Limited liability companies often need to raise capital to expand their business, enter new markets or invest in R&D. While the financing options are numerous, each choice comes with various constraints, such as the company owner granting a loan. Additional capital contributions are advantageous because:
- of the high refund flexibility;
- it is a sort of self-financing, with no negative effect on credit ratings, and
- in comparison to loans granted by associated companies, they are unlimited.
Financing via additional capital contributions
Additional capital contributions are additional payments made by company owners. Usually, these kinds of payments are foreseen in a company agreement, but this is not mandatory. If there is no clause regarding additional capital contributions in the company agreement, company owners have following options:
- amend the company agreement with a clause on additional capital contributions, or
- amend the company agreement with a clause that foresees a unanimous decision from the company owners that additional capital contributions have to be paid. This is the alternative normally used by company owners.
In compliance with Art. 491 of the Slovene Corporate Law (hereinafter referred to as: ZGD-1), company owners can contribute money, movable or immovable assets, rights, shares or a complete company as an additional capital contribution into their company. Additional capital contributions can only be paid by directly involved associates, and they do not increase common capital stock, shareholdings or initial contributions.
Returning additional capital contributions to company owners
Additional capital contributions may only be refunded when all material and formal requirements are met. Moreover, in compliance with Art. 495 ZGD-1, refunds are only allowed if the equity capital is positive.
Furthermore, a decision on the refund must be published on the AJPES official website three months before the additional capital contribution is transferred back to the company owners. If an initial contribution of a company owner has not been paid, or at least not fully, the additional contribution is offset against the missing amount of the initial contribution.
Taxation of additional capital refunds since 2020
The changes regarding additional capital refunds relate to:
- all refunds that are about to be paid back and
- refunds that have already been transferred back to owners.
Refunds can be paid back at the same or at a higher amount than the additional contributions. The amount of the refund is important for taxation purposes.
A) Refund at same amount as contribution
If the refund is the same as the contribution, the company owner gets the invested money back and no benefit has been achieved. Therefore, this kind of refund is tax free. Furthermore, it does not matter if the refund is paid in one or multiple amounts.
B) Refund is higher than contribution
The additional capital refund can be higher than the previous additional capital contribution. In this case, the difference between the refund and the contribution is considered a dividend and is charged with 27.5% tax.
The company paying the dividend has to determine the tax and pay it to the Slovene tax authorities (Form REK-2, income nr. 1923). If the refund is paid to a legal entity, there is no need to assess the tax or report a refund to the tax authorities. Moreover, it does not matter if the refund is paid in cash or not.
C) Sale of shares and additional capital refunds
If an owner decides to sell his share in the company and his additional capital contribution has not been refunded, or no decision about a refund has been made, then the amount of the additional capital contribution is included in the acquisition costs.
Given that a decision about a refund has already been made and this decision has been published on the AJPES website in compliance with ZGD-1, the (previous) owner has a claim against company in the amount of the additional capital contribution.
D) Buying shares and additional capital refunds
In some cases, a new shareholder can get a refund even though the previous shareholder paid the additional capital contribution. This is most common in cases of inheritance or gifts. It rarely happens that a share is sold without refunding the previous additional contribution.
In such a case, the refund is treated as if the additional capital contribution was paid by the new owner. The implications are the following:
- If the refund is the same as the previous additional capital contribution, there is no tax liability.
- If the refund is higher than the previous additional capital contribution, the difference between the two is taxed at 27.5%.
When the additional capital contribution is refunded to the new shareholder, his purchase cost of the share is reduced by the amount refunded. Moreover, the taxpayer (new shareholder) has to assess and pay the tax to the authorities. An income tax return has to be filed by 28 February of the following year.
New rules from 2021: refund reports
From 2021 all companies have to submit automated refund reports to the Slovene tax authorities. The reporting obligation only applies to refunds of additional capital contributions on the part of individuals. Companies with additional capital contributions on their balance sheet have to submit the following information to the Slovene tax authorities:
- name and surname of the person,
- date of birth,
- tax number,
- country of residence,
- date and amount of additional capital contribution and
- date and amount of additional capital contribution refund.
Companies have time to report information on the above, more precisely, the deadline is 31. January 2021 for the year 2020. Furthermore, companies have to share the status of all additional capital contributions paid by individual associates. The status of additional capital contributions has to be reported via E-davki (Slovenian electronic tax program).
Please note that there is no reporting obligation for refunds handled for legal entities.
If you would like to know more about additional capital contributions and refunds in Slovenia, or you are interested how your company can profit from it, please visit the website of WTS Slovenia and contact the local experts of WTS Global for Slovenia.