New Requirements for the Share Capital and Equity of Estonian Private Limited Companies

The new Estonian Commercial Registry Act that came into effect in February 2023 brought about changes to the Estonian Commercial Code and the Bankruptcy Act as well. The main purpose of these changes was to harmonize and clarify the regulations concerning private legal entities, as well as to ensure greater legal certainty when relying on registry data, in short, to simplify the activities of both the registry keeper and entrepreneurs. This article focuses on the changes regarding the requirements for the share capital and equity of Estonian private limited companies.

As a brief reminder, let's clarify the meanings of two seemingly similar terms, "share capital" and "equity."

Previously, the minimum requirement for share capital was 2500 euros. However, as of February 1, 2023, private limited companies in Estonia no longer have a minimum share capital requirement. This means that the share capital can be as low as 1 cent.

According to the previous version of the Commercial Code, a private limited company could be established without making a contribution to the share capital. However, this current version no longer allows for such an option – the share capital must be contributed upon the establishment of the private limited company, regardless of its size. It should be noted that companies established before February 1, 2023, without contributing to the share capital are not affected by this change and are not required to make a capital contribution retroactively.

The Obligation to Submit Bank Notices also changed. According to the legal amendment, a bank notice about the share capital contribution only needs to be submitted upon establishment if the share capital contribution exceeds 50,000 euros. For smaller share capital contributions, the burden of proof rests with the management board of the private limited company, who confirms in a declaration that the contributions have been paid to the company. This declaration is submitted to the registry upon establishment.

As a new requirement, a sworn auditor's report must be submitted to assess the value of non-monetary contributions exceeding 25,000 euros. This report verifies the adequacy of the valuation.

The legal amendment removed the requirement that equity must be at least as large as the minimum share capital amount prescribed by law, which was previously 2500 euros. Equity must now be at least half of the company's share capital, regardless of its size. Thus, if the private limited company's share capital is 2500 euros, the equity must be at least 1250 euros, or if the share capital is 1 cent, the equity requirement is 0.5 cents.

The new requirements for share capital may lead entrepreneurs to consider reducing their share capital. The law allows for the reduction of share capital if it exceeds the legally required minimum amount. Procedurally, this involves more steps than just making a corresponding decision and submitting it to the registry. The decision to reduce share capital must specify the reason, extent, and method of the reduction.

If the reduction of equity requires an amendment to the articles of association, which is usually the case, the decision to amend the articles of association must be made before the decision to reduce the share capital.

Notice of the share capital reduction must be given to creditors within 15 days. Additionally, a corresponding notice must be published in the Official Notices publication, including a call for creditors to submit their claims within 2 months. Ensuring the security of claims submitted within the deadline is mandatory for the private limited company.

If the reduction of the share capital is carried out to cover losses, the reduction occurs under a simplified procedure. In this case, notices are not sent to creditors, and the notice is not published in Official Notices. However, the decision to reduce the share capital must indicate the loss for which the share capital is being reduced. It's important to remember that under the simplified form of share capital reduction, dividends cannot be paid to shareholders in the year the decision to reduce the share capital is made and in the following two fiscal years.

Although according to the current legislation, a private limited company can be established with a share capital of as little as one cent, it's important to highlight that in the event of bankruptcy, as mentioned earlier, the collective liability of shareholders is still a minimum of 2500 euros. Therefore, if the temporary administrator is unable to cover their fees and satisfy claims from the legal entity's assets, they have the right to demand payment and reimbursement of expenses from the private limited company's shareholder, up to the difference between the share capital and 2500 euros.

The legal amendment grants entrepreneurs in Estonia the freedom to decide the minimum capital requirement for their private limited company. As the option to establish a company without contributing to the share capital disappears, situations where minimum share capital has only a fictional significance and remains unpaid in reality will decrease. However, companies with a share capital of a few cents should always keep in mind the liability limit, which remains at 2500 euros in the event of bankruptcy. From a business perspective, it is still advisable to maintain a share capital size that covers the liability threshold set for the private limited company and not rush to reduce the share capital in every instance. Additionally, it's important to monitor the personal contributions of business partners toward the stability of the company. For transactions of a certain magnitude, it's crucial to consider whether the partner company is reliable and capable of fulfilling its obligations.