Exemption Method in Payment of Dividends

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.