Central bankers slam Estonian government, commercial banks' dividends deal

Bank of Estonia Governor Madis Müller.
Bank of Estonia Governor Madis Müller. Source: Ken Mürk/ERR

Bank of Estonia Governor Madis Müller and economist Kaspar Oja on Tuesday criticized the deal struck between the government and commercial banks earlier that day according to which commercial banks operating in the country will be spared from a contemplated new bank tax by paying more dividends next year.

"There will be no bank tax; the banks are willing to contribute to society in solidarity," Prime Minister Kaja Kallas (Reform) announced Tuesday after meeting with the chiefs of Estonian Banking Association member banks. "This will give the banks tax peace for three years."

According to subsequent explanations, commercial banks promised to pay larger dividends than planned this year, which would support the state budget, as these are subject to income tax. Nonetheless, the income tax rate would be higher next year, meaning that banks would essentially have to pay less income tax.

This solution was criticized by representatives of the Bank of Estonia, the country's central bank, who drew attention to the fact that under this plan, the Estonian state will lose out on tax revenue.

"The banks are showing solidarity (with their clients or the state budget?) by distributing even more profits and capital to their owners as dividends before the tax hike!" Müller tweeted. "If only their profits could be bigger, they could show even more solidarity?"

Oja highlighted the same.

"Someone just got absolutely taken for a ride..." the central bank economist tweeted. "Banks are going to pay out dividends at a lower tax rate prior to the tax hike and the coalition is calling this a big win. In other words: banks' profits are going to be taken out of the country, and they won't be increasing lending here."

Commercial banks in Estonia are expected to see significantly higher profits this year than last thanks to the increase in the Euribor, or Euro Interbank Offered Rate.

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Editor: Aili Vahtla

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