It is not uncommon in the course of business that the company may not have sufficient funds to cover the costs of its operations or to carry out its business projects. In such a situation, the company may acquire funding from its owners or from external entities. There are several approaches to recapitalisation by raising additional funds from owners, and the choice should always be tailored to the company’s needs and financial situation as well as the owners’ means.

How to recapitalise a limited liability company / joint-stock company?

The primary forms of company recapitalisation using funds originating from shareholders include a loan from the owners, increase of share capital, and in the case of private limited liability companies, there is also the option of additional contributions.

1. Loan

A loan extended by a shareholder is the most flexible, and usually the easiest and fastest form of raising additional funds. This solution only requires a contract made in the relevant form (with loans exceeding one thousand zlotys, the document form is required), usually accompanied by the applicable corporate consents, and a transfer of funds. The owner and the company are free to agree any terms of disbursement and repayment at their discretion, though – importantly – the interest rate should be set at a market level. As a matter of principle, loans extended directly by the shareholders to the company are exempt from the tax on civil law transactions. The loan contract does not have to be reported to the National Court Register (hereinafter: “KRS”), or even the tax office, unless the obligation to pay the tax on civil law transactions at 0.5% of the loan amount has been incurred. Nevertheless, you need to bear in mind that a loan is by nature a refundable instrument, which means that the company will be obliged to repay the loan amount with interest, and that the funds raised are recognised principally in liabilities, not equity.

2. Increase in share capital

On the other hand, the company does not have to repay funds paid as contributions related to a share capital increase. However, an increase in the share capital of a limited liability company / joint-stock company is a much more complex procedure. As a matter of principle, the process requires:

  • relevant resolutions adopted by the shareholders’ meeting, which resolutions must be recorded in minutes in a notarial deed drawn up by a notary (in the case of a limited liability company, share capital may be increased without amending the articles of association, i.e. without having to pay notary’s fees, as long as the articles provide for such an option),
  • subscription of shares by all of the existing shareholders, some of them, or by third parties,
  • filing the appropriate application for entry in the KRS business register,
  • registration of the increase in KRS.

Apart from having to pay the notary’s fees and the filing fees, the company will also be obliged to pay the tax on civil-law transactions amounting to 0.5% of the share capital increase amount. Importantly, the tax base will be equal to the amount of stated capital increase (the nominal value of newly issued shares), and not the value of contributions made by the shareholders. Any surplus in the contributions in excess of the nominal value of the issued shares (the so-called agio or share premium) is recognised in the company’s supplementary capital. Share capital increase does not inflate the company’s liabilities, but is added to equity, increasing share capital and often supplementary capital, too (agio), which has a beneficial effect on the capital level and structure in the company. Please note, however, that seeing as the tax on civil law transactions is levied only on the portion of funds recognised in share capital, the creation of any share premium may entail tax scheme reporting obligations, in accordance with MDR provisions.

3. Additional contributions

Furthermore, recapitalisation of a limited liability company can also be achieved through additional contributions by shareholders. The additional contributions procedure is not very complex and only requires relevant resolutions adopted by the shareholders’ meeting and a transfer of funds. While the company is not obliged to report additional contributions to KRS, it must file an appropriate tax return and pay the tax on civil-law transactions amounting to 0.5% of the amount of additional contributions. Additional contributions must be paid by all shareholders proportionally. The shareholders may be – though not necessarily – reimbursed for additional contributions. Please note that the option of making additional contributions must be provided for in the articles of association. It is also prudent to stipulate the conditions for reimbursement of additional contributions in the articles.

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Company recapitalisation – what is the optimal solution?

When choosing the optimal scenario for the company and its owners, the key considerations to be taken into account include:

  • the resources available to the shareholders (the necessary funds may be provided by all of the existing owners, some of them, as well as a third party);
  • the prospects for reimbursement of funds by the company;
  • the company’s financial needs and the resulting parameters of the transaction, including the cost structure of debt financing;
  • capital structure in the company and the potential effects of company recapitalisation on that structure (funds originating from a loan, share capital increase or additional contributions will be recognised in the balance sheet in different ways);
  • whether there is adequate supplementary capital in the case of a joint-stock company (this type of company is obliged to create supplementary capital and transfer to it at least 8% of its profits for the financial year until it reaches at least one third of the share capital), as additional paid-in capital due to a share issue in excess of par (agio) will also be recognised in supplementary capital;
  • whether there are losses in the company which may be covered by funds obtained by a share capital reduction, or from supplementary capital, including agio.

There is no one-size-fits-all recommendation for choosing the form of company recapitalisation. On each occasion, your decision should take into account a wide variety of considerations including, but not limited to, the company’s capital structure, the impact on the company’s performance of any additional interest that has to be paid, the objectives of the recapitalisation, the timeline for potential repayment, the provisions of the company’s articles of association, the sources of the funds and the capabilities and expectations of the company and its shareholders. However, with the wide range of available solutions, it is possible to choose the optimal scenario under the given circumstances, taking into account the resulting tax consequences.

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Justyna Nykiel

Counsel, Attorney-at-law

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