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published on 5 Januar 2023 | reading time approx. 5 minutes
An important date for private legal persons established under Estonian law is 1 February 2023, when the Commercial Register Act enters into force. There will be substantial amendments to the current Commercial Code, whereby the provisions governing the commercial register are being transferred to a separate Commercial Register Act.
The main aim of the amendments is to harmonise the register related rules for private legal persons, as the current rules are fragmented and non-uniform. The aim is to increase the reliability and legal certainty of relying on registry data and to simplify the activities of registrars and companies.
Below we look at the most important changes affecting limited liability companies under Estonian law.
At present, when a private limited company is set up, the statutory share capital of 2,500 euros is usually automatically chosen. However, as the current Commercial Code does not provide for a time limit for making the share capital payment, it has been possible until now for the share capital to remain unpaid for a long period of time or for no payment to be made at all.
The amendment aims to increase the responsibility of the founders and to make them think more carefully about the amount of capital they actually need to start the company. The abolition of the minimum capital requirement means that it will no longer be possible to set up a company without share capital contribution. However, at the same time, it will be possible to set up a company, for example, with a share capital of only one cent.
Nevertheless, the amendment seeks to ensure that the share capital chosen and paid in by the founders will in future also provide third parties with information on the reliability of the company and its thoughtful formation. Moreover, the current minimum capital of 2,500 euros has been in force since its introduction in 1995 and has therefore lost its value.
Under the current law, the net assets must be at least half of the share capital of the company, and the net assets must be at least equal to the minimum amount of share capital set by law, i.e. at least 2,500 euros. With the law amendment the requirement that the net assets (equity capital) must be at least equal to the minimum share capital laid down by law will be removed.
Under the current law, the list of shareholders is kept by the management board of the company. The details of the shareholders are publicly available in the commercial register, but these are only informative data and not entries in the commercial register.
The amendments foresee that the list of shareholders will henceforth be kept in the commercial register. As the information entered in the list of shareholders will have the status of a commercial register entry, this information will henceforth have public trustworthiness. It will therefore be possible to rely on the list of shareholders recorded in the commercial register and a bona fide acquisition of shares will be possible.
The obligation to submit the annual report is laid down by law, so the deadline does not come as a surprise. Under the new rules, the registrar has the discretion to impose a fine without issuing a warning order to a legal person that has not submitted its annual report on time. In determining the amount of the fine, the registrar can take into account, inter alia, the length of time for which the annual report has been overdue and the number of occasions on which the annual report has been overdue.
If a legal person fails to submit an annual report also within the time limit set by the registrar and at least three months have elapsed from the deadline for submitting the annual report prescribed by law, the legal person may be deleted from the register. To be removed from the register, certain conditions must be met, such as, for example, that the legal person has no assets and is not party to any pending proceedings.
As deletion from commercial register is the most extreme measure against a legal person, the possibility of re-registration within 3 years will be created to counterbalance the deletion.
In addition to the simplified procedure for deleting a legal person from the register in the event of failure to submit an annual report, this is also possible in situations where a legal person with a foreign address does not have a contact person in the register. A contact person must be appointed if the legal person has no Estonian address.
The draft law lays down an obligation to designate a contact person for a specified term. Once the term has expired, it can be extended or the contact person will be removed from the register.
If a legal person fails to provide information, a fine can be imposed, but it is important to note that under the new regulation, if a legal person fails to appoint a contact person within the deadline set by the registrar, the registrar has the right to remove the legal person from the register if certain conditions are met. Again, the draft law provides for the possibility of re-registration within 3 years.
As the latest amendment to enter into force, from 1 March 2024, the law will provide for the possibility to reserve a business name. When reserving a business name, the activity for which the business name is to be used and the legal form of the company must be specified.
The eligibility of a business name is checked at the time of its reservation, and the registrar makes a final decision on the eligibility of the business name at the time of the reservation, which cannot be reviewed or changed once the business name has been registered.
It is possible to reserve a business name for up to six months, and for good cause extend the reservation once for three months. The same person may not reserve the same name a second time, to avoid malicious reservations of business names. Pursuant to the explanatory note to the draft law, the state fee for reserving a business name will be 150 euros, but it should be noted that the state fee will not be refunded if the reservation is cancelled.
Under the new regulation, a specific date for making an entry in the commercial register can be requested for a valid reason. This possibility is foreseen, inter alia, for determining the consequences of mergers and divisions. For example, in situations where it is necessary for a merger to take effect on a certain date and so that it would be clear with sufficient time whether there are deficiencies in the submitted application or whether the entry can be made on the desired date.
Such an application can only be made for a change of data, and not for first-time entries. The requested date of entry may be within a period of up to six months from the date of the application for entry.
According to the current Commercial Code, a branch of a foreign company is obliged to appoint a contact person if at least half of the management of the branch is not residing in Estonia. However, this requirement to appoint a contact person through the residence of the management board members of the branch will be abolished in the future. This means that the appointment of a contact person will become voluntary for the foreign branch.
However, under the new regulation, a branch of a foreign company is obliged to enter in the register the Estonian address of the branch where documents can be served.
It is important to note that, under the new rules, when appointing a contact person the expiry date of the appointment shall also be indicated. The information on the expiry date of the appointment of the contact person must be submitted with the application for the appointment and the registrar must be informed if the term of the appointment is extended. If the term of appointment is not extended, the contact person will be removed from the register.
The requirement for at least one liquidator to be resident in Estonia is abolished. The requirement also does not apply to members of management board, who are often liquidators.
The conditions under which a company may not be deleted from the register at the end of liquidation are specified. According to the amendment, the liquidators submitting an application to the register for the company's deletion will have to confirm, among other things, that there are no other legal obstacles to deleting the company from the register. In particular, a legal person that is a party to an ongoing proceeding may not be deleted from the register if deletion from the register would impede that proceeding.
There are also some terminological changes. For example, the term "opening balance sheet of the liquidation" is replaced by "liquidation report", and "final balance sheet" is changed to "closing report of the liquidation".
According to the law amendment, an audit of the closing report of the liquidation is required if such an obligation existed regarding the last annual report before the dissolution resolution or would exist for the closing report of the liquidation, taking into account the requirements of the Auditors Activities Act.
It is the responsibility of the management board to valuate the non-monetary contribution. Under the current law, the valuation of the non-monetary contribution shall be verified by an auditor if the share capital of the limited liability company is at least 25,000 euros and the value of a non-monetary contribution exceeds 1/10 of the share capital, or if all the non-monetary contributions of such private limited company collectively form more than one-half of the share capital. Under the new rules, the requirement for the valuation of the non-monetary contribution to be verified by an auditor should only apply to public limited liability companies. The legislator considers that only audits of non-monetary contributions of a higher value (from 50,000 euros) are justified.
New rules for groups of companies will be introduced, in particular as regards group governance and the liability of the parent company and the liability of the board member of a subsidiary.
According to the general principle, each member of a company's management body must act primarily in the interests of that company. However, the law amendment introduces the group interest, as acting in the interests of one's own company may be contrary to the interests of the group as a whole. Thus, the parent company will henceforth have the right to give instructions to a member of the management body of its subsidiary. The amendments also introduce the liability of the parent company in a situation where a subsidiary has been managed on the basis of the instructions of the parent company and that subsidiary finds itself in such an economic situation due to which insolvency is likely to occur in the future.
Due to the large volume of information systems developments, the entry into force of the law amendments is divided into three phases:
Alice Salumets
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