Pursuant to the legislation in force in Estonia, the submission of an annual report is mandatory for all Estonian accounting entities and the annual report has to comply with the statutory format. The financial year is 12 months in length and in most cases the financial year is the calendar year, including from 1 January to 31 December.
The activities related to the annual report can be divided into two. Firstly, the preparation of the annual report (including approval by the management board) and approval by the general meeting of shareholders. Secondly, the submission of the annual report to the registrar.
Approval of the annual report by the management board marks the end of the preparation of the annual report. There is no formal requirement for the approval of the management board, unless it follows from the company’s own articles of association. However, it is important to bear in mind that for the sake of clarity and to avoid potential conflicts between the members of the management board, it is prudent that the management board’s resolution to approve the annual report is in writing. If necessary, the management board may, in the same resolution, submit a proposal for the distribution of profits or the coverage of losses to the shareholders or to the general meeting of shareholders.
The next important step is the review or audit of the annual report if it is mandatory for the company to carry out a review or audit. An audit or review of the annual report is mandatory for accounting entities that meet at least two of the following criteria:
| Criterion | Audit obligation | Review obligation |
|---|---|---|
| Revenue/income exceeds | 4,000,000 euros | 1,600,000 euros |
| Total assets as at the balance sheet date of more than | 2,000,000 euros | 800,000 euros |
| Average number of employees exceeds | 50 people | 24 people |
An audit or review is also mandatory for those companies that meet at least one of the following criteria:
| Criterion | Audit obligation | Review obligation |
|---|---|---|
| Revenue/income exceeds | 12,000,000 euros | 4,800,000 euros |
| Total assets as at the balance sheet date of more than | 6,000,000 euros | 2,400,000 euros |
| Average number of employees exceeds | 180 people | 72 people |
A mandatory review may be replaced by an audit. Among other things, according to the Auditors Activities Act, the audit of the annual report is mandatory for every public limited company with more than two shareholders, state accounting entity, local government unit, legal person governed by public law, political party receiving an allocation from the state budget, and company in which the state has at least the required interest within the meaning of the State Assets Act.
A review or audit of the annual report should also be carried out if the company’s shareholders have voluntarily opted for such a review or audit.
Approval of the annual report is decided by the company’s shareholders or the general meeting of shareholders, and the management board submits the approved annual report to the commercial register within six months of the end of the financial year.
Pursuant to the Accounting Act, the management, the shareholders or the sole proprietor certify the accuracy and completeness of the information presented in the annual report, including that the annual accounts have been prepared in accordance with the financial reporting standard and give a true and fair view of the financial position, financial performance, and cash flows of the accounting entity. It is also worth noting that the distribution of profits or the coverage of losses is only made on the basis of the approved annual report. The meeting of shareholders or the general meeting of shareholders of the company may simultaneously adopt resolutions on the approval of the annual report and distribution of dividends, or resolve the payment of dividends later.
The shareholders have the power to decide on the approval of the annual report. In a situation where the annual report is not approved and submitted to the registrar, the company is in breach of its obligation to provide information to the registrar. Failure to comply with the obligation can even lead to the company being deleted from the commercial register.
On 1 February 2023, the amendments to the Commercial Code and the Commercial Register Act entered into force, which will allow the commercial register to more easily remove from the register legal persons that have not submitted their annual report by the deadline. In this context, the possibility to submit an annual report that has not been approved by the meeting of shareholders has been added to the annual report submission environment of the commercial register portal. In such a case, the annual report will be accompanied by a public indication that the annual report has not been approved, but when the report is filed, the commercial register will still consider the obligation to file an annual report to have been fulfilled. If the company’s shareholders or the general meeting of shareholders decides to approve the annual report after the submission of the report with the aforementioned indication, the management board has to submit a new report to the registrar without this indication, which has to be re-signed by the management board.
By failing to submit an annual report, a company may put its very existence at risk. It is therefore important to comply with the requirements for the approval and filing of the annual report correctly and on time. Legal advisers at Leinonen OÜ are ready to assist and advise clients with the preparation of resolutions on the approval of annual reports required by the Commercial Code and the conduct of any related operations, if needed.
