Income tax when profits or assets are transferred to a foreign head office
If a foreign company has a branch or a permanent establishment in Estonia, it is important to understand its specific income taxation rules. In Estonia, corporate income tax is based on distributed dividends, meaning that tax is currently paid at a rate of 22/78 on distributed profits.
A branch or permanent establishment does not distribute dividends, but it must also pay income tax when its profits or assets are transferred to the foreign head office. Additionally, income tax is payable on fringe benefits, gifts, representation expenses, and non-business-related costs incurred in Estonia. However, if the profits and assets remain in the use of the permanent establishment or branch, no income tax is payable in Estonia.
Accounting and financial Statements
A separate accounting record must be kept for a permanent establishment, and it must prepare financial statements for Estonia within six months after the end of the financial year.
The financial statements of a permanent establishment must include at least:
- Basic information, name, registration number, and registered office in Estonia
- An activity report on the operations of the permanent establishment in Estonia
- Balance sheet
- Income statement
- Signature of the authorized representative
TSD tax return for transferred profits and balance sheet changes
For taxation purposes, the permanent establishment in Estonia must ensure that the profits it generates remain available for its use at the end of the tax period (calendar month). In practice, this requires preparing the balance sheet so that all earned but undistributed profits correspond to actual assets (cash, goods, securities, receivables, etc.). The deadline for filing the TSD tax return is the 10th of the month following the taxable event. If no changes have occurred, the TSD return does not need to be submitted.
The TSD return reports the value of new assets if, during the tax period (calendar month), there has been a transfer of assets between the head office and the permanent establishment in Estonia (e.g., assets brought to the permanent establishment in Estonia or transferred back to the head office).
If the foreign head office cannot prove that an amount equivalent to the profit remains available for the permanent establishment (for example, if the foreign head office has distributed dividends from the profit earned by the permanent establishment or if it is found that the permanent establishment has not received fair compensation for the use of its assets), the profit is considered to have been transferred and is subject to income tax.
The value of assets reported as arriving at the permanent establishment reduces the taxable profit allocated to the permanent establishment.
Example questions regarding reportable assets
-
Are computers/machines purchased in Finland by the head office and brought to Estonia for the branch’s use reportable assets? Yes, if the computers/machines were purchased on behalf of the head office in Finland and the branch has not paid for them, they must be reported as assets.
-
Should funds transferred by the foreign head office to the permanent establishment’s bank account to cover operating expenses be reported? If the foreign head office has transferred loan funds to the permanent establishment and the permanent establishment is required to repay the loan, the transferred funds are not considered reportable assets. However, if the head office has transferred funds to the permanent establishment to cover operating expenses and there is no obligation to repay the funds, then the transferred funds must be reported as assets.
For more information, visit the Estonian Tax and Customs Board:
taxation profit permanent