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Dividend Decision under Distributed Profit Taxation: Investorís Perspective


  • Aaro Hazak

    () (School of Economics and Business Administration, Tallinn University of Technology)


Distributed profit taxation is the corporate taxation regime of Estonia. A theoretical model on dividend policy under this tax system, compared to traditional gross profit taxation, is presented in this paper. The paper seeks to model a company operating under uncertainty in a binomial framework, including company and investor level taxes and investorís different consumption levels. Overall, the tax effects on different forms of payout (e.g. dividends or share repurchases) are equal under this tax regime and the main question is deciding upon the timing of dividends. There appear to be different optimums for the timing, depending on the investorís consumption as well as the probability of losses, tax rates and interest rates. Though one of the aims of the Estonian corporate tax system is to motivate companies to reinvest the profits earned instead of paying them out, the theoretical analysis in this paper shows that from the investorís perspective retaining of all profits in the company may not be the optimal payout policy in many cases. The study helps to understand the characteristics of this unusual tax regime and may potentially lead to discussions on introducing a similar system in other jurisdictions or on modifying the corporate taxation principles in Estonia

Suggested Citation

  • Aaro Hazak, 2006. "Dividend Decision under Distributed Profit Taxation: Investorís Perspective," Working Papers 145, Tallinn School of Economics and Business Administration, Tallinn University of Technology.
  • Handle: RePEc:ttu:wpaper:145

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    References listed on IDEAS

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    Cited by:

    1. Aaro Hazak, 2009. "Companies' Financial Decisions Under the Distributed Profit Taxation Regime of Estonia," Emerging Markets Finance and Trade, M.E. Sharpe, Inc., vol. 45(4), pages 4-12, July.

    More about this item


    dividend policy; corporate taxation; distributed profit taxation;

    JEL classification:

    • G35 - Financial Economics - - Corporate Finance and Governance - - - Payout Policy
    • K34 - Law and Economics - - Other Substantive Areas of Law - - - Tax Law

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