There were significant changes to the Estonian Commercial Code starting from February 1st, 2023. Now, a company’s share capital can be as low as one cent, eliminating the need for a minimum capital requirement.
Flexibility in Share Capital Requirements
Through amendments to the Commercial Code, founders of companies have gained increased freedom and opportunities to evaluate the actual capital necessary for establishing their businesses. It is crucial to assess your precise capital requirement when forming a company and choose the share capital accordingly. Share capital can be modified, either increased or decreased, at any point. Additionally, non-monetary contributions are allowed if stipulated in the Articles of Association.
Compliance and Documentation
Share capital must be paid to the company and declared with the Tax Department for future tax free distributions. To ensure accurate declaration of your share capital, consult your accountant. If you don’t have an accountant yet, please contact email@example.com.
During company registration, the share capital must be paid by the founder. Failure to do so triggers personal liability of the founder. Furthermore, founders can face criminal liability for providing false information to the business register.
Methods of Paying Share Capital
New share capital rules allow more flexible ways for making the capital deposit. Founders can deposit capital to a bank account, pay in cash or make non-monetary contribution. For more information please contact firstname.lastname@example.org.
Dividends and Share Capital
Since February 1st, 2023, every company established has the right to pay dividends, regardless of capital amount. However, failure to pay in share capital and declare it with the Tax Department will impact future dividend payouts.
Personal Liability of the Owners
We would like to draw your attention to another change in the legislation related to the new share capital regulation.
Where the share capital of the company is less than 2,500 euros and the company is in bankruptcy, shareholder may be requested personally to pay the bankruptcy fees to the extent of the difference between the share capital of the company and 2500 euros.
For instance, if a company’s share capital is less than 2500 euros and the interim trustee cannot recover fees from the company’s assets, they can demand reimbursement from the shareholder. This amount lies between the share capital and 2500 euros. Therefore, if a shareholder invested just 1 EUR in a private limited company’s share capital, their responsibility extends to 2499 EUR. However, with a share capital of 2500 euros, shareholders are not liable for bankruptcy fees reimbursement.
For share capital exceeding 50,000 EUR, it’s mandatory to provide payment proof to the business registry.
Company Net Assets
A company’s net assets must equate to at least half of its share capital. The point here is that if the capital is 1 EUR, then the loss cannot exceed 50 cents, which essentially means there should be no loss. This is a concern for a startup company that invests too little capital that doesn’t meet its operational needs. But on the other hand, there is concern when a shareholder gives a loan to a private limited company with a share capital of 1 cent (finances his company) and the limited company does not make a profit.
In this case, granting a loan to the company has an impact on the indicators of the first financial year and especially on the net asset indicator in the balance sheet. Thus, the report of the first financial year may reflect a negative net asset, for the correction of which the remedies provided in the Commercial Code must be applied. In addition, practice shows that most companies end the first year with a loss, i.e. for a private limited company with one-digit share capital, operating at a loss in any case leads to negative net assets. This is also one of the reasons why a shareholder must carefully consider the size of the share capital when establishing a private limited company and assess the need for this amount.
Share capital amendments mark a significant shift in Estonian Commercial Code practices, granting greater flexibility to founders. Understanding the implications of these changes is vital for both current and aspiring business owners. For any queries regarding share capital, our expert legal advisor Viire is available to assist you.