--- title: About the equity requirement in the annual report date: 2017-05-05T13:37:07Z modified: 2025-11-11T12:30:23Z permalink: "https://grow.ee/omakapitali-noudest-aastaaruandes/" type: post status: publish excerpt: "" wpid: 4563 timestamp: 2025-11-11T12:30:23Z tags: - Accounting --- When submitting a company's annual report, two very similar terms often raise questions: namely share capital and equity. Therefore, for the benefit of readers and those involved in submitting annual reports, we provide a brief overview of the most important topics related to these two terms below. ## What is share capital and what is equity? Operations related to share capital are the primary operations of every new company. **Share capital** is a certain amount that must be paid in before the establishment of a company (as an exception, [establishing a company without making contributions](https://grow.ee/wp-content/uploads/wp-mfa-exports/page/ettevotte-asutamine-eestis.md) is also allowed). For example, in the case of a private limited company, the required share capital is at least 2,500 euros (§136 of the Commercial Code). It is important to note that **all changes related to the share capital must be registered in the commercial register.** All the money that the owners have paid in as share capital can later be withdrawn tax-free. Equity, or net assets, is the **part of the company's assets by which the company has more assets than liabilities** and its size must also be at least 2,500 euros in the case of a private limited company. However, if the share capital exceeds the amount required by law of 2,500 euros, the requirements for equity capital also change - in this case, it must be at least ½ of the share capital, but not less than 2,500 euros. It should be noted that in the future **all increases or decreases in share capital must be declared monthly!** ## Other important terms When preparing a company's share and equity capital, several other nuances must be kept in mind. Below we will list the most important items related to them with a brief description. - **Share premium or agio.** If the company wishes to increase its equity capital, but not its share capital, it is possible to increase its share capital with a share premium. Since the prerequisite for the occurrence of a share premium is a contribution to share capital, **this must be registered in the commercial register.** The share premium can be reduced accordingly by reducing the share capital. - **Mandatory reserve capital.** Today, the Commercial Code no longer requires a mandatory reserve capital from a private limited company (but from a public limited company), but if a mandatory reserve capital is prescribed in the articles of association of an OÜ, at least 5% of the profit earned must be transferred to the corresponding line every year and this until **the reserve constitutes 10% of the share capital**. For older companies that do not need a reserve capital, the corresponding requirement can be removed by amending the articles of association. However, if a corresponding entry is made in [accounting](https://grow.ee/services/raamatupidamine/), it is made by a shareholders' decision on the distribution of profit (in the event of a loss, the amount of the reserve capital remains unchanged). - **Other reserves**. This is a largely unregulated area in Estonia, but voluntary reserves formed according to the owner's decision are increasingly used. Their advantage is that they do not have to be registered anywhere and they are easy to increase, but the disadvantage is the lack of certainty that payments from this line are exempt from income tax. - **Retained earnings**. As the name suggests, this is the profit earned in previous years that has not been paid out as dividends. - **Profit for the reporting year**. Once again, it is clear from the name that this is the profit earned in the last financial year (the balance of which is transferred to the profit from previous periods at the beginning of the new year). ## Contribution in kind Making a contribution in kind is a good opportunity to **form share capital without using financial resources.** This means that if the articles of association allow it, the company's share capital can be paid up to its full extent in kind (§142-143 of the Commercial Code), i.e. in kind: be it a personal computer, machinery or inventory. This can be done both as an immediate contribution and as a later contribution to share capital. But how is the value of a contribution in kind determined? This is assessed by the board itself, and a short agreement is drawn up for each transfer, along with a deed, which lists the things to be transferred and assesses their value. There is a difference here for large private limited companies whose share capital exceeds 25 thousand euros - in the case of such companies, if non-cash contributions total more than half of the share capital, this contribution must be assessed by an auditor. **However, in the case of a company that is very widely used today, non-cash contributions cannot be used when registering online.** The standard articles of association of a private limited company that was originally established without contributions do not allow non-cash contributions, and making non-cash contributions is therefore a prerequisite for making such contributions. ## What to do if the equity is below the required level? Fortunately, there are several solutions to this problem, and the company should first contribute to finding simpler solutions. First of all, it is worth critically reviewing the balance sheet and looking for lines that should be revalued. Or if there is hope that there will be enough profit in the current year to cover the equity deficit, it is also possible to **submit an interim balance sheet to the commercial register in the current year.** However, if all of the above is not sufficient, the share capital must be increased. This can be done either through cash or non-cash contributions or through an owner's loan. For example, the share capital can be increased by 10 euros and the remaining amount defined as a share premium - although many recommend an increase of one euro, this is not reasonable, because later there may be problems with reducing the share premium in parts. Hopefully, this post will help many people find a solution to their problems. In addition, we recommend that you read other posts on [our blog](https://grow.ee/wp-content/uploads/wp-mfa-exports/page/blogi.md) so that you can stay up to date with the most important things.