Increasing and Reducing an LLC's Charter Capital: Procedure and Taxes

When the charter capital can be increased

An increase is allowed only once the charter capital has been paid in full (Law ZRU-1137, Article 17). Each participant must make their full contribution within the term set in the founding documents, but no later than one year after state registration of the company (Article 15).

The decision is taken by the general meeting by a majority of at least two thirds of all participants' votes, unless the charter requires more (Article 17). Sources: the company's property, including retained earnings; additional contributions by participants; and contributions by third parties admitted to the company, unless the charter prohibits this.

Route 1. From the company's property and retained earnings

• The decision may be taken only on the basis of financial statements for the year preceding the decision, confirmed by an external audit opinion (Article 18). Without audited statements this route is not available.
• The increase may not exceed the difference between net assets and the sum of the charter capital and the reserve fund (Article 18).
• All participants' percentage shares stay the same; the nominal value of each share rises proportionally (Article 18).
• Tax: for Tax Code purposes, an increase in the nominal value of a share out of the company's own equity is a dividend to the participant (Article 41, part 1, item 4), provided it is pro rata to shareholdings. For a resident individual participant, the PIT rate on dividends is 5% (Article 381).

Route 2. Additional contributions from participants and contributions from third parties

Where all participants contribute, the meeting's resolution must set the total value of additional contributions, each participant's amount and the deadline for paying them (Article 19). Where the increase is based on an application from an individual participant or a third party, the meeting decides unanimously; the application states the procedure, amount, method and deadline for the contribution and the share sought.

A participant's nominal share may not increase by more than the value of their additional contribution, and a third party's nominal share may not exceed the value of its contribution (Article 19).

• No later than one month after the contribution deadline, the meeting approves the results, increases the charter capital and amends the founding documents (Article 19).
• Registration documents and evidence that contributions were paid in full go to the registration authority no later than one month after the meeting approves the amendments; for participants and third parties the amendments take effect on registration (Article 19).
• If deadlines are missed or contributions are not paid in full, the increase is deemed not to have taken place and cash contributions must be returned within ten days (Article 19); late repayment carries interest. Non-cash contributions are returned within three months.
• Non-cash contributions worth more than ten thousand BCV are valued by an appraiser and may not exceed that valuation (Article 15); the monetary value of a non-cash contribution is approved unanimously by the meeting (Article 16).

When the charter capital must be reduced

• If the charter capital is not fully paid within one year of registration, the company must announce a reduction to the amount actually paid and register it, or resolve to liquidate (Article 20).
• If at the end of the second or any later financial year net assets are below the charter capital, the company must reduce it to an amount not exceeding net assets (Article 20).
• A reduction by lowering the nominal value of all participants' shares keeps their percentage shares unchanged (Article 20).
• Within thirty days of learning of the reduction, creditors may demand in writing early performance of obligations and compensation for losses (Article 20).
• If, in the mandatory cases, the company does not resolve within three months to reduce capital or liquidate, creditors may demand early performance and the registration authority may apply to court for liquidation (Article 20).

Taxes for the company

• Funds received as a contribution to charter capital are not taxable income of the company (Tax Code, Article 304, item 1), nor is any premium of the placement price over nominal value (Article 304, item 2).
• Where, on a reduction, a participant waives payment for their share in favour of the company, the company has taxable income (Article 297, item 22).
• Transferring goods as a charter capital contribution is a supply for VAT purposes (Article 239). The receiving company may offset the VAT paid by the participant on the transfer (Article 266), which matters when equipment or real estate is contributed.
• The initial cost of a depreciable asset received as a contribution is the monetary value agreed by participants, but not above market value (Article 306).

Taxes for participants

An increase in nominal share value out of the company's equity is a dividend (Article 41, part 1, item 4), taxed at 5% for a resident individual (Article 381) and 10% for a non-resident (Article 382). Only pro-rata payments are treated as such income.

Amounts a participant receives within the limit of their contribution on exit or on a reduction of their share are not income (Article 304, item 3). Paying a departing participant the actual value of their share above its charter capital amount is treated as a dividend (Article 41, part 1, item 3).

The procedure in brief

• Check that the current charter capital is fully paid and choose the source of the increase.
• For an increase from retained earnings, prepare audited statements for last year and calculate the ceiling (net assets minus charter capital and reserve fund).
• Hold the general meeting: a 2/3 vote, or unanimity for increases based on applications from individual participants or third parties.
• Collect contributions on time, approve the results within one month, and file for registration within one month of approval.
• Record the transactions and assess taxes: dividends to participants, VAT on non-cash contributions.