Accounting services in Estonia 2023
Distributed profit and distribution dividends. Limited liability companies without registered capital
The Estonian Economic Code permits the establishment of a limited liability partnership without contribution, but prohibits the increase and reduction of the charter capital of a limited liability partnership, and payments from a limited liability company until the deposits are paid in full. Therefore, in order to be able to make payments from accumulated profits to shareholders, the authorized capital must be paid in full.
Only an individual can be a shareholder in a private limited liability company without a deposit. Prohibited payments mean payments to shareholders from capital (dividends, buybacks of own shares, etc. etc.), so payments made in the ordinary course of business (wages, remuneration of a member of the board of directors, etc. are not subject to the prohibition.
The distribution of dividends in a limited liability company requires the existence of already distributed profits. Thus, in addition to monetary and non-monetary contributions, the question also arises as to whether and to what extent the equity of a private company can be paid without contributions from (free or tied) equity, i.e. issue a fund and/or compensate (dividend) claim. When the nominal value of a share increases due to free capital, that is. e. in the case of the issue of the fund, there is no obligation to pay profits to shareholders (as opposed to paying dividends to shareholders)and thus one or the other solution may also mean another tax regime.
Until the contribution is paid in full, the distribution of profits (dividends) among the shareholders is excluded, and thus there can be no shareholder claim for payment of dividends (to be deducted) to the limited liability company. This is primarily because the dividends cannot be distributed chronologically until an internal payment is made. In practice, the interpretations of the Ministry of Justice and the Commercial Register (courts) differ. The Ministry considers the real «monetary» payment to shareholders as a payment, and the Commercial Register considers the payment as creation of a claim. If a private limited liability company has money, in practice it is still possible to lend to shareholders and compensate for later liability on payment of dividends with a comparable loan requirement. Such conduct is not likely to infringe the interests of creditors, but is contrary to the prohibition of lending in the Economic Code. The interpretation of the Ministry of Justice can be assessed in the same way, in which case the interests of creditors are not violated, but contradicts the ban on payments provided by the Economic Code. For example, such profit sharing is considered as shareholder sharing for tax purposes.
Although, according to the Commercial Code, a limited liability company may increase its authorised capital at the expense of the equity of a limited liability company without making contributions (issue of a fund)the share of the shareholder increases in proportion to the nominal value of the share in the event of the release of the fund. Since the Economic Code prohibits increasing (and reducing) the authorised capital of a private company until the full payment of contributions, and the increase in the nominal value of a share means an increase in the authorised capital, it becomes unrealistic to make a contribution from own capital. It also does not depend on the treatment of unpaid authorised capital, as:
- If the share capital of 0 EUR and the shareholder requirements of 0 EUR (mainly justified by the lack of time to fulfill the deposit obligation), the issue of the fund will mean an increase in the authorised capital;
- Recognition of the authorised capital (e.g. 2,500 euros) and shareholder (unpaid authorised capital) requirements of 2,500 euros (justified, especially in cases where the term of payment is specified in the constituent documents)The issue of the fund will require an increase in the authorised capital and a simultaneous reduction with the liquidation of the claim;
- If the share capital is specified with 0, where the unregistered share capital (e.g.) is 2,500 euros and the shareholder requirements are 2,500 euros (justified, in particular, in cases, when the share issued on the reporting date and filed for registration, but not yet registered in the trade register), the authorized capital should also be increased taking into account the issue of the fund and at the same time reduced if the requirement is excluded.
In the first case, the issue of a fund would clearly mean an increase in the authorised capital and, would thus, be contrary to the prohibition of an increase in the authorised capital in the Economic Code. The second and third options, too, will not be much better, so the surest way to pay for a deposit is a monetary or non-monetary contribution to the charter capital.