Amendments to the Estonian Commercial Code in 2023

Amendments to the Estonian Commercial CodeThe provisions of the current Estonian Commercial Code governing the Business Register will be included in a separate Law on the Business Register and the existing Commercial Code will be substantially amended.

The Law on the Commercial Register will enter into force in three stages: the general period of entry into force is February 1, 2023, changes in the maintenance of the list of shareholders and the list of members of the construction company will come into force on September 1, 2023, and only from March 1, 2024. The changes associated with the reservation of the brand name and the entry on a certain date, only from March 1, 2024.

These changes in Estonian legislation primarily provide legal clarity and ensure the reliability of the data submitted to the Estonian electronic business register. The main objective is to simplify the activities of both the entrepreneur and the registrar, including to provide legal certainty for third parties by relying on the data of the registry. I

The new provision allows the registrar to fine the person obliged to provide data on the beneficiaries in case of failure to provide the data required by the legislation or to provide knowingly false information. In this way, the data published about companies in the commercial register become more reliable and allow third parties to analyze the history and business competence of the legal entity before starting a business relationship. Third parties will also have access to information about fines imposed on individuals associated with Estonian legal entities, which makes the Estonian business environment even more open.

Minimum capital requirement for companies to be abolished

When establishing a company in Estonia without paying the authorized capital, the current Economic Code does not set a term for making a contribution to the authorized capital, but leaves it to the discretion of the shareholders, which leads to a situation where the authorized capital is not contributed. The authorized capital must be paid if the shareholders wish to increase, reduce or pay dividends. The regulation of private companies is becoming more flexible as the requirement of a minimum authorized capital is eliminated. This means that the limited liability partnership can no longer be created without the contribution of the authorized capital, but the amount of the authorized capital is left to the discretion of the founders, because the minimum authorized capital requirement (EUR 2,500) established by law is generally not related to the actual capital requirements of the company.

Thus, a limited liability partnership may be established with a minimum authorized capital (1 euro).

Maintenance of the list of shareholders of a private limited liability company in the commercial register

From 1 September 2023, the list of shareholders of the limited liability partnership will be kept in the commercial register, which means that the data on the list of shareholders will be registered in the commercial register. This is accompanied by public reliability of data, which greatly increases legal certainty in transactions with shares of a private company. According to the current regulation, the shareholder must submit the contract confirming the acquisition of the share to a notary to confirm the share in the limited liability company and transfer the share. But in the future both the transmitter and the acquiring part can rely on publicly available and reliable data from the business register.

The amendment applies to companies whose shares are not registered in the securities register or which have not renounced the formal requirement for the disposition transaction. If the shares are registered in the securities register, the list of shareholders is still kept in the register, and if the formal requirement of the alienation transaction has been abolished, the list of shareholders is kept by the board of a private company.

Failure to submit the annual report of the Estonian Company

At the moment, a significant problem is the deadline for submitting the annual report of legal entities, because the submission of the report is delayed or the annual report is not submitted at all. The legislator took the position that a systematic failure to submit an annual report is unacceptable, as it is a matter of business security.

The new provision of the Act allows for the imposition of a fine on a legal entity that has not submitted an annual report within the prescribed time limit, without a warning. When imposing a fine, the registrar is given a great deal of discretion, so a fine may be imposed repeatedly until the annual report of the Estonian company is submitted. Among other things, when making a decision, it may be taken into account how many times the legal entity has not submitted an annual report in time, How much time has elapsed since the deadline for the submission of the report and other circumstances important to the registrar for the imposition of the fine and its determination. In addition to the legal person, the registrar may also impose a fine on a member of the board of a limited liability partnership and, as an innovation, in the case of private companies, if they do not have a board, also on shareholders.

If the legal entity does not submit the report within the deadline set by the registrar and at least three months have passed since the statutory deadline for the submission of the annual report, the legal entity may simply be removed from the register under certain conditions (no assets, not party to any ongoing proceedings).

In order to reduce the abuse associated with the breach of the reporting obligation and to avoid situations where it is desirable to get rid of associations that have not submitted an annual report and do not want to comply with this obligation, the law has been amended, which states that the registrar shall not record in the commercial register a merger, division or transformation until the legal person involved in the merger, division or transformation has submitted the missing financial year report.

Possibility of entering an entry in the commercial register at a certain date

From 1 January 2024, companies will be able to reserve one brand name for up to six months. When reserving the brand name, it is necessary to specify the scope of the company for which the brand name will be used, as well as the organizational and legal form of the company, which cannot be changed in the future when reserving.

In addition, in justified cases, registration in the business register may be requested on a specific date. This can be done, for example, if it is necessary for the merger to take effect on a certain date and with sufficient time it becomes clear whether there are defects in the application or whether the entry can be made on the desired date.

An application to make an entry on a certain date can only be submitted for a change of data, but not for the first application to establish an Estonian company. The state fee for the reservation of the brand name is 150 euros and is not refundable in case of cancellation of the reservation of the brand name.

Reinstatement of a person from the Estonian Register

Under the changes in force, the registrar may remove a legal person from the registry in a simplified and faster manner than before, for example, in the case of failure to submit an annual report or absence of a contact person. For example, if an annual report is not submitted, a legal entity may be removed from the register no earlier than three months after the deadline for filing the report. A legal person may also be removed from the register if it has not specified a mandatory contact person. The company is now obliged to appoint a contact person for a certain period of time. At the end of the term it can be extended or the contact will be automatically removed from the register.

A legal person may be reinstated in the registry on the basis of a declaration, both for the purpose of continuing the activity and for the conduct of liquidation proceedings, if it turns out that the expelled person has retained property. Reinstatement in the roster is possible within three years after removal from the roster, if the person has been excluded due to the failure to submit an annual report or the absence of a contact person (forced exclusion). In other cases, if the compulsorily liquidated company had assets and it was desirable to terminate activities related to assets, the company could be reinstated in the registry to cease operations. This is called additional liquidation and in this case there is no time to reinstate such a company.

In the case of the reinstatement of a legal entity in the registry, the expiry of the claims against it ceases from the moment of its exclusion from the register until the moment of its reinstatement in the registry.

Other important changes

The amendment removes from the law the requirement that the net assets (equity) of a limited liability partnership must not be lower than the minimum authorized capital of a limited liability company provided by law.

Temporary (two-month) prescription of distribution of property of the liquidated joint-stock company is excluded if the joint-stock company has only one shareholder or, in addition to the shareholder, the shareholder is the joint-stock company itself.

The foreign subsidiary is no longer obliged to appoint a contact person, it becomes a voluntary procedure. A branch of a foreign company is obliged to enter in the register the Estonian address of the branch, since the requirement for the appointment of a contact person, which was still in force, is cancelled if the head of the branch was in a foreign country.

When creating group rules clarify the responsibility of members of the board and specify in which cases the board of the subsidiary is not responsible for damage caused by the execution of orders of the parent company.

The requirement that at least one liquidator must have a residence in Estonia has been abolished and the requirement does not apply to board members, who are often liquidators.