Shareholders’ contributions and their reimbursement
The increase seen in recent years in the use made by capital companies of shareholders’ contributions which do not increase capital is explained by the advantages such contributions offer. They are not regulated as such in corporate/commercial legislation, the fact being that no mention is made of them in either the Capital Companies Law (LSC), or the old Corporations Law or Limited Liability Companies Law. The rules applicable to them are to be found in the Spanish National Chart of Accounts (PGC) and, indirectly, in the Transfer and Stamp Tax Law (ITP-AJD).
These contributions – which can be used to offset losses, to increase shareholders’ equity or both – offer a number of advantages in comparison with a traditional share capital increase operation, since there are fewer formalities involved, implying a saving in terms of both costs and time. No public deed needs to be executed for the formalization of these contributions and they are not required to be entered subsequently in the Commercial Register. All that is required for their formalization is a resolution adopted by the Shareholders’ Meeting, approved by an ordinary majority.
Similarly, as in the case of share capital increases, which are regulated in the LSC, all kinds of assets and rights can be contributed, including cash contributions, non-cash contributions, or collection rights. Even the tax treatment for ITPAJD purposes is identical in either case, although the treatment from the company’s perspective varies if the contributions made are not proportional to the ownership interest corresponding to each shareholder, in which case they are subject to Corporate Income Tax.
The reimbursement of these contributions to the shareholders is nevertheless a contentious issue, and this is precisely due to their scant regulation.
In principle, for contributions of this kind to be classed as shareholders’ equity, they must be made on a definitive, non-refundable basis and must entitle the contributors to receive no consideration of any kind. This is expressly stated in binding ruling no. V1863-09 issued by the Directorate General of Taxes. If these conditions are not fulfilled, then the arrangement must be classed as a commercial loan (or equivalent transaction in the case of contributions in kind), which must be recorded as a liability in the company’s books of account.
This difference is far from being trivial. Although it is of less consequence in the case of companies whose financial position is sound, in the case of a company which is on the verge of being obliged by law to dissolve – because losses have reduced its equity to below half of share capital (article 363.1.e) LSC)—the fact of these contributions being recorded as a liability rather than shareholders’ equity can place it in just such a situation, resulting, ultimately, in its directors being held liable for failing to adopt the remedial measures envisaged in the LSC.
In any event, even though these contributions may initially be intended as definitive, it is arguable whether this means that the shareholders cannot, later on, decide they should be reimbursed. It does not seem logical that a contribution should be blocked indefinitely as shareholders’ equity of the company. According to the PGC, these contributions can be used to offset losses or “allocated for whatever purpose”. Moreover, the possibility of reimbursement is recognized in recent binding rulings of the DGT, nos. V1887-15 and, in particular, V1978-16. This latter ruling also stipulates that the reimbursement should receive the same treatment as is stipulated for a distribution of additional paid-in capital in the form of dividends. Our understanding is therefore that the most reasonable approach would be to accept definitively the possibility of these contributions being reimbursed, provided that the reimbursement meets the requirements of the LSC applicable to distributions of dividends. This issue is nevertheless the subject of much debate and we will need to see how it is addressed by the courts in future rulings.
Garrigues Corporate Law Department
This article was published on El Periódico Mediterráneo