Companies establishing subsidiaries: why is this necessary?

Depending on the jurisdiction, holding companies can offer tax advantages, including deferring the taxation of profits, lower tax rates, or using tax credits. Often the idea behind establishing holding companies is the creation of centers of competence; a holding also enables centralised management of different subsidiaries, which can lead to more efficient decision-making and smoother operations. Diversification of investments and flexible response to market conditions are common keywords in the emergence of distinctive group structures.

For years, Estonia has promoted itself as an attractive location for foreign holdings, but it can't be said that too many have accumulated here. On the contrary, active efforts in this direction are still needed. Our geographical location unfortunately works to our disadvantage here. According to the 2025 PwC survey of top executives, 66% of Estonian CEOs have rated geopolitical risk as high or very high. Local top executives are also dissatisfied with the country's tax system and its changes, as well as the government's efforts in developing the business environment.

In terms of corporate law, Estonia's legal environment can be considered advanced and European, with key words being reliability and transparency. The requirements for establishing a company, maintaining it, and financial reporting in Estonia are generally clear and understandable, with the Commercial Code having been in force for over thirty years, offering consistent interpretation and application. The latest major changes in corporate law came in 2023 when, as part of the revision of corporate law, rules governing registry maintenance were delineated in a separate act, giving the registrar greater rights to verify compliance with legal requirements, including those related to reporting obligations.

Specifically speaking about group structures, the legal amendments at that time addressed the issue of group liability at the legislative level, enhancing legal certainty by incorporating previously expressed positions from Supreme Court decisions into the law.

Relationships between parent and subsidiary companies within a group are regulated somewhat differently than those of stand-alone companies. It is natural for the parent company to provide directives to the subsidiary's management bodies, and such directives are mandatory for the subsidiary's executives to follow. It may happen that the instructions received from the group are not the best choice from the perspective of a specific subsidiary, but they align with the interests of the group as a whole. If the subsidiary's management legitimately follows the group interest in such a situation, they are not considered to have breached their duties as board members. Naturally, it is important to note that not every transaction can be justified by group interest, only those that meet the criteria set out in law. Additionally, for the sake of proof, the legislator has stipulated that guidelines must be at least documented in a form that allows for written reproduction, which means that directions agreed upon in undocumented conversations are insufficient for reliance.

Company structures sometimes need updating

Returning to the reasons for the emergence of group structures and internal restructurings, in practice these are mostly combined, with clear trends appearing occasionally. In practice, situations arise where a structure previously preferred for a particular purpose becomes impractical over time, for example, an interim holding may become unnecessary. It might happen that there is a willingness to sell a business, which creates a need for the seller to place it in a separate entity beforehand, and from the buyer's perspective, perhaps a need to combine entities. In business cessation, one might consider merging the company as an alternative to liquidation, but it should be kept in mind that while the activities of the company end in both cases, merger and liquidation have different consequences. When merging a company with another entity, its obligations are transferred to the new entity, whereas in liquidation, the creditors’ obligations are discharged before deletion from the register. An interesting nuance is that the Commercial Code allows for the merger of a company with the assets of a sole individual owner.

Intra-group restructurings often occur through mergers and divisions, which are generally tax-neutral. From a corporate legal perspective, these are well-regulated but document-heavy and in most cases rather time-consuming transactions, especially when the restructuring has a cross-border component.

One risk is chaotic project management during restructurings, which can result in necessary changes not being registered on time. For years, an uncertainty regarding the date of registry entry for such transactions was a common stumbling block, but the amendment of the Commercial Code has resolved this issue. According to current law, it is possible to request the registration to be tied to a specific date.

In our experience, the greatest risk is the inadequate evaluation of the impacts of the planned restructuring. The drivers of restructuring are commercial considerations, but preparation should map out impacts on employees, legal actions, associated costs (such as notary fees), how and when the restructuring will be reflected in reports, and of course possible tax implications. The devil is often in the details, and thorough advanced planning saves time, money, and nerves.

The article was originally published in Estonian in the news portal Postimees.