annual reconciliation stage. These concerns were confirmed by the tax authorities’ interpretations at that time.

New interpretation

In the latest interpretation by the Director of the National Tax Information, the authority confirmed that, pursuant to the amendment of tax regulations effective from 1 January 2022, a company paying advances on account of dividends may reduce the withheld 19% PIT by the appropriate part of the company’s income tax due (i.e. part of the company’s CIT). This is the first interpretation of its kind addressing the issue of the Estonian CIT regulations’ interpretation.

The content of the issued interpretation is of significant importance for companies subject to the new regulations, which until now have refrained from paying advances on account of profit (dividends) for fear of the inability to deduct.