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Slovak Republic: Contributing funds debate

Other capital funds as one of the components of a company´s equity in Slovak entities (Funds) are used primarily when there is a need to inject cash into a company in a very short time. A company's equity comprises: (i) share capital; (ii) capital funds (including the Funds); (iii) funds created from net profit; (iv) profit or loss from previous years; and, (v) after-tax profit or loss for the accounting period. The issue of contributions to Funds has long been a subject of intense legal discussion in Slovakia. The main discussion is focused on the issue of whether the Funds may represent cost free contributions and may be freely returned to the shareholder who provided them.

Funds are created from voluntary contributions made by the shareholders of a company. Contributions to the Funds can only be made by a company's shareholders, not by any third party. A contribution to the Funds has two main characteristics. It is cost-free (interest-free), and voluntary (at the discretion of the company and its shareholder).

Contributions made by shareholders to the Funds do not increase the company's share capital, but they do increase equity – the company's own resources.

Daniel FutejRadka Sláviková GeržováLenka Horváthová
Money deposited in the Funds can especially be used: (i) to cover a company's losses; (ii) for a company's investment purposes; and, (iii) for distribution to shareholders.

If the company suffers a loss and does not have its own resources to cover the loss, a shareholder may make a contribution to the Funds to cover such loss.

If a company is contemplating an investment which it cannot finance on its own, but the process of obtaining a bank loan seems too lengthy, a shareholder may decide to contribute his own money so the company can proceed with the investment. The shareholder will have in particular the following two options: (i) lending money to the company; or (2) making a cost-free contribution to the Funds. In a case such as this, most shareholders opt for the latter – a contribution to the Funds – as the simplest and quickest way to provide money to the company.

A company's articles of association may govern distribution of the Funds to its shareholders, meaning that they can be distributed to the shareholders on the basis of how much they contributed to the Funds. If a shareholder's contribution is used to secure the company's increase in its share capital, the company may later return the funds without any sort of additional value to that shareholder. After money from the Funds is distributed to the shareholders, the equity cannot be less than: (i) the share capital; (ii) the unpaid share capital; (iii) the legal reserve fund; and (iv) other funds, which according to law or the articles of association, cannot be paid out to shareholders.

Shareholders cannot be forced to contribute to the Funds and the company cannot be forced to return the contributions. It is solely up to the shareholder and the company to agree on whether a shareholder will contribute to the Funds and in what amount, and if the company will later return the contribution to the shareholder.

The prevailing legal opinion is that in the context of the Income Tax Act, a shareholder's contribution to the Funds and the later return of the contribution are tax-neutral transactions for both the shareholder and the company.

Daniel Futej, Radka Sláviková-Geržová, and Lenka Horváthová

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