Do I need to do annual reporting?
As a business owner, yes you do. Your accountant does the annual reporting.
So all you need to do is upload your expense documents and invoices every month and your accountant’ll take care of the rest.
Do I need external auditing?
An external audit of your annual accounts is not compulsory if your company is smaller than:
€4 000 000 in sales revenue or income per year,
€2 000 000 total assets as of the balance sheet date,
50 people as the average number of employees.
If this is the case, Your accounting and tax reporting services should be sufficient to make sure that everything is compliant in Estonia.
What implications does the financial year have?
A standard financial year for your company starts on January 1st and the financial year is 12 months long.
For example, if you start your company after July 1st (in Q3 or Q4 of the first year) then your accountant consolidates this period and the 2nd year into one financial year by default. You‘d need to submit your first annual report after the financial year of the second year has ended and you can pay dividends at the beginning of the third year at the earliest.
However, if a company which was registered in Q3-Q4 of their first year earns profit during this period, and wishes to pay dividends earlier, then LeapIN can submit the annual report in Q1 of the second year at your request. In this case, the company can already pay dividends at the beginning of the second year.
In the event of a funding round, would you be able to help with the paperwork?
Your accountant can help you find a trusted legal partner in Estonia. However, it’s not currently part of our services.
We don’t support any alternative crowdfunding or external financing initiatives by our customers, except from the single shareholder (share capital or a loan). Such needs are exceptional ones among our existing/target customers and would require a custom solution, going beyond our standardized approach. For instance, as long as you run your company alone, all corporate governance issues (voting rights, decision making policies etc.) are irrelevant. However, once you include additional shareholders, these issues start to matter, and the standard Articles of Association needs to be adjusted to reflect the agreements between the shareholders.
Can I operate freely with company money (e.g. on year-to-year declaration basis)?
You cannot operate freely with the money belonging to your business (e.g. use this for personal use), your business’ money and your own personal money must be kept separate.
LeapIN will execute monthly reporting and your business bank accounts must match business documentation (e.g. sales and purchase invoices), which you can administer easily with LeapIN.
Please note that LeapIN does not accept cash transactions (e.g. taking cash out of ATM with your bank card).
Can I invest from my Estonian company?
Technically, you can invest but your options are limited. Your Estonian company is allowed to make the following investments:
Buy-sell shares in publicly traded companies and funds
Buy-sell cryptocurrencies for investment purposes
Invest in start-ups or other private companies registered in the EU (either a convertible loan or equity), receiving a minority stake and no controlling rights (less than 30%)
Lend via internationally recognized crowd-funding platforms
This means the following investments are not allowed (not an exhaustive list):
Buying real-estate, a car or any other physical assets
Buying physical gold/silver
Buying a controlling/majority share in another company
Lending to a friend or any other individual directly
Lending to yourself (as a shareholder / board member of the company)
Your company is allowed to invest only profits earned from your core business activities or reinvest funds earned from other investment activities, assuming the latter will not become the core business activity itself.
This means you cannot use a loan or initial share capital to make investments. And the investment activities cannot replace the initial core business of the company (e.g. instead of providing software development services the company starts trading activities), because otherwise the company will be required to have a separate activity license in Estonia.
Advice regarding investment opportunities is beyond our competence. But there are other professional service providers you can turn to.
For instance, LHV is also known for its investing capabilities. You can read more about it on their website.
For accounting purposes you would need to provide us an extract of your investment account on a monthly basis.
How can I loan money to my company?
Loaning money to your company as a private person is allowed by Estonian business law. You can transfer any amount from your personal account to your business bank account by adding ‘Loan from shareholder’ as the description of the transfer.
The duration of the loan can be unlimited. Once your company has sufficient funds on its bank account, the loan can be paid back any time to your personal bank account.
Creating an agreement between the shareholder (you) and the company for receiving a loan is voluntary. The interest for the loan can be 0%.
How can I repay a loan from my shareholder(s)?
If you as a shareholder in your company have lent money to your company, you can pay it back to your personal bank account when needed. In order to make a repayment of the loan provided to your company you can proceed as follows:
Go to your company’s bank account to create a payment
Enter the description of the payment as “Repayment of loan to shareholder”
Make a payment to your personal bank account
Can my company give me (the shareholder) a loan?
According to Commercial Code it is not allowed to give loan to the shareholder nor board member, because this activity is considered as hidden profit distribution and therefore taxes should be applied. You can find the legal act from the following link (§ 159 https://www.riigiteataja.ee/en/eli/519122017001/consolide).
Why can’t I buy real estate using company money?
According to Estonian laws a company is allowed to buy a real estate and rent it out for business purposes both in Estonia and outside.
There are multiple issues involved. Firstly, the resources used to buy a real estate have to be earned from the core business activities, not taken as a loan. Otherwise public authorities and the bank may question the origin of this money and ask you to present additional written evidence to prove its legitimacy, even if it’s obvious to you. You might end up in a lengthy and bureaucratic procedure. In addition, they’d re-classify the company as a holding/real-estate company rather than a consulting business.
Secondly, if a company buys a real estate outside Estonia and rents it out for business purposes, the local authorities in the location of the real estate are likely to claim that the company has permanent establishment in that location and will require local compliance as well. It would go beyond the concept of a location-independent company and that’s where we cannot provide any further support.
In summary, the only way we could support this is to invest the funds which your company has earned from your core business activities into real estate in Estonia. But if you plan to do this, please let us know and we can discuss it in more detail.
What are the rules for paying dividends?
There are the following rules around the process of paying dividends:
A company is allowed to pay out dividends only if:
the company has earned profit during the last financial year(s), and has not paid it all out as dividends in the previous years. For instance, if the company earned the profit of €10 000 in 2016, distributed dividends of €6 000 in 2017, earned the profit of €5 000 in 2017, the company can distribute maximum €10 000 – €6000 + €5000 = €9 000 as dividends in 2018. These sums are only officially taken into account if they’re recorded and reported in the annual report of the company. If the company wants to distribute (a part of) the accumulated profit as dividends, the company has to submit the annual report first. AND
the shareholders of the company have made an official decision to distribute x EUR as dividends.
A company is not obliged to distribute dividends, even if the company have an option to do it (see 1a). It’s up to the shareholders of the company to decide how much (out of the maximum amount) to distribute as dividends, if any. The maximum amount is limited to the sum in 1a, but the minimum is 0. And the shareholders’ decision (see 1b) determines the actual sum to be distributed.
Even if the shareholders of the company have made the decision to distribute dividends of x EUR, they can choose when the company will actually make the payments to the shareholders – The shareholders’ decision does not trigger automatic payments from the company’s account to the shareholders. And if (a part of) the sum allocated is not paid out in 3 years, it will not be lost but technically will be transferred back to the retained earnings in the company’s balance sheet, so it could be distributed as dividends again in future.
From our earlier example, in March 2018 the shareholders decide to distribute €5 000 (out of the €9 000 maximum amount). Out of €5 000, €1 000 is paid out in April 2018, €1 500 in October 2018, and the final €2 500 is not paid out at all, which means in 3 years €2 500 will be reclassified as retained earnings of the company (subject to dividend payments in future).
The corporate income tax on the distributed profit is paid in Estonia based on the actual dividend payments (point 3), not the “decided” payments (1b). For example, if the shareholders decide to distribute €5 000 in March, but pay out only €1 000 in April, only €1 000 is reported to the Estonian Tax authorities, and the corporate income tax of 20/80 (€250 in this case) has to be paid to the Estonian Tax authorities in May (the next month).
By default the shareholders’ decision about the distribution of dividends (see 1b) is declared in the annual report, once per year. And by default the decision is “not to pay any dividends this time”. Now, there are 2 options:
If the shareholders can, and plan to, pay dividends within the current year (based on the previous year’s results), they usually declare the sum in the same decision which is attached to the annual report (instead of “not to pay in dividends”, they declare “plan to pay x EUR as dividends”). In that case the formal part is done, and they can choose if and when they actually make the payments (see 3) without any formal procedures (except the tax reporting). It makes sense to go this way if the plan to pay out dividends is reasonably certain, and the shareholders have a decent understanding of how much they’d like to pay in total. If the sum declared is more then the actual payments, nothing serious happens (see 3). If the sum declared is less than the actual amount needed for payments, see the next option.
The shareholder can make the relevant decision (see 1b) later in the year as well. In the annual report they can declare the decision “not to pay any dividends”, but in July they make a new decision to “pay out x EUR as dividends”. The latter decision has to be formalized, but doesn’t have to be reported to any authorities unless asked for specifically (e.g. by Estonian Tax authorities). It makes sense to take this approach if, during the time of submitting the annual report, there’s no intention to pay any dividends or there’s some uncertainty about how much would actually be needed by the shareholders.
If the company decides to pay dividends, it’s strongly recommended to also pay a reasonable board member fee, if it hasn’t been done before. Otherwise the tax authorities might argue that the underlying profit has been earned by using the contribution by the board member (vs. the company earning it somehow magically), and as the contribution by the board member has to be compensated by the board member salary, the tax authorities would have an incentive to reclassify the dividends as the board member salary instead, and tax the payments in a different manner. To avoid this, it makes sense to pay the board member salary proactively.
For everything to remain in order, the board member salary payments have to be recorded as company costs in the same period when the company earned the profit which is distributed as dividends. So if the company decides to pay out dividends in 2018, the company can do it only based on the profit earned up to the end of year 2017 (see 1a), and this means that any relevant board member salary has to be recorded in the company’s financial figures of 2017, not 2018 (the board member salary would reflect the contribution the board member made in 2017 to earn the profit in 2017, which would be paid out as dividends in 2018). And that’s why, if the shareholders make a decision to pay dividends in 2018 and declare it together with the annual report, it makes sense to record the board member salary costs in the annual report as the costs of 2017 (lowering the profit accordingly), even if the board member salary and the relevant taxes would be paid out in 2018.
When is my 2018 annual financial report due?
The previous financial year’s (2018) annual report is due 30th of June 2019.
If you don’t provide us the relevant documents by the time of filing the annual report, and the report is not submitted on time, you can be fined anywhere from €200 to €3200.