December 1, 2021
To liquidate a private limited company or a public limited company by a simplified procedure by transferring the assets of the company to a natural person who is the sole shareholder or shareholder and the natural person becomes the legal successor of the legal person.
As the amendment to the Estonian Commercial Code provides for a merger procedure in which both the assets and liabilities of a company are transferred to a sole shareholder, it is not yet clear from the merger what the final profits of the company will be to its shareholder. Therefore, the provisions of the Income Tax Act (TuMS) were supplemented, which specify the calculation and taxation of profits distributed in a merger at the level of both the company and the shareholder.
Taxation at the company level
According to the wording valid until 31 December 2014, no tax liability arose if the assets of the company deleted from the register continued to be used in economic activities in Estonia.
The amendment valid from 1 January 2015 supplements the wording of § 50 (22) of the TuMS so that tax liability does not arise only if the assets of a deregistered company continue to be used in Estonia for economic activities in another company or a permanent establishment of a non-resident company.
As a result of the amendment, a tax liability also arises for a company which transfers its assets and liabilities to a natural person upon merger (on the basis of subsection 391 (7) of the Commercial Code). As before, the company incurs a tax liability on the part of equity that exceeds the financial and non-monetary contributions made to the company. The tax liability is calculated on the basis of the amount of equity 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 which the benefits received from the company due to the merger are taxed similarly to the equity payments and liquidation division provided for in § 15 (2) and (3) of the TuMS. Thus, the natural person with whose assets the company’s assets were merged must be aware of any tax liabilities that may arise.
§ 15 (32) of the TuMS provides that upon the merger of a company with the assets of a natural person the income received from the company in monetary or non-monetary form and the assumed liabilities exceeding the acquisition cost, except for the part of the said profit . If the obligation taken over from the company is subsequently extinguished due to waiver, expiration, coincidence of the debtor and creditor or for any other reason, the amount of the extinguished liability by which the income from the company was reduced upon merger is subject to income tax.
Thus, in a merger, a natural person incurs a tax liability between the assets and liabilities acquired from the company, which exceeds 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.
Although in the case of a merger pursuant to § 391 (7) of the Commercial Code, the obligations of the company are transferred to a sole proprietor or shareholder who is a natural person, 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 or 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) if the sole shareholder or shareholder who has taken over the obligation from the company is himself or herself a creditor of the company.
If, in calculating a company’s tax liability, taxable profits have been reduced by such a liability, the natural person must pay income tax if it becomes apparent that he is not required to comply with that liability.
A natural person becomes liable to tax in the tax period in which the obligation ceases to exist. In the case of limitation, the tax liability arises upon the expiry of the limitation period of the claim. At the level of a natural person, income tax is calculated only for the part of the obligation that the natural person does not have to fulfill. For example, if a natural person has fulfilled part of the obligation at the expense of his or her property and part of the obligation expires, then the natural person has to pay income tax only for the part that expired.