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.
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.
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.
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