In 2013, €1.5bn worth of dividends were declared at Tax and Customs Board – a whopping 35 percent more than the year before and by far the biggest money for the past decade or more. The data being fresh, Taxman has not had the time to do deep analysis to find out how this came to be: by some super payments or numerous newcomers.
At the beginning of this year, Ministry of Finance announced that 2013 legal persons income tax came in at 139.6 per cent of sum planned for budget, revenue thereof up 29.4 per cent year-on-year. Of that, 81.1 per cent was income tax paid from dividends.
Better off, financially
Proportion of companies with state holdings amounted to 11.6 per cent. Over the year, share of such enterprises shrunk 15.6 per cent, private sector’s input increasing nearly 46 percent.
As assessed by finance ministry, the strong dividends growth in private sector was probably caused, among other things, by increased business confidence and the undistributed profits accumulated over the years. The ministry pointed out the large proportion of enterprises which paid their first dividends in the past five years.
For the dividend leap, analysts have no explicit explanation; even so, they are speculating about unwillingness to invest and increased profits. Entrepreneurs themselves are, among other things, anxious about increase of taxes. In the opinion of LHV economist Heido Vitsur, higher dividends are paid for the simple reason of Estonian companies having done quite well over the past three years, on average, many significantly improving their financial positions.
«Meanwhile, in the current market situation, good investment options are lacking the world over and in Estonia also. It hardly makes the companies willing to invest, with weakening demand on our export markets and the chronic lack of skilled labour at home,» he explained.
According to Martti Talgre, corporate banking chief at SEB, while talking to representatives of companies and clients he has discovered that their desire to invest is currently rather low, while financial results, money flows and balance sheets are strong. Thus, the companies have more spare cash, which they wish to pay out to owners as dividends.
As underlined by entrepreneurs: dividends are paid as the owners see fit, depending on needs of the moment. Here, the macroeconomic situation is just one of the factors.
According to Viktor Siilats, owner of Info Auto, it may be that 2013 was a good year and owners rewarded themselves with dividends; or, rather, that the macroeconomic situation does not favour reinvestments and it makes more sense, therefore, to take the profit out as dividends.
«Sometimes, it is wise to keep the company thin, so to speak, and take the profit out as dividends i.e. not letting the management spend too loosely on inventory or new gadgets,» he added. «At the same time, we are currently having a favourable tax environment which may change, in the future. Therefore, postponing the taxes may not end well.» The fact that enterprises are worried, lately, about the tax environment, was clearly seen in a recent top managers survey by PricewaterhouseCoopers (PWC), the auditor. A whopping 73 percent of the 70 top managers interviewed in Estonia thought that, for them, the increasing tax burned was an acute problem.
Left turn fear?
Presenting the study results, PWC Eesti chief Ago Vilu said this had never before been a problem for such a large number of entrepreneurs. «The overall sentiment, among entrepreneurs, is negative. There has been no positive news over the past four-five years. Estonia is starting to lose its reputation for good tax environment,» he stated.
Worryingly, tax amendments were attached to the state budget, at the end of last year; definitely, some entrepreneurs are also nervous about Riigikogu elections next year. As predicted by the public, «left turn threat» in Estonia is the greatest over many years.
Mr Vitsur, the LHV analyst, does not believe the increased dividends came out of entrepreneurial fear of left turn or tax hikes. Even so, he notes the entrepreneurs are worried about tax environment for many years already.
«Firstly, tax proposals related to entrepreneurs haven’t been discussed too seriously up to now. Secondly, Ministry of Finance has not been too active in engaging entrepreneurs in its tax policy discussions,» said Mr Vitsur.