Ways of Recapitalising a Limited Liability Company

A limited liability company (sp. z o.o.) may be recapitalised by increasing its equity or by obtaining external funds. In this article we discuss the following issues concerning the options for recapitalising a limited liability company:

1. Increase of the share capital,
2. Increase of the share capital from company funds,
3. Agio,
4. A loan granted by a shareholder,
5. Additional payments (dopłaty) made by shareholders,
6. Other options for recapitalisation.

We also briefly discuss the tax aspects of the individual ways of recapitalising a limited liability company.

Share Capital

A company's share capital is a mandatory fund created when the company is formed. It consists of the contributions made by the shareholders and equals the nominal value of all shares created and taken up by the shareholders. The amount of the share capital is set by the articles of association (the share capital may be increased or reduced during the company's existence).

Increase of the Share Capital

An increase of the share capital in a limited liability company consists in changing the company's capital structure by making contributions that increase the company's assets. The share capital is increased by creating new shares (the company creates new shares with the nominal value of the existing shares) or by increasing the nominal value of existing shares (making additional payments on existing shares, which do not increase the total number of shares, but only increase the nominal value of each existing share in proportion to the amount of the recapitalisation).

The Commercial Companies Code (CCC) provides for two procedures for increasing the share capital in a limited liability company. The first requires a resolution of the shareholders' meeting, an amendment of the articles of association and registration of the changes in the National Court Register (KRS). The second, simplified procedure applies only where the articles of association provide for this possibility and specify the amount and date of the increase. It consists in increasing the share capital on the basis of the provisions of the articles of association, without amending them: this requires a resolution of the shareholders' meeting and registration of the capital increase in the KRS.

An increase of the share capital is subject to tax on civil law transactions (PCC at 0.5%), but is not subject to corporate income tax (CIT).

You can read more about increasing the share capital in a limited liability company in the article: Increase of the Share Capital in a Limited Liability Company

Increase of the Share Capital from Company Funds

Under Article 260 § 1 CCC, a shareholders' resolution amending the articles of association may increase the share capital by using funds from the supplementary capital or from reserve capital (funds) created out of the company's profit (an increase of the share capital from company funds). The new shares are allocated to the shareholders in proportion to their existing shares and do not need to be taken up.

An increase of the share capital from company funds (supplementary capital or reserve capital) requires a shareholders' resolution amending the articles of association, followed by an application for the corresponding change in the KRS.

An increase of the share capital from company funds is subject to tax on civil law transactions (PCC at 0.5%), but is not subject to CIT.

Agio

Under Article 154 § 3 CCC, shares may not be taken up below their nominal value. If a share is taken up at a price higher than its nominal value, the excess is transferred to the supplementary capital.

Shares in a limited liability company may be taken up at their nominal value or at a price higher than their nominal value. Where shares are taken up at a price higher than their nominal value, a surplus known as agio arises. Agio does not increase the company's share capital: by operation of law, this surplus is transferred to the company's supplementary capital.

Example: the nominal value of shares in the company is PLN 50 per share; a new shareholder bought shares at a price of PLN 70 per share; this creates a surplus of PLN 20 per share; PLN 50 (the nominal value of the share) goes to the share capital and PLN 20 (the agio, the surplus) to the supplementary capital.

Agio goes to the supplementary capital and may be used to cover losses or to finance new projects. You can read more about supplementary capital in the article: Share Capital, Supplementary Capital and Reserve Capital in a Limited Liability Company

Agio is not subject to tax on civil law transactions.

Surpluses (agio) resulting from a cash contribution are not subject to income tax (CIT/PIT) on the company's side, while specific tax rules apply to agio on a contribution in kind.

Loan Granted to the Company by a Shareholder

A cash loan is granted to the company on the basis of Article 720 § 1 of the Civil Code. Under a loan agreement, the lender undertakes to transfer ownership of a specified amount of money to the borrower, and the borrower undertakes to return the same amount of money.

Below we set out the most important points concerning the conditions that a loan agreement between a management board member and the company must meet:

1. A loan agreement with a shareholder, if its value exceeds PLN 1,000, requires documentary form.
2. An agreement with a sole management board member who is also the sole shareholder requires the form of a notarial deed under Article 210 CCC.
3. Under Article 230 CCC, incurring an obligation to perform a service with a value more than twice the amount of the share capital requires a shareholders' resolution. Accordingly, if the value of the loan agreement exceeds twice the amount of the company's share capital, concluding the agreement requires the consent of the shareholders' meeting in the form of a resolution.
4. The articles of association themselves may require the consent of the shareholders' meeting to the conclusion of a loan agreement, regardless of its value.
5. Under Article 15 § 1 CCC, the conclusion by a capital company of a credit, loan, surety or other similar agreement with a member of the management board, supervisory board or audit committee, a commercial proxy (prokurent) or a liquidator, or for the benefit of any of those persons, requires the consent of the shareholders' meeting or the general meeting, unless the law provides otherwise.
6. A shareholder may grant the company an interest-bearing loan (the company must repay the principal and the interest agreed in the loan agreement; this is a reciprocal performance for consideration) or an interest-free loan (the company must repay only the principal; the shareholder receives no remuneration for the loan; the performance is without consideration).

Under Article 9(10)(i) of the Act on Tax on Civil Law Transactions, loans granted by a shareholder to a capital company are exempt from tax on civil law transactions.

The grant of a loan is neither income for the company nor a cost for the lender; income and costs arise only from the interest (remuneration) received. Accordingly, the basis for income tax (CIT on the company's side, PIT/CIT on the lender's side) is only the interest, in accordance with Article 14(1) of the CIT Act (and the corresponding PIT provision), which treats interest as income from business activity.

In the case of an interest-free loan, the company receives income from a gratuitous benefit equal to the market amount of interest, so the company will be required to pay income tax (CIT) on the market amount of interest.

Under Article 43(1)(38) of the VAT Act, services consisting in granting credit or cash loans are exempt from tax.

Other Ways of Recapitalising

Other ways of recapitalising a limited liability company may include, for example, a loan from an investor, a loan from another third party, a bank loan and grants.