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6.1. Main Rules Governing the Determination of Taxable Income

Estonia levies a corporate income tax only on corporate profits that are distributed or deemed distributed. Retained profits of all sources and regardless of denomination are exempt from tax, unless deemed distributed. Distributions and deemed distributions subject to corporate tax consist of the following:.

  • Dividends (other than stock dividends) and other profit distributions such as share buy-backs, capital reductions or liquidation proceeds in excess of contributed capital;
  • Transfer pricing adjustments;
  • Non-business related expenses;
  • Fringe benefits ; and
  • Gifts, donations and entertainment expenses.

From the Estonian perspective, the tax on distributions and deemed distributions is characterized as  as a corporate income tax (see Sec. 8.1.1. for tax rates) rather than a withholding tax and, therefore,  the tax rate is not affected by double tax treaties. Certain domestic and foreign taxes can be credited against the corporate income tax charge under domestic law or double tax treaties (see Sec. 9.). Certain distributions are exempt from such tax (“participation exemption – see Sec. 6.6.”).

Distributable profits are determined by financial statements drawn up in accordance with Estonian GAAP or IAS/IFRS and there is no adjustment of accounting profits for tax purposes (e.g., there is no separate tax depreciation or tax loss carry-forward or carry-back).