The definition of equity contributions
The equity of a company represents the total of its shareholders' equity, primarily composed of share capital, share premiums, reserves (legal, statutory, or discretionary), retained earnings, and net income. This constitutes a stable source of financing, as these funds are provided or retained by shareholders to sustainably support the company’s activities. From an accounting perspective, equity reflects the difference between the company's assets and debts, thereby showcasing its solvency and acting as a last resort guarantee for creditors regarding the company’s ability to meet its obligations. Moreover, the level of equity can influence corporate governance, the distribution of decision-making power, and the applicable tax framework (e.g., dividends, corporate tax). An equity contribution involves shareholders injecting additional funds directly into the company, either in cash or in kind. In Luxembourg accounting, such contributions can sometimes be recorded under account 115. This type of contribution strengthens the company's financial resources on a long-term basis without diluting the existing shareholders' stakes.
Equity contributions via account 115: Definition and legal framework
Equity contributions recorded under account 115 in Luxembourg are governed by local law and can encompass various forms, such as in-kind or cash contributions. These contributions are simpler to implement compared to a capital increase but raise questions regarding their accounting nature and tax implications. They differ from capital increases, which are decided during general meetings and often require notarized amendments to the articles of association, except in some cases (e.g., SARL-S or SCI).
Advantages of equity contributions via account 115
Contributions recorded under account 115 increase a company's equity without altering its shareholding structure. As these contributions do not involve issuing new shares, they typically represent additional funds provided by existing shareholders. When considered a non-remunerated contribution, they can be recorded in account 115, provided they are intended to be permanent.
This type of contribution offers several benefits:
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Strengthening equity without issuing shares;
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Avoiding the dilution of existing shareholders’ stakes;
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Providing additional funds for specific projects or supporting business expansion.
Capital increases
A capital increase represents a robust alternative to an account 115 contribution. This often involves injecting funds or assets into the company to bolster its financial resources. It can also be achieved by converting debts, reserves, or retained earnings into capital, providing an interesting alternative to equity contributions. In all cases, it is considered a statutory amendment and must typically be formalized through a notarized deed (except for SARL-S and SCI).
Capital increases also often include a share premium, which represents an additional amount shareholders must pay beyond the nominal value of the shares to acquire associated rights. This premium is determined based on the real or estimated value of the company, exceeding the nominal value of the shares. It differs from preemptive subscription rights, which allow existing shareholders to maintain their proportional stake in the share capital by subscribing to new shares in priority.
Limitations of account 115 contributions
From a tax perspective, account 115 contributions cannot be equated with share capital, even though they are considered equity from an accounting standpoint. A March 2022 ruling by the Luxembourg Administrative Court confirmed that such contributions do not count toward the acquisition price of a participation, a key condition for certain tax exemptions under Articles 147 and 149 of the Luxembourg Income Tax Law (LITL).
Tax implications of non-remunerated equity contributions
Using account 115 for equity contributions presents certain limitations:
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Non-recognition as share capital participation: Such contributions are not factored into the calculation of the minimum participation threshold required for certain tax exemptions (e.g., parent-subsidiary regime).
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No impact on acquisition price: These contributions cannot be included in the acquisition cost of shares, limiting potential tax benefits during resale.
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Flexibility with risks: Although they strengthen equity, these contributions may be perceived as less secure from a tax perspective, especially in cases of disputes.
Accounting limitations of account 115 contributions
While contributions recorded under account 115 comply with the principles of transparency and fair representation, they do not guarantee permanence. Furthermore, the possibility of remunerating them with interest raises doubts about their classification as “equity.” The primary purpose of such contributions is to increase the equity of the recipient company. This implies that the contribution is made on a permanent basis, prohibiting any withdrawal or reduction of this capital. Additionally, any withdrawal or reduction of these contributions by the managing shareholder could result in liability and, for certain regulated professions prohibiting negative equity, sanctions such as the revocation of the manager’s accreditation.
