A founder of a private limited company is free to determine the amount of share capital at incorporation. A public limited company is subject to a statutory minimum capital. The amount that is nominally paid up on shares is considered risk capital for the shareholder. The nominal issued capital is visible in the trade register.
Methods of financing
Financing a company can be done in various ways. In addition to paying up nominal share capital, there may (also) be:
- premium payment on (types of) shares;
- (cumulative) preferred share capital (with its own reserves);
- Money loans (convertible, subordinated, with or without collateral).
Share premium
A payment by a shareholder on shares held above the nominal value is called a share premium payment. Like the nominal payment on shares, share premium is regarded as equity of the company. Thus, no debt relationship arises between the shareholder and the company. On the company's balance sheet, issued share capital and share premium are distinguished. If there are different types of shares, each can have its own share premium reserve.
Share capital cannot be repaid 'just like that'. For repayment of share capital, capital must be reduced. This is subject to legal and statutory requirements. A capital reduction reduces the fiscal acquisition price of the shares.
A repayment of share premium can be made without reducing the capital, but is regarded as a distribution for tax purposes. In case of repayment of share premium to a company to which the participation exemption applies, the repayment can be made untaxed.
If share capital or share premium is repaid to a natural person-shareholder with a substantial interest (5% or more), the distribution will be regarded as income from substantial interest. Redemption on shares up to the amount of the acquisition price for tax purposes will be made without levying income tax. Distribution above the acquisition price and distribution charged to the share premium reserve will be taxed in Box 2 (2021: 26.9%).
(Cumulative) preference shares
Therefore, paying up share capital does not lead to a debt relationship. If a remuneration should nevertheless take place on the paid-up capital, (cumulative) preference shares could be issued. These shares are then entitled to a certain percentage of the profits.
If that profit right cannot be distributed in any year, then it can be determined that the undistributed portion will cumulatively roll over to subsequent years. The remaining profit will then accrue to all or the other shareholders.
Money Loans
If no equity interest is intended and/or repayment of financing must be possible without the aforementioned conditions, then providing a money loan may be a better option. Interest must normally be paid on the amount of the money loan. In addition, a maturity and due dates apply.
It can also be agreed that under circumstances the money loan can be revenue (converted) into share capital. The conditions can be very diverse. If there are several financiers of the company, a money loan can be subordinated to another creditor or other money loan. Again, the terms vary.
Collateral
As security for the repayment obligation and other (payment) obligations, the money loan can be secured with collateral securities. This could be a right of mortgage on registered property or a lien on shares or other property (assets, receivables).
Formalities
Legal acts relating to shares (incorporation, issue, delivery, capital reduction, pledge) must be performed by notarial deed. However, no formal notarial requirements apply to a share premium payment. A shareholder resolution is sufficient for a (distribution of a) share premium payment to take place.
It is of course important in all cases to ensure that the legal acts I have mentioned in this contribution are properly recorded.
