Key Facts at a Glance
- In a capital increase from company funds, the company’s reserves are converted into share capital.
- A capital increase from company funds requires audited and certified annual financial statements.
- The procedure requires the involvement and notarisation by a notary.
What Is a Capital Increase from Company Funds?
In a capital increase from company funds, capital reserves or retained earnings are used to increase the company’s share capital. This represents a reallocation within the company’s equity rather than the introduction of new capital.
A capital increase from company funds has the following effects:
- Company taxation: Generally, the capital increase does not affect the company’s income and therefore does not impact its tax burden. However, the tax contribution account may be reduced (see Section 28 (1) German Corporate Income Tax Act – KStG). A reduction of the tax contribution account may result in higher taxation of future distributions to shareholders.
- Shares or nominal value: The capital increase from company funds either results in the issuance of additional shares or an increase in the nominal value of existing shares. The new shares are distributed among the shareholders in proportion to their existing holdings. A different distribution is not permitted (Section 57j German Limited Liability Companies Act – GmbHG).
- No taxation for shareholders: For shareholders, the issuance of new shares or the increase in nominal values does not lead to additional taxation.
How Is a Capital Increase from Company Funds Implemented?
The following requirements must be met in order to carry out a capital increase from company funds:
- Resolution to increase capital: A formal resolution to increase the share capital is required. This resolution must be approved by at least 75% of the shareholders (Section 53 GmbHG).
- Registration: All managing directors must register the capital increase from company funds with the commercial register. The registration must include a declaration confirming that, to the best of the directors’ knowledge, no reduction of assets has occurred between the balance sheet date and the date of registration.
- Supporting documents: The registration must include the balance sheet on which the capital increase is based. In addition, the resolution on the capital increase, the updated list of shareholders and the amended articles of association must be submitted.
In order to adopt the resolution on the capital increase, the following conditions must also be satisfied:
- Approved annual financial statements: In principle, the annual financial statements for the previous financial year must have been formally approved by the shareholders’ meeting. A resolution regarding the allocation of profits must also have been adopted.
- Balance sheet: The resolution on the capital increase must be based on a balance sheet, usually the balance sheet included in the annual financial statements. It is important that the balance sheet has been audited and has received an unqualified audit opinion. The audit must be conducted by a certified public accountant. For small corporations, a certified public auditor may also be sufficient.
- Time limit: The balance sheet date may not be more than eight months prior to the filing of the resolution for registration in the commercial register.
- Convertible reserves: Equity may only be converted into share capital if sufficient capital reserves and/or retained earnings exist. These reserves must be clearly identified as such in the annual balance sheet used as the basis for the capital increase. With regard to profits from the most recent financial year that are not yet part of the reserves, a resolution allocating these profits to the capital or revenue reserves is sufficient.
When Is a Capital Increase from Company Funds Advisable?
A capital increase from company funds may be advisable when the company intends to increase its share capital from an accounting perspective. Since this measure represents a purely balance-sheet adjustment, it may be particularly useful in the following situations:
- Conversion of a UG into a GmbH: If an entrepreneurial company (UG) is to be converted into a GmbH, this can be achieved through a capital increase from company funds. However, this approach requires audited financial statements. Therefore, in many cases a regular capital increase through cash contributions is preferred for such a conversion.
- Creditworthiness: The amount of share capital may be taken into account when lenders assess a company’s creditworthiness. Increasing the share capital through company funds may therefore improve the chances of obtaining financing or securing more favorable loan conditions. This is because the converted funds become subject to the strict capital maintenance rules applicable to share capital.
However, the following disadvantages should also be considered:
- No additional capital: The capital increase does not provide the company with any new funds. It merely represents an internal reallocation within the balance sheet.
- No change in ownership structure: A capital increase from company funds does not allow for changes in the distribution of shareholdings among shareholders.
- Costs: This form of capital increase requires audited financial statements, which generally results in costs of at least four figures. For smaller companies, this procedure is therefore often comparatively expensive.
What Are the Costs of a Capital Increase from Company Funds?
The costs of a capital increase from company funds generally amount to at least a four-digit sum. These costs mainly consist of notarial fees, registration costs and the expenses for auditing and confirming the annual financial statements.
- Notary: Notarial fees arise in particular from the notarization of the resolution to increase the share capital, the amendment of the articles of association and the notarial supervision of the process. These fees are set by law and are calculated based on the value of the transaction.
- Annual financial statements: Significant costs may also arise from the requirement that the financial statements used as the basis for the capital increase must be audited and certified. For companies that are otherwise not subject to audit requirements, this represents an additional financial burden. The exact costs depend on the respective auditor.
