Estonian CIT and MDR is a topic that is raising more and more doubts among entrepreneurs planning restructuring. Where does legal tax planning end and the obligation to report a scheme begin? We analyse when actions can be classified as artificial, what characteristics determine MDR and how to protect yourself against the risk of the Head of the National Tax Administration questioning your reorganisation.
The legislator’s objective – Estonian CIT as a tool for development, not optimisation
The explanatory memorandum to the act introducing Estonian CIT (Parliament print no. 643 of 2020) indicated that the new taxation model is intended to promote investment, development and capital accumulation. It is aimed at entities with a transparent ownership structure and low profit distribution.
At the same time, the legislator emphasised that the system is intended to be an alternative to optimisation mechanisms, not a substitute for them. This means that although reorganisations are permissible, they must be justified on business grounds, not just tax grounds.
MDR in the context of reorganisations and Estonian CIT
Joining the Estonian CIT is often preceded by restructuring (spin-offs, transformations, mergers). In such cases, the question arises: is such a reorganisation subject to reporting as a tax scheme?
According to the Tax Ordinance Act (Articles 86a–86o), in order for a reporting obligation (MDR) to arise, the arrangement must have certain characteristics. Thus, in the case of general characteristics of a tax scheme, the main benefit test must be met, but in the case of specific and other hallmarks, it does not.
The main benefit test in MDR arises when the main or one of the main objectives of the taxpayer’s activity is to obtain a tax benefit, i.e. to reduce, avoid, defer or refund a tax liability.
This does not apply to every tax benefit – the key question is whether this benefit outweighs the economic objectives. If the reorganisation is carried out mainly to obtain more favourable taxation (e.g. Estonian CIT) and the business objectives are only apparent or marginal, the main benefit test is met and the transaction may be considered a tax scheme.
As a necessary prerequisite – an alternative course of action.
This is a hypothetical way of achieving the same economic or commercial effect, but without (or with less) tax benefit.
When is it relevant?
If it can be demonstrated that a rational taxpayer could have achieved the same objective by a simpler, more tax-neutral means, but chose the route with the greater tax advantage, then:
the main benefit test is met.
Example:
A company wants to spin off its operating activities. It can:
- A. Carry out a organised part of the enterprise (ZCP) contribution (tax neutral, but subject to conditions for exclusion from Estonian CIT),
- B. Sell/redeem shares and restructure in a complex manner, but allowing for faster entry into the lump sum scheme.
If it chooses B solely for tax benefits, and the business effect could be achieved by A, the Head of the National Revenue Administration may consider that:
- the actions are artificial,
- there is an alternative, less tax-efficient route,
- and there is an MDR reporting obligation.
Summary
The alternative route is a measure of the rationality of the taxpayer’s choice. If there is a simpler, economically justified path without tax benefits, and the taxpayer chooses a different, more favourable tax route, then it most likely meets the main benefit test.
Example of a positive assessment – protective opinion of 10 March 2025.
The Head of the National Tax Administration considered a reorganisation in which a joint-stock company and a limited liability company, prior to entering into a lump-sum scheme, carried out the following to be consistent with the objective of the Act:
- purchased real estate and took out an investment loan,
- division by spin-off of a organised part of the enterprise,
- creation of new operating companies.
Although this resulted in tax benefits (deferral of CIT, neutrality of the division), the authority considered that the economic objectives prevailed: professionalisation, efficiency and clear division of activities.
Consequently, the main benefit test was not met and the reorganisation was not an MDR scheme.
Example of a negative assessment – refusal of a protective opinion, 27 June 2024.
The refusal concerned a capital group planning to switch to Estonian CIT. Key actions:
- sale and redemption of shares between subsidiaries,
- granting loans without economic justification,
- commencing lump-sum taxation immediately after the reorganisation.
The Head of the National Tax Administration concluded that:
- the transactions were artificial, without a rational business purpose,
- they were purely tax-related – including the conversion of capital gains into interest,
- the actions were aimed at circumventing the provisions of Articles 28j and 28k of the CIT Act (prohibition on shareholding and conditions for reorganisation).
Result: the authority questioned the intention behind the actions and decided that the reorganisation could be tax avoidance (GAAR clause) and wasn’t eligible for protection in the form of a protective opinion.
Practical conclusions
Estonian CIT and reorganisation – examine your MDR obligations
Actions should make economic sense – they cannot serve solely to achieve more favourable taxation.
- MDR reporting becomes mandatory if the reorganisation:
- leads to significant tax benefits,
- is not justified by actual economic activity,
- meets the hallmarks of a tax scheme, e.g.
– when the activities are based on significantly standardised documentation of an arrangement or
– they take a highly standardised form or involve a change in the classification or taxation rules, or
– when there is a transfer between related entities of intangible assets that are difficult to value, or
– there is a transfer of functions, risks or assets between related entities, where the EBIT for a three-year period would be less than 50% if such transfer had not taken place
- Refer to the legislator’s objective – the justification for the law is a strong argument in a possible dispute with the authorities.
- Not every restructuring = tax scheme. The key factors are transparency, documentation and the proportion between tax and economic motivation.
Summary – Estonian CIT and MDR: Where does tax planning end and a scheme begin?
Estonian CIT is a solution for companies that invest, not those that aggressively optimise. Reorganisations are permissible if:
- they have a real economic purpose,
- they are not solely intended to enter the lump sum scheme,
- they are not artificial.
If the main benefit is solely to defer or avoid tax, there is a risk of MDR or even GAAR. Professional analysis and preparation of documentation (or a request for a protective opinion) can help you safely implement the new taxation model.
Do you have additional questions? Be sure to contact us!
