As the year 2021 has unnoticeably come to an end, it’s the final time to look over the financial position of your company. It doesn’t matter if you just recently established your company in Estonia or have been doing business for years now, there are some main rules to follow. The most unnoticed, but at the same time one of the most important rules associated with the company is net assets value. So, let’s have a more detailed look at this and the best measures to take if your net assets value is not meeting the requirements dictated by the law.
The most important rule to follow
The law states that by the end of the financial year, net assets of a private limited company in Estonia must amount to at least half of the value of its share capital or 2500 €, as a minimum. This means that if you have put in bigger share capital than 2500 €, let’s say 8000 €, then your company’s net assets must be at least 4000 € by the end of the year. If you have put in the standard minimum share capital of 2500 €, this is also the minimum that your company’s net assets value must be by the end of the year.
Therefore, if the company’s share capital is 2500 €, then the company can not have a loss at the end of the year. If the company’s share capital is 8000€, the loss can be up to 4000 €.
Before diving into the topic in more detail, let’s also have a look at what net assets exactly means. Net assets (also called equity capital or net assets value) is one of your company’s financial situation indicators and is made of your company’s share capital, profit or loss, and reserves.
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 are required to take some measures. If these measures are not taken, the government may fine the company and eventually start liquidation of the company.
Firstly, the registry will issue an official note with a deadline for you to solve the problem. If it’s not done by the deadline, fines will follow, and if after that the net assets value is still not in line with the law, the next step is deleting the company from the registry. After that is done, restoring the company is no longer possible, and business activities can’t continue. Of course, even if the company is deleted, the official liquidation of the company must still be done by professionals.
And most importantly, if the net assets value does not meet the official requirements, paying the dividends won’t either be possible.
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. Decreasing or increasing the share capital.
One of the most commonly used options – we’ll go into more detail below, so read more about this topic under financing options.
2. Changes in the company’s structure – merging, dividing, or restructuring the OÜ.
For that, you need to put together all the legal documents, go to the notary and make changes to the Business Register. Read more about the service here.
3. Liquidating the company.
When you decide to stop the business activities of your Estonian company, the company must be closed by voluntary liquidation. Read more and check the price here.
4. Submitting the bankruptcy statement.
Voluntary liquidation can only take place in case 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 most important questions.
5. Using other measures – donation, loan, voluntary reserves.
Read more about these options below.
Usually, most business owners are not interested in closing their company, either with liquidation or bankruptcy announcement. So, what can you do to avoid that?
How to finance your company?
If your wish is to continue with your business without liquidating it, announcing the bankruptcy, or changing something in its structure, there are a couple of solutions that we are going to look into in more detail.
There are four generally recognised options to finance your company. The choice depends on the purpose, needs of the company, but also the financial position of the company. Each option results in legal and/or tax consequences, therefore, please contact your accountant or order a consultation before making payments to your company.
A private person may donate their assets to their company without requesting anything in return. The most common donation is to waive the right to claim repayment of the loan given to the company by the owner. If the owner is a legal entity, a donation in favour of the subsidiary is subject to corporate income tax. Therefore, a donation can be an option only for a private person.
- no declarations
- no taxation
- increases the profit of the company
- donated amounts cannot be retrieved from the company tax-free
Therefore, a donation is suitable in case you need to show a profit during the financial year and thereby increase your net assets.
Allocation of the loan is an alternative to donation. Allocation means that if the company’s finances require, then the loan given by the owner may be moved from liability to equity, interest calculation frozen. This means that the owner of the company can not freely pay back the loan. The loan is blocked in the equity as long as the equity does not comply with legal requirements.
- no declaration
- no taxation
- can be transferred to liability once the equity is in order
- Not suitable for a long-term equity problem. In case of continuous equity problems, the following two options are more suitable.
Increasing the share capital
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 in the tax office.
- money contributed to the capital of the company can be repaid tax-free to the owner
- will solve the problem of the equity assets being below the legal limit
- does not increase obligations of the company
- requires following certain legal and tax processes
- increases the limit of mandatory equity (50% from capital, but not less than 2500 EUR).
In order to keep the registered capital and the mandatory equity linked to the lower registered capital, it is possible to increase the share capital using the share premium method. For example, you need to finance the company with 10 000 EUR and increase the capital from 2500 EUR to 12 500 EUR. By increasing the capital by 10 000 EUR to 12 500 EUR, you would also increase the mandatory equity from 2500 EUR to 6250 EUR.
Instead, you can increase the capital by 1 EUR, from 2500 EUR to 2501 EUR, and record the rest 9 999 EUR as a share premium.
- does not increase the limit of mandatory net assets (50% from capital, but not less than 2500 EUR).
- share premium may only be used for covering losses or increasing the share capital.
The capital increase is suitable if you need to increase the equity to the mandatory limit (half of the registered capital or not less than minimum capital). If you wish professional help with increasing your share capital, check out this service.
Owners may decide to set up voluntary reserves and establish conditions for making contributions to and payments from such reserves. Setting up voluntary reserves must be included in the articles of association. Voluntary reserves may be created only after registering the appropriate articles of association in the business register. Payments to and from the reserves are made based on shareholders resolutions. In addition to the business register, the capital increase must be registered in the tax office.
- no difficult registration in the business register, compared to contributions to the capital.
- more legal paperwork compared to other options.
The voluntary reserve is suitable in case you do not want to increase the capital and the company is not able to repay loan and interest.
Keeping your company’s financial position in order is one of the most important things in doing business. If you have run into some problems regarding net assets, don’t worry, as there are enough options and measures to get everything back in line.
Of course, if you are not that familiar with all the legal and tax processes, it can be a bit overwhelming. Therefore, 1Office’s professional lawyers and tax consultants are more than happy to offer you a consultation or even carry out these processes on your behalf. Just contact us for further information.