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Negative equity can pose challenges for private limited companies (OÜ) in Estonia. It arises when a company’s liabilities exceed its assets, leading to a situation where its net assets—or equity—fall below the legally required minimum.

In case you submit an annual report that indicates your company’s equity as being negative, you will receive a notification from the Estonian Business Registry. In this notification the Business Registry informs you about the fact that your company’s equity has become negative and gives you 6 months to take measures to make the equity positive again. Receiving such a letter from the Business Registry does not mean that your company is in immediate threat of receiving a fine or other sanctions. However, it is a “Call to Action”.

We shall examine the possible actions in this article.

What Are Share Capital and Equity?

Under Estonian law, every OÜ must have a share capital. This is the initial amount paid in by the shareholders when the company is established. Equity, or net assets, is calculated as a company’s total assets minus its total liabilities.

Starting from February 1, 2023, Estonian legislation allows the establishment of an OÜ with a share capital as low as 1 cent. However, while the legal barrier to entry is now minimal, a low share capital can impact your company’s credibility and financial security.

It is also important to keep in mind that the liability of shareholders is never less than €2,500. Even in the case the company’s share capital is smaller.

Legal Equity Requirements

The Estonian law stipulates that the company’s equity must be at least 50% of its share capital.

The Estonian Business Registry checks whether or not this condition is met each time the company submits its Annual Report.

What Causes Negative Equity?

In most cases negative equity is caused by a loss that the company has made. It may also be caused by unpaid vendor invoices or shareholders’ loans that are recorded in the company’s books as liabilities.

What to do if your company’s equity falls below the legal minimum?

Most importantly – please inform your accountant, should you receive the formal notification about negative equity. Estonian law offers several remedies to address the negative equity issue and together with your accountant, you can choose the one that suits your company best.

Assisting our clients with the negative equity issue is an extra service that we provide and there are extra fees involved. The fees depend on the option (see below) you choose to use. Please consult your accountant for more details.

In case you ignore the letter from the Business Registry and do not inform your accountant that you have received it, and as a result the 6-month deadline expires without any action from the company’s side, the company may be deleted from the Registry without additional notice.

Options available to companies for restoring a positive equity are descried below. We recommend that you discuss these with your accountant and have your accountant formulate the documents, no matter which option you choose.

Inform the Business Registry about your profits of the running year

If, by the time your company receives such communication from the Business Registry, the company has already made profit to cover the previous losses, it will be sufficient to simply send a new balance sheet to the Business Registry, demonstrating that the company’s equity has been restored to the required level.

Create a voluntary reserve

In case shareholders have previously given loans to the company, then an easy way to restore a company’s equity to the required levels is to create a voluntary reserve capital, based on these loans. This requires amending your company’s Articles of Association and formulating a specific decision of the shareholders.

Reclassify shareholder loans as revenue

Shareholders can formally waive their loans to the company. Converting loans to revenue is simple to do, because it does not involve any formal decisions by the shareholders or any changes to the company’s file in the Business Registry. However, if you choose this option, please remember that if you later choose to pay dividends, the waived amount becomes taxable as profit and cannot be withdrawn tax-free.

Increase Share Capital

Shareholders can increase the company’s share capital. Usually this is done in the form of monetary payments by the shareholders.

Procedure of increasing share capital entails formulating a shareholders’ decision and making a relevant amendment in the Business Registry.

Hand some non-financial assets over to the company

In case the shareholders have some assets, like intellectual property or equipment, these can be handed over to the company. The market value of these assets needs to be evaluated and this value should not be exaggerated. Also, a handover document needs to be formulated. This will increase the company’s assets and may solve the problem of negative equity.

Besides these relatively easy measures, you also have the options of merging your company with another company that has a stronger financial situation, liquidating the company or declaring bankruptcy. We shall not consider these options further in this article.

Preventing your company’s equity from going negative

As you see, addressing the problem of negative equity is not too difficult. It is nevertheless better to be proactive and prevent your equity from going negative in the first place. Here are some tips about how to do that:

• Monitor your finances in Q4: Evaluate your company’s assets and liabilities before the year ends. Ask advice from your accountant if needed.
• Shift expenses: Defer large expenses to the next fiscal year.
• Accelerate income: Invoice clients before year-end to boost year-end revenues.
• Capitalize assets: Spread the cost of major purchases over several years as depreciable assets.