U.S. Tax Desk Newsletter - November 2021 (part I)

In the event of a need for capital in a limited company, shareholders may inject funds in the form of a shareholder contribution. The addition may be conditional or unconditional.

 If an enterprise is insolvent or risks becoming insolvent, the company's equity may be increased through a shareholder contribution. One or more shareholders in the company may make shareholder contributions, which means that the shareholders either:

• invest more money in the company,
• provide assets or
• by remissioning a claim that is a liability in the company.

The shareholder contribution must always be irrevocable. The opposite would be considered a loan, and it would then be a debt in the company which does not increase equity. A written declaration should be given to the company that it is an addition and not a loan.

In the event of a conditional shareholder contribution, conditions are made against the other shareholders that the contributing shareholder reserves the right to receive the capital if certain conditions are met, such as sufficient earnings in the company. Repayment of the contribution takes precedence over dividends to shareholders and is resolved at the annual general meeting or extraordinary general meeting. 

If an unconditional shareholder contribution is made, the shareholder has no right to recover the contributed capital. But there may be tax advantages to this option. An unconditional contribution may be added to the cost of the shares in the company. 

Note that if there are several shareholders and not all of them make unconditional shareholder contributions concerning their respective equity. The unconditional shareholder contribution is, to some extent, a wealth transfer. Where the shareholders are not related to each other, such a transfer of wealth may result in income taxation of the favoured shareholders.

In companies with several shareholders, it is vital to regulate shareholder contribution in a separate shareholder agreement or in a shareholder contribution agreement. The shareholder agreement should decide when shareholders should vote in favour of the shareholder contribution possibly being repaid. There are also specific civil provisions to deal with when repayment can be made.

The option which is the best solution varies based on the specific conditions. Feel free to contact one of our tax advisors if you want to find out what is best for your company.