According to Article 4 of the EU Parent-Subsidiary Directive (90/435/EC) on the common system of taxation applicable to parent companies and subsidiaries of different EU member states, member states must: (i) refrain from taxing (ie, the exemption method); or (ii) authorize the parent company to deduct from the amount of tax the amount of corporation tax paid by the subsidiary (ie, the credit method).
Amendments to the Income Tax Act which became effective on July 1 2005 herald the application of the exemption method to dividends paid by Estonian parent companies or payments made by permanent establishments of non-resident companies. The amendments apply retroactively as from January 1 2005.
Under the amendments, dividends paid by a parent company resident in Estonia are not taxable if the parent company held at least 20% of the shares of the subsidiary at the time of receiving payments from the subsidiary and the subsidiary has been taxed in Estonia or a foreign country. In addition, the payment of dividends imputable to the profits of a permanent establishment of a resident parent company are not taxable if the permanent establishment has paid the relevant corporation tax. In both cases tax paid by the subsidiary is taken into account only if taxation is obligatory under the law or a tax treaty.
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