The contributions of partners to account 118 of the General Accounting Plan have, in recent years, become a widely used mechanism by companies – especially by closed companies or family companies – that require an injection of capital into their own funds to cover losses, adjust balance sheets, or handle certain investments in a short period of time. These contributions are, in essence, assets (of a monetary or non-monetary nature) delivered by partners on a “non-recoverable” basis, by virtue of transactions not described in other accounts, which do not constitute a consideration for the supply of goods or rendering of services performed by the company, and which are not liabilities. They are an interesting alternative to the classic contributions of partners (those which can be registered as part of share capital and have as a balancing entry the issuance of shares or membership interests, regulated in articles 58 and thereafter of the Spanish Companies Act) because of their simplicity and reduced cost, since they do not require the granting of a public deed, nor registration in the Commercial Registry.
The contributions of a partner are a part of the net assets, under equity, and are made without the right to a repayment. By not constituting a claim by a partner against the company, and given the scarce legislative development around this figure (it is only regulated in the General Accounting Plan), it is common that companies consider whether such contributions are eligible to be returned or refunded to partners, and if this is possible, what requirements must be followed for this. On this issue, one must refer to Judgement no. 249/2017, from October 17, 2017, issued by the Commercial Court of Palma de Mallorca, which establishes that, before the entry into force of the current General Accounting Plan, the use of Account 118 was only contemplated for the compensation of losses or with the aim of compensating for a “deficit”, but that this approach has been broadened and the assignment of the contributions of partners may now be different from what has gone before, as defined in the current General Accounting Plan (“Depending on how the contribution is used “).
According to Binding Consultation V1978-16, from 9 May 2016, of the Sub-Directorate General of Income Taxes of Legal Entities, the reimbursement of partner contributions corresponds to a partners’ abstract right to the distribution of reserves (arising from profits or partner contributions), agreed in the terms and with the requirements established for this in commercial regulation. Bearing this in mind, the distribution of reserves corresponding to partner contributions should receive the same treatment as provided for the distribution of share premium, this being of a similar nature. The distribution of a share premium, in turn, is subject to the same limits as the distribution of profits. In the same vein, the judgement cited above states that “it may be understood that the distribution of this account [no. 118] shall be similar to that of an available reserve and shall comply with the general rules and limitations provided for in the commercial field for the distribution of profits.” It does not appear, however, that the statutory limitations applicable to the distribution of profits might also be extended to the repayment of partner contributions. The limitations provided for in the commercial regulation (articles 273, 274 and 326 of the Spanish Companies Act) for the distribution of profits are as follows:
(i) The value of the net worth of a company, cannot be, nor come to be as a result of the distribution, less than the amount of the company capital.
(ii) If losses from previous years exist that cause the value of the company’s assets to be lower than the company capital, the profit must be used to offset these losses.
(iii) The legal reserve must have been endowed with an amount equal to ten per cent of the profits for the year, until the reserve reaches at least twenty per cent of the share capital.
(iv) A sufficient quantity to cover research and development costs contained in the assets of freely available reserves must exist.
A lack of profits or freely available reserves would not prevent the company from being able to reimburse the contributions, in our opinion. Nor would the fact that the company had not covered the legal reserve prevent the repayment of the contributions, since this must be met through the profits of the financial year, not through reserves (or through partner contributions). As long as the net worth is not less than the company capital as a result of the repayment, the transaction would not entail the risk of generating an equity imbalance and therefore could be carried out, subject to the adoption of the corresponding resolution in a General Meeting.
Joan Lluís Rubio
Vilá Abogados
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19th of April 2024
