Dividendsis one of the most common ways for a business owner to receive a share of the profits earned by the business. If your business is successful and you have made a profit, there is a natural desire to participate in it personally. But paying dividends is not just a click of a button — it requires correct documentation, timely decisions, and tax accounting.

In this article we explain step by step:

• What are dividends and when can they be paid?
• What are the main conditions for paying dividends?
• How to declare dividends and what taxes are involved?
• What mistakes to avoid?

What are dividends?

Dividends are corporate Profits from previous yearsincome paid to owners (shareholders). It is like a “return on investment”, or a reward for having contributed capital to the company.

NB! It is important to remember: Dividends are not wages. They are not paid for the work done, but for being the owner.

When can dividends be paid?

Dividends may be paid solelyif all of the following conditions are met:

1. Share capital paid up in full— without it, no dividends may be paid.
2. The company has retained earningsfrom previous financial years.
3. Annual report approvedAudited if necessary.
4. The decision of the shareholders to pay dividends is formalized.
5. Solvency of the companymust not suffer after the payment of dividends.

Dividend payment for the first time

If you plan to pay dividends for the first time, additional requirements apply:

• At least one completed financial yearmust be present.
• The report must contain profit, at the expense of which to pay dividends.
• Annual report must be submitted and approved.

How often can dividends be paid?

Dividends are paid in Estonia Mostly once a year, but the law does not limit the frequency. In practice, it is also possible to pay Quarterlyor even twice a year.

NB! Monthly Dividend Paymentsmay raise doubts in the Tax and Customs Board, especially if the company does not pay wages at all. However, if the company receives mainly investment income, a monthly dividend may still be justified.

How to pay dividends?

1. Submit an approved annual report.
2. Formalize the decision of the shareholders on the payment of dividends.
3. Make a dividend payment to shareholders.
4. Submit TSD Annex 7 and INF1 declarations in e-MTAS.
5. Pay income tax.

Taxation of dividends

When paying dividends, it is also necessary to take into account with income tax, the rate of which is 22/78perhaps approximately 28.2% of the net amount.

Example:
You want to pay 10 000€in the net amount of dividends (that is, this amount is transferred to the shareholder).

Income taxis calculated as follows:
10 000€ × 22/78 = €2,820.51

Total cost of the enterprise:
10 000€ + 2 820.51€ = €12,820.51

In other words, if you want to pay the shareholder 10,000€, the company will pay in total. €12,820.51, of which €2,820.51 must be paid as income tax to the State.

To whom and how much are dividends paid?

Dividends are distributed according to participation. If you are a 50% shareholder in the company, you will also receive 50% of the dividends paid.

Where the articles of association provide otherwise (e.g. different types of parties or contractual differences), the distribution may be different.

Common misconceptions

“If dividends are not stated in the annual report, they cannot be paid.”Okay. However, the shareholders' meeting may subsequently decide to pay dividends.

“If dividends are specified in the report, they must definitely be paid out.”Okay. This is a proposal, not an obligation. Shareholders may choose not to pay dividends.

Checklist for paying dividends

• Share capital paid in
• Annual report submitted and approved
• Retained earnings available
• Shareholders' decision made
• Disbursement made
• TSD and INF1 declared
• Income tax paid

Dividends are reasonable and legal wayto distribute the profits of the company among the owners. But in order to avoid problems with the tax office, it is necessary to fulfill all the conditions established by law and correctly draw up decisions.

If you need assistance with dividend payments, reporting or tax accounting — Feelfin helps!