Running a limited liability company often involves the need for additional financing. The company may need funds for ongoing operations, investments, repayment of liabilities or improving financial liquidity.
In practice, shareholders most often consider three solutions:
- increasing the share capital,
- granting a loan to the company,
- making additional contributions by shareholders.
Each of these solutions has different legal, tax and accounting consequences. The choice of financing form should depend not only on how quickly the company needs money, but also on whether the funds are to be returned to the shareholders in the future and whether the company is taxed under standard CIT rules or Estonian CIT.
Share capital - when is it worth increasing it?
The minimum share capital in a limited liability company is PLN 5,000. Many small companies choose exactly this minimum amount, because high share capital is not always a practical solution.
Increasing the share capital may make sense when the company wants to increase its credibility towards contractors, banks or investors. Higher capital may be perceived as a sign of greater financial stability.
However, it should be remembered that funds contributed to the share capital are more difficult to return to shareholders later. Reducing the share capital requires a formal procedure, including a shareholders' resolution, the involvement of a notary, notification to the National Court Register and carrying out a procedure protecting creditors.
For this reason, high share capital should not be established solely to temporarily provide the company with cash.
Loan from a shareholder - simple and flexible financing
A loan from a shareholder is one of the most commonly used ways of financing a limited liability company. It is a flexible solution because it allows funds to be quickly transferred to the company and at the same time assumes the possibility of their later repayment.
Under standard CIT, interest on a loan may be a tax-deductible cost for the company, but as a rule only at the moment of its payment or capitalisation. On the shareholder's side, the interest received is income taxed as capital gains, most often at the rate of 19%.
It is also worth remembering that a loan from a shareholder to a capital company is generally exempt from PCC. This does not mean, however, that the loan may be completely arbitrary. In the case of related parties, market financing terms, appropriate documentation and correct tax treatment of interest must be ensured.
A loan will therefore be a good solution especially when the company is taxed under standard CIT rules and needs temporary financing that is to be repaid to the shareholder in the future.
Additional contributions by shareholders - an intermediate solution between a loan and capital
Additional contributions are a special instrument provided for in the Commercial Companies Code. They can be treated as an intermediate solution between a loan and an increase in share capital.
Additional contributions do not increase the share capital, but they allow the company to be funded by shareholders. Importantly, making them does not require notification to the National Court Register. It is therefore a less formalised solution than increasing the share capital.
However, for additional contributions to be possible, the articles of association must expressly provide for such an instrument. If the articles of association do not contain provisions on additional contributions, it will be necessary to amend the articles of association before a notary.
The articles of association should specify the maximum amount of additional contributions in relation to the shares, for example as a multiple of the nominal value of the shares. Additional contributions must be imposed and paid by shareholders equally, in proportion to the shares held.
How to formally make additional contributions to the company?
The mere existence of an appropriate provision in the articles of association does not mean that shareholders automatically have to pay money.
A resolution of the shareholders' meeting is required to make additional contributions. The resolution should specify, above all, the amount of the additional contributions and the deadline for making them.
After adopting the resolution, the company should remember about tax obligations. Making additional contributions is subject to PCC at the rate of 0.5% of the value of the additional contributions. The company should submit a PCC-3 declaration and pay the tax generally within 14 days from the date of adopting the resolution.
Properly made additional contributions, compliant with the Commercial Companies Code and the articles of association, do not constitute taxable income for the company for CIT purposes.
Return of additional contributions - can the company return money to shareholders?
Additional contributions may be refundable or non-refundable. If they are to be returned to shareholders, the conditions resulting from the regulations should be remembered.
The return of additional contributions is possible if they are not required to cover a loss shown in the financial statements. A shareholders' resolution on the return of additional contributions is also required.
As a rule, the intention to return additional contributions should be announced, and the return itself may take place only after one month has passed from the announcement. The return should be made equally to all shareholders.
In practice, it is worth properly regulating the rules for the return of additional contributions already at the stage of creating or amending the articles of association. This is particularly important when the sale of shares may occur in the company. If a shareholder sells shares before the adoption of the resolution on the return of additional contributions, doubts may arise as to who is entitled to receive the returned funds.
Additional contributions and Estonian CIT
Particular caution should be exercised in companies taxed under Estonian CIT, i.e. the lump-sum tax on corporate income.
In Estonian CIT, the concept of hidden profits plays an important role. Hidden profits may include, among others, interest, commissions and fees on a loan granted to the company by a shareholder or a related party.
This means that a loan from a shareholder, which under standard CIT may be a neutral and flexible solution, may prove less tax-efficient under Estonian CIT.
An even greater risk arises in the opposite situation, i.e. when the company grants a loan to a shareholder or a related party. In such a case, the hidden profit may be the loan amount itself, not only the interest.
The Estonian CIT rate on hidden profits is 10% for small taxpayers and 20% for other taxpayers.
Why can additional contributions be beneficial under Estonian CIT?
Additional contributions made properly, in accordance with the Commercial Companies Code and the articles of association, are generally not treated as hidden profits. For this reason, in companies taxed under Estonian CIT, they may be a more beneficial form of financing than a loan from a shareholder.
The return of additional contributions should also not lead to taxation in the same way as a profit distribution, provided that the amount previously contributed is returned and the conditions provided for in the regulations are met.
However, all additional benefits for shareholders must be treated with caution. If the articles of association provided for interest on additional contributions, such interest could be treated as a hidden profit. In companies taxed under Estonian CIT, interest on additional contributions is therefore not recommended.
What to choose: capital, loan or additional contributions?
There is no single solution that is good for every company.
Increasing the share capital may make sense when the company wants to increase its credibility and does not assume a quick return of funds to shareholders.
A loan from a shareholder is a simple and flexible solution, especially under standard CIT. It works when the financing is temporary and the shareholder expects the money to be repaid with interest.
Additional contributions are a very interesting solution for companies that want to fund their operations without increasing the share capital. They may be particularly beneficial under Estonian CIT, provided that the articles of association contain appropriate provisions and the entire procedure is carried out correctly.
Financing a limited liability company should be well thought out. The same form of financing may be beneficial in one company and unfavourable in another.
Under standard CIT, a loan from a shareholder will often be a practical and quick solution. Under Estonian CIT, however, particular caution should be exercised with loans and interest, as they may lead to taxation of hidden profits.
Additional contributions by shareholders can be a very good tool for financing a company, but only if they are properly provided for in the articles of association, correctly resolved, contributed proportionally by shareholders and properly settled for tax purposes.
The choice of the appropriate form of financing a limited liability company depends on many factors: the provisions of the articles of association, the method of taxation, the financial situation of the company and the plans of the shareholders.