Contribution outside registered capital

What it means

A capital contribution outside share capital is a cash or other contribution by a shareholder to a limited company that increases neither the share capital nor their stake. It lets the shareholder provide money, for example for start-up, an investment or covering a loss, without changing the articles or the register entry.

The contribution may be mandatory, if the articles provide for it, or voluntary, based on the shareholder’s decision. In the books it is shown within capital funds as part of equity, not as a liability. It is not income for the company and is therefore not taxed.

The contribution can later be returned to the shareholder, but only under statutory conditions: the return must not reduce equity below the level set by law or make the company insolvent. A returned contribution is generally not taxable income for the shareholder.

How it works in practice

When clients fund their own company, we compare a capital contribution with a shareholder loan. A loan is easier to repay and its interest may be an expense, but it increases leverage and is subject to the thin capitalisation rules. A contribution strengthens equity, which helps with banks and in averting a crisis.

For companies with negative or low equity, a contribution is often the quickest way to bring the company out of crisis and restore its financial stability. We document the decision and purpose of the contribution so that it cannot later be confused with a loan.

When an investor comes in, a contribution is often combined with a share capital contribution or share premium. We track in detail who contributed what and when, because that determines to whom and on what terms it can later be returned.

What to watch out for

Money sent by a shareholder without a contract or decision is ambiguous. It is later hard to prove whether it was a loan, a contribution or something else, which causes problems in a tax audit or a sale of the company. We therefore document every contribution in writing.

Returning a contribution while the company is in crisis is prohibited, and directors who approve it are liable for the damage. Before any return we therefore check equity, solvency and whether the company is in crisis under the Commercial Code.