Capital Increase in a German Limited Liability Company (GmbH)

What Is a Capital Increase?

A capital increase refers to the process of raising the equity capital of a German limited liability company (GmbH). The increase in share capital can be achieved either through the contribution of cash or other assets (e.g., the transfer of real estate or entire businesses). It is also possible to convert retained earnings or capital reserves into equity (known as a capital increase from company funds).

There are various reasons why shareholders may decide to carry out a capital increase. Common scenarios include:

• Offsetting losses: When a company has incurred significant losses over an extended period and a new investor joins to support restructuring.
• New investments: When a company requires additional funds for expansion or capital-intensive investments, such as building new facilities or entering foreign markets.
• Reducing debt: When a company faces a heavy debt burden, new equity may be injected to repay part of the outstanding liabilities.
• Improving financing conditions: Some banks consider the structure and level of equity when granting loans. Strengthening the equity base before obtaining financing can lead to more favorable loan terms.
• Converting a UG into a GmbH: A capital increase is often used to convert a UG (haftungsbeschränkt) into a GmbH in order to enhance the company’s credibility.

What Are the Consequences of a Capital Increase in a GmbH?

A capital increase affects both the company and its shareholders.

• Company: A capital increase results in an increase of the company’s equity. This may occur through the contribution of new assets (cash or non-cash contributions) or by reallocating existing reserves. From a tax perspective, a capital increase generally has no significant impact. In particular, no taxes are triggered solely by increasing the share capital.
• Shareholders: A capital increase may alter the shareholders’ ownership percentages. For this reason, all shareholders are generally entitled to a subscription right unless they choose to waive it.

What Types of Capital Increases Are Available?

There are several ways to increase the share capital of a German limited liability company (GmbH). The appropriate form of capital increase depends on the specific circumstances of the individual case. Each type has its own advantages and disadvantages, and it must be assessed on a case-by-case basis which structure is suitable. The following forms of capital increase are available:

• Cash Capital Increase: In a cash capital increase, new shares are issued against a cash contribution, providing the company with additional liquidity. A cash capital increase is particularly suitable when the company intends to reduce existing debt or finance new investments.
• Capital Increase in Kind: A capital increase in kind is similar to a cash capital increase, but instead of receiving cash, the company is provided with other assets (e.g., a business, real estate, or other property).
• Capital Increase from Company Funds: In this form, retained earnings or capital reserves are converted into share capital. Due to the requirement of an audited balance sheet, this type of capital increase is comparatively complex and costly, and therefore less common in practice.
• Authorised Capital (Genehmigtes Kapital): Authorised capital represents a special case. Here, the management is authorised to implement a capital increase at a later date without requiring a new shareholder resolution. This is not an independent form of capital increase, but a corporate authorisation mechanism that must be included in the company’s articles of association. The articles must specify the maximum nominal amount of the authorised capital and the duration of the authorisation. Under § 55a GmbHG, the authorised capital may not exceed 50% of the existing share capital and may be granted for a maximum period of five years. Additional conditions may be included in the articles, such as who is entitled to subscribe to the new shares or whether a premium (agio) must be paid.

How is a capital increase carried out in a German GmbH?

A capital increase is a formalised process that requires the involvement of a notary and the commercial register. The procedure differs depending on whether the increase is carried out by way of a cash or in-kind contribution, or by converting company reserves into share capital.

Procedure for a cash or in-kind capital increase:

• Legal advice: If necessary, the process begins with legal advice on the objectives and structure of the capital increase.
• Resolution: The capital increase starts with a shareholders’ resolution. The resolution must be adopted by the shareholders’ meeting with a 75% majority of the votes cast. It must be notarised and must specify the exact amount of the capital increase. In the case of an in-kind contribution, the requirements of Section 56 GmbHG apply, meaning that the specific asset contributed and the nominal amount of the shares to which the contribution relates must be clearly identified.
• Subscription of the new shares: The company and the subscriber must enter into a share subscription agreement. The subscriber’s declaration of subscription requires notarised certification. As a rule, the company accepts the subscription by having the capital increase resolution and the subscription declaration notarised together, so that no separate declaration of acceptance is required.
• Payment of the contribution: The (new) shareholders must then pay their contributions. It is essential that the contribution is fully and freely available to the managing directors at the time of registration, as required by Section 57(2) GmbHG.
• Registration and filing:
  The capital increase must subsequently be filed with the commercial register. This filing is typically handled by the notary. The managing directors must confirm that the contribution has been made into the share capital and is fully at their free disposal. In the case of an in-kind contribution, it is advisable to submit supporting documents to enable the commercial register to verify the value of the contributed assets.

A capital increase from company funds follows a similar structure. However, no new contributions are made; instead, existing company reserves are converted into share capital. The following special requirements apply:

• Resolution: The resolution must be based on audited financial statements. The annual financial statements must already have been approved, and a resolution on the appropriation of profits must be in place. The underlying balance sheet must be no more than eight months old. Sufficient profit or capital reserves must be available for conversion.
• Share allocation: A capital increase from company funds may not alter the shareholding ratios (Section 57j sentence 1 GmbHG). The new shares must be allocated strictly in proportion to the existing ownership structure.
• Registration: The capital increase must then be filed with the commercial register. In this case, neither a subscription declaration nor a contribution payment is required.

Notes on Capital Increases in a German Limited Liability Company (GmbH)

When conducting a capital increase in a GmbH, the following aspects are commonly relevant:

• Pre-emption Rights: In the event of a capital increase, it is generally assumed—unless the articles of association provide otherwise—that existing shareholders have an implicit statutory pre-emption right to subscribe to the newly issued shares. If only certain shareholders are intended to participate in the capital increase, the shareholders who are to be excluded must either consent, or their pre-emption rights must be formally excluded. Such an exclusion may be appropriate, for example, when the assets contributed are of particular importance to the company and cannot otherwise be acquired. A valid exclusion of pre-emption rights requires a 75% majority of the votes cast.
• Agio (Share Premium): When new shareholders join at a later stage, they are often required to pay a premium. This means that they pay more for their share than the original shareholders did. As a result, part of the payment flows into the share capital (Stammkapital), and the surplus amount is allocated as a premium (Agio) to the capital reserve. If such a premium is intended, it should be expressly included in the capital increase resolution.

How much does a capital increase cost?

The costs for a capital increase generally start at around EUR 1,000. The overall expenses typically consist of the following components:

• Notary fees: The resolution to increase the share capital, as well as the related documents (e.g., the subscription declaration), must be handled by a notary. Notary fees are statutory and therefore fixed by law.
• Commercial Register fees: Costs are incurred for filing and registering the capital increase with the Commercial Register.
• Legal counsel: If you obtain advice from an attorney, additional fees will apply. The amount depends on the scope and complexity of the legal advice required.
• Annual financial statements: For a capital increase from company funds, you will need audited and certified financial statements. The costs for such audited accounts usually amount to several thousand euros.