How are dividends taxed in the Baltics?
Indeed, this question becomes more and more relevant thanks to rapid growth in the Baltic markets and investments from abroad. In general, all three countries have established rather favorable regimes for the expatriation of profits in the form of dividends. Tax treatment, however, differs in each country depending on the taxation system.
As a rule, companies in Lithuania and Latvia may distribute dividends out of net profit. Consequently, amounts used for the payment of dividends should first undergo taxation of profits at the company level. The corporate profit tax is applied on an annual basis, and the standard tax rate is 15 percent both in Lithuania and Latvia.
Dividends distributed by Lithuanian companies to foreign ones are subject to a withholding tax of 15 percent. However, dividends paid to foreign companies are not taxed in Lithuania if the recipient of dividends holds more than 10 percent of shares for a period no shorter than 12 consecutive months, including the moment of distribution of dividends. However, this exemption does not affect companies registered in offshore zones.
Dividends distributed by a Lithuanian company to individuals, both local and foreign, are subject to a 15 percent withholding individual income tax.
Generally, dividends paid by a Latvian company to foreign companies and individuals are taxed at a 10 percent withholding rate. As with Lithuania, this rule is subject to the exemption that, however, is limited by higher restrictions and in fact could be applied in the scope not broader than that established by the EU parent subsidiary directive (90/435/EEC). Thus, according to the general exemption, the dividend tax is not imposed on the dividends paid by a Latvian company to a company incorporated in the EU and that holds at least a 25 percent shareholding for no less than two years. This exemption is subject to certain formalities to be filed with the tax authorities.
The taxation of dividends of Estonian companies is influenced by specific rules applied in regard to taxation of profits of resident companies. In Estonia, the corporate profit tax is not applied on a regular basis. Instead, the obligation to pay the profit-tax occurs at the moment of distribution, including distribution via dividends. This system should remain until 2008, since Estonia has been provided with a transitional period to that date for the application of the parent subsidiary directive.
Thus, an Estonian company that distributes dividends will first be required to pay the profit-tax from the distributed amount - the so-called "distribution tax." Currently, the corporate profit tax rate is 26/74 of the net distributed amount - i.e. 26 percent of the gross amount. The tax rate will be gradually reduced down to 20 percent by 2007.
After payment of tax on profits, an Estonian company must withhold the dividend tax, which at the moment is 26 percent, unless the dividends enjoy exemptions.
Dividends distributed to foreign companies holding 20 percent or more of shares in the Estonian company, as well as to foreign individuals, are not subject to withholding tax. Nonresident companies located in offshore territories may not benefit from this exemption.
In case of the distribution of dividends to foreign persons by the Baltic companies, one should also take into account tax treaties concluded by Lithuania, Latvia or Estonia with other states. The application of those treaties could result in the reduction of withholding tax rates or a possibility to decrease the tax burden in the home country of the recipient.