Reduction of registered capital

What it means

A reduction of registered capital is a formal change to the registered capital figure entered in the commercial register. It is done either to absorb an accumulated loss or to pay part of the capital back to the shareholders.

It is not an entry a bookkeeper can make alone: without a shareholder resolution and a register entry the figure does not move. It cannot go below the statutory minimum for the legal form, nor below the minimum contribution of a single shareholder.

Reducing the capital is not the only way to hand shareholders back money they put in. A contribution made outside the registered capital is returned by a general meeting resolution, with no register entry and no call to creditors, provided it was not used to cover a loss. Both routes reduce equity, but only the one that changes the registered figure is formally demanding.

How it works in practice

The general meeting decides and the articles change, which calls for a notarial deed. The directors then publish the resolution twice in a row in the Commercial Bulletin and invite creditors to register their claims.

Claims that come in must be settled or secured, or the register will refuse the filing. The reduction takes effect only on the entry in the commercial register, not on the date of the resolution, and the payout is booked to that day.

A reduction can also come unplanned. If a shareholder leaves an s. r. o., for example by expulsion or by a court ending their membership, and their ownership interest is not transferred within the statutory period, the company must reduce its capital by that contribution. We then work out the settlement share and the dates with the directors, so the procedure does not start after the period has run out.

What to watch out for

A payout to a shareholder is often treated as a tax-free return of capital. If the capital had earlier been raised out of profit, that part of the payout is taxed as a profit share, and the mistake surfaces at an audit together with interest. A reduction that absorbs a loss, meanwhile, does not lift equity by a single euro.

Paying shareholders before the reduction is entered in the register is an unlawful return of contributions. The shareholders must pay it back, and the directors who approved it answer to creditors for the damage under director’s liability. The money is therefore released only after the entry, even though the decision was taken months earlier.