Glossary
Distributed profit tax
A corporate tax that falls only when profits are distributed as dividends — retained and reinvested profits are untaxed. Estonia's model is the best-known example.
Under a distributed profit tax, a company pays 0% corporate income tax on the profit it retains or reinvests, and is taxed only when it distributes that profit to its owners (dividends). Tax is deferred indefinitely for a growing business, which rewards reinvestment over extraction.
Estonia's model
Estonia pioneered this system in 2000. There is no annual tax on retained earnings; distributed profits are taxed on a grossed-up basis — historically 20% (calculated as 20/80), rising to 22% (22/78) from 2025, so verify the current rate. Latvia adopted a similar model in 2018. See tax residency in Estonia.
Why it matters
For founders who reinvest, the effective corporate rate can be zero for years — capital compounds untaxed until it is paid out. It pairs naturally with Estonian e-Residency for running the company remotely, though your own personal tax residency is a separate question.
Official sources
Rules change — always confirm the current position with the primary authority:
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