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Declaration of value of assets imported to a permanent establishment of a non-resident legal person since 1 January 2019


A non-resident legal person with a permanent establishment in Estonia is obliged to declare the amount of value of assets not yet exported as of 31 December 2018 in code 3333 of Annex 3 of form TSD of January 2019, by 11 February 2019 (subsection 61 (60) of the Income Tax Act).

What is to be followed in determining the value of assets?

In determining the value of assets imported in the permanent establishment in Estonia, the value of assets established by another country, where the assets are transferred from. The market value is accepted if the established value does not reflect the market value. (Subsection 53 lg 412 of the Income Tax Act)

If a non-resident legal person transfers assets to a permanent establishment in another country, the assets may have been taxable in the country of origin, either the established or market value of assets (exit tax).

When a value of assets transferred to Estonia is declared in Annex 3 of form TSD, the double taxation of a same amount will be avoided in the future, while transferring the assets back to the head office.

In Annex 3 of form TSD, the value of assets to the extent no other assets are granted for or no services provided or no other equivalent benefits are granted, no payment or demand is given, must be declared.

Which kinds of assets are to be declared?

Which assets are to be declared on code 3333 of Annex 3 of form TSD?

According to the guidance available in the Estonian Supreme Court case (RKHK 3-3-1-20-14), the important principle to be followed is the equal taxation treatment of economic transactions between a non-resident and its' permanent establishment in Estonia compared to the situation where instead of a permanent establishment or a branch, there would have been an independent subsidiary. The Estonian Supreme Court has concluded that any granted or returned loans may not be regarded to be contributions to or payments from equity.

A share capital of a company or other contributions made by shareholders and shown in an annual report of an independent company would be regarded similar to the assets of a permanent establishment imported into Estonia.

The act of taking out of assets from a permanent establishment can be compared to a case of reduction in a share capital of a company or in the contributions of a general or limited partnership, and a case of redemption or return of shares or contributions or liquidation proceeds of a company.

Those payments are taxable in the amount which exceeds the acquisition cost of the holding (shares, contributions). Similarly to a tax treatment of those transactions of an independent company, profit attributed to a permanent establishment upon division is taxable (as dividends and other profit distribution of a resident company). Since the amount of profit taken out does not exceed the amount previously imported into a permanent establishment, it is not taxable, similarly to contributions in a share capital of an independent company.

Examples
Can a computer acquired for a branch be declared as imported assets of a permanent establishment?

If the computer was acquired (cost charged) by the branch, it has not to be declared as imported assets. If the computer was acquired (cost charged) by the head office and the branch did not pay for it, the value of a computer may be declared as imported assets.

Are a computer or other equipment acquired for a branch by the Finnish non-resident company and imported into Estonia be regarded as assets imported into the permanent establishment to be declared?

Yes, a computer or other equipment acquired for a branch by the Finnish non-resident company and imported into Estonia are regarded as assets imported into the permanent establishment to be declared.

Is a bank transfer for remuneration of operating costs from a non-resident to a permanent establishment to be declared?

Yes, a bank transfer for a remuneration of operating costs from a non-resident to a permanent establishment is to be declared if the branch does not have to pay for it.

If the head office of a non-resident granted a loan to a permanent establishment and the last is obliged to return it, is such loan to be declared?

No, if the head office of a non-resident granted a loan to a permanent establishment and the permanent establishment is obliged to return it, such loan is not declared.

Are cost of services provided or goods sold to a permanent establishment by a non-resident legal person to be declared as assets imported?

No, as there is an obligation to pay for services provided or goods sold to a permanent establishment by a non-resident legal person, the cost in not  to be declared as assets imported into the permanent establishment.

Is profit earned by a permanent establishment to be declared as assets imported into a permanent establishment?

No, only assets imported into a permanent establishment by a head office of a non-resident legal person, not exceeding the amount of assets taken out of it are to be declared as assets.

Profit derived by a branch (permanent establishment) in Estonia cannot be declared as imported assets!

Why is it important to declare the value of assets?

Income tax is imposed on profit attributed to a permanent establishment which has been taken out of the permanent establishment during a period of taxation in monetary or non-monetary form (subsection 53 (4) of the Income Tax Act).

Provided that the assets are set to revert to Estonia within a period of 12 months, the abovementioned sentence shall not apply to asset transfers related to the financing of securities, assets posted as collateral or where the asset transfer takes place in order to meet prudential capital requirements or for the purpose of liquidity management (the second sentence of subsection 53 (4) of the Income Tax Act, in force since 1 January 2020).

Profit attributable to a permanent establishment according to subsection 53 (4) of the Income Tax Act, shall be regarded also:

  • difference between the market value and balance sheet value of assets transferred at the moment of removal, and

  • positive difference between the market value and established value of assets transferred (according to subsection 53 (412) of the Income Tax Act) in a permanent establishment, at the moment of removal (subsection 53 (413) of the Income Tax Act, in force since 1 January 2020).

Thus, it is important to declare the value of assets transferred to Estonia, in order to attribute profit to and assess income tax to profit of a permanent establishment according to subsection 53 (413) of the Income Tax Act.

Declared value of assets is important, because it influences the profit attributable to a permanent establishment to be taxable by income tax.

How will the value of assets be declared in the future?

In the future, the net balance of assets shall be declared monthly in code 3333 of form TSD, if there is a change in the amount of assets that month (if assets are transferred in or out of a permanent establishment). If and when there are no transfers that month, there is no need to fill in code 3333 then).

How is profit attributed to a permanent establishment declared?

In code 3000 of form TSD, the following shall be declared:

  • usual profit attributed to a permanent establishment, which has been taken out of the permanent establishment during a period of taxation in monetary or non-monetary form, and

  • profit derived from assets transferred from a permanent establishment during a taxable period, where the value declared in code 3333 of Annex 3 of form TSD is allowed to take into account in calculation of the profit.

In the e-Tax/e-Customs, there is no automatic common calculation of codes 3000 and 3333 of Annex 3 of form TSD. If profit is derived from assets transferred from a permanent establishment, the value of assets shown in code 3333 must be deducted manually.

How is the reduced rate of income tax to be applied to profit of a permanent establishment?

Since 1 January 2019, a reduced income tax rate 14% or 14/86 from net amount, instead of general 20% or 20/80 from net amount will be applied to a profit taken out of a permanent establishment.

Thus, if profit is taken out regularly annually from a permanent establishment, it will be taxed at a lower rate, compared to large amounts collected longer and paid out while closing a permanent establishment.

The lower income tax rate applies to a profit distributed during a calendar year, up to the extent of amount of average distributed taxable profit of the previous three calendar years of a permanent establishment.

It does not prevent from calculating average profit of the previous three calendar years and application of a lower income tax rate, if profit has not been distributed during one or more previous years. Just the amount of 0 will be taken into account upon calculation of an average of the year, while taxable profit has not been distributed.

According to the new regulation, in calculating the average distributed profit of the previous three calendar years, the first year to be taken into account shall be deemed to be 2018. The lower rate applies in 2019 to one-third of the profit distributed in 2018 on which income tax has been paid, in 2020 to one-third of the profit distributed in 2018 and 2019 on which income tax has been paid by a non-resident with a permanent establishment.

Both profit amounts on which income tax has been paid at a lower income tax rate of 14/86 and general income tax rate of 20/80 are taken into account while calculating the average of profit of the previous three calendar years. The amount exempted in order to avoid double taxation will not be taken into account in calculation of an average amount.

The average taxable amount of the previous three years is calculated separately for each next calendar year. The net amount of average profit calculated last year, but not distributed and used to pay a lower income tax rate then, will not be carried forward to following calendar years. Thus, the more regularly and in equal amounts annually the profit is distributed every year, the bigger and more stable will be the amount on which the income tax at a lower rate is to be paid.

It is possible to check the total net amount of profit of a permanent establishment, on which the lower income tax rate is applicable, in the e-Tax/e-Customs, in part I of Annex 3 of form TSD.

How is the profit attributed to a permanent establishment and taxable both at a lower and general income tax rate declared?

Distributed profit attributed to a permanent establishment shall be declared in code 3000 of Annex 3 of form TSD. It is possible to avoid double taxation of the amount at first, by deducting the tax exempted amount in code 3260. After that, the part of profit to be taxed at a lower rate of 14/86 shall be calculated in code 3272. At last, the part of profit which exceeds the unused average taxable amount of the previous three calendar years shall be calculated in code 3273, on which general income tax rate of 20/80 is applied.

There is no withholding income tax applicable on the amount of distributed profit (if compared to taxable dividends paid to a natural person) and the payment shall not be declared in form INF 1.

January 2019
 

11.02.2019