In Estonian legislation there are few financial management requirements set in place for protection of the creditors. But despite having just a few requirements, failure to comply may lead you to losing your company and paying taxes. The most unnoticed, but at the same time one of the most important rules set for the company is its net assets value. It’s worth mentioning that this rule is considered so important that if the net assets value does not meet the legal requirements, paying the dividends is not allowed, moreover, your company may be dissolved by the government. So, let’s have a more detailed look at this and introduce the best measures to take if your company is not meeting the requirements dictated by the law.

The most important rule to follow

The law states that the net assets of a company must amount to at least half of the share capital. Before diving into the topic in more detail, let’s have a look at what net assets exactly mean. Net assets (also called equity capital or net assets value) is one of your company’s financial situation indicators and is made up of your company’s:

1 – share capital (including share premium)
2 – profit or loss, and
3 – reserves
Minimum share capital rule was abolished in Estonia in February 2023. This means that the minimum net asset requirement – half of share capital, is different for each company, dependent on its share capital.
For companies registered until February 2023, minimum net assets requirement is not less than 1250 EUR.
Therefore, if your company was registered before February 2023 with share capital 2500 EUR, then at the end of each financial year, the value of share capital, reserves and profit/loss cannot be less than 1250 EUR.

What happens to the financial position of company if it doesn’t have the minimum amount of net assets?

If the net assets value does not meet the rules we previously mentioned, the owners must take certain legal actions. If these actions are not taken, the government starts dissolution of the company.

Firstly, the business register will issue an official note with a deadline for you to solve the problem. If it’s not done by the deadline, the register starts the process of deleting the company from the registry. After a company is deleted, restoring the company for business is no longer possible, and business activities can’t continue.

You may lose your business and pay taxes that can be legally avoided by taking the steps described below.

What measures to take if the company has less net assets than required by the law?

Fortunately, there are several options for the owners if the net assets value is not meeting the requirements.

1.Increasing or decreasing the share capital.
One of the most used options for restoring net assets is capital increase.
The capital of the company can be increased by monetary or non-monetary contributions.
The capital increase must be registered in the business register, and new capital is valid from the registration. Registering capital increase in the business register requires resolution of the shareholders, amendment of the articles of association, and submitting the petition to the business register. In addition to the business register, the capital increase must be registered with the tax office.
Capital decrease is also a suitable option in certain cases.

2. Making other contributions to the equity.
Another popular option is to create voluntary reserves. Contributions to these reserves can be made by monetary or non-monetary payments.
Contributions to reserves will not be registered in the business register, but to get tax benefits, it requires amendments to the articles of associations. It is also important to declare such contributions to the tax office.

3. Changes in the company’s structure – merger or liquidation.
Merging is possible between at least two limited liability companies. If the company has only one shareholder who is a private person, it is possible to merge the assets of the company with the assets of the shareholder. A merger requires visiting a notary and registering changes with the business register.
When your business plan didn’t work out and none of the above options are reasonable, then the business activities have to be ended. Voluntary liquidation of Estonian company takes at least 7 months and must be performed by a liquidator. The period is long, but for the owners it is a passive period, and our liquidator takes care of everything for you.

4. Submitting the bankruptcy statement.
Voluntary liquidation can only take place if the company is solvent and able to pay all debts. In case the company is insolvent, the bankruptcy process must be initiated by the board instead. The process can be complicated, but if you need any help, we can offer legal consultation and answer your questions.

We encourage you to contact 1Office lawyer Mrs Viire Murak viire.murak@1office.co for the review of net assets of your company.
Our team of lawyers and accountants will evaluate your specific situation and suggest the best option for your company to be compliant.