In order to minimize marketing and sales costs in the Baltic States, many foreign traders employ so-called consignment deliveries. Other than reducing costs while penetrating the Baltic market, consignment deliveries can also limit a foreign trader's tax exposure in the country of a consignee.
As a practice, consigned merchandise is transferred to a consignee for presale storage or sale. A consignor can raise its profile on the Baltic market by making the merchandise accessible on the spot by the customers.
For tax purposes, the mere delivery, storage or display of the merchandise in the consignment stock will not generally be treated as a permanent establishment of a consignor. However, a consignor must clearly identify the risk related to creation of a permanent establishment through a dependent consignee, who will sell the merchandise thereafter in the name and the account of a consignor.
As a result, tax experts advise not to consign a substantial part of merchandise to a consignee, who by virtue of the obligations contained in the cooperation agreement will become a dependent agent of a consignor.
The accounting treatment of consignment deliveries is also quite straightforward. In consignment presale storage, a consignor bears all risks related to the merchandise, including but not limited to risk of destruction, market price fluctuations, cost of the financing. As a result, the merchandise is reflected in the balance sheet of the consignor.
On the other hand, in a consignment sale a consignee bears related risks or assumed the risk of realization of the merchandise and, as a result, the merchandise is reflected in the balance sheet of a consignee.
In Estonia, intra-community consignment sales do not impose the obligation on a consignor to register as a VAT-payer in a country of a consignee due to reverse charge taxation. In the opposite, if a consignee or a third party does not acquire the consigned merchandise, a consignor will be required to register as a VAT-payer as a consignor will be considered to create an intra-community acquisition of goods. Importing the merchandise from third countries does not impose the obligation on a consignor to register as a VAT-payer. However, in this case a consignor shall be aware that exceeding the respective threshold for local sales will at some point impose the registration obligation.
A foreign trader has a range of options for trading on the Baltic market, and consignment deliveries is one possibility. In this way the cost side of the start-up activities will be kept at reasonable level, and a foreign trader can lawfully reduce its tax exposure in the country of a consignee.
Konstantin Kotivnenko is an attorney-at-law, a senior associate at Sorainen Law Offices in Tallinn