Recapitalization of the company step by step
- Corporate Law in Poland
- Representation in a limited liability company
- Supervision in the company – Supervisory Board
- Commercial Proxy
- Meeting of shareholders
- Shareholders resolutions in Poland
- Recapitalization of the company
- Share capital in LLC in Poland
- NBP Reporting in Poland
- Taxation of Polish Company
- Accountancy in Polish Company
- UBO / Ultimate Beneficial Owner in Poland
- Transformation into Joint Stock Company in Poland
- Company Liquidation in Poland
- Foundation registration in Poland
Updated: 21.10.2024
After establishing a limited liability company in Poland, shareholders generally begin to think about how to deposit funds into the company (recapitalization). As a result, investors often don’t realize that any payment to the cash register or account of their company must have a specific legal title and be properly recorded – it’s not enough to just make a transfer to the account.
This is because a limited liability company is a separate entity that has its own assets and its own interests, and the assets transferred to the company are no longer owned by the shareholder, but by the company. Shareholders or members of the company’s board of directors cannot freely deposit or withdraw money from the company’s bank account without a specific and legally permissible title of payment. Such actions may even expose these individuals to criminal liability for misappropriation of another’s property or mismanagement.
What are the reasons to consider recapitalization of a company? You will find out in this article.
There are several ways to recapitalize a limited liability company:
- an increase in share capital,
- surcharges,
- loan.
Choosing the right form of recapitalization is crucial, because each of these ways of recapitalization leads to different consequences from the point of view of the company’s accounting and tax consequences, so choosing the right way is a key aspect.
How to increase a company’s share capital?
Increasing share capital is one of the most common forms of recapitalization of a company. It allows increasing the company’s assets (assets), increasing the credibility of Poland’s company in the eyes of clients, financial institutions or government authorities, but often requires a considerable amount of time before the payment of funds to the company becomes possible.
Methods of increasing share capital
The decision to increase a company’s share capital is made by means of a shareholders’ resolution, which generally requires the form of a notarial deed and a two-thirds majority vote of the shareholders. If, on the other hand, the articles of association provide for the possibility of a simplified increase in the company’s share capital, this may be done without amending the articles of association, and the shareholders’ resolution in such a case may be in ordinary written form and an absolute majority of the shareholders’ votes is sufficient for its adoption.
Regardless of the method of share capital increase chosen, this action also requires registration in the Register of Entrepreneurs of the KRS, since only after entry in the KRS is the share capital increase effective.
What are the tax consequences of a share capital increase?
PCC
An increase in a company’s share capital always results in an obligation to pay civil law transaction tax (PCC) at a rate of 0.5% calculated on the value of the capital increase.
If a shareholder acquires a share at a price higher than its nominal value, the excess funds (called agio) are transferred to the capital reserve. The payment of funds in the agio portion is tax-neutral.
The law does not regulate the proportion between the amount of the share capital increase and the amount of agio, so it is possible to increase the share capital by only a small amount, and treat the remainder of the contributed funds as agio, which will be more favorable for tax purposes.
CIT
A share capital increase does not constitute CIT taxable income.
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Surcharges – when can shareholders contribute to the company and what are the consequences?
Surcharges are monetary benefits of shareholders to the company usually used to cover a loss or to subsidize the company when the company itself is unable to obtain funds for its operations from other sources. Surcharges increase the company’s assets (contributing to the reserve capital), but do not change the amount of share capital and the value of shareholders’ shares.
Establishment of surcharges – only if provided for in the articles of association?
Payment of surcharges is possible only if the articles of association provide shareholders with such a possibility and specify the upper limit of the amount of surcharges that can be paid.
However, the obligation to pay surcharges itself, the deadline for their payment and the amount of surcharges is determined in a separate resolution of shareholders adopted unanimously by all shareholders. There is no obligation to file such a resolution with the registry court.
Shareholders’ surcharges must be paid by all shareholders in proportion to their shares.
Surcharges previously paid may be returned to shareholders if they are not required to cover the loss shown in the financial statements (this restriction can be excluded in the articles of association).
Surcharges and taxes – what should you know about the tax consequences?
PCC
The receipt of surcharges constitutes a taxable transaction for the company at the rate of 0.5%, as in the case of a share capital increase.
CIT
Surcharges paid to the company do not constitute income for the company.
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Loan of the company – what to pay attention to?
This is the most common method of recapitalizing a limited liability company. The granting of a loan is not subject to registration with the KRS, so the funds can be transferred to the company as soon as the loan agreement is concluded. A loan agreement, the value of which exceeds PLN 1,000, should be stated in writing for evidentiary purposes (documentary form). Loans for smaller amounts do not require any special form for their effectiveness.
Funds obtained as a result of a loan do not increase share capital. Loans granted by entities constitute financial assets of the company classified as long-term or short-term investments depending on the period for which the loan was granted.
The shareholder who granted the loan has a claim for repayment.
Interest on the loan
Under tax law, a shareholder is a related party to the company, and therefore all agreements and transactions between the two entities should be made at arm’s length.
If the interest rate on a shareholder’s loan to the company is lower than the regulatory safe harbor limits, the tax authorities may challenge such a loan and the expenses arising from it. The amounts of the base interest rate and the margin determining the conditions of the safe harbor rule are published by announcements of the Minister of Finance every year.
Related parties are also required to prepare transfer pricing documentation in electronic form for the tax year for transactions exceeding:
- PLN 2,500,000 – for financial transactions concluded with tax havens;
- PLN 500,000 – for other transactions concluded with tax havens;
- PLN 10,000,000 – for financial and commodity transactions;
- PLN 2,000,000 – for service and other transactions.
Tax implications
PCC
The granting of a loan by a shareholder to a capital company is not subject to PCC tax.
CIT
A shareholder’s loan to a company does not constitute income on the part of the company and is not a deductible expense for the lender.
On the other hand, it should be borne in mind that the granting of an interest-free loan to the company by a shareholder gives rise to income on the part of the company from the receipt of a gratuitous benefit in the form of interest, which the company would have to pay according to market prices appropriate for this type of service.
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Frequently Asked Questions about Recapitalization of a Limited Liability Company
What are the most common methods of recapitalizing a limited liability company?
Recapitalization of a limited liability company typically involves three main methods: increasing share capital, providing shareholder surcharges, or granting loans. Each method has its own implications for the company’s capital structure, such as adjusting the mixture of debt and equity. Increasing share capital directly influences the equity capital of the company, while loans introduce debt capital, and surcharges add to the company’s assets without changing the proportion of equity capital.
How does increasing share capital affect a company’s capital structure?
Increasing the share capital of a company is one of the most common forms of recapitalization which can stabilize a company’s capital. It directly enhances the company’s equity capital, improving the company’s assets and making it more attractive to investors.
This method does not increase the company’s debt obligations but requires formal procedures, such as a resolution of the shareholders and registration with the KRS. The process does not alter the debt to equity ratio unless additional capital is raised alongside existing debt capital.
Are shareholder loans an effective form of recapitalization?
Yes, shareholder loans are a common way to recapitalize a limited liability company without altering the share capital or requiring registration in the KRS. These loans introduce debt capital into the company’s structure, adding financial obligations such as interest payments.
However, loans must comply with arm’s length principles to avoid tax challenges, and interest on such loans is subject to specific tax regulations. Loans provide a flexible method of recapitalization but must be carefully structured to avoid increasing the company’s debt load excessively.