Compulsory dissolution of a branch
A branch may be deleted from the Commercial Register on the basis of a court decision. There may be various reasons for the decision; in general the reason is that the branch or its activities do not conform to legislation. If it is possible to eliminate the branch’s deficiencies, the court shall grant a term before deleting the branch. This term allows you to eliminate deficiencies and continue the branch’s activities.
Reasons for deletion of a branch
The most common reasons for deletion of a branch:
- the branch has not adopted a dissolution resolution, even though it was required to do so;
- the objective of the branch’s activity or the activity itself is not in conformity with the requirements set forth in legislation, is in conflict with the public order and good morals;
- a petition by a creditor of the branch substantiating that the branch is not capable of discharging the demands presented by the creditor on the basis of the company’s assets in Estonia. Thus the company’s obligations must be paid from its other assets.
In addition, deletion may be based on other reasons arising from legislation. Among other things, deletion may be a punitive sanction for an offence committed by the branch.
The deletion process
Submit a petition for deletion of the branch to the county court on whose territory the branch is registered. Contact data for the court. The petition for deletion of a branch must be submitted by the company’s management board. Deletion may be initiated by the court itself and it may be sought by some other interested party (such as a creditor).
Begin liquidating the branch. You will have to follow a specific series of steps.
Liquidation consists of the following stages:
- Appointment of liquidators and entry of their names into the Commercial Register. The liquidators in the case of deletion of a branch will be appointed by court decision;
- Publication of a notice regarding the liquidation of the branch in the Ametlikud Teadaanded and notifying known creditors. The liquidation notice must specify that the creditors must present their demands within four months of publication of the notice.
- Approval of both the opening balance sheet prepared upon liquidation and the annual report by resolution of the shareholders. The opening balance sheet prepared upon liquidation and the annual report shall after approval be submitted promptly to the Commercial Register.
- A court may release a branch of the obligation of auditing the opening balance sheet prepared upon liquidation and the annual report if the financial situation of the company is so unequivocal that an audit appears not to be necessary in the interests of the company’s shareholders or the creditors.
- Dissolving the branch, collection of debts, sale of assets and satisfying creditors’ demands, regardless of notification of demands. If the assets of the branch being liquidated are not sufficient to satisfy all of the requirements of the creditors, the liquidators must file a bankruptcy petition. If a creditor known to the branch has not presented a demand and the demand cannot be satisfied due to reasons independent of the branch, the funds belonging to the creditor shall be placed in escrow.
- If it is not possible to discharge the obligation during the liquidation or if the demand is challenged, the branch’s assets may not be distributed among shareholders if the disputed sum of money has not been deposited or if the creditor has not been given sufficient security.
- Preparation of the final balance sheet of the branch and distribution of assets. Upon dissolution of a branch, transfer of assets from one structural unit of the company to another takes place – i.e. in general from the branch to the foreign parent company. As the parent company is responsible for the obligations arising from the branch’s activity, the foreign company will incur an income tax obligation with regard to gains earned from the transfer of assets.
- If the foreign company has not distributed the profit of its Estonian registered branch prior to dissolution of the branch, then the profits will be considered distributed upon dissolution of the branch and the foreign company will incur the obligation of paying income tax on the profit earned. Upon completion of liquidation, the final balance sheet shall be prepared.
Liquidation of a branch is a fairly time-consuming process that lasts at least six months. If the company that dissolved the branch wishes to do business in Estonia in future, it must establish a new branch.
The deletion will be effective as of the moment the corresponding court ruling enters into force. The court will also communicate the relevant information to the Commercial Register for the making of a dissolution entry.
If a branch is deleted from the Commercial Register on petition by a creditor, the foreign company may enter a new branch into the register only if the creditor’s claim has been discharged or if you present the creditor’s written consent for entering a new branch into the register.