What is ‘minimum share capital’ and how do Estonian companies register it?

Estonia’s unique share capital rules are designed to increase trust in business without raising the barriers to entrepreneurship.

  • Last updated April 2018 to include ‘Why would a capital contribution statement be rejected?’ in response to two recent cases discussed in the Estonian e-residents Facebook group.

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: you can defer your minimum share capital payment for a private company for up to 10 years.

That means 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. Most 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.

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.

If you choose to defer paying in the minimum share capital at this point then that is fine. Most e-residents do this and find that it’s actually easier that way.

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.

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’.

Remember — when we say ‘payment’, we are talking about moving money into your company account so all you need to supply from your company is the proof that you’ve done that.

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 Holvi). 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.

How this affects your options for banking and service providers

As an e-resident, you can register your Estonian company and manage it entirely online by yourself if you choose to (although you will need an Estonian address and — if outside the EU — a contact person there too). That includes registering the minimum share capital yourself if you wish, as Ian did.

However, we have a list of business services providers that are recommended by other e-residents and we do advise e-residents to use them if they are new to business, want to save time and hassle, need to obtain an Estonian address or contact person, or simply don’t have the necessary knowledge of Estonia’s business environment when it comes to things like accountancy. Most e-residents pay about €60 to €100 per month for all their business services and this value-for-money is actually one of the main advantages of the programme for many people. Many e-residents also use a provider to establish their company.

The issue of minimum share capital (and related issues with banking) further highlight why we recommend business services providers though and it affects some of the choices you might make about them.

For a start, none of this would be possible of course if you are unable to obtain an IBAN account connected to your company.

If you would like to open an Estonian bank account then an e-Residency business services provider can guide you through this process so that you have a better chance of obtaining an account. Unfortunately, Estonian banks still require applicants to travel to Estonia and demonstrate a ‘connection to Estonia’. Business services providers can also give you the pre-decision so that you don’t travel to Estonia if you are going to be rejected. At present, the banks do not give pre-decisions directly to applicants, although it is possible that this will change in future and that is definitely something the e-Residency programme wants to happen.

However, we strongly believe in giving e-residents the power to open a complete EU company with EU business banking online from anywhere on Earth. That means we need to help e-residents get access to the widest possible range of services, including for banking.

Fortunately, there are a wide range of financial technology (or ‘fintech’) companies now disrupting the banking industry by offering their own IBAN business accounts for companies (and many more are on the way). E-residents are already ahead of us at the programme by trying out different providers and giving us feedback about which ones work best and should be a priority for integration. In addition, some e-residents are even able to obtain business banking for their Estonian companies from banks outside of Estonia.

As a result, we are working with as many of these companies as possible to ensure that their products and services are integrated with e-Residency, compliant with the rules for Estonia’s business environment and available as widely as possible across the e-Residency community.

The topic of minimum share capital is just one example of an issue we raise when speaking to these companies. To serve e-residents adequately, they need to be willing to supply e-residents with confirmation that their minimum share capital has been paid in a way that meets the requirements of the Estonian Business Registry (digitally-signed and written in Estonian).

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.”

The good news though is that an increasing number of companies are interested in integrating their products and services with e-Residency.

Holvi is the first company that has invested in online business banking for e-residents by ensuring that their service meets the needs of e-residents running Estonian companies. Despite being a Finnish-based payment institution, they will provide e-residents with the correct documentation, digitally signed and in Estonian to give to the Estonian Business Registry.

On that note, congratulations to CVproof.com co-founder Ray Chow-Toun who used Holvi to become the very first person to successfully register the minimum share capital in Estonia from a payment institution that is neither a bank nor based in Estonia. That might sound like one small technical step for his company, but it’s one giant leap for our entire digital nation because it opens up so many more possibilities for entrepreneurs.

On a side note, this is also another example of how e-Residency benefits everyone who operates within Estonia’s business environment, including citizens and residents. A few years ago, when the e-Residency programme was just getting started, it may have seemed like a strange business decision for global companies such as these to ensure their products are optimised for use by Estonian companies, but the growth of e-Residency means an increasing number are keen to conform to the standards of our growing digital nation.

How Estonia can improve minimum share capital

We’ve discussed what the private sector is doing to improve the process of paying minimum share capital in Estonia so I want to give an overview of the public sector side too.

In fact, part of the motivation for writing this article now is another article that was recently published about ‘the secrets that the e-Residency programme doesn’t want you to know’. You are welcome to read it here.

Although the author is our most passionate critic across social media forums, he too is an e-resident and is motivated by the desire to improve location-independent entrepreneurship so he does sometimes make good points that we can agree with.

However, some aspects of this article (like the headline) are not entirely accurate. The programme was launched in beta mode so our team is always happy to discuss how we are working to overcome challenges in detail with journalists, e-residents, and anyone else willing to listen. Ironically, many of e-Residency’s most important challenges aren’t mentioned in the article.

We don’t have the resources to respond to all criticisms, but the issue of registering share capital (and whether it is possible to do it from a non-Estonian bank) is perhaps the most serious point raised in the article because those reading it might make very different choices about how (and if) they start their company as a result.

According to the article:

…the e-residency team infers that it would be possible to block [register] the capital in a bank outside Estonia, or a pseudo-bank (this transaction is needed to be done before paying dividends to shareholders), while refusing to contact the commercial register for confirmation. So we contacted the commercial registrer and were told that this is not possible!

The assumptions here are not accurate. Minimum share capital has been registered in banks outside of Estonia and with fintech companies (which he calls pseudo-banks), as mentioned earlier. Also, we are in constant discussion with our partners across the Estonian state about how we can work together to improve e-Residency.

However, he is right to identify the issue of minimum share capital and how it relates to non-Estonian banks as a challenge for e-Residency.

First, it’s important to note that the Business Registry is under the jurisdiction of the courts so judges needs to rule individually on each submission when entrepreneurs provide their evidence that minimum share capital has been paid. No one else in the Estonian government or at the e-Residency programme can intervene or speak on behalf of them.

As the ruling can only be made for each individual circumstance when the certificate is delivered, the person he spoke to would have done their job correctly by simply restating the letter of the law, which is that minimum share capital payments should be registered at an ‘Estonian credit institution’.

That wording of the law does seem to indicate that it would not be possible to use a bank that isn’t inside Estonia or a payment institution inside or outside Estonia. However, the law was written in 1995 and this was simply long before the need to use non-Estonian banks for this purpose ever existed.

The formal opinion of Estonia’s Ministry of Justice and our e-Residency programme is that IBAN accounts that are used by Estonian companies and fully compliant with Estonia’s business environment do actually fit within the law.

Fortunately, the judges have been approving the registration of share capital from Estonian companies in these circumstances.

We are also aware of some incidents in which share capital has been rejected in these circumstances too, although in some cases the issue was resolved when the correct documentation was resubmitted. If your share capital is rejected then you should speak to your business services provider about your options, but please be aware that not taking advice from a business services provider from the very start (about which IBAN providers are suitable for you, for example) could put you in a situation that is more difficult to resolve.

In any case, it’s really important that entrepreneurs running Estonian companies have greater confidence in their ability to use IBAN accounts without Estonian banks so there is a lot of work taking place behind the scenes (at a very high level) to ensure there is a long term solution. Changing the wording of the law is not a simple process, but laws have already been changed in favour of e-residents in order to support the programme.

We look forward to keeping you updated.

Another key point made in the article (and emphasised by the author across social media) is that the e-Residency programme shouldn’t promote certain companies, while ‘hiding’ information about alternative providers. In reality, we have always been publicly asking for feedback about companies that are best serving e-residents and we have always invited the author to share his own feedback with us and other e-residents, even when it included criticisms of the programme.

To be clear though, the role of the e-Residency team includes growing the e-Residency ecosystem, which means encouraging private companies to integrate with e-Residency. We work with many more companies behind the scenes who are planning to do this, but we won’t recommend them if they are not yet suitable for e-residents.

It is not the role of the e-Residency programme to tell entrepreneurs how to run their companies, but we can highlight companies that are doing the most to add value to the programme.

This issue of share capital is a very good example of why that’s important.

However, here’s some of the alternative banking providers that the article says we don’t want you to know about:

Transferwise [Borderless], Paysera, Revolut (pending a banking license), Payoneer, WestStein, Viabuy, GQ Card, IbanFirst, LeuPay, Pocopay, Veritas Card

In all these cases, there is either work taking place to integrate them with e-Residency or they don’t serve e-residents yet. Crucially, none of them are yet ready to help e-residents register minimum share capital (but watch this space).

However, if you want to try applying for IBAN accounts with these companies as an e-resident then please do send us your feedback about using them and report any problems that we can help solve together.

As ever though, companies that invest in e-Residency, integrate their services, comply with Estonia’s rules for its business environment, offer more value to e-residents, and then invest their own resources into marketing are obviously going to be heard more often by e-residents and that’s a good thing.

One important last note though — It is still possible for e-residents to gain value from these alternative banking providers even if they don’t solve the share capital issue. For one thing, some e-residents tell us that they choose to use these online IBAN accounts for daily business banking or as a temporary solution until their company takes off and they are ready to make a bigger commitment or choose another solution in future.

After all, e-residents are 100% in control of their own company and can choose their own services at any time, while the ability to conduct location-independent business is improving every day.

Why would a capital contribution statement be rejected?

There have been a small number of incidents recently in which e-residents have had their share capital contributions rejected by the Business Registry because the statement was not provided by an Estonian bank. A rejection can usually be resolved by following the instructions in the ruling, such as to correct the documentation, but if the stated reason is that you can’t use a fintech account then switching to an Estonian bank may not be possible or desired.

The first point to emphasise is that, despite this, most e-residents are still managing to succeed first time using either a fintech firm or a bank outside of Estonia to register the contribution.

When you submit a certificate, it is allocated to a judge who then makes the decision to accept or reject it based on the current law. As we have seen, the majority accept it because they agree with our opinion at the e-Residency programme and the Ministry of Justice that the law should be interpreted more widely to account for the fact that Estonian companies do not just use Estonian banks anymore.

These cases that were rejected were the result of the judge ruling with a stricter interpretation of the law (which was written before Estonian companies even had the option to use fintech accounts).

In these cases though, e-residents have also successfully appealed. Their service provider responded by pointing out that their other clients have been more consistently accepted under the same circumstances and the decision was then reversed.

This process is not nearly as smooth as we would like it to be, of course, but we expect this issue to be fully resolved so that it works smoothly for everyone first time in future.

Bare in mind though that this advice is for people who are rejected simply because they are using an account that is not from an Estonian bank. There may be other errors highlighted in the judge’s response that could be fixed instead. One quite common mistake for example is to attach the PDF file instead of the digitally-signed BDOC file.

What else would you like to know about e-Residency?

I hope this guide has been useful. Let me know in the comments below if there is anything here that could be explained better or if there are other issues about e-Residency that you need more information about.

Here are some of our other most useful resources (so far) for e-residents starting and running companies: