The article was published in Äripäev on 27 May 2026.
Foreign withholding tax is not simply an unavoidable tax cost for an investor operating through a company. If treated correctly, it constitutes a tax credit that reduces future Estonian corporate income tax liability, write financial adviser and investor Jekaterina Tint and Tõnu Kolts, Managing Associate at COBALT.
Many Estonian investors invest in foreign shares and bonds through an Estonian company. In such cases, income tax is often withheld abroad from dividends and, in some cases, from interest payments. In practice, this is often viewed simply as an investment cost or an unavoidable form of “tax leakage”.
In fact, foreign income tax withheld can be used by an Estonian company as a tax credit, reducing its future Estonian corporate income tax liability. Moreover, in certain circumstances, such a tax credit may also have accounting value.
How does double taxation arise in practice?
When an Estonian company receives dividends or interest from a foreign company, income tax is often withheld in the foreign country. For example, dividend payments may reach the investor’s account only after 15%, 20% or, in some cases, even 35% income tax has already been withheld.
The same funds may then be taxed again in Estonia when profits are later distributed. To avoid this, section 54(5) of the Estonian Income Tax Act allows income tax withheld or paid abroad to be used as a credit against the Estonian company’s corporate income tax liability.
Importantly, unlike the exemption method, the application of the credit method does not depend on the size of the shareholding. This means that the credit method may be particularly relevant for portfolio investors investing through a company in securities in which they hold smaller stakes.
Tax credits do not arise only from dividends
In practice, the credit method is most commonly associated with foreign dividend-paying shares, but tax credits may also arise from other types of income.
For example, certain countries also withhold income tax from interest payments or other forms of income, such as royalties. The issue is therefore relevant not only to dividend investors, but more broadly to investment companies earning passive income from abroad.
Tax credits may accumulate over the years
In practice, the credit method often remains unused by investors operating through companies.
Many smaller corporate investors prepare their accounts only once a year when drawing up the annual report. As a result, foreign withholding tax is often left undeclared, either through lack of awareness or in order to avoid additional administrative work.
At the same time, investment portfolios may grow for many years before the owner begins to make dividend or capital distributions from the company. During that period, unused tax credits may accumulate into a significant amount.
For example, a portfolio worth €10,000 with a 4% gross dividend yield would generate €400 in dividends per year. If 15% income tax is withheld abroad, this amounts to €60 of foreign income tax paid. If this amount is properly declared, it can be used to reduce future Estonian corporate income tax. At Estonia’s 22% corporate income tax rate, a €60 foreign tax credit covers the Estonian income tax liability arising on a net dividend payment of €212.73.
Although the amounts for individual years may appear small, over a longer period they may accumulate into a meaningful tax credit.
Not all withholding tax paid abroad may be creditable in Estonia
This is where an important practical nuance arises.
In Estonia, only the portion of foreign income tax that was mandatorily payable under the law of the foreign country or under an applicable tax treaty can be taken into account as a credit. In practice, this rate is generally 10% or 15%.
This means that if a foreign country withholds more income tax than permitted under the tax treaty between Estonia and that country, the excess amount cannot be used as a tax credit in Estonia.
For example, depending on the broker, dividends from Finland may in certain cases be subject to withholding tax of up to 35%, even though under the tax treaty between Estonia and Finland the tax burden should generally be limited to 15%. Similar situations may also arise in relation to securities issued by companies in certain other countries.
In such cases, the Estonian company may credit in Estonia only the portion permitted under the relevant tax treaty. The remaining amount must be reclaimed separately from the foreign country.
The choice of broker may affect the actual net return on an investment
In practice, the impact of withholding tax does not depend solely on the investment itself, but also on the broker’s practices.
Some brokers apply the reduced tax treaty rate already at the time of payment, collect certificates of tax residence from investors and help avoid excessive withholding tax.
Other brokers do not do so, leaving investors to deal with foreign tax refund procedures themselves, submit certificates of residence retrospectively or accept that part of the withholding tax will remain a final cost.
The choice of broker may therefore affect the actual net return on an investment more than an investor might initially expect.
Foreign withholding tax as an asset
Foreign withholding tax is often treated purely as a tax matter. In fact, it may also have an important role in financial reporting: where the amounts of foreign tax withheld become material for a company, consideration should be given to recognising them in the company’s accounts.
The Estonian financial reporting standard does not expressly prescribe how such a tax credit should be accounted for and refers to the international standard IFRS for SMEs, section 29. For listed companies, a similar principle also follows from IFRS, in particular IAS 12 *Income Taxes*, under which recognition of a tax credit depends on whether it is probable that the future tax benefit will be realised.
If it is probable that the company will be able to use the tax credit in the future to reduce its Estonian corporate income tax liability, the credit may be recognised as prepaid income tax within assets. The justification for recognising the asset must also be reassessed at each reporting date.
If, however, the realisation of the credit is not probable, for example where the company is unlikely to be in a position to distribute dividends in the coming years, it may be appropriate to recognise the amount immediately as an expense.
From an economic perspective, this means that foreign withholding tax does not necessarily represent merely a historical tax expense for a corporate investor, but may instead constitute a tax asset that can be realised in the future.
Declaration and documentation
Income tax withheld or paid abroad is declared in Part Ib of Annex 7 to the TSD tax return. In order to use the tax credit, the company must hold a certificate from the foreign tax authority or the withholding agent confirming the amount of tax withheld. In practice, a broker’s transaction statement showing the amounts of tax withheld is often used as supporting evidence.
Records must be kept separately for each country and for each payer. The declaration shows the gross amount of income received and the income tax withheld, of which only the amount permitted under the applicable tax treaty is automatically taken into account as a credit.
If tax credits have not been declared in previous years, it is possible to amend the relevant tax returns. In practice, however, amendments can generally only be made for a period of three years, which is why it is advisable to declare tax credits on an ongoing basis.
Foreign withholding tax is not merely an unavoidable tax cost for an investor operating through a company. If treated correctly, it constitutes a tax credit that reduces future Estonian corporate income tax liability and can therefore mitigate double taxation more effectively than many investors realise. Where the use of the credit is probable, it may also be recognised on the company’s balance sheet as a tax asset, thereby strengthening the company’s financial position.
