Contributions from the 118 account as a form of corporate finance

Contributions from the 118 account as a form of corporate finance

Our mercantile legislation articulates a series of tools to instrumentalise investments in companies. Some tools are configured with a maturity date on which the instrument must be repaid; others provide for a transformation of its accounting nature, as in the case of convertible notes, etc.

There is, however, one way that is interesting in view of its liberal nature, as it is not subject to a maturity date, but lacks enforceability. In this article we will discuss “non-refundable” contributions from shareholders.

What are non-refundable contributions?

Non-repayable contributions are the concept of any injections of assets, whether monetary or non-monetary, which are recorded for accounting purposes in Account 118 of the General Chart of Accounts “Contributions from shareholders or owners”. Non-repayable contributions are those “contributions” made by the shareholders of a company that are not considered to be liabilities or share capital, but are considered to be part of equity as a kind of “additional reserve”. 

In accordance with the above, these contributions are non-refundable, insofar as their contribution does not generate an obligation of return for the contributing shareholder, and consequently constitutes an atypical and substantially different figure to loans, convertible notes, participating loans or other debt instruments.

Are there any advantages to this type of contribution?

Given that these contributions lack formality in their creation, these private instruments are outside the sphere of notaries and registrars, and it is not necessary for their validity to notarise them in a public instrument or for them to be subsequently registered.

On the other hand, case law has established that contributions made by shareholders that are not in the nature of a contribution to capital will, unless there is proof to the contrary, be considered as a loan. In this respect, and despite its non-typical nature, it is advisable to record such a contribution in the minutes of the General Meeting.

In accordance with the above, this type of contribution is usually of interest from the point of view of “speed” in its instrumentalisation, since, although it is not obligatory, it is simply advisable to register it by means of the minutes of the General Meeting, but not by means of a public deed or registration in the Register.

Elements to be considered as a contribution to account 118

The Spanish Accounting and Auditing Institute (Instituto de Contabilidad y Auditoría de Cuentas) has defined the requirements that a certain contribution must meet in order to be recognised as a contribution to account 118:

(i) certainty of the incorporation of the assets into the company’s assets or, where applicable, the cancellation of the corresponding debt. 

(ii) identity of the contributors and the percentage of participation in the company’s share capital;

(iii) determination of the amount of the cash contribution or the fair value of the assets contributed by the members or of the debt forgiven; and 

(iv) the basis or objective reason for the increase in the company’s equity and that, therefore, it is indubitable that its repayment is subject to compliance with the legal requirements for the distribution of distributable profits.

Asymmetric contributions and tax treatment

We have already seen that this type of contribution is made by the shareholders without there being any enforceability in their repayment. Notwithstanding the above, it is possible that in a company made up of several partners, one partner may make a contribution of this kind and the other partners may not contribute any amount or any asset, or even that in a plurality of partners some partners may contribute more than others.

In accordance with the above, asymmetrical contributions would be perfectly possible, although the tax treatment of the contribution (from the company’s perspective) would be different, in that, while proportional contributions between partners, or the contribution of the sole partner are not tax relevant, asymmetrical contributions mean that the amount contributed with “the asymmetry described” is considered as income for corporate income tax purposes. The reason is simple, those partners who do not participate in the contribution are favoured by this contribution, as we would be adding a reasonable value to the company’s own valuation, without the position of the non-contributing partners in the company being diluted.