Additional contributions in a limited liability company as an internal financing instrument

Changes in the economic market, deteriorating financial conditions or new investments often compel a limited liability company to seek additional financial resources. The Commercial Companies Code provides such an option in the form of shareholder contributions. This is a favourable instrument for the company if it does not wish to rely on external funding sources. The Code does not restrict the purposes for which the funds from such contributions may be used. However, in practice, companies most often resort to shareholder contributions when facing financial difficulties. The additional funds often enable the company to overcome a challenging financial situation and may be essential to avoid a prolonged financial crisis, including, ultimately, bankruptcy.

Contributions or Loan?

Contributions do not have a clearly defined character — this instrument lies somewhere between shareholder loans and capital injections into the share capital. Contributions may only be monetary and should be imposed and paid by shareholders proportionally to their shareholdings. They form part of the company’s assets; however, it is important to note that they neither increase the shareholdings nor the share capital. Similar to loans, their purpose is to recapitalise the company, thereby opening up various opportunities for its continued operation. While a loan is always repayable, contributions are also generally temporary and repayable, although under specific conditions, they may not be returned to the shareholders. Furthermore, interest is generally not charged on contributions. Another point of distinction is how these instruments are recognised and treated in the company’s balance sheet. A loan is reported under liabilities, which may restrict the company’s ability to incur additional debt, whereas contributions are reported as equity under reserve capital, which does not have such limiting consequences. If there is any uncertainty regarding the appropriate option for your company, it is advisable to consult a legal advisor.

How to Apply Contributions?

According to Article 177 §1 of the Commercial Companies Code, the obligation of shareholders to provide contributions must be included in the articles of association. This obligation may be included in the original articles or introduced through an amendment. It is important to note that an amendment introducing such an obligation requires the unanimous consent of all shareholders. Although there is some debate as to whether the obligation may be imposed only on certain shareholders, it is generally accepted that it must apply to all. Moreover, the articles of association must specify the numerical amount of the contribution per share. The obligation to make contributions arises upon a resolution passed by the shareholders’ meeting, unless the articles of association specify the amount and due date for the contributions. In most cases, however, the resolution will determine these elements. The deadline set in the resolution is crucial, as per Article 178 §2 of the Commercial Companies Code — if a shareholder fails to fulfil their obligation on time, the company is entitled to interest for the delay. The reason for the shareholder’s failure is irrelevant. Additionally, the company may seek damages resulting from the delay. The law allows for alternative provisions to be included in the articles of association, such as lower interest rates or waiving certain claims. When adopting a resolution on contributions, it is advisable to consult a legal advisor to achieve the most favourable arrangements.

Repayment of Contributions — How and When?

Repayment of contributions is also a crucial issue. Just as with their provision, repayment requires a specific resolution by the shareholders’ meeting. However, it is not always possible. According to the Commercial Companies Code, contributions may be repaid only if they are not required to cover balance sheet losses. Repayment may only take place after one month has passed since the announcement of the intention to repay the contributions in the Court and Commercial Gazette (*Monitor Sądowy i Gospodarczy*). The repayment procedure is relatively time-consuming and costly, as a fee is payable for each day of publication. The law requires repayments to be made proportionally to all shareholders. However, the articles of association may provide more favourable, flexible and faster conditions for repayment. It is worth seeking advice from a legal counsel to draft the most beneficial provisions in this regard.
 

Contributions and Tax Implications

Corporate Income Tax (CIT)

Under the Corporate Income Tax Act, shareholder contributions are not treated as income, provided they are made in accordance with the Commercial Companies Code. Therefore, making such contributions does not create a tax liability.

Personal Income Tax (PIT)

Shareholders who are natural persons are not required to pay income tax on the repayment of contributions, provided the amount returned is equal to the amount originally paid in, as measured in PLN on the date of contribution. However, interest earned on contributions (if agreed) is taxable.

Civil Law Transactions Tax (PCC)

According to the Civil Law Transactions Tax Act, contributions are treated as an amendment to a company’s articles of association. As such, they are taxed on the same basis as the formation or amendment of a company. The applicable tax rate is 0.5% of the contribution amount. The obligation to pay PCC falls on the limited liability company itself, which must file a PCC declaration, calculate the tax and remit it within 14 days of the resolution on contributions being adopted.