Shareholders’ Contribution as a “Donation” to the Company

Did you know that you can donate money or assets to a trading company? Have you ever thought that it would be good to strengthen your company’s assets but you weren’t sure how to do it?

In this article we explain in which situations and under what circumstances you can make donations to trading companies.

Firstly, we must understand that a limited liability company (LLC) has its own legal personality and can therefore receive and make donations like any natural person. So, what is the accounting and tax treatment for such contributions?

Throughout this post and to be more specific, we will focus on the realisation of donations by shareholders to their limited liability companies.

For years, under the former General Accounting Plan, there has been account 118 “Contributions of partners or owners”, which is part of companies’ basic funding. This accounting sub-account was normally used to offset losses, without considering the possibility of contributing shareholders’ funds to invest in new projects or improve the company’s profitability.

However, nowadays this concept has expanded and sub-account 118 covers more concepts, such as investing in new projects, improving liquid assets and/or profitability, or re-establishing the balance of assets. The current description of said account within the General Accounting Plan is as follows:

Assets and liabilities delivered by the company’s shareholders or owners when they act as such, by virtue of operations not described in other accounts. In other words, as long as they do not constitute remuneration for the supply of goods or services by the company, nor do they have the nature of liabilities. In particular, it includes amounts paid by members or owners for compensation of losses.”

Having read the definition, we can discuss the following applications: Accounting, Trading and Taxation.

  • Accounting:

With regards to accounting, shareholders’ donations are regarded as a third-party “subsidy”, the General Accounting Plan specifically includes the concept of “Subsidies, donations and legacies received”, stating that non-refundable subsidies, donations and legacies are not considered as income, since they must be registered in the shareholders’ equity.

Registry and Valuation Regulation number 18 clearly indicates that the accounting treatment is the same when a company receives a “subsidy” as when it receives a “Donation” from a shareholder. Despite the fact that the subsidy has no relation to the company and the donation does, the same accounting treatment applies.

“Non-refundable subsidies, donations and legacies granted by shareholders or owners are not considered as income and are accounted directly in the shareholders’ equity, regardless of their type”.

How must we allocate these contributions to the income statement? To do so, the General Accounting Plan requires that we attend to the purpose of the contribution when it comes to non-refundable subsidies, donations or legacies, and, particularly, that we allocate them to the income statement based on whether they are granted to ensure profitability or to compensate the company’s deficit, to fund specific expenses, to acquire assets or to cancel liabilities.

In the specific case that they are granted to acquire assets or to cancel liabilities, they shall be considered as proportional income for that financial year according to their category. That is, contributions for said purpose will be allocated to the income statement in proportion to their amortisation if they are fixed intangible assets, real estate material and investments, when depreciation or deterioration occurs in the case of stocks that are not obtained as a result of a trade rebate or financial assets. If they are contributions destined towards the cancellation of debts, they will be allocated to the income statement in the financial year in which said cancellation takes place, unless they are granted for specific funding, in which case the allocation will be carried out based on the element funded.

Lastly, some contributions are received for no specific purpose. These will be allocated to the income statement as income in the financial year in which it is received.

  • Trading:

There is no regulation for subsidies regarding trading. However, it is true that this type of agreement, as any other, must be included in the minutes of the meeting in which said shareholders’ contribution has been discussed, and it must not be included in the report that accompanies the Annual Accounts presented to the province’s Company Registry.

Having said that, notarising said minutes is not necessary, nor is their registration in the Companies Registry.

Be careful, because this lack of regulation in particular raises some questions… What do we do with the account balance? Can it be refunded to the shareholders?

To answer this question, we can look at its accounting treatment. As we have seen previously, the contributions can be used for multiple purposes, company growth, compensating losses… so, it can be concluded that its balance will be used for any purpose needed within the company, including refunding shareholders for previous contributions.

It can therefore be understood that the distribution of this account will be similar to that of an available reserve and will be subject to the general rules and limitations established for profit distribution in trading.

  • Taxation:

We must look into how the operation is taxed. How do you tax a contribution as a donation from a shareholder to your company? It is easier to carry out the tax operation than the accounting operation.

Except from some differences, for purely accounting purposes, the treatment of subsidies, donations and legacies are very similar. However, the same cannot be said when it comes to the operation’s taxation.

In other words, subsidies, as well as donations, are directly registered in the company’s net assets and are gradually added to the income statement attending to the aforementioned explanations. This, however, does not occur with taxation.

Let’s take a look at the different taxes that may apply:

There is a Binding Consultation which answers all of the practical questions, specifically number 1978/2016, of 9th May, in which the General Tax Directorate indicates:

There are two very specific times:

  • One, when the company’s shareholders make the contributions.
  • The other, in the specific case when the company recovers its situation and decides to refund the shareholders’ contributions.

In this sense, the following shall apply:

1. Corporate Tax

a) When the company’s shareholders make the contributions:

The non-refundable amount made by the shareholder will be deemed to be the shareholder’s contribution to the company, but this contribution does not generate any income to be taken to the income statement and, insofar as the Corporate Tax Law does not establish anything in this respect, it does not generate any income for the purposes of determining the taxable income of the Corporate Tax either.

b) In the case of subsequently refunding the contribution to the shareholders:

It must have the same treatment established for the distribution of the issue premium, given its very nature. In this respect and in accordance with the Spanish Corporate Tax Law, the distribution of the share premium will reduce the tax value of the share, with any excess being considered as income. This refers to the case in which the recipient is a legal entity.

2. Personal Income Tax

a) When the company’s shareholders make the contributions:

The comparison made by the accounting regulation of the shareholders’ contributions to the company without compensation, regardless of whether they are intended to compensate for losses, must also be made with regards to the classification for personal income tax purposes. Therefore, the amounts contributed by the shareholder must be included in the acquisition value of their shares.

b) In the case of subsequently refunding the contribution to the shareholders:

Subsequent refunds will receive the treatment established for the issue premium given its very nature. With regards to the refund it is considered that the amount obtained will reduce the acquisition value of the shares until they are cancelled and any resulting excess will be taxed as income from movable capital.

However, it should be remembered that, from 1st January 2015, if the share premium corresponding to unlisted companies is distributed, the shareholder must pay tax on the amount they receive or on the market value of the asset or right received up to the limit of the difference between the assets amount, according to the balance sheet of the last financial year closed before the distribution, and its acquisition value. The excess over this limit shall reduce the acquisition value of the interests or shares. For this purpose, the calculation of shareholders’ equities would involve subtracting the profit distributed from the balance sheet date until the distribution of the premium and restricted reserves generated after the acquisition of the share.

3. Tax on Property Transfers and Documented Legal Acts (TRLITPAJD)

a) When the company’s shareholders make the contributions:

Contributions made by shareholders that do not involve an increase in capital are considered to be a corporate operation subject to Article 19.1 of the TRLITPAJD, which will be exempt under Article 45 of the same legal text.

 b) In the case of subsequently refunding the contribution to the shareholders:

The refund to the shareholders of what has been contributed, at a time when it does not represent capital reduction, does not constitute a taxable transaction and therefore no taxation applies in this respect.

  • Conclusion

In the case of subsidies, they shall be taxed based on their allocation to the income statement. However, donations, which is the issue concerning us, does not follow this same rule, as they are taxed when the company receives the donation, i.e. the accounting and tax regulations coincide and no temporary difference is generated.

At the end of the financial year, the income statement must be liquidised and the donation received must be added to the Taxable Income, and of course the corresponding tax effect must be calculated, as far as corporate tax is concerned.

As you can see, deciding how to inject funds and assets into companies is not easy, however, there is a wide range of options that, as long as they are well assessed, can be very useful for undertaking your projects.

At Ruiz Ballesteros we can help you with this kind of corporate operation from an accounting, trading or tax point of view, so that you have enough information to make the right decision.

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