SORAINEN Newsflash - So the euro doesn’t give you a scare!

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	Kadri Kallas Senior Associate kadri.kallas@sorainen.com

Dear client and cooperation partner,

We are a little more than 50 days away from adopting the euro and preparations are in progress. In that light, we are dedicating this newsletter to discussion on how transition from the Estonian kroon to the euro on 1 January 2011 will affect businesses in Estonia. The common currency regime will enliven Estonia’s economy in general, make it more sound and reliable, increase foreign investors’ trust and simplify and enliven trade relations between Member States. One advantage will be better competition conditions for Estonian companies in Europe and simplified entry to the Estonian market by other companies in the euro zone. Adoption of the euro will not bring about significant changes in the legal environment. However, both natural and legal persons have to consider and deal with some aspects before 1 January 2011.

For additional information regarding adoption of the euro and related preparations, please visit Euroweb.

In order to prepare you for adoption of the euro, we have compiled a brief summary of issues to consider before 1 January 2011:

Impact of adoption of the euro on contracts

Adoption of the euro will affect all contracts made before 1 January 2011 containing amounts in Estonian kroons. Contractual amounts in kroons are recalculated into euros on the basis of an exchange rate of 15.6466 kroons to one euro. Recalculation of amounts does not constitute amendment of the contract. The principle of consistency applies in contractual relationships, i.e. adoption of the euro will not alter the terms and conditions of the contract. For further information on the impact of adoption of the euro on contractual relationships and financial obligations see here.

Requirements for displaying and recalculating prices

Adoption of the euro means that for sale of goods and supply of services it is essential to be familiar with the requirements for displaying prices. Traders must display prices in kroons as well as euros from 1 July 2010 until 30 June 2011. Various exceptions exist to this requirement. For further information on the requirements for displaying prices in connection with adoption of the euro see here.

When displaying prices in two currencies, keep in mind the simple rules of recalculation of prices. That is, the price in euros equals the price in kroons divided by 15.6466. Rounding up the exchange rate 15.6466 and recalculating prices on some other basis is prohibited! For further information on the rules for recalculating prices see here.

What to do with share capital?

On 1 January 2011 when the euro will be automatically adopted in accounting and in contractual relationships, share capital will not be automatically re-registered in euros in the commercial register. The legislature requires every company to convert its capital into euros on its own and to determine the nominal value of its shares in euros. For further information on what to do and what to keep in mind upon changing capital from kroons to euros, see here.

What is a share with no nominal value?

Adoption of the euro enables public limited companies to introduce no-par value shares. These make capital calculations of the company easier by preventing further use of fractions that are unnecessary for shareholders and lack substance. A public limited company that wishes to introduce these shares will have to amend its articles of association. For further information on the conditions of such an amendment, the advantages of a no-par value share and the principles of the regulation allowing for introduction of such shares see here.

Impact on tax law

In tax law, adoption of the euro will luckily only result in a change of currency and rounding of limit values. The respective laws have already been adopted; only a few implementing instruments are missing. Thus, new figures can be forecast with relative certainty when budgeting for the coming year.

All tax arrears, interest arrears and prepayments existing as of 1 January 2011 will be converted into euros based on the official exchange rate of 15.6466. Thereby the sum obtained as a result of division must be rounded with an accuracy of one euro cent at the third digit following the period, i.e. up to 0.004 cents must be rounded down and as of 0.005 cents the digit must be rounded up.
Tax amounts expressed in natural numbers, e.g. excise duty rates, gambling tax and heavy goods vehicle tax rates, are converted by dividing the tax amount by the coefficient 15.6466 and following the same rules of rounding.
Currently, amounts have to be entered into tax returns with an accuracy of one kroon, but as of 1 January 2011 they will have to be entered into tax returns with an accuracy of one cent.

We remind you that returns submitted in 2011 for income earned in 2010 as well as amendments and corrections to the 2010 return must be made in kroons. Only the final tax amount payable should be converted into euros.

For further information on changes to the limits set out in the Taxation Act, Income Tax Act and Value Added Tax Act see here.

Notification and agreements in labour law

Will adoption of the euro involve amending employment contracts or signing new employment contracts altogether because the pay currency changes? For further information on what changes the employee must be informed of, that is, what the Employment Contracts Act has to say about it, see here.

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Please note that the SORAINEN Newsflash is compiled for general information only, free of obligation and free of legal responsibility and liability. It does not cover all laws or reflect all changes in legislation, nor are the explanations provided exhaustive. Therefore, we recommend that you contact SORAINEN or your legal adviser for further information. Electronic versions of Newsflashes are available and can be subscribed to on the SORAINEN website – www.sorainen.com.