Lawyers and tax consultants from Company in Estonia OÜ have prepared detailed information on the forthcoming tax changes in Estonia in 2023 – 2025.
Growth of the tax-free minimum
Since 2023, Estonia has been increasing the income-exempt minimum and will compensate for the previously suspended payments to the second pension. The following is an overview of the significant legislative changes in the area of responsibility of the Ministry of Finance, which will come into force in 2023.
Tax-free income from this year increased from 500 to 654 euros per month or from 6,000 euros to 7,848 euros per year.
The tax-free minimum is calculated for a calendar year and employees earning up to 14,400 euros per year will be able to use it in full, i.e. deduct 7,848 euros from their taxable income. For those earning more than EUR 14,400 a year, the tax deduction is gradually reduced to zero for people earning more than EUR 25,200 a year.
For recipients of the old-age pension, the tax-free income is equal to the average old-age pension, which in 2023 will amount to 704 euros per month. For old-age pensioners, this tax deduction is retained regardless of their total annual income.
Fuel excise increase postponed
The reduced excise rates were extended until 30 April 2024 – this applies to diesel fuel, fuel oil, natural gas, liquefied gas and electricity.
The gradual increase of excise duties to the pre-crisis level is planned for the period from May 1, 2024 to May 1, 2027.
Until 30 April 2024, the agricultural and shale sectors will be able to use diesel fuel with special marking at a minimum allowed rate of 21 euros per 1000 litres (excise duty on conventional diesel is now 372 euros per 1000 litres).
Increased excise duty on tobacco products and re-introduced excise duty on nicotine-containing liquids
Reimbursement of suspended contributions to pension pillar II
At the end of January, participants in the second pillar will be reimbursed for the public portion of contributions that were suspended for 14 months in 2020-2021.
These are persons born since 1961 who did not leave the secondary level and who continued to pay 2 percent of their gross income between 1 July 2020 and 31 August 2021, despite the fact that the State has suspended payments of 4 per cent. State payments were not suspended for those born before 1961. Those who left the second stage will also not be compensated in January, as they have already been compensated.
If payments are made to the pension and investment account, the compensable amount will also be transferred to the investment account. Those leaving second pillar in January will simply receive an additional payment.
The compensable amount is calculated on the basis of contributions made by the person during the period of suspension of public payments. If in the period from July 1, 2020 to December 31, 2022, the average yield of pension funds II stage is positive, then the compensable amount is increased by this yield.
Second-tier payments made by debtors can now be seized
As of 1 January 2023, the bailiffs have the power to seize the second-pillar debtor. This means that the owner of the pension register withholds the amount of the debt from the debtor. If funds are held in a pension fund, in a pension investment account or have been invested in securities through a pension investment account, they can still not be recovered to cover debts.
Increase in VAT and personal income tax
New coalition agreement provides for an increase in VAT and income tax
will increase from 1 January 2024 by 2 percentage points, and personal income tax – by 2 percentage points from 1 January 2025. The tax-free minimum will rise to 700 euros.
“Yes, it is clear that these are unpopular decisions. But, unfortunately, in the current security situation, we have no other option. We must increase defence expenditures and be ready to defend Estonia, no one else will bear these costs for us. In addition, in recent years we have built a kind of welfare state, and maintaining such a state requires expanding the tax base,” said Prime Minister of Estonia Kaya Kallas.
As can be seen from the above, tax changes will affect only the permanent residents of Estonia and will not affect the international entrepreneurs opening a company in Estonia – the tax on the retained earnings of the company will remain 0%. Also, the investment profit of the company is not subject to taxation – the purchase of real estate, vehicles, office equipment and furniture for business needs will not be subject to additional taxes. An Estonian company may not have local employees and the use of a virtual office is allowed, and the profit of the owner of the company may be distributed dividends, to the size and frequency of payments which are also not strict obligations.
A more detailed analysis of Estonia’s tax advantages over other European countries is available here.
Estonia is a suitable country to establish a company because it is consistently appearing among the most open, competitive, and transparent economies in the world. This success is due to the intensive work on reducing bureaucracy, the rule of law and significant investments in infra-structure and human capital, which creates an environment that facilitates the search, development and supply of solutions and services on a global level. The attractiveness of Estonia is proved by many foreign investors, as well as the dominance of world-famous foreign companies in some sectors of the Estonian economy. The current income tax rate in Estonia is 20%. From the beginning of 2023, the generally applicable tax-free minimum is €654 per month. Registration requires at least one shareholder and one director (individual). 100% foreign ownership is allowed. If the majority of the directors do not reside in Estonia, the company must provide the e-Business Register with the contact details of the local representative who will be responsible for further communication with the public authorities. Annual reporting is submitted online to the e-Business Register. The audit is mandatory only for large firms. The size of the company is determined based on its total assets, income, and number of employees. Estonia’s e-residency is a unique programme of the Estonian government. Entrepreneurs who have received an e-resident card have access to all the country’s electronic services – they can manage the firm completely online, from signing contracts to paying taxes. But an e-resident card is not an analogue of an Estonian passport: it does not give the right to live in Estonia and does not grant tax status.
The Republic of Lithuania implements a business-friendly tax policy, and the entire tax system of the Republic of Lithuania is designed in accordance with the EU legislation and adheres to their provisions. Over time, after the restoration of Lithuanian independence, the tax system of the Republic of Lithuania underwent changes, i.e. it was redesigned in such a way that the state could attract as many foreign investments as possible, creating favourable conditions for them; in addition, efforts were made to expand the labour market. The main legislative act that sets out and regulates the principles of taxation in the Republic of Lithuania is the Law on Tax Administration, which not only establishes the rights and obligations of the tax administrator and taxpayers, but also regulates the procedure for calculating taxes.
The Czech Republic has a progressive taxation system that applies to both individuals and companies. In order to do business in the Czech Republic, companies must register with the Czech Trade Register and obtain a business license. Companies must also comply with local labour laws and regulations, as well as file taxes and other appropriate documents. Companies must also abide by the Czech Republic’s anti-money laundering and counter-terrorist financing regulations. The Czech Republic is a member of the European Union (EU) and the Economic and Monetary Union (EMU), which means that it is part of the single market and enjoys the benefits of the EU’s common external tariff and customs union. This means that goods can be imported and exported freely within the EU, and that EU companies can benefit from the free movement of goods and services across the region.
Cyprus is known as an attractive location to do business due to its low corporate tax rate of 12.5%. This is one of the lowest tax rates in the European Union. Additionally, profits derived from foreign activities are not taxed in Cyprus, providing a great incentive for international businesses to set up shop in the country. Cyprus also has a number of tax incentives available to businesses. These include double taxation treaties with many other countries, which allow companies to pay taxes on their income in the jurisdiction where they operate rather than in the country where they are based. Other incentives include exemptions from withholding taxes, reduced tax rates for certain activities, and restrictions on capital gains tax. Cyprus does not require an employee, however, it requires a nominal director on site.
In Spain, businesses are subject to corporate taxes, which are calculated on their profits. The rate of tax depends on the size and nature of the company, but it is typically 25%. Additionally, companies may be subject to value-added tax (VAT), which is a tax on goods and services that is charged at a rate of 21%. Companies may also be subject to other taxes, such as social security contributions, property taxes, and withholding taxes. The most common complaint of those who want to start a business in Spain is the difficulty of obtaining legal documents for any company. This includes the extra time and money needed to account for when planning a business in that country.
In recent years, in an effort to harmonize its fiscal system with the generally accepted norms of the European area, Latvia has been constantly changing tax legislation. Due to this, the vast majority of the norms and requirements of the tax system are in line with those in other EU countries. One of the important indicators for entrepreneurs, taxes in Latvia remain the lowest in Europe. The reason for this, despite the low level of public debt and the small state budget deficit, is that the economy is not yet fully strengthened. To ensure its consistently high growth, the country introduces tax incentives for entrepreneurs. Concerning the employment in Latvia, when company is established, it is not required, however, it is required after to obtain VAT number. Without an employee, they do not give a VAT number and, in general, the tax board does not allow you to work without employees.
Poland is one of the few countries in Europe where there is a constant increase in economic performance and improvement in social standards. In Poland, entrepreneurial activity can be carried out by an individual entrepreneur or in the form of a legal entity. All companies in Poland must be registered with the National Court Register (Krajowy Rejestr Sądowy). Today, doing business in Poland is carried out in the form of individual entrepreneurial activity and in the form of an analogue of a limited liability company – Sp. z o. o. (Spółka z ograniczoną odpowiedzialnością), which is one of the most common forms of doing business in Poland, both among Poles and foreign citizens.
The tax system in the United Kingdom cannot be called soft, but from year to year, thousands of foreign entrepreneurs and just wealthy people choose the United Kingdom to start a business and optimize taxes. Such popularity is due to some features of British legislation that allow reducing tax costs for both individuals and companies. It is important that legal methods of reducing fiscal payments in the British Isles have been practised for decades and this is not considered a criminal activity. If you are just planning to move to the UK, you will probably be interested in learning about several ways to reduce your tax burden in England at once. But before telling how a newly minted resident does not have to pay at least part of the taxes without violating strict English laws, let’s understand the basic concepts.
In addition to corporate taxes, employers are subject to both social security contributions and payroll taxes. Social security contributions are paid by employers and employees and are used to fund the state-run social security system. Payroll taxes, such as the income tax, are paid by employees and are used to fund the state’s budget. In France, the limited liability company (LLC) is known as a “société à responsabilité limitée” (SARL). It is a popular form of business entity among entrepreneurs and small business owners, as it offers limited liability protection and flexible ownership and management structures. To form an SARL in France, at least one shareholder and one director are required. The shareholders’ liability is limited to their capital contributions, and the company must have a minimum capital of €1. The directors can be individuals or legal entities, and they are responsible for managing the company’s affairs and making decisions. The SARL is subject to corporate income tax (CIT) on its profits, which is levied at a standard rate of 26.5% for 2022. The company is also required to file an annual financial statement and tax return with the French tax authorities.
Germany has a complex and intricate taxation system. The taxation system is based on the principle of progressive taxation and is composed of a number of taxes including income tax, corporation tax, value added tax, and capital gains tax. Income tax is levied on the income of individuals and corporations, and is determined by the individual’s or corporation’s tax class. Tax classes are determined by the taxpayer’s marital status and employment status. In general, income tax is charged at progressive rates depending on the amount of income earned. Corporation tax is levied on the profits of corporations, and is determined by the type of corporation and the amount of profits earned. Corporation tax rates vary depending on the size and type of corporation.[/vc_column_text][/vc_column][/vc_row]
[vc_row][vc_column][vc_column_text]An Estonian company may be changed or transformed into another type of company by the decision of the owners/shareholders. Reorganization is often the simplest, fastest and cheapest alternative to two separate procedures – liquidation of the company and creation of a new one. But what should be noted in this case?
When comparing a joint-stock company and a private limited company, the law imposes much more serious requirements on a joint-stock company. For example, a joint-stock company has a three-tier management structure, an auditor’s requirement and an obligation to audit the annual report even if the company does not operate during the year. As a result, the maintenance costs of an excise company are much higher than those of a limited liability company, so it may be advisable to transform a joint-stock company into a limited liability company. Below is a brief description of the steps to be taken to transform a joint-stock company into a private limited liability company in Estonia.
If the company wants to change the structure, you need to follow certain procedural steps:
The Board of the transforming company must prepare a written report on the transformation, in which the transformation is legally and economically justified.
The report shall be submitted to the shareholders together with the report for the last financial year for review at least one month prior to the general meeting that adopted the conversion decision.
If more than six months have elapsed since the end of the financial year report at the time of the general meeting, an interim balance shall also be established. A transformation report need not be prepared if there is only one shareholder in the converted company or if all shareholders agree that a transformation report is not prepared.
The decision on transformation is made by the shareholders at the general meeting with the adoption of the decision on transformation. General meeting shall be carried out as required. The decision to reorganize shall be in writing and shall be supported by not less than 2/3 of the votes presented at the General Meeting, unless the Statute requires otherwise.
A new charter must be drawn up for the new limited liability company. The charter must be approved by a decision on transformation.
In addition, the members of the Board shall be elected together with the decision.
The decision on conversion shall specify:
into which type of business the joint stock company will be transformed
new company name
shareholder replacement ratio
the amount of authorized capital, the rights granted to shareholders
the effects of the transformation on employees
the time at which transactions of a reorganized society are considered completed by a newly reorganized society
Also, when transforming a joint-stock company into a limited liability company, it is necessary to inform the holder of the securities registry.
Application for conversion to a business register
A company is deemed to have been transformed if the transformation is entered in the commercial register. The board of the transformed company must apply to the Business Register for conversion to the Business Register – this can be done if at least one month has elapsed since the conversion decision was made.
Together with the application should be provided:
minutes of the shareholders’ meeting
charter of the New Association
transformation report, balance
board and board members’ data
confirmation by the securities registry holder of the conversion notification.
The members of the Board should also confirm in the application that they had not contested the conversion.
For the incorporation of the company into the Business Register, the state must pay 130 euros. Applications shall be processed in the commercial register within five working days. By making the transformation in the commercial register, the company is considered to be transformed. After conversion to the Business Register, the company must immediately inform creditors of the company’s transformation by issuing a notice in the official notices.
Transformation takes at least two months.
A month before the General Meeting, shareholders must be presented with a report on the conversion.
A month after the decision is made, an application can be submitted to the Business Register.
The application will be considered in the business register within 5 days.
For detailed advice on the transformation of your Estonian Company, please contact the legal department of Company in Estonia OÜ and get answers to your questions.[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][us_btn label=”contat us” link=”url:https%3A%2F%2Fwww.estonia-company.ee%2Fcontacts%2F” align=”center”][/vc_column][/vc_row]
[vc_row][vc_column][vc_column_text]In recent years, providing employee options has become increasingly popular. This means that if an employee is hired by the employer after a certain period of time, the employee has the opportunity to acquire a share in the employer’s company. Options are a very good way to motivate employees and tie them to the company – the employee does not look at the labor market so easily, and he develops a sense of «ownership», which hopefully reflects on the best results of the employee in the Estonian company.
What is an option?
The option is essentially a derivative instrument entitling an employer to acquire a share in the future, subject to certain conditions stipulated in the optional contract. For the employer, the option of participation is the opportunity to pay wages not with money, but with promise. Thus, the positive impact of the option on the company’s cash flow is obvious. The content of this promise is to give the employee a stake in the employer’s company in the future.
Positive side of the option for the employer
Unlike wages, options are not taxable. The option is not subject to special tax. Therefore, if an additional labor tax is required for the payment of wages, there are no tax costs for the option.
The most important and best condition for an employer is the so-called transition period – an employee receives a share only if he works for his employer for a certain minimum period of time. This gives the employer the opportunity to connect with good specialists for a longer term, and there is no need to use other options that often accompany hiring top managers.
Estonian tax law requires the employer and the employee to agree on a payment period of at least 3 years. Specifically, the Income Tax Act provides that the exercise of an option, that is, the conversion of a promise given to an employee, into a share, may not be regarded as a special benefit if at least three years have elapsed between the granting of an option. If the option is fulfilled before the end of the 3-year period, it will usually be subject to preferential taxes, which means that tax efficiency will also be lost in such performance.
In some exceptional cases, it is also possible to avoid paying preferential taxes when converting an option into shares of the company within a 3-year period. This is the case, for example, in the case of the sale of the entire share of the employer. In such a case, the exercise of such a number of options shall not be taxed, which is proportional to the time elapsed after three years.
The employee and the employer agree on the participation option, the eligibility period is 3 years, and the employee is given an option to receive a nominal 100 euro share. After a year and a half, the employer’s shareholder sells its entire stake to a foreign investor, which results in a new shareholder for the employer. In this case, the employee can realize half of the options and receive a part of the nominal value of 50 euros without special tax. Typically, a shareholder of a new employer requires that it also be able to buy shares from employees when buying a share, in which case the employee can simultaneously sell his share to a new investor.
Advantages of the option for employees
For an employee the option option is a good solution if he plans to be associated with his employer for a long period of time (at least three years of cooperation). For an employee, the option gives the opportunity to join his employer’s shareholders with full shareholder rights, i.e. to vote at the shareholders’ meeting, receive dividends, influence the company’s strategic decisions and finally sell the company’s shares. When receiving dividends, the employee’s remuneration no longer depends only on his own contribution to the success of the company, but also on the contribution of all his colleagues and the growth of his employer’s business as a whole. This option is especially valuable when we look at how Estonian unicorns have grown and what opportunities they offer their employees at the moment.
The positive aspect of receiving dividends is that the state has to pay them a much smaller tax than the wages. Dividends paid by the Estonian employer are taxed on income either only at the level of the employer at the rate of 20%, or income tax at the rate of 14% at the level of the employer and income tax at the rate of 7% at the level of the employee. For foreign employers, these rates may differ.
The transfer of a company’s share creates a tax credit similar to the payment of dividends, because it is a passive income as opposed to wages. When the share is transferred, the employee must pay income tax at the rate of 20 percent of the profit received, the social tax obligation does not arise when the share is transferred. It is clear that this benefits the employer, who is the payer of social tax in the case of wages.
How to provide an option?
To provide an option, an optional contract is concluded with the employee, which must be either digitally signed or notarized. The form requirement also needs to be considered when options are provided through other documents, for example by joining an optional program.
In the case of options, it is usually agreed that in their performance, the employer issues an additional share to the employee, and the authorized capital is increased by the nominal value of the corresponding share. From a corporate law point of view, this is the simplest way to issue options, so it would be prudent to provide the charter capital in the constitution of a company not as a specific amount, but as a range.
Items that must be included in an optional contract
Option contract duration
Termination and options
Company sales and options
Option contract duration and option transfer
Since one of the purposes of providing options to an employee is to bind the employee to the company for a longer period of time, the employer must consider and determine the period of working out options in the contract. To be allowed to participate fully in the company, an employee must work for the same employer for the entire period of the option. After the expiry of this term, the employee has the right to purchase a part of the company or shares of the company.
The most favorable situation from the tax point of view arises when the period of granting the right of option lasts at least three years, after which the employee has the right to purchase the given options in full.
Alternatively, it may be stated in the contract that the employee receives options on a continuous basis for a period of proportional time worked. This means that although the entire period of the option is three years, for example, rights should not wait until three years have passed and the employee is entitled to options earlier, taking into account the time already worked.
For example, in the case of a three-year endowment period, an employee is already entitled to one third of the options after one year from the beginning of the endowment period. After the second year there is a right to two-thirds etc. In this case, a clause in the defense of the employer is usually included in the contract, that if the employee resigns before, for example, six months or a year after the signing of the optional contract, the employee loses all rights to options. Since the employer’s interest in providing options is to ensure the employee’s long-term commitment, it is unreasonable to include in the contract an option to acquire a share after only a few months of work.
The option contract should specify when and how the options will be redeemed. One option sets a time limit within which an employee must declare an interest in actually acquiring a share. This may be, for example, one year after the period of option awarding. At this stage, it is advisable for the employer to consider how in general the program of options for employees should be organized, so that it does not create an excessive administrative burden, and accordingly write down the time and order of purchase of options in the contract.
In order for an employee to convert their earned options into shares, the employer must submit an application stating that the employee wishes to buy the options. It is recommended that the application form be added to the end of the optional contract in order to avoid misunderstandings related to the creation or purchase of shares.
What happens if the employee leaves before the deadline?
While both parties may have only the best intentions at the time of signing the optional agreement, sometimes life does make adjustments and the employment relationship does not continue until the end of the option period. For such situations, the option agreement specifies exactly which exit the employee retains the right to an option and which does not.
Each employer should carefully weigh when it is not possible to continue the optional contract and reflect this appropriately in the option contract. If an employee resigns during the period of employment through no fault of his own (illness, death or serious breach of the law by the employer), the employee is generally considered to be entitled to options in proportion to the time already worked.
Sale of the company during the option period
If it is a company whose owner plans to sell all or most of its company, these future plans should be reflected in an option contract. You should consider what happens to the employee’s right to receive options in the event of a sale of the employer’s company. Sometimes it is stipulated that in case of sale of the company the employee has the right
Immediately redeem their options and should not wait until the end of the entitlement period. However, if the employee is of key importance in the company and the employer’s buyer may have an interest in a company with key employees, it may be stipulated that in the case of a sale of the company, the employee may obtain some of its capabilities. In any event, plans for the future should be considered and, if necessary, reflected in an option agreement.
In addition to the topics mentioned in this article, of course, the basic terms of participation should also be written. You can read about them in the document «Conditions of participation» prepared by EMTA. It is also important to note that an optional agreement can be notarized or digitally signed.
If you are interested in drawing up an optional contract, please contactCompany in Estonia OÜ and receive information today.[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][us_btn label=”contact us” link=”url:https%3A%2F%2Fwww.estonia-company.ee%2Fcontacts%2F” align=”center”][/vc_column][/vc_row]
[vc_row][vc_column][vc_column_text]The total turnover of Estonian startups for the three quarters of this year increased by 64% year-on-year to 1.5 billion euros.
Estonian startups also attracted record investments – a total of 1.2 billion euros, including 40 transactions worth more than one million euros.
In 2021, the total turnover of the startup sector in Estonia amounted to 1.4 billion euros, i.e. in the nine months of this year, startups have already exceeded the last year’s result. Since at the end of the third quarter 2022, the total turnover of startups amounted to 927 million euros, there has been 64% growth year-on-year.
The managing director of Startup Estonia, Eva Peterson, said that although global markets are now suffering, Estonian startups continue to grow rapidly. “Estonia has a very good international image, and the foundation that we laid in difficult times over the years is working in our favor. Of course, the key role is also played by the experience of our startup entrepreneurs, who have repeatedly proved to investors, customers and employees that they are able to quickly adapt to changes in the conditions and turn the situation in the market in their favour, “Peterson said.
The highest turnover at the end of the third quarter of this year was posted by Bolt (775.3 million euros), Veriff (50.5 million euros), Swappie 47.6 (million euros), Comodule (27.8 million euros) and Starship Technologies (24.6 million euros). Data on turnover of startup enterprises are based on quarterly data on turnover tax provided by the Tax and Customs Board, which are based on VAT declarations. Turnover data may differ from the data provided in the annual report of the startup company, but they give the best possible overview of the current situation regarding the growth of the startup sector.
According to Startup Estonia, 1446 startup companies have been registered in Estonia at the moment, of which 418 or 29% have been operating for five years or more.
According to the data of the Estonian Tax and Customs Board, for the three quarters of this year, startup companies paid a total of 134 million euros (an increase of 48%) in labour taxes to the state. In the same period last year, startups paid 90.5 million euros in labour taxes to the state.
Estonian startups raised 1.2 billion euros in investments in the three quarters of this year, in a total of 61 deals. The average size of the investment was 19.3 million euros, while 40 investments were worth more than one million euros. A year ago, the volume of funding raised amounted to 870 million euros in 66 transactions, and the average size of the funding transaction was 13.2 million euros, 34 transactions amounted to more than 34 million euros.
Peterson added that Estonian and international investors believe in Estonian startups. “This is evidenced by the constant increase in the total value of transactions, as well as statistics shows that in addition to the most famous and large startups, many other Estonian startup companies are also investing in startups, ” she said.
The largest funding raised in the third quarter of 2022 was attracted by Ready Player Me (55.1 million euros), Monese (35 million euros), Lightyear (25 million euros), Klaus (12 million euros) and Jobbatical (11.6 million euros).
Startup Estonia is funded by the European Regional Development Fund.
[vc_row][vc_column][vc_column_text]The termination of a company’s activity is as natural a stage in the development of any business as its beginning. At the same time, it is often very difficult to liquidate an enterprise due to the large number of legal and business relations, obligations, and often debts that are part of the company’s business activity.
Depending on economic circumstances, the company owner, who has decided to end the business, must make a choice between liquidation or bankruptcy.
If it is a question of voluntary termination (the law also establishes cases when the company is terminated forcibly), the issue is resolved at the general meeting of shareholders, and in case of a positive decision, the liquidation process begins. This lengthy and time-consuming procedure of debt collection, sale of property and satisfaction of creditors’ claims involves many issues of both a legal and economic nature. As a result of the liquidation, the assets remaining after the satisfaction of the creditors’ claims will be distributed among the shareholders, after which the company is deregistered from the Commercial Register.
The process is somewhat different in the case of bankruptcy. The main difference here is the fact that the company is unable to satisfy the claims of creditors, and that this inability is not temporary, taking into account the economic situation. If such a situation occurs, the members of the management board of the company must immediately file to the court an application for declaring bankruptcy. It should be stressed that the filing of an application for bankruptcy in this case is the responsibility of the members of the board and, in the event of non-compliance, members of the management board may incur both civil and criminal liability.
Not only the debtor but also the creditor may file an application to the court to declare a company bankrupt, however, it should be remembered that the main condition here the debtor’s insolvency.
In any case, the processes described above are quite complex from both a legal and an economic point of view, and it is extremely difficult to navigate in them without in-depth knowledge. A good way in building this knowledge is to start with simple consultation. The further participation of our specialists will be determined solely by your needs.
If the Estonian company is put into liquidation, the company’s creditors (clients) can file their claims through the appointed liquidator within four months. If the assets of the company are insufficient to fulfil all its obligations, the liquidator is required to file to the court an application to declare the company bankrupt.
The court will most likely declare the company bankrupt and appoint an interim bankruptcy trustee, The court proceedings will begin. If the company does not have any assets that can be sold in the process of bankruptcy, and none of the company’s creditors deposits with the court funds to cover the future work of the bankruptcy trustee, the bankruptcy process will end on the basis of the deregistration of the company. After that, it is no longer possible to submit a claim against the company’s former management board member.[/vc_column_text][vc_column_text]
Bankruptcy procedure description
In the current economic situation, issues related to insolvency proceedings – restructuring, bankruptcy, debt adjustment – have become particularly relevant.
Competition law and bankruptcy and liquidation procedures are one of the most important activities of Company in Estonia OÜ. By combining both legal and economic experience and thinking, we can be doubly useful and effective in addressing possible problems.
Bankruptcy is not necessarily a dead end for the debtor or creditor, but it can also be a solution – not a good solution, but still a solution. Bankrupt nests often have resources that, when handled skilfully, can satisfy creditors’ claims, and although this is not common in practice, it is also possible to rehabilitate the debtor company by judiciously using the resource found in it.
Our lawyers have many years of experience in representing the interests of both creditors and debtors in bankruptcy proceedings. In addition, we advise clients at all stages of restructuring, debt adjustment and liquidation procedures.
If the above is not entirely related to your problem, feel free to contact us. Only by accurately describing our problem can we decide how we can best help you.
We can support you with the following questions:
Legal analysis of pre-bankruptcy transactions;
Initiation of bankruptcy proceedings, including filing for bankruptcy and filing for bankruptcy;
Advising debtors on finding optimal solutions in a pre-bankrupt situation;
Representation in court during the consideration of the bankruptcy application, by way of submission and admission of claims, at general meetings of creditors, etc.;
Preparation of applications, claims, complaints, and other documents necessary for bankruptcy proceedings;
Advice on restructuring procedures;
Consulting and representation in liquidation procedures;
Representation in transactions with insolvency practitioners, creditors, or the debtor;
Representation of insolvency practitioners in more complex proceedings.
[vc_row][vc_column][vc_column_text]The 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.[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][us_btn label=”Contact us” link=”url:https%3A%2F%2Fwww.estonia-company.ee%2Fcontacts%2F” align=”center”][/vc_column][/vc_row][vc_row][vc_column][us_page_block id=”10363″][/vc_column][/vc_row]
[vc_row][vc_column][vc_column_text]Before the entry into force of the Estonian regulation governing crowdfunding (collective financing), the authorities were concerned that there could be an avalanche of permit applications which would take a whole year to review. However, now there is concern that many companies providing crowdfunding services could miss out on the deadline to obtain a crowdfunding permit and would have to either stop or suspend their services.
On 7 October 2020, the European Parliament adopted the long-overdue Regulation 2020/1507 (EU) on the regulation of crowdfunding (“Regulation”).
In line with the rationale for the Regulation, crowdfunding is increasingly an alternative means of financing for startups and small and medium-sized enterprises. Crowdfunding is considered a good opportunity to improve the availability of financing, and it has also become one of the opportunities for financing the entrepreneurial activities of individuals and legal entities. Such financing is provided via online platforms, and funded projects usually attract a large number of private and corporate investors. This includes startups that often raise the necessary funding through crowdfunding.
In December 2021, the provisions of the Securities Market Act that apply to crowdfunding service providers within the meaning of the Regulation entered into force. These provisions foresee that crowdfunding service providers will be under the supervision of the Estonian Financial Supervisory Authority (FSA).
On 5 November 2021, FSA held an information day for crowdfunding service providers and explained in detail the issues that are related to applying for permit to provide crowdfunding services and supervision matters. These materials are available as a video recording on the FSA website.
In order to ensure consistent application of the Regulation, including the provision of adequate investor and consumer protection, the Regulation gives the European Securities and Financial Markets Authority (ESMA) and the European Banking Supervision Authority (EBA) the mandate (authorization) to develop regulatory technical standards and submit them to the European Commission.
The problem is that the Regulation contains quite a number of the regulatory technical standards that ESMA and EBA are required to draft and which are important in the context of an application for an operating permit. However, what happened was that ESMA and EBA were unable to develop all the required regulatory technical standards. This situation is now causing problems for both permit applicants and regulators: on the one hand, the situation is specific and clear – crowdfunding service providers must be regulated and supervised and if they fail to do so within the time frame specified in the Regulation, they may be prohibited from providing the service. On the other hand, a number of very important components are still missing that enable the regulators to deal with applications for a permit to operate with complete confidence and, if the required data and information are sufficient, to grant a license to operate.
For obvious reasons, this situation creates uncertainty and may become a direct obstacle to the provision of crowdfunding services both in Estonia and in the European Union as a whole. In the light of the foregoing, FSA has developed an approach that allows companies to apply for a permit under the current legal situation.
According to the Regulation, the transition period is until 10 November 2022. Until then, crowdfunding providers may continue to provide the crowdfunding service without a permit.
The procedure for processing a crowdfunding permit application is similar to that for other areas of the financial sector. An entrepreneur applying for a crowdfunding permit must collect the required information and submit it with the application to FSA. One important difference is the timing of the so-called preliminary assessment of the application.
In other words, FSA must, within 25 working days of receiving a formal application, assess the completeness of the application, including whether sufficient information has been provided. Within the specified period, FSA must assess the compliance of the form and content of the application with the requirements established by law. If the application or the documents attached to it do not comply with the current requirements, contain significant shortcomings in form or content, FSA shall assign an additional period for the applicant to remedy the shortcomings.
Thus, at the initial stage of the consideration of the application, it is possible that 25 working days have elapsed since the receipt of the application, FSA has identified shortcomings, and sets a deadline for their elimination. An additional period of 10–20 working days may be required to remedy the deficiencies, depending on the content of the deficiencies being remedied. It is also possible that such an additional term may be imposed more than once.
In addition, FSA should have time to review the responses. In general, it is possible that 25–50 (and even more) working days may pass before the beginning of the process of consideration of the application, which in fact is almost two calendar months.
If FSA does not return the application and begins the review process, the Regulation sets the time limit for the proceedings at three months, within which FSA must decide whether the potential crowdfunding service provider meets all requirements. The decision should take into account, among other things, the nature, scope and complexity of the potential crowdfunding service, as well as the suitability and law-abidingness of managers and owners.
Thus, during the process of consideration of an application, it is possible that the total duration of the procedure may be on average five to six calendar months or even longer. It may happen that the application for permission will not receive a positive decision for the first time. Given that it is no longer possible to work without permission after 10 November, crowdfunding service providers must begin to act and file a correct and eligible application.
Prior to the entry into force of the crowdfunding regulation, FSA reviewed the potential market for crowdfunding services and identified some 20 potential business entities as candidates for authorization. Considering that today applicants of the permission can be counted on fingers of one hand, it is possible that many of them didn’t have so much time to submit the application. It is also worth noting that activities without permits are governed by penitentiary law and are punishable, so the obligation to apply for a permit must be taken seriously. It would be naïve to hope that the Commission would extend the deadline set out in the Regulation – this is unlikely, especially since a certain time delay does not apply in all cases.
Currently, more than 400 Estonian companies are providing crowdfunding services. The experts of Company in Estonia OÜ will assist you in setting up your company in Estonia and can support you in preparing documents for filing an application and obtaining permission for crowdfunding activities in Estonia.[/vc_column_text][/vc_column][/vc_row]
[vc_row][vc_column][vc_column_text]The free movement of capital is one of the four fundamental freedoms of the single market of the European Union, and in order to safeguard these freedoms, it is necessary to simplify the rules and remove the restrictions that are an obstacle to the movement of capital between EU member states.
Access to capital ensures economic development, and the main sources of capital are banks. Excessive reliance of financial markets on banking activities does not benefit the financial system, therefore it is important to develop other functions of the financial market. The financial market must be diverse and develop in a balanced manner. Investment and pension funds are one of the largest non-bank financial intermediaries, and their development ensures a more efficient functioning of the financial market.
To this end, on 18 May 2022 the Estonian Parliament adopted the amendment to the Investment Funds Act and related acts, which for the most part entered into force on 3 June 2022.
The amended act simplifies the activities of investment funds in other EU countries.
The purpose of these amendments was to simplify the marketing of investment funds to investors from different EU member states. The main objective of the law is to improve the functioning of the single market for EU investment funds, which is useful for investors, as they will have easier access to investment funds of other EU member states.
According to statistics, 70% of the assets held by investment funds are offered in the fund’s countries of origin, that is, the funds are not interested in placing their funds in other EU countries than the country of origin. The main reason why funds do not want to offer their product outside the country of origin is excessive regulation.
The new law removes restrictions and simplifies activities in other countries. For example, under the amended law, alternative funds registered in the EU (i.e. venture capital funds intended for professional investors) that offer a product in another EU member state no longer need to have a representative, which is expensive, and before entering the market, the fund can assess its marketing potential in the market.
This means that it will be easier for foreign funds to gauge the interest of local professional investors in the investment idea or strategy of the fund manager before offering shares, stocks, or units in these markets.
Today’s stock market in Estonia is not yet diverse. The new law makes it easier for funds established in other EU countries to enter the Estonian market and offer Estonian investors diversified investment opportunities. Since the law is based on EU norms, Estonian funds are now able to offer their products more easily in other countries of the European Union.
Company in Estonia OÜ will assist you in registering a small alternative fund in Estonia. In the field of financial investment structures, we support our clients at all stages of their activity. Each new cooperation begins with a consultation, where the basic principles are discussed and the mechanism of work of the future company is determined. The next step is to prepare a legal decision on the fund’s activity and draw up step-by-step instructions for registering a small alternative fund in Estonia. Contact us and get an offer today.[/vc_column_text][/vc_column][/vc_row]
[vc_row][vc_column][vc_column_text]In this article, legal experts of Company in Estonia OÜ give an overview of the information that you need to know before entering into a notarized contract in Estonia.
A notary in Estonia is a holder of office in public law, an independent official to whom the state has delegated the duty of ensuring the security of legal relationships and prevention of legal disputes. The main field of activity of notaries is the certification of transactions in civil matters on the request of natural persons and legal entities.
Notarization in Estonia enhances the protection of individuals’ rights and confidence in legal matters. The purpose of certification is to ensure the stability of relations between persons, and thus to prevent possible subsequent legal disputes. Below is a brief description of the work of notaries given on the website of the Estonian Chamber of Notaries.
Notary’s obligation to clarify
There are unfortunately cases when, despite the participation of a notary in entering into a contract, a party subsequently suffers damage precisely because of the clauses stipulated in the contract. In general, it can be assumed that when entering into a notarized contract, the parties understand and are clear about all their rights and obligations, since when concluding a notarized contract, the notary has the obligation to clarify. However, how extensive is the duty of a notary to clarify, and what should be considered before entering into a notarized contract?
Subsection 18 (1) of the Notaries Act stipulates that the notary must explain to the parties the meaning of the transaction, its legal consequences and various possibilities of concluding the transaction. At the same time, the notary must ensure that there are no mistakes and doubts about the transaction, and that the interests of an inexperienced and unaware participant are not infringed. Subsection 2 of the same article says that if the notary has doubts about the compliance of the transaction with the law and the actual will of the participants, the notary must discuss it with the participants.
The Supreme Court of Estonia (in its decision No. 3-2-1-17-15) explained that during the certification of the transaction, the notary is obliged to inform the parties, including about the consequences of the requested transaction, and to warn them about relevant legal risks. Also, the notary must in an unbiased form explain the possibilities how to achieve the result that best corresponds to the will of the participants. As the competent state official, it is the duty of the notary to ensure that the content of the transaction can be clearly and unambiguously determined at a later date. At the same time, the Supreme Court noted that the purpose of the requirement for notarization of the transaction can be both the protection of the parties to the transaction from ill-considered actions, that is, a preventive function, and their consulting.
Thus, the obligation of the notary to explain, which is implicit in the law, is quite broad and should include, among other things, a warning to the parties if the contract seems ill-conceived to the notary. The foregoing shall ensure that the parties enter into only such contracts, the contents and potential risks of which are well known to them. Unfortunately, case law shows that this is not always the case.
However, the above is not the only reason why a notarized contract does not provide the parties with the protection one would hope for. In Estonia, it is still common to enter into so-called ostensible transactions. An ostensible transaction is a transaction in relation to which the parties have agreed that the manifestations of intention that they made to carry out that transaction do not have the legal consequences corresponding to the volition that was manifested – for the reason that the parties intend to create an impression of the transaction’s existence, or to conceal the transaction they actually intend to carry out.
In other words, a transaction is ostensible if a contract with one content is deliberately entered into, which for some reason is more beneficial to the parties, but in fact the parties are referring to another transaction.
The type of transaction that is most often ostensible is purchase and sale transactions. With the purpose of avoiding the payment of income tax on the income from the sale, often a gift agreement is concluded with a notary. At first glance, this may seem like a good plan, but in the event of a dispute, it will be very difficult for the injured party to prove what the real will of the parties was.
Without knowing the actual goals and intentions of the parties to the transaction, the notary cannot advise the parties when exercising their will, warn about the risks arising from the current law, explain the consequences of the requested transaction or prove the content of the will. Therefore, it is important that the parties disclose reliable information when notarizing the transaction and do not hide its actual content. In that case, the rights of the parties would be better protected in possible legal proceedings.
The duty of a notary to provide clarifications is quite broad and detailed, but nevertheless it should not be assumed that a notarized contract will protect in the event of any dispute. It is always worth making sure that all clauses of the contract are understood, and if necessary, clarify unclear places. It is also worth being honest with a public notary and disclosing only reliable information to ensure the best protection of your rights.
If you are interested in a notarial transaction, contact the representatives of the Company in Estonia OÜ, and we will help you to book time to a notary and support you throughout the process.[/vc_column_text][/vc_column][/vc_row]