Share premium

What it means

Share premium is the difference between what an investor pays to join a company and the nominal value of the shares or contribution they receive. If a share with a nominal value of one euro costs ten euros, the share premium is nine euros per share.

It arises at incorporation and on an increase of registered capital: in a joint-stock company when shares are subscribed, and in an s. r. o. when a contribution exceeds the amount entered as registered capital.

Share premium increases equity but not registered capital. It is booked to capital funds and is not income, so it enters neither the profit for the year nor the income tax base.

How it works in practice

When an investor such as a business angel enters a growing company, share premium is normal: the investor pays for future potential, not for the current book values. Most of the amount invested goes into the premium and registered capital rises only symbolically.

How share premium may be used is governed by law and the statutes or articles. It can be used, for example, to increase registered capital, cover a loss or top up the reserve fund, and under certain conditions it can be returned to shareholders.

Returning share premium to shareholders is not a dividend where what is returned is what the shareholder contributed. The payment must not jeopardise the company’s ability to pay its liabilities, however, and the tax effect for the recipient is assessed too, so we always prepare it together with the general meeting resolution.

What to watch out for

The difference between share premium and a loan from the investor must be clear from the documents. If the investor sends money without a contract and a resolution to increase capital, it is unclear whether it is a contribution, a loan or an additional payment, and each has different consequences for the books and for the investor’s rights.

With a non-cash contribution, share premium arises from an expert’s valuation of the contribution. If the valuation is inflated, the premium is not backed by the real value of the assets, and at an audit or in bankruptcy this may be treated as an unpaid contribution.