In Estonia, as in any other country, the rules and requirements for annual reporting for the Companies play a key role in ensuring transparency and accountability to the stakeholders. Every year, no later than 6 months after the end of the financial year, an annual report containing a detailed overview of the company’s results for the previous financial year should be prepared and submitted to the Commercial Register. In addition to the above, additional reports and declarations must be submitted in accordance with the company’s form, structure, and scope of business.
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BASIC REQUIREMENTS FOR THE ORGANISATION OF ANNUAL REPORT
The annual report is mandatory for all Estonian accounting organisations and must comply with the form prescribed by law. The annual report consists of the annual accounts and the company’s activity report.
It should be noted that the annual reporting requirements in Estonia are applicable to all registered companies, whether or not they are small companies by start-ups or large corporations. This ensures a level playing field for all market participants and increases confidence in business in the country.
The main components of the annual report are the description of activities, balance sheet report and profit and loss statement. They provide important information about The company’s financial position, its strategic directions and past activities. In addition, important elements are the statement of cash flows the statement of changes in equity and the statement of changes in equity, which supplement the basic statement, providing more detailed information on financial transactions and changes in the of the company’s structure.
The process of preparing the annual report requires the active participation of the company’s management. It is important that they not only recognise their responsibility for the accuracy and integrity of the information, but also recognised the importance of financial compliance. In some cases, an audit of the report may be required to to ensure its reliability and credibility.
Filing a report includes not only the compilation of documentation, but also its registration with the relevant authorities, such as the Estonian Business Register. These are enables information to be made available to the general public and stakeholders.
The main purpose of this whole process is not only to comply with the law, but also to building trust in the Estonian business environment. Companies that follow the requirements for reporting, demonstrate their willingness to operate in a transparent and responsible manner, which ultimately contributes to their success and sustainable development in the market.
Our company offers professional assistance in preparing and filing the annual report. We have extensive experience in working with different types of companies and knowledge of all aspects of Estonian financial reporting legislation.
Our team of experts is ready to provide comprehensive support at every stage of the report filing process, including drafting documentation, compliance checking and registration with the relevant authorities. We guarantee a high level of quality and accuracy in our work, which will help your company remain compliant with the legislation and demonstrate transparency to stakeholders. By enlisting our help, you can rest assured that your annual accounts will be completed to a high standard and on time.
| Annual report fee | from 250 EUR |
FINANCIAL YEAR-END REPORT
A company’s financial year is 12 months. In most cases, the financial year is a calendar year (from 1 January to 31 December), but the company’s articles of association or other document regulating its activities may also establish another financial year in accordance with the working cycle of the accounting entity. In exceptional cases, the financial year may be shorter or longer than 12 months, but not more than 18 months.
STAGES OF PREPARATION OF THE ANNUAL REPORT
- Preparation of annual accounts
- Preparation of a report on the company’s activities
- Approval of the annual report
The filing of the annual report includes the following steps:
- Drawing up a proposal to distribute profits or cover losses for the financial year
- Submission of the annual report for approval.
- The annual financial statements must contain relevant and true information about the financial position, financial results and cash flows of the accounting organisation. The annual report consists of the main statements (balance sheet, income statement, statement of cash flows and statement of changes in equity) and annexes.
Microenterprise
According to the Accounting Act, micro and small enterprises may prepare an abridged annual report, which consists of at least two main reports—a balance sheet and a profit statement—and up to three annexes. A micro-enterprise may (optionally) prepare an abridged or full annual report. Thus, a microenterprise using the abbreviated annual report option is not required to prepare a management report.
Small business
The abridged annual report of a small business is prepared in accordance with the Estonian Financial Reporting Standard and consists of two main reports: a detailed balance sheet and an income statement, and up to 9 annexes. A small business is also obliged to prepare a management report.
Medium and large enterprise
The annual report is prepared either in accordance with the requirements of the Estonian Financial Reporting Standard or International Financial Reporting Standards (IFRS): a management report, 4 main reports and an average of 15 annexes. A full annual report is required for medium and large companies as well as non-profit associations and foundations.
The financial statements are prepared in Estonian in euros (the official currency of Estonia) with an indication of the degree of accuracy of the figures used.
ANNUAL REPORT COMPONENTS
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Balance sheet and income statement.
The balance sheet reflects the financial position (assets, liabilities and equity) of the accounting entity at the end of the financial year. The income statement is a statement of income and expenditure and reflects the economic results for the reporting period.
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Cash flow statement
This report shows cash flows for the reporting period (cash receipts and payments). Receipts and payments for the reporting period are indicated by grouping them by purpose for financing, investing and commercial activities.
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Report on changes in authorised capital
This statement reflects changes in the company’s equity during the reporting period. The financial statements include contributions to equity and distributions to owners, profit or loss, the effects of changes in accounting policies, increases and decreases in reserves, and other transactions affecting equity entries.
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Attachments
The number of annexes to the annual report depends on the specifics of the company, but it is mandatory to include:
- The specification of the financial reporting standard from which the annual financial report is based.
- Accounting policies used in the preparation of the annual report.
- Clarification of significant items of the main statements and their changes during the reporting period.
- Other material circumstances relating to the entity’s financial position, results of operations and cash flows.
BUSINESS REPORT
The management report provides an overview of the company’s actions and circumstances that played a decisive role in assessing the financial position and business activities, the significant events of the financial year, and the expected development directions for the next financial year.
If, at the end of the financial year, the company’s capital does not meet the requirements of the Commercial Code (i.e. is negative), the management report must describe the actions that are being taken to ensure the stability of the company in the future, if not already in place.
For accounting entities subject to audit, the management report must include the main financial indicators for the financial year and the previous financial year, as well as the formulae for their calculation.
AUDIT OF ESTONIAN COMPANIES
An audit or review of the annual financial statements is designed to make your company’s financial information more reliable in the eyes of investors, shareholders and the public.
Obligations
If the company is subject to audit, the annual report must be accompanied by the report of a certified/sworn auditor. The audit of the annual report is mandatory for accounting entities whose annual report must include at least two financial year indicators exceeding the following conditions:
| Condition | Audit | Inspection |
|---|---|---|
| Sales income | More than 4, 000, 000 EUR | More than 1, 600, 000 EUR |
| Company assets | 2, 000, 000 EUR | 800, 000 EUR |
| Number of employees | 50 people | 24 people |
Also, verification of the annual report is mandatory for accounting subjects, in whose annual reports at least one of the indicators of the financial year exceeds the following conditions:
| Condition | Audit | Inspection |
|---|---|---|
| Sales income | More than 12, 000, 000 EUR | More than 4, 800, 000 EUR |
| Company assets | 6, 000, 000 EUR | 2, 400, 000 EUR |
| Number of employees | 180 people | 72 people |
Organisation of audits
The audit shall be conducted by an independent assessor, i.e. a certified auditor or an audit firm. The board of the company appoints the auditor, determines the number of auditors, terms of payment and term of office. The appointment of the auditor requires the written consent of the auditor. Prior to the audit, a contract must be concluded with a natural person included in the list of certified auditors in Estonia.
CORPORATE INCOME TAX
Estonia offers one of the world’s most favourable tax systems for startups and small businesses. In Estonia, income tax is 0%, which means there is no need to pay corporate tax on income earned. A special feature of corporate income tax in Estonia is that only the distribution of profits in the form of dividends. The profits and funds of the company are not taxed before the distribution of profits. Income tax must be payable on distributed income, expenses and payments not related to the business of the company, as well as gifts, donations, hospitality, and fringe benefits provided to employees. Income tax is also levied on reduction of corporate capital, redemption of shares and payment of liquidation income more than cash and non-cash contributions to the share capital of the company. Some domestic and foreign taxes may be applied to corporate income tax under domestic laws or double taxation agreements. Some distributions are exempt from such a tax:
- Dividends obtained from Estonian, EU, EEA or Swiss tax resident companies in which the Estonian company owns at least 10% of the shares;
- Profits obtained through a permanent establishment in the EU, the EEA or Switzerland; Profits earned through foreign missions in all other countries, provided that such profits are taxed in the country of the mission;
- Dividends obtained from all other foreign companies in which the Estonian company owns at least 10 per cent of the shares, provided that the main profits were subject to foreign tax or the foreign income tax was withheld from the dividends received;
- Liquidation proceedings, repurchase of shares or reduction of capital, which are taxable by the distributor of such proceeds;
- Dividends paid by Estonian companies to non-resident legal entities (including companies with «low tax jurisdictions»).
Dividends IN ESTONIA
Dividend is a payment made by decision of the competent body of a legal entity from net profit or from retained earnings for previous business years, the basis for which is the dividend recipient’s shareholding in the legal entity.
The tax rate for the company in 2024 is 20/80. The tax rate on dividends paid regularly is 14/86. Dividends paid to individuals at a reduced tax rate are subject to 7% income tax withholding.
What to consider when paying dividends
- Dividends are taxed at the rate of 20/80.
- The tax rates on regularly paid dividends are lower at 14/86.
- The General Shareholders’ Meetings determine the procedure for profit distribution proportionally.
- The authorised capital must be fully paid up before dividends are paid.
- If dividends are received from net profit, a resolution of the management board for dividend payment must be submitted
- Within one month of payment, dividend amounts must be declared in INF 1 and Schedule 7 (by the 10th day after payment).
How to declare dividends?
The resident commercial association declares in Annex 7 of Form TSD and in Form INF 1 dividend payments, both at the lower tax rate and at the normal rate.
In the e-MTA environment there is in Annex 7 of Form TSD «Calculation of the Distributed Profit for Application of a Lower Tax Rate», where the commercial association is displayed at the moment:
- In the previous year, dividends paid and equity payments (profit-sharing) from which the business association paid income tax
- Profits for which a lower tax rate is applied
- In a calendar year, distributed profits with a lower tax rate
- Profit, which can be distributed in a calendar year with a lower tax rate
The amount of the dividend – the income of the individual and the withheld income tax on dividends – is declared in form INF 1. The form INF 1 under code 13050 has the form of MDK – dividends stamped at a lower tax rate, and still the type of DK payment – dividends, covered at the usual rate. The gross amount of dividends – the income of a natural person with the form of payment «MDK» is declared in the form INF 1 under the code 13060, the rate of withheld income tax under the code 13073 and withheld income tax under the code 13074.
If an individual is paid a dividend at a lower tax rate, or if the dividend continues to be paid to an individual from the received dividend at a lower tax rate, the income tax is usually withheld at 7%.
FREQUENTLY ASKED QUESTIONS
The annual report should contain information on the following financial performance of the company :
- Balance
- Income statement
- Statement of cash flows
- Appendices explaining financial data
- Report on the company’s activities and plans for the new financial year
Every year, no later than 6 months after the end of the business year (often the calendar year from 1 January to 31 December), an annual report containing a comprehensive overview of the company’s financial performance for the previous financial year should be prepared and submitted to the Commercial Register.
Accounting of Estonian companies is mostly based on RTJ standards, international IFRS standards are also accepted.
Every Estonian company is obliged to submit an annual report, even if it has not conducted any business during the financial year.
The information to be provided in the annual report is directly related to the size of the company.
Microenterprise
According to the Accounting Act, micro and small enterprises may prepare a summary annual accounting report, which consists of at least two main reports – balance sheet and income statement – and up to 3 annexes. A micro-enterprise may (if it wishes) prepare a summary or a full annual report. Consequently, a micro-enterprise that takes advantage of the summary annual report option is not required to prepare a statement of activities.
Small business
The summary annual report of a small company is prepared in accordance with the Estonian Financial Reporting Standard and consists of two main reports: a detailed balance sheet and an income statement, as well as up to 9 annexes. A small business is also obliged to prepare an activity report.
Medium and large enterprise
The annual report is prepared either in accordance with the requirements of the Estonian Financial Reporting Standard or in accordance with the requirements of International Financial Reporting Standards (IFRS or IFRS): a business report, 4 main reports and an average of 15 annexes. A full annual report is mandatory for medium and large companies as well as non-profit associations and foundations.
In case of failure to submit the annual report on time, the registry may initially send a penalty notice or exclude the company from the registry altogether, which implies the termination of the company’s financial activities.