Income tax on dividends could be lowered

Joosep Värk
, reporter
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Information available to Postimees suggests that the prime minister's economic growth working group will propose cutting the rate of income tax on regular dividends to 14 percent, instead of the current 20, as part of a package of changes next Wednesday. Regular dividend payments would be defined as the average distributed profit for the past three years. Anything above that would be subject to the current 20 percent rate.

The working group, described by CEO of LHV group Erkki Raasuke as a place where members ask each other questions about the elephant in the room we no longer want or know how to talk about, has done its job and it set to present its report on Wednesday. The report's several dozen items include descriptions of how to boost quality of management, solve creeping labor shortage, create more added value etc.

Raasuke did not want to comment of what the report includes precisely and whether the dividends proposal is indeed a part of it yesterday. He said that first the report needs to be presented to the government. Analysts who did not participate in the work of the committee were willing to comment on the theoretical proposal.

The president's economic adviser Heido Vitsur said he has repeatedly suggested that growth stimuli require income tax on dividends to be separated from the general income tax rate. “It could be done for a time. For example like they do it in the United States, where a change is made for a period of ten years, after which it is decided whether it pays to retain or reverse it,” Vitsur explained.

The most obvious problem spot with this proposal is the so-called practice of contracting (using companies to offer services instead of entering into employment contracts to avoid having to pay social tax on salary) that could become more common as a result of a 14 percent tax rate. Vitsur recalls the income tax act that was in effect during the first republic where tax obligations depended on the level of openness of the company. “Such concessions cannot be made in situations where the company and its management board are not open. So something has got to change first,” Vitsur said. He added that the change should not apply to those who engage in the sharp practice.

Economist at SEB Mihkel Nestor is less enthusiastic about the idea, and also highlights the practice of contracting. “Additional measures can be taken to avoid that; however, it could prove very difficult in practice,” he said.

The analyst gave the example of a situation where an executive manager who also has a stake in the company pays himself average salary but also takes out three average salaries worth of dividends each year. “Is he avoiding taxes on salary? Where do we draw the line?” Nestor asked.

He also doubts whether the change would affect availability of capital to any notable degree. “The problem with the economy right now doesn't seem to be lack of capital but rather sensible ways to use it,” Nestor explained. He added, however, that the change would yield more accurate state budget revenue forecasts.

The proposal is just one among dozens the working group of entrepreneurs has put together inside the past year. Raasuke said members met a total of ten times, and that these meetings were not spent in happy unison.

Solutions for sharp problems Estonia faces were sought by entrepreneurs Erkki Raasuke, Ardo Hansson, Ruth Oltjer, Margit Härma, Taavi Veskimägi, Urmas Varblane, Seth Lackman, Rain Rannu, Maris Lauri, and Väino Kaldoja. Prime Minister Taavi Rõivas also participated on a few occasions.

The group will first present the report to the government for questions. After that, the report will be made public and sent to all interest groups for coordination and addition – the latter is a requirement introduced by the working group's members as modern governance demands interest groups to be consulted.

Once the coordination round is complete, proposals will move back to the government and the surviving ideas will be distributed between ministers.