Non-resident branch mergers get tax-free path with conditions

A merger that folds a non-resident company's Estonian permanent establishment into an Estonian company is free of income tax under TuMS § 53 lg 44Riigiteataja only when four conditions holdEmta together: the merged company is a non-resident legal person; that non-resident has a permanent establishment in Estonia; the enterprise forming part of that establishment passes to the acquiring company in the merger; and economic activity continues in Estonia through the transferred enterpriseEmta. Residence follows treaty article 4(1) with TuMS § 6 lg 3; the establishment follows treaty article 5(1). The transfer itself runs through ÄS § 391 with TsÜS § 661 and VÕS § 180 lg 2 or, alternatively, § 185.

A parallel exemption covers the receiving side. Where a resident company absorbs the enterprise of a non-resident's Estonian permanent establishment, TuMS § 50 lg 2 last sentence grants the same merger reliefEmta: the merged company is a non-resident, it has an Estonian permanent establishment, that establishment's enterprise passes to the resident company, and the transfer follows the same civil-law route with TuMS § 6 lg 2 second sentence addedEmta. Property brought in for the establishment counts like shareholder contributions, so taking it out is treated like a distribution on a capital reduction.

A missed declaration does not destroy the relief by itself. Following RKHKo 3-18-989 p 15 on distributions from a resident company's equity, TuMS § 50 lg 2 does not tie contributed capital to its declarationEmta: breaching the declaration duty does not turn every later distribution into taxable incomeEmta. The same principle applies to property brought in for, or taken out of, a permanent establishment. But a declaration failure alone does not forfeit the reliefEmta, though it raises the taxpayer's burden of proof in an audit.

Carrying a tax-exemption right into the acquirer has a hard limit. Under TuMS § 50 lg 11 and lg 21, a dividend paid out of received taxed profit, and a code 7550 entry in part IV of TSD annex 7, presuppose a real movement of money or other property to the Estonian company in EstoniaEmta — not merely the transfer of an abstract right to make tax-exempt distributionsEmta. An acquirer that inherits only the paper right, with nothing actually moved, cannot book a 7550 amountEmta.

The decisive moment is the registry entry, not the merger balance-sheet date. Following RKHKo 3-20-2630 pp 11–27, the balance-sheet date is only a statutory fiction for relations between the merging companies and for drawing up accountsEmta: it has no tax-law effectRiigikohus, ends neither accounting nor tax dutiesEmta, and does not move rights against third partiesEmta. Assets pass to the acquirer by force of law when the constitutive merger entry is made under ÄS § 403 lg 1Emta, and tax rights and obligations move at that same moment under MKS § 35 first sentenceEmta. The opposite reading would leave up to eight months of profit (ÄS § 400 lg 2 first sentence) taxed nowhere. Final returns may be filed after the merger-entry application but before the merged company or branch is deleted from the registerEmta.

Legal basis: TuMS § 50 lg 2, lg 11 and lg 21, § 53 lg 4 and lg 44, § 54 and § 6 lg 2–3; ÄS §§ 391, 400 lg 2 and 403 lg 1; TsÜS § 661; VÕS § 180 lg 2 and § 185; MKS § 35; TSD lisa 7 IV osa kood 7550.