Taking counsel: Dividend payment in Estonian business entities

  • 2007-04-04
  • By Mariana Hagstrom [Teder, Glikman & Partnerid]
It is once again time to approve economic reports and adopt resolutions on distribution of profit, so the basic aspects of dividend payments in Estonian businesses should be reviewed. The pre-condition for dividend payment is that the relevant authorized body (general meeting of shareholders/meeting of shareholders) of a business entity (public limited partnership/private limited partnership) has passed a resolution on profit distribution based on a formerly approved economic year report.

The Commercial Code provides a condition that a business entity may only make payments to shareholders from net profit of the last year or from undistributed profit from previous financial years, from which uncovered losses from previous years have been deducted. Payments shall not be made to shareholders if the net assets of the public limited company, as apparent from the annual report of a business entity (equity capital), are less than, or would be less than, the total of share capital and reserves.

The income tax rate calculated from net dividend payments is 22/77'si.e., 22 percent of the gross sum. (From 2008 the rate will be 21 percent, and it will decrease 1 percent per year until 20 percent in 2009.) At the same time the actual income tax payable from the dividend can be even less due to tax exemptions and discounts.
For example, a dividend paid by an Estonian business entity is exempted from income tax if the entity has received the assets, which are the basis for income tax payment obligation, as dividend from another Estonian or foreign company, and this other legal entity has already paid income tax from this profit either in Estonia or abroad.

The same is applicable if the dividend is paid from profit earned by a permanent business establishment in a foreign country. The additional requirement is that the Estonian entity must have at least 15 percent ownership in the Estonian or foreign entity that paid the dividend, from 2009 this requirement decreases to 10 percent of ownership.
Dividends will be paid to persons included in the shareholders' list. In case the profit distribution decision does not provide due date and terms for payment of dividend, inter alia whether the dividend will be paid in full amount or in instalments within a certain time period, then the shareholders are entitled to claim payment of dividend at any time. As a rule, a shareholder will be paid a share of profit, i.e., dividend, according to the nominal value of the shareholder's shares.

In respect to public limited companies the Commercial Code provides a new possibility to pay a so-called preliminary dividend, if such possibility is provided in the articles of association. Namely, in case of consent by the supervisory board, after the end of the economic year and prior to approval of the annual economic report, the management board of a public limited company can make dividend pre-payments to shareholders from the anticipated profit up to half of the estimated sum to be distributed between the shareholders. As far as private limited companies, the Commercial Code does not provide such a possibility of preliminary dividends.

The amendments of Commercial Code, which were adopted last year, also annulled the restriction to pay'si.e., to decide payment of dividend only once a year.

Mariana Hagstrom is attorney at law at Teder, Glikman & Partnerid, a member of Baltic Legal Solutions, a pan-Baltic integrated legal network of law firms which includes Kronbergs & Cukste in Latvia and Jurevicius, Balciunas & Bartkus in Lithuania, dedicated
to providing a quality 'one-stop shop' approach to clients' needs in the Baltics.