Prohibition on returning contributions

What it means

The prohibition on returning contributions is the rule that a company may not repay shareholders their contributions or give them any other benefit except a profit share, the liquidation surplus or a payment on a lawful reduction of registered capital. It applies to both limited liability and joint-stock companies.

The rule exists to protect creditors. Registered capital and the company's other assets serve as a cushion for creditors, and shareholders cannot take them out at will. Since shareholders of an s.r.o. are generally not liable for its debts, it is important that the company's assets stay in the company.

The prohibition covers not only direct payments but also hidden forms, such as selling assets to a shareholder below value, buying from a shareholder above value, interest-free loans or paying a shareholder's private expenses. Such benefits are treated as an unlawful return of contributions.

How it works in practice

A shareholder can lawfully receive money from the company mainly as a profit share approved by the general meeting, remuneration for work as a director or employee, payment for goods and services at market prices or repayment of a contribution outside registered capital under statutory conditions.

Before any payment to shareholders, it must be checked that the law permits it and that it would not make the company insolvent, in other words a solvency test must be carried out. Further restrictions protecting creditors apply to payments made while the company is in crisis.

Transactions between the company and a shareholder should be on market terms and documented. Besides company law risks, a favourable benefit to a shareholder can have tax consequences, for example being treated as a hidden profit distribution.

What to watch out for

If the company gives a shareholder a benefit in breach of the prohibition, the shareholder must return it. A director who allowed the payment may be liable for damages and, in a later bankruptcy, may face claims from the trustee or creditors.

A profit distribution decision must be based on proper financial statements and respect statutory limits, such as mandatory reserves. Paying interim dividends without meeting the conditions, or out of non-existent profit, can also amount to an unlawful return of contributions.