How to distribute dividends in Estonia?

Estonia, due to its attractive legal regulation, favorable tax conditions and ease of administration, is popular among investors. Many entrepreneurs choose this particular jurisdiction to register their business. However, after registering the company, shareholders always face the question of how to distribute dividends in the company. Therefore, this article is aimed at highlighting the features of the distribution of dividends in Estonia.

First of all, it should be noted that Chapter 19 “Commercial Code” – this is the basic law that establishes the rules of the distribution process. And we were guided by this law in order to emphasize the key points when dividends can be distributed and how to do it in Estonia.

So in accordance with § 157 (1) “Commercial Code” (1) dividends can be paid to shareholders from net profit or from undistributed profit of previous years, from which losses of previous years are deducted, on the basis of the approved annual report.

On April 13, 2022, the Estonian Parliament abolished the requirement for minimum authorized capital for Estonian limited liability companies (OÜ). However, since the minimum nominal value (par value) of a share is one euro cent according to § 148 “Commercial Code”, the authorized capital of Estonian limited liability companies can now amount to one euro cent if it has one founder and one shareholder

It should be noted, that only public limited companies have a special opportunity to pay shareholders part of the profit for the current year, however, such a right is not provided for a Private limited company.

According to § 157 “Commercial Code”  share of the profit (dividend) is paid to the shareholder, proportional to the nominal value of his share, unless otherwise provided by Article of association.

Therefore, dividends do not necessarily have to be paid in the same proportion as the share in the authorized capital, although this is the most common practice. The Commercial Code requires that this possibility of disproportionate dividends be spelled out in the articles of association. If all the shareholders agree, there should be no problem and no one will check it.

Please read below the main rules that you need to take into account regarding the distribution of dividends in Estonia:

• If your company was founded before February 1, 2023, make sure that you have paid the required authorized capital; For companies established after 01.02.2023, the contribution to the authorized capital must be made at the time of the establishment of the company, and so, for companies created after 01.02.2023, we don’t discuss this requirement.
• When deciding on the amount of dividends, make sure that it does not exceed retained earnings according to the company’s annual report. Secondly, net assets of the company as a result of the payment of dividends cannot fall below half of the authorized capital or the mandatory minimum size of the authorized capital of the company – depending on which of these values ​​is greater.

It should be noted here that such a conclusion was not made in connection with the provisions of Chapter 19 “Commercial Code”, but in accordance with § 171, which states that the board is obliged to convene a meeting of participants if it is necessary in the interests of a private limited company or if :1) net assets (total assets minus total liabilities on the balance sheet) of a private limited company are less than half of the authorized capital. And in this case, in accordance with § 176. “Reduction of assets” if the net assets of a private limited company are less than half of the authorized capital, the shareholders must make a decision:

1) decrease or increase of the authorized capital, provided that the net assets after that amount to at least half of the authorized capital; or

1.1.) implementation of other measures, as a result of which the net assets of the private limited company will amount to at least half of the authorized capital; or

 2) liquidation, merger, division or transformation of a private limited company; or

 3) filing a bankruptcy petition.

• According to § 157 “Commercial Code”, payments to shareholders are not made if the net assets of the Private limited company, as can be seen from the annual report approved at the end of the previous financial year of the Private limited company, are less or will be less than the amount of authorized capital and reserves, which, according to the law or the articles of association, are not payable to shareholders.
• If a company capitalizes development costs as intangible assets and the development costs are not fully amortized, profits cannot be distributed if the sum of reserves that can be used for profit distribution and retained earnings from prior periods is at least does not equal unamortized development costs. In practice, this means that if unamortized development costs are, for example, $1 million, the company must accumulate enough retained earnings and reserves to total at least $1 million before it can distribute as dividends.
• The payment of dividends must be declared in TSD Annex 7, and the corresponding tax must be remitted by the 10th of the month following the actual payment.
• Even if the company’s shareholders have decided on the distribution of dividends, they can choose when the company will actually make payments to shareholders – the decision of the shareholders does not result in automatic payments from the company’s account in favor of the shareholders. However, if (part of) the allocated amount is not paid within 3 years, it will not be forfeited, but will technically be transferred back to retained earnings on the company’s balance sheet, so that it can be redistributed as dividends in the future. This means that on the basis of the approved annual report, the owners can distribute profits and pay dividends as many times as they see fit in accordance with the provisions of the Articles of association, and there are no restrictions in this regard. However, in practice, lawyers and accountants recommend paying dividends once a quarter to make it more convenient to keep records.

Also, in the case of Estonian legislation, please note that according to§ 158 (2) “If, upon receiving the dividends, the shareholder did not know and should not have known that they were paid to the shareholder without reason, the return of dividends may be demanded only if it is necessary to satisfy the claims of the creditors of the Private Limited Company”, that is, if you received money from the company in the form of dividends and you did not know that this money was paid to you without reason, then you must return this money only if it is necessary to pay the company’s debts to its creditors.

Consequently, there are certain restrictions on dividend payments in Estonia, especially compared to Cyprus. Therefore, when choosing this jurisdiction, it is important to study the rules for the distribution of dividends in order to avoid possible misunderstandings and troubles related to the violation of distribution procedures.