Funding a Polish subsidiary: additional contributions or a loan?

Your Polish subsidiary needs money - for a project, a weak year, or because the group is moving cash around. Your Polish adviser suggests additional contributions (dopłaty). For most foreign groups the tool has no counterpart at home (German readers will know its cousin, the GmbH’s Nachschuss), and the first question from head office is usually: is this capital, or is this a loan? The honest answer is neither, and that is the whole point.

What additional contributions actually are

Additional contributions are a form of shareholder funding that sits between a capital increase and a loan. The money goes into the company’s equity - shown as a separate item, the reserve capital from shareholders’ additional contributions - not into share capital, and not onto the balance sheet as debt.

In plain terms: the shareholders put money in, it strengthens the company’s equity, but it is not a sum the company owes back on a fixed date, and it does not increase anyone’s shareholding. The company can use the money for anything in its interest - covering a loss or financing operations.

For precision: the obligation to make additional contributions is a cash obligation, and the money paid in is not the company’s debt - until the shareholders resolve to repay it, they are not the company’s creditors.

Additional contributions, a shareholder loan or a capital increase?

Three tools, one goal - getting shareholder money into the company.

In my experience, foreign groups rarely use additional contributions. In a wholly-owned structure a shareholder loan usually does the same job with less friction. It is a universal instrument: the parent can grant it from its own jurisdiction with no clause in the Polish articles - at most an internal Art. 230 KSH approval, which the articles can switch off. And a loan from a shareholder to its Polish capital company is exempt from the tax on civil-law transactions (podatek od czynności cywilnoprawnych, ‘PCC’; Art. 9(10)(i) of the PCC Act), while additional contributions bear PCC at 0.5% of their amount, payable by the company, every time they are called in.

For precision: I am an advocate, not a tax adviser, and the tax points in this article are signposts. The exemption covers a loan from the shareholder; a loan from a sister company may fall outside PCC altogether or bear 0.5% (the intra-group loans article explains). Confirm your position with your Polish tax adviser.

So when are additional contributions the right tool?

When you want the money to sit on the balance sheet as equity rather than debt. Some groups want, or need, that amount on the balance sheet, and that is when they use them. It happens - just not often.

The second case is easy to miss in a group used to total control. Where a Polish company has several shareholders, one of them may not want to carry the funding alone by lending to the company on its own. A clause on additional contributions lets the company raise the money from every shareholder at once, in proportion to their shares - the reluctant one included. A loan cannot do that.

How to put additional contributions in place

Two steps, and the order matters.

First, the articles of association must provide for additional contributions, with a limit stated in figures for each share (Art. 177 § 1 KSH). If the articles are silent, you amend them - and because the amendment increases the shareholders’ obligations, every affected shareholder has to agree (Art. 246 § 3 KSH). In a wholly-owned subsidiary that is a formality; the amendment needs a notarial deed and takes effect on registration, which takes about two to four weeks.

Second, with the clause registered, the shareholders call the contributions in by resolution, fixing the amount and the payment date. The resolution must apply to all shareholders equally, in proportion to their shares, and the decision cannot be delegated to the management board.

What if a shareholder does not pay?

Once the shareholders have called in a contribution, each of them owes their part. A shareholder who pays late owes statutory default interest, and can be made to cover any loss the delay causes the company (Art. 178 § 2 KSH).

The articles can change that rule and make it bite harder - for instance by setting default interest at the statutory maximum, twice the statutory rate. What they cannot sensibly add is a contractual penalty per day of delay: Polish law allows one only for non-monetary obligations (Art. 483 § 1 of the Civil Code), and most commentators reject it here.

The sharper tool is compulsory redemption: the articles can provide that the shares of a shareholder who does not pay may be redeemed without their consent (Art. 199 KSH). If the redemption covers all of that shareholder’s shares, they leave the company altogether - though they are still paid for them, at least the net-asset value shown in the last financial statements. The clause has to be in the articles before the dispute starts.

Getting the money back is the part groups underestimate

This is where clients are caught out. Additional contributions are not repaid on demand. Under the default rules, the shareholders resolve to repay them (Art. 228(5) KSH); the management board announces the intended repayment in the Court and Commercial Gazette (Monitor Sądowy i Gospodarczy, ‘MSiG’); and the money can leave only one month after that announcement (Art. 179 § 2 KSH).

On top of the wait sits a hard limit: nothing may be paid out to shareholders from assets needed to cover the share capital in full (Art. 189 § 2 KSH). That is the creditor-protection floor - in plain terms, you cannot use a repayment to drain a company that is already underwater. A shareholder who receives money in breach of it must return it, and the management board members responsible for the payment are jointly liable for the return (Art. 198 § 1 KSH).

The repayment rules are a default, not a straitjacket. The articles can set their own - drop the announcement, shorten the wait, or allow repayment in a loss year. In my experience, clients who discover the procedure usually choose to switch the announcement off in the articles rather than wait it out. Two things stay whatever the articles say: a repayment still needs a shareholders’ resolution, and it can never reach into the assets that cover the share capital.

Converting additional contributions into share capital

Once additional contributions are on the balance sheet - often after the company has spent the cash - groups frequently do not want them left hanging there as a reserve, and convert them into share capital instead.

The route I use runs through repayment. At one meeting the shareholders resolve to repay the additional contributions and to increase the share capital, by notarial amendment of the articles. The shareholder then takes up the new shares and pays for them by setting its repayment claim off against the payment due on those shares - by agreement with the company, which the Code allows although a one-sided set-off is barred (Art. 14 § 4 KSH). No cash moves; the increase takes effect on registration in the KRS.

For precision: moving the reserve straight into share capital is doubtful, because the Code allows an increase from the company’s own funds only out of reserves created from profit (Art. 260 § 1 KSH), and additional contributions are not profit. The repayment route, in turn, carries the repayment rules with it: it is closed where the contributions are needed to cover a loss shown in the financial statements, unless the articles say otherwise, and, if the articles still require the announcement, the cautious course is to announce and let the month run before the set-off. Some commentators consider the wait unnecessary when no cash leaves.

On tax, the statute exempts from PCC a capital increase covered with additional contributions that were never returned and were already taxed (Art. 9(11)(b) of the PCC Act), so the same money should not be taxed twice. Confirm with your tax adviser how that applies to a set-off on your facts.

What this means for you

If the group just needs to move money into the Polish company and back out again with the least friction, a shareholder loan is usually the cleaner tool - and as long as it is repaid rather than converted into equity, it carries no PCC. Convert it later and the 0.5% arrives then, on the amount added to share capital. Reach for additional contributions when you want equity on the balance sheet, or need every shareholder to pay in.

Whichever you choose, decide the exit before the money goes in: with additional contributions, the moment to fix the articles is at the start - not when you want the cash back.

Watch out

• Money wired in without a clause in the articles is not an additional contribution. At best it is a loan; at worst a payment with no legal basis (świadczenie nienależne) the company may have to return. If you want additional contributions, fix the articles first.
• Additional contributions always bear PCC; a loan from a shareholder does not. A loan from a sister company is a different case - check it separately.
• Repayment is gated - a resolution, under the default rules a one-month announcement, and the share-capital floor. Money paid out below the floor has to come back, and the board members who approved it are jointly liable.
• You cannot single out one shareholder. Additional contributions fall on all of them, in proportion to their shares - relevant wherever there is a minority or a joint-venture partner.

Next steps

1. Decide the real goal: temporary cash, or funds that should sit on the balance sheet as equity?
2. Check the articles - do they already allow additional contributions, and up to what limit per share?
3. If not, amend them and wait for the KRS registration - about two to four weeks.
4. Settle the exit now: live with the default repayment rules, or rewrite them in the articles.
5. Clear the tax treatment - PCC on the contributions, and on any later conversion into share capital - with your Polish tax adviser.