Despite being in effect for several years, the regulations regarding the taxation of profit distributions from companies subject to Estonian corporate income tax (CIT) still raise some doubts. Perhaps surprisingly, the disputes center around, among other things, who actually pays the tax.
How does taxation of profit distributions work in Estonian CIT?
While under the traditional corporate income tax (CIT), a company generally pays tax on its income, Estonian corporate income tax (CIT) delays this payment until the profits are distributed to shareholders. This special tax preference allows the company to accumulate capital that can be reinvested, positively impacting business development. Taxing profits only on the portion allocated for distribution to shareholders is therefore advantageous, especially if the shareholders' financial needs are significantly lower than the profitability of their venture.
In addition to deferring taxation on profits, Estonian corporate income tax also generates a tangible tax benefit in the form of a reduced total tax rate for partners. Personal income tax due on dividends can be reduced by the appropriate portion of the Estonian corporate income tax attributable to each partner. The reduction is 90% of this part of the lump sum in the case of a company applying the 10% rate or 70% - when the company applies the 20% rate.
What is the essence of the problem?
During the first years of Estonian corporate income tax regulations, the following interpretation prevailed: first, the shareholders' meeting would adopt a resolution regarding the distribution of profits, specifying a specific amount. From this sum, the company would then deduct its own Estonian corporate income tax (10 or 20%), and then also the personal income tax due from the shareholder. As a result, in economic terms, the partners economically financed both their own and the company's taxes. In practice, therefore, the comparison of company taxation under the “ordinary” and Estonian CIT was as follows:
| Company on "ordinary CIT" | Company on Estonian CIT (old rules) | |
| Income | 100 | 100 |
| Tax (19% / 20%) | 19 | 20 |
| Income after tax | 81 | 80 |
| Partner's tax | 19% * 81 = 15,39 | 19% * 100 = 19 |
| Tax reduction amount | 0 | 70% * 20 = 14 |
| Total tax burden | 34,39 | 25 |
| Partner's income | 65,61 | 75 |
Of course, it is clear that the Estonian CIT has always been a clearly more friendly tax regime, but in this tax settlement model, a limited liability company was somewhat closer to partnerships that are not CIT taxpayers.
Who paid the tax?
Although the low tax burden rate is a very important argument in favour of choosing Estonian CIT, in this case the problem lies elsewhere. The crux of the dispute surrounding who should actually pay Estonian CIT is that, applying the new line of interpretation, companies should have paid out over the years not 75% of the amount indicated in the resolution on profit distribution, but approximately 95%. As a consequence, many shareholders may have potential claims for payment of the missing 20% dividend.
How have the views of the Director of KIS evolved?
For a long time, the Director of the National Tax Inspectorate (KIS) held the position described above: partners would approve a specific amount of profit to be distributed, and then the company would deduct both its own tax and the partners' personal income tax from that amount. The body adopted this position, for example, in its interpretation of July 15, 2022, reference number 0111-KDIB1-3.4010.238.2022.3.MBD.
On March 15, 2024, a breakthrough came. In interpretation 0111-KDIB2-1.4010.39.2024.1.AR, the authority agreed with the taxpayer, finding that the dividend amount resulting from the resolution is not reduced by Estonian CIT. The company pays tax from its own funds (which basically follows directly from Article 1 of the CIT Act), and only the partner's PIT is deducted from the dividend – after applying the applicable reduction. DKIS also upheld this position in subsequent interpretations, for example in the one issued on June 13, 2025, reference number 0111-KDIB1-1.4010.199.2025.1.KM, and on January 5, 2026, reference number 0111-KDIB1-2.4010.644.2025.1.EJ. In our opinion, the "grossing up" of Estonian CIT is fully justified by the provisions of the Act and this view should be maintained in case law and interpretative practice - the burden of CIT rests with the company and it is difficult to argue with that.
The mechanism used is illustrated in the table below:
| Income | 100 |
| Company CIT | 20 |
| Gross Partner Dividend | 100 |
| PIT before reduction | 19 |
| PIT after reduction | 5 |
| Partner's net income | 95 |
| The "cost" of withdrawal | 120 |
What does this mean for taxpayers?
The authorities' newer approach is undoubtedly much more beneficial for shareholders of companies using the flat-rate income tax – a larger amount is paid to them under favorable terms. On the other hand, the economic burden of the tax rests with the company.
The analyzed change in interpretation may result in a complete reorganization of settlements between the company and the shareholder.Many taxpayers, after all, remain under a significant obligation to shareholders, stemming from the fact that they were entitled to receive approximately 95%, not 75%, of the gross dividend.
If the company has paid out generous dividends in the past, there is a significant liquidity risk, as the shareholders' receivables may reach several percent of the paid amount. Due to the fact that the claims for dividend payment are not periodic in nature (confirmed by the resolution of the Supreme Court of 18 June 2015, file reference no. III CZP 31/15), under current law, are subject to a statute of limitations of 6 years. Consequently, arrears with interest may constitute a significant amount.
It should be emphasized that a mere change in the interpretation of the Director of the National Tax Information System does not automatically result in additional claims by shareholders. The legal situation of the parties depends on many factors, including the content of the resolutions concerning dividend payments. However, it appears that in practice, many shareholders may seek additional funds.
Summary
The aforementioned change in the interpretation of the Director of the National Tax Information Act may open up the possibility for shareholders to recover significant amounts—often amounting to hundreds of thousands of zlotys. If you know or suspect you have a claim for payment of the missing portion of your dividend, contact us—we will assist you in handling this process from start to finish.
