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26 September 2022 New Corporate Law: Simplified rules on reserves (no. 12)

The new company law, which comes into force on 1 January 2023, brings many changes. In our current blog series, we present these in detail.

The new company law simplifies the regulations on reserves and adapts them to international practices. The revised law now makes a clear distinction between capital reserves and retained earnings, as their origin is different.

Statutory capital reserves are funds contributed by the company's equity investors and thus do not originate from the company's entrepreneurial activity. In contrast, retained earnings are reserves that are formed from retained profits of the company. The revised law further divides the retained earnings into statutory and voluntary retained earnings.

What is attributed to the statutory capital reserve?

To the capital reserve are allocated the proceeds obtained from the issue of shares in excess of the nominal value and the issue costs (so-called premium or "agio"). Further contributions and subsidies paid on shares and participation certificates of the company are then allocated to the capital reserve.

If a shareholder does not (fully) meet his payment obligations based on the share subscription, the board of directors may declare the defaulting shareholder to have forfeited his shares and issue new shares (so-called "caducation"). Provided that these newly issued shares do not result in a reduction in proceeds, any profit is allocated to the capital reserves.

How may the statutory capital reserve be used?

Any part of the statutory capital reserve which, together with the statutory retained earnings, less any losses, exceeds half of the registered share capital may be repaid to the shareholders. If the company has issued participation certificates, the participation capital must be added to the statutory capital reserve.

What are the new rules on the statutory retained earnings?

Five per cent of the annual profit must be allocated to the statutory retained earnings. The statutory retained earnings must be accumulated until they have reached, together with the statutory capital reserve, the amount of 50% of the registered share capital. Any participation capital must also be included in the calculation of the statutory retained earnings.

What rules apply to holding companies?

Under the current law, holding companies, i.e. companies whose main purpose is to hold shares in other companies, already enjoy relief. Under the new company law, holding companies must accumulate statutory retained earnings until they reach, together with the statutory capital reserves, 20% of the registered share capital.

What has to be considered when acquiring own shares in a group of companies?

If a group company acquires shares from the controlling company, the latter must separately show in the balance sheet an amount corresponding to the acquisition value of these shares as statutory retained earnings. This statutory retained earnings may not be taken into account in the calculation of the thresholds mentioned above (50% or 20% of the registered share capital). 

What restrictions apply to voluntary retained earnings?

The general meeting may provide for the creation of voluntary retained earnings in the articles of association or by resolution. However, there are restrictions on the formation of additional reserves. According to the revised law, voluntary retained earnings may only be formed if the long-term prosperity of the company justifies this, taking into account the interests of all shareholders. For example, the formation of reserves is not permitted if they serve non-business purposes or the discrimination of minority shareholders.

Under the current law, voluntary retained earnings can be formed for replacement purposes which is no longer permitted under the new law. However, according to the general accounting rules, additional depreciation and value adjustments may be made for replacement purposes. The creation of reserves for charitable purposes is abolished under the new law, as they have lost much of their importance.

How are losses to be offset?  

The new company law aims to provide clarity on the order in which annual losses must be offset. For example, it should be avoided that the opening balance sheet of the new business year shows an annual loss and a profit carried forward at the same time.

Annual losses are to be offset as follows:

  • Firstly, with the profit carried forward;
  • secondly, with the voluntary retained earnings;
  • thirdly, with the statutory retained earnings; and
  • lastly with the statutory capital reserve.

Instead of offsetting against the statutory retained earnings or statutory capital reserve, remaining losses may also be carried forward in part or in full to the new annual financial statements.

Your VISCHER team will be happy to answer any questions you may have.

Other articles in the series:

Authors: Lukas Züst, Thomas Steiner-Krizaj, Peter Kühn