If you own and run an Estonian company while operating in Estonia on a permanent basis and being a tax resident there, the following principles apply regarding dividend payments.
If your company has earned profit and you'd prefer not to pay dividends at the moment, but you might change your mind in future, there are 2 possible approaches, taking into account the core principles below. It's up to you to decide, and let us know.
Core principles
The core principles are as follows:
Taking into account the possible dividend payment which you’d make during 2021 (if you change your mind), you decide the total sum of your salary (i.e. board member's remuneration) which should be recorded as a cost of year 2020 in order to balance the potential dividend payment in a fair manner.
We’ll record the sum of the salary + related taxes in the annual report for 2020. The salary + related taxes would lower the profit of 2020 accordingly (and lower the maximum sum to be distributed as dividends).
While the salary + tax costs are taken into account in the annual report, these don't have to be paid out immediately i.e. you can decide if and when you make the actual payments.
The salary + taxes are reported to the Estonian tax Authorities only when you make the actual salary payment. For example, if you decide to pay it out in September 2021, it will be reported in October 2021, and then the relevant taxes will have to be paid as well. If you do not pay it out at all (for instance if you do not change your mind about dividend payments), nothing happens, so no taxes are reported nor paid on the salary either. And if you do not make the payments at all, then when we compile the next annual report (about 2021) you'll need to decide whether to cancel the recognised salary cost + related tax cost (which means the profit of 2021 would increase accordingly) or still keep it in the balance just in case you'll decide to make the payments in 2022.
The salary + taxes (indicated in the annual report of 2020) have to be paid out latest when you make the dividend payment in 2021.
Option A
If you already have an approximate idea of how much you'd possibly like to pay out as dividends in 2021, you'll declare the relevant shareholders decision in the annual report as well. And to match the possible dividend payment, we'll also record an average board member salary cost + taxes in the annual report of 2020 (lowering the profit of 2020 accordingly) already, to keep it in the same period as the allocated profit.
In this case no further shareholder decisions would be required during year 2021, and you're free to decide when you actually make the dividend payments, the salary payment, and the related tax payments. The salary + tax payments cannot take place later than actual dividend payments.
Option B
If you are unlikely to pay out any dividends in 2021, it makes sense to declare the shareholders decision in the annual report as follows - 'Not to pay out any dividends', and not to record any additional salary for 2020 retroactively either. And if during the year you change your mind and would like to pay out x EUR as dividends, you'll make a formal decision (as a shareholder), and the rest of the process will follow.
The shaky component in this case is the salary - if you decide to pay dividends in August (still based on the profit earned in 2020), and have not declared the salary + taxes for 2020 (to match the logic of dividends) in the annual report, it cannot be declared retroactively and would be considered as a salary for the contribution in 2021 instead. We presume that this discrepancy triggers an alarm for the tax authorities.
The salary and the related taxes could be declared in the annual report i.e. the cost recognised in the company's books (lowering the profit accordingly), but it's a separate decision when to make these cost payments from the company's account, so you can postpone the actual payments.