Estonia’s unique share capital rules are designed to increase trust in business without raising the barriers to entrepreneurship
Last updated February 2019 to include an overview of Estonia’s new commercial code, which enables share capital to be registered with any credit or payment insititution across the EEA.
If you establish a limited company in Estonia then you will also need to register its ‘minimum share capital’ or ‘minimum capital requirement’.
We know this isn’t the most exciting issue that we’ve addressed on the e-Residency blog so far. However, understanding it properly can help you choose the best services for running your company.
The idea of minimum share capital was introduced for Estonian companies in the early 1990s after the country gained re-independence. It was part of a broad range of (successful) measures to create a trusted business environment.
When you establish a limited company, you are creating a separate legal entity to yourself and this protects you from personal liability if something goes wrong. However, you still want people to have confidence in that company in order to deal with it.
As the theory goes, if you are required to invest some money into your company as minimum share capital before you can take any money out as dividends then everyone — including customers, suppliers, partners and employees — has greater confidence in both your company and the entire business ecosystem.
It’s important to remember though that minimum share capital is not a fee. It’s your money that goes into your company to spend as your company chooses (in support of business activity).
That capitalisation is then recorded in publicly available records, as are many other things about your Estonian company that can increase confidence in it, such as its ownership and taxation. This high level of transparency provides a huge advantage to people who value greater trust in their business (as so many e-residents do).
Some countries have set a minimum share capital requirement for their companies that is much higher than Estonia’s. This can prevent many legitimate entrepreneurs from ever being able to get started in business. In fact, some people become e-residents when they want to start a company specifically because they can’t afford to pay the minimum share capital amount required in their own country when they register a company there.
Other countries have chosen to eliminate the requirement for share capital entirely or set it at 1 unit of their currency. This does help more people start their companies, but it doesn’t provide the higher level of trust that many entrepreneurs want.
So how can the rules for minimum share capital be set in a way that is fair to everyone and provides greater trust without raising the barriers to entrepreneurship?
As a result of these considerations, Estonia has set a reasonable rate for its minimum share capital (which I’ll come onto in a minute) but also added an extra rule that is fairly unique in order to not to deter people from getting started in business: If necessary, a private company can choose a later date after it has been established for when the minimum share capital is paid and registered.
A partner is required to pay the share capital contribution promptly after the company has been established unless a later date is entered into the company’s articles of association. The template for the articles of association lets you choose a period of up to 10 years, but it’s also possible to choose a date beyond that yourself. It is recommended that you pay in the amount as early as possible though, as you should also want a company that you expect to start growing as early as possible too.
However, this option to delay the contribution means that you can start your company, conduct business, earn profits and pay wages straight away, but you only have to pay in the minimum share capital once you are ready to take out dividends. Some e-residents wait at least one year until after their company’s first annual report, but your accountant should be able to advise you on the most suitable arrangements for your company.
The effect is that you benefit from the minimum share capital requirement, while still being able to keep startup costs low. If your business doesn’t take off and you incur no liabilities then you never have to worry about paying it. However, this also prevents less responsible entrepreneurs from operating within our business environment because it is more difficult to walk away from liabilities that may have been incurred.
This compromise in the way the requirements have been structured in Estonia is particularly suited to people who wish to operate with a higher level of trust than where their business is physically located, but do not have large amounts of capital when starting their company.
In fact, so does Estonia’s entire e-Residency programme.
Minimum share capital rates in Estonia
There are two types of limited companies that can be registered in Estonia.
A private limited company is called osaühing in Estonian. This is the most common form of company run by e-residents, which is why their companies usually have the shortened version OÜ (equivalent to LTD) at the end of their legal name.
The minimum share capital for a private limited Estonian company is €2,500. As this is the minimum share capital amount, you can of course choose to pay in and register even more as share capital.
As discussed, this can be deferred for up to 10 years, except for one exception — if you choose to set your share capital above €25,000 then it can’t be deferred.
There is a good reason why many companies do pay in more than the minimum rate, although usually only by a few euros. If you are splitting a company equally between multiple shareholders then you will need to choose an amount of euros that can be equally divided too. For example, a company with three shareholders would require a minimum share capital of €2502 if each one is to receive equal shares at €1 each. That can be divided to €834 per person.
However, a limited private company can also be run by just one person and many e-residents are solo entrepreneurs, freelancers or contractors.
A public limited company is called aktsiaselts in Estonian, which is shortened to AS at the end of a company’s legal name.
It is very rare for e-residents to run these companies for the simple reason that it is difficult to benefit from location-independence if you run a larger and more complex business (at least at this moment in time).
If you do choose this form of company though, the minimum share capital requirement for public limited companies in Estonia is €25,000 and the minimum value of a share must be €1. It is not possible to defer this payment at incorporation.
A non-profit organisation is called MTU in Estonia. Several e-residents have already established these, such as for operating a social enterprise or charity, or if they require a foundation to conduct an Initial Coin Offering (ICO).
Here’s the good news. These types of companies require no minimum share capital.
What kind of account can I use to register the share capital?
The share capital contribution should be made from your personal account (in your name) to your business account (in your company’s name).
Estonia has recently updated its Commercial Code so that the business account can be provided by any credit or payment institution across the European Economic Area. This means your company account should be with a bank or fintech company that is based in any EU country plus Iceland, Liechtenstein and Norway.
The rules previously stated that only an Estonian credit institution could be used for registering share capital because the rules were written before the market had developed so this was restricting choice of business banking for Estonian companies.
You can read more about this decision here:
How to pay and register minimum share capital in Estonia
Once you receive your e-Residency digital ID card, you can log into Estonia’s Business Registry and establish your company. It’s this online portal where you will also return to register your minimum share capital payment once you are ready.
In order to defer paying the share capital, there are two sections on the company registration form that you need to pay attention to. First, there is a section specifically about capital, which you open up by clicking ‘enter the capital’. The screenshot below shows what you’ll see there:
Once you have decided the capital amount, simply click ‘establish the company without making capital contribution’. After that, you can save the changes and return to the main screen of the application page.
Your decision to defer share capital will affect another part of the application though, which is at the bottom of this next screenshot. Your company’s articles of association will need to explain the capitalisation of your company, its corresponding division of shares and when you intend to pay it in.
If you are imagining hours spent with lawyers typing up this document then don’t worry! Click ‘enter the articles of association’ and you will actually be given a template that you can easily amend by selecting from multiple options for each section.
You have the option to choose up to ten years for the period in which you intend to pay in your company’s minimum share capital. As mentioned, you can propose a time period even later than this if you don’t use the template, but it is not really reasonable to wait anywhere near that long when building a company.
Until share capital is registered, those who have received the shares are personally liable up to the amount not paid in and no dividends can be issued. In practise, most e-residents — particularly those selling services online with low running costs — don’t have too many concerns about their company being liable for very much.
Once you are running your business and ready to complete this process, transfer the money from your personal account (in your name) to your company’s IBAN account. You can simply mark the payment as ‘minimum share capital’.
Request a capital contribution statement from your banking provider to prove that the share capital has been paid. This statement should be digitally-signed by your banking provider, written in Estonian and conform to the requirements of the Estonian Business Registry. This won’t be a problem if your IBAN account is with a bank in Estonia or a fintech company that has specifically invested in serving e-residents (like those on our Marketplace). If not, I’ll explain your options in the next section.
E-resident Ian Wagner runs Funktional, which provides technical consulting and development. Ian is originally from the US and signed up for e-Residency out of curiosity, but he now lives in South Korea and has found the programme ideal for him as an entrepreneur. Fun fact — Ian even now speaks good Estonian, despite only ever visiting the country on business trips!
Ian recently posted in the Estonian e-residents Facebook group to explain how he registered his share capital payment:
“Whoo! Share capital is paid! I decided to be adventurous and submit a petition to register my share capital on my own and fill out some additional company info like website and email. It’s actually a pretty painless process. In case anyone else is wondering, here’s my cheat sheet on how to register share capital.“
“You can submit a petition by clicking the blue box (as shown in my screenshot). Then find and uncheck the box that says you’ve established your corp w/o paying share capital. Then upload any documents you have proving that the capital has been paid. If you have an LHV account, you can easily export a digitally signed record for the transaction. It took several days for them to process it. I received a confirmation email that the petition had been submitted, but for some reason I never got a notice that it had been approved. So check back in about 5 days if you don’t hear anything.“
But the question remains — what are your options if you are using a banking provider that is not yet willing or able to provide the minimum share capital certificate you need for Estonia’s business registry?
Well, that is still possible. One business services provider that already has experience doing this is 1Office.
They have successfully helped their e-resident clients register minimum share capital with both fintech companies and banks outside of Estonia, despite the fact that those companies are not yet able to meet the requirements themselves.
In those cases, they have done the hard work themselves by working with the banking provider to obtain some kind of certificate (which is usually still on paper!) and then ensure it is notarised into an Estonian document that does conform to the requirements.
Kadri Raig is Marketing and Communication Manager at 1Office. She explains:
“Our clients often want to open an Estonian bank account for their limited company or ‘OÜ’ because they believe it is necessary for paying the minimum share capital. However, we are happy to inform them about their full options and how we can support them, even if they don’t have an Estonian bank account. For example, we have e-resident clients who have opened up a bank account for their Estonian company in Latvia or Malta and have made a share capital payment from these accounts, which has been successfully registered. In addition, there are fintech companies such as Holvi, which are more and more widely used by e-residents. The most important consideration while opening an account in a foreign bank or fintech company is whether they are willing to provide the proof that the share capital payment has been made.”