Capital funds

What it means

Capital funds are the part of equity made up of resources from owners or others that are neither registered capital nor profit. In the balance sheet they form a separate line between registered capital and funds created from profit.

They most often include share premium, contributions outside registered capital from shareholders, other capital funds such as non-cash contributions exceeding capital, and revaluation differences from remeasuring assets at fair value.

Capital funds do not arise from profit, so they are not taxed when created and do not enter the profit for the year. How they can be used depends on where they came from: some can be returned to shareholders tax-free, others, such as revaluation differences, are not meant for distribution at all.

How it works in practice

When a shareholder puts money in, we distinguish whether it really is a contribution to a capital fund or a loan. A capital fund increases equity and improves the ratio of equity to liabilities, which banks prefer, while a loan increases liabilities.

Capital funds can be used to increase registered capital, to cover a loss or to return money to shareholders. The general meeting decides, and on a return it must be shown that the company will not jeopardise its ability to pay its liabilities.

When money goes back to shareholders we trace the origin of the fund. Returning what a shareholder contributed is not a dividend, but funds from other sources may have tax consequences for the recipient, so for every use we prepare a breakdown of the fund by source.

What to watch out for

When a company is in crisis, returning capital funds to shareholders is restricted like any other payment in their favour. A company that returns a contribution and then fails to pay its suppliers risks having to reclaim the money from the shareholder.

A common mistake is booking money from a shareholder without a resolution and a contract. It is then hard to prove later whether it was a fund, a loan or a capital increase, and each means different accounting and different consequences for tax and for the shareholder’s rights.