Often companies have financial difficulties or need financing for investments or business projects. In order to cover such financial requirements, one option is to look to the company partners.
There are several different options available for company funding by its partners, which we sort from lower to higher enforceability, depending on whether such financing entails an increase in the company’s own funds or its due liabilities:
- Partner contribution by means of a capital increase.
- Partner contribution without a capital increase.
- Partner’s loan
1) Contribution to equity by means of a capital increase (with or without a premium).
The contribution of partners to company equity by means of a capital increase, as the name implies, means that the contribution is integrated into the company’s share capital. This is the option with more formal requirements to be met, given that the capital increase must be agreed by the general meeting and be recorded as minutes in accordance with the criteria established for the modification of the articles of association (article 296 of the Spanish Capital Companies Act), and in turn recorded in a public deed and duly registered at the Commercial Registry, upon prior filing of the Self-assessment Form 600 to the Tax Agency of the corresponding Autonomous Community, bearing in mind the corresponding notary and registration costs involved.
From a tax perspective, the capital increase of a company is a corporate operation subject to the Stamp Duty and Tax on the Documentation of Legal Acts pursuant to article 19.1.1º thereof and exempt from the category of Corporate Operations in accordance with article 45.B).11 of the same legal text.
2) Partner contribution without a capital increase.
When the partner contribution does not involve a capital increase, said contribution is paid into the net worth of the company, and therefore it is not considered as a liability neither does it generate a credit right to the partners. It is a hybrid made up of capital and liabilities which is non-returnable. For its return to occur, in the absence of specific commercial regulation, it is usually treated as an available reserve, with the same limitations as set forth for the dividend distribution.
The partner contribution to equity does not require agreement from the general meeting, except under certain circumstances, although it is advisable to place on record that it is carried out in order to offset losses or to increase equity. Likewise, it is not necessary for it to be recorded in a public deed or registered at the Commercial Registry, thus no registry or notary public costs are involved.
From a tax perspective, the partner contribution to equity is a corporate operation subject to the Stamp Duty and Tax on the Documentation of Legal Acts pursuant to article 19.1.2º thereof and exempt from the category of Corporate Operations in accordance with article 45.B).11 of the same legal text.
3) Partners’ loan
Another alternative for financing business activities is a loan granted to the company by the partner’s, which, unlike an ordinary loan, is integrated into the net worth of the company, instead of into due liability.
The definition of a partner’s loan can be found in article 20 of Royal Decree-Law 7/1996 of 7th June, on urgent measures of a fiscal nature and on the promotion and liberalisation of economic activity, in the following terms:
“Article 20 partner’s loan
One. Loans with the following characteristics shall be considered as partner’s loans:
a) The lending entity shall receive interest at a variable rate which shall be determined depending upon the how the business activity of the borrowing company develops. The criteria for determining said development could be: net profit, turnover, total net worth or any other freely agreed by the contracting parties. Furthermore, a fixed interest rate may also be agreed regardless of the development of the activity.
b) The contracting parties may agree a penalty clause in the event of early repayment of the loan. In any case, the borrower may only repay the partner’s loan in advance if said amortisation is compensated with an increase in equity of the same amount and only provided that this is not derived from the restatement of assets.
c) The partner’s loan shall be placed after common creditors in the order of priority claims.
d) The partner’s loan shall be considered as net worth for the purposes of a capital decrease and the winding up of companies, as set forth in commercial legislation.”
We may deduce the following from said article:
a) The partner’s loan allows the borrowing company to pay a variable interest rate, depending upon the development of its activity and without prejudice to reaching an agreement regarding a fixed interest rate.
b) Like any other type of loan, the partner’s loan must provide a condition for returning the loan within a set term, as set forth in article 1740 of the Civil Code. The early repayment, although possible, is not open, and must be carried out against a capital increase for an equal amount. This limitation is established for the protection of creditors in maintaining the same amount of equity.
c) The partner’s loan generates a subordinated credit to the lender, who in turn will recover the loan once the ordinary creditors have been satisfied in insolvency proceedings.
d) For the purposes of undercapitalisation, the partner’s loan counts as net worth.
As far as the formalities required for a partner’s loan are concerned, it is a matter of a commercial contract which does not need to be recorded in a public deed or registered at the commercial registry, and therefore does not involve registry or notary public costs.
Carla Villavicencio
Vilá Abogados
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14th September 2018
