Abstract

The lump-sum tax on income of capital companies (Estonian CIT) implies a postponement of taxation of corporate profits until they are distributed to shareholders. As long as the company does not distribute the profit, it is not obliged to pay a lump sum on the income or collect tax on the dividend.

If the profit is distributed, it is still subject to taxation (PIT and CIT), however, due to the application of the deduction mechanism indicated in Article 30a Paragraph 19 of the Personal Income Tax Act (hereinafter: PDOFizU), the effective tax rate is much lower and amounts to 20% or 25%.

However, in the opinion of the National Tax Information Office, this provision does not apply to the payment of advances on account of dividends.

In the tax authority's opinion, it follows directly from the wording of the provision that the deduction mechanism may only be applied to dividends paid by a company from profits taxed with a lump-sum tax on income of capital companies. This means that it does not apply to advance payments of dividends.

Nevertheless, such interpretation should be regarded as excessively rigorous . When issuing a tax interpretation, the tax authority should also take into account the objective and systemic interpretation. Applying only the literal interpretation leads to an unjustified differentiation in the status of shareholders receiving advance payments and those receiving dividends. It is difficult to assume that the legislator's intention was to tax the same category of profit differently.