Estonian tax deducted from dividends paid by an Estonian company at the agreement rate of 15 per cent (5 per cent if the dividend is paid to a UK resident company which controls directly at least 25 per cent of the voting power in the company paying the dividend) qualifies for credit as a direct tax (see INTM164010(c)). The reduction to the above rates is not given where the dividends are effectively connected with (see INTM153110, fifth sub-paragraph) a permanent establishment or fixed base which the recipient has in Estonia.
However, the EC Parent-Subsidiary Directive applies to Estonia from 1 January 2005. This bars the imposition of withholding taxes on dividends paid by a company resident in one Member State of the Community to a company resident in another Member State, where the company receiving the dividends holds a minimum of 20 per cent (from 1 January 2005)of the capital of the company paying the dividend. The level of control required to gain exemption will be 15% from 1 January 2007 and 10% from 1 January 2009.
Where a dividend is paid to a UK resident company which controls, directly or indirectly, at least 10 per cent of the voting power in the company paying the dividend, relief is also due under the agreement for underlying tax (see INTM164010(d) and Article 23(1)(b)).