Do you need to make a shareholder contribution?
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Please continue reading this post if you are curious about basic information on shareholder contributions, conditional and unconditional. Cooach operates in Europe and helps companies achieve growth. This text is based on European laws and regulations.
A separate shareholder agreement governs shareholder contributions to companies with multiple shareholders. A shareholder agreement on shareholder contributions may contain provisions on, for example, when and how much shareholder contributions should be made to the company by the shareholders, whether the shareholder contributions should be conditional or unconditional, and what conditions should be met for repayment of the shareholder contributions.
Which shareholders make the shareholder contribution?
One or more shareholders of the company may make shareholder contributions. Usually, shareholder contributions are made by all shareholders.
Unconditional shareholder contribution
If you make an unconditional shareholder contribution, you have no right to get the money back. For example, the shareholders may agree that all shareholders will be obliged to make an unconditional shareholder contribution of a fixed amount if the company embarks on a financially risky project. However, such an agreement is usually only made when deciding whether the company should embark on the project.
An unconditional shareholder contribution is non-refundable and increases the shareholder’s cost of the shares. This is beneficial from a tax point of view in calculating tax-free and low-tax dividends and in calculating future capital gains.
Conditional shareholder contribution
If you make a conditional shareholder contribution, you require the company’s shareholders to vote at the general meeting to repay the money if certain conditions are met, usually when the company’s finances are once again sound and stable. This is not a requirement on the company itself, as this would create a debt that would not strengthen its equity.
A conditional shareholder contribution can be repaid under certain circumstances; we write more about this later in the article.
What assets can be used?
A shareholder contribution is made by bringing money or other assets into the company. What is contributed must have value to the company. One way to contribute assets is to waive a debt owed to the company, such as a claim for expenses recorded as a debt to the shareholder.
How large is the contribution usually?
The contribution size is usually related to each shareholder’s holding. However, there is nothing to prevent shareholders, irrespective of the size of their holding, from agreeing on a different distribution, e.g., that everyone should make an equal shareholder contribution.
The contribution must be irrevocable
For a shareholder contribution to increase the company’s equity, the contribution must be irrevocable, i.e., not a loan. Otherwise, the contribution will be counted as a debt, which does not strengthen the company’s overall financial position. A written statement should be provided to the company that it is a contribution, not a loan.
Repayment of shareholder contributions
A conditional shareholder may agree with the other shareholders that, under certain conditions, they will vote in favor of repayment at the general meeting. However, it must be made clear to the company that this is not a loan but a capital contribution.
Who will be the counterparty?
The repayment condition must not be directed against the company, as it would not be considered a genuine shareholder contribution. The company will still have an obligation (debt), and the contribution will not affect the company’s equity.
The other shareholders should be obliged to vote in favor of the repayment of the shareholder contribution. The repayment is legally regarded as a dividend. This means that only when there are distributable profits can the shareholders who made a conditional shareholder contribution be reimbursed.
When is a refund of contributions usually made?
It is common for shareholders to make contributions when the company is insolvent. Therefore, repayment is often delayed.
The shareholders’ agreement should specify when shareholders should vote to repay the shareholder contribution. The repayment should be made at an appropriate time when there are sufficient distributable profits. Most commonly, it is decided that repayment will be made when there are distributable profits according to an established balance sheet.
Since repayment of a conditional shareholder contribution is treated as a dividend under civil law, repayment may not be made in the year the profits are created. Only when there are distributable profits, i.e., when an approved annual financial statement with distributable profits has been prepared, may a repayment be made. A valid general meeting resolution is also required before a refund can be made.
A conditional shareholder contribution repayment is treated as a loan repayment for tax purposes. This means that there is usually no income taxation on the contributor.