To liquidate a private or public limited company by a simplified procedure, transfer the assets to the sole shareholder. The sole shareholder then becomes the legal successor.

The amendment to the Estonian Commercial Code establishes a merger procedure. This procedure transfers a company’s assets and liabilities to a sole shareholder. However, it remains unclear what the final profits for the shareholder will be. To address this, the Income Tax Act (TuMS) was supplemented. The act provides clarity on calculating and taxing profits distributed in a merger at both the company and shareholder levels.

Taxation at the company level

The wording valid until 31 December 2014 stated that no tax liability arose. This condition applied if the assets of the company were deleted from the register. They continued to be used in economic activities in Estonia.

The amendment valid from 1 January 2015 updates the wording of § 50 (22) of the TuMS. Tax liability does not arise if the assets of a preregistered company continue to be used in Estonia. This applies to economic activities in another company or a permanent establishment of a non-resident company.

A tax liability arises due to the amendment. This affects a company that transfers its assets to a natural person through a merger. The process is based on subsection 391 (7) of the Commercial Code. As before, the company incurs a tax liability on the equity amount exceeding the financial contributions. This also includes non-monetary contributions made to the company. The tax liability is calculated based on the equity amount. This amount is reflected in the final balance sheet of the company being acquired.

Taxation at the shareholder level

As of 1 January 2015, § 15 (32) of the TuMS was supplemented. According to this, the benefits received from the company due to the merger are taxed similarly to the equity payments. They are also taxed like the liquidation division provided for in § 15 (2) and (3) of the TuMS. The company’s assets were merged with a natural person’s assets. This person must be aware of any tax liabilities that may arise.

§ 15 (32) of the TuMS provides details about company mergers. Upon merging with the assets of a natural person, income received in monetary or non-monetary form is taxed. The assumed liabilities exceeding the acquisition cost are also considered, except for the part of the said profit. If the obligation taken over from the company is extinguished because of waiver or expiration, it affects tax. A coincidence of the debtor and creditor or any other reason can also extinguish it. The amount of the extinguished liability reduces the company’s income upon merger, and it is subject to income tax.

Thus, in a merger, a natural person incurs a tax liability. A tax liability arises when there is a difference between the assets and liabilities acquired from the company. This difference is compared to the acquisition cost of the shareholding. Income received in non-monetary form (acquired assets) is accounted for at market price. If the liabilities taken over from the company are subsequently reduced, the natural person will incur an additional tax liability.

The obligations of the company are transferred in the case of a merger pursuant to § 391 (7) of the Commercial Code. They are transferred to a sole proprietor or shareholder who is a natural person. However, it may happen that the natural person does not have to perform all obligations. For example, after a merger, a creditor may waive a claim against a natural person. Alternatively, the natural person may refuse to perform an obligation due to lapse of time.

A claim may also terminate upon the coincidence of the debtor and the creditor (§ 186 (3) of the LPA). This happens if the sole shareholder is a creditor of the company. It also applies if a shareholder who has taken over the obligation from the company is a creditor.

When such a liability reduces taxable profits in calculating a company’s tax liability, the natural person must pay income tax. This occurs if it becomes apparent that he is not required to comply with that liability.

A natural person becomes liable to tax in the period when the obligation ceases. For limitation cases, tax liability arises once the limitation period expires. Income tax for a natural person is calculated only on the part of the obligation not fulfilled. For example, if part of the obligation has been met using property, the individual pays tax. They pay tax only on the expired portion. The individual pays tax only on the expired portion.