Income tax on reduction of the authorized capital

The owners of the company may decide to reduce the authorized capital to pay themselves the difference. Sometimes they are obliged to reduce the authorized capital. The Ministry of Finance clarified whether the amount of the authorized capital will be taxed if it remains at the disposal of the company.

The authorized capital of a non-public joint-stock company and a limited liability company must be at least 10,000 rubles, the authorized capital of a public joint-stock company is at least 100,000 rubles.

The authorized capital represents the nominal value of the shares distributed among the company’s participants. The authorized capital cannot be less than the net asset value. Net assets are the size that cannot be crossed by increasing debt obligations in order not to go bankrupt. Any changes in the size of the authorized capital require registration.

If the company repays all debt obligations, it must have a certain amount of funds at its disposal that has no connection with any obligations. These will be net assets. The amount of net assets is the difference between the assets and liabilities of the balance sheet.

The size of net assets is necessary when determining: the size of the authorized capital or the estimated share price.

Voluntary reduction of the authorized capital

In case of voluntary reduction, the owners of the company can pay themselves the difference between the previous and the new value of the share, or they may not pay it. Thus, the company will receive or not receive income.

In the case when the difference has been paid, the company has no income, since there is no economic benefit. There is income when the company does not pay the owners the difference between the former and the new value of their shares and these amounts remain at its disposal.

Reduction of the authorized capital by law

If the value of the company’s net assets at the end of the financial year is less than the authorized capital, the company must make one of the decisions: either reduce the amount of the authorized capital, or liquidate the company.

Taxable or non-taxable income

Basically, the reduction of the authorized capital occurs by reducing the nominal value of the participants’ shares without changing the size of the shares and their ratio.

The amount by which the authorized capital was reduced is paid into the company’s non-operating income if the participants refused to pay them these deposits.

The amount of reduction of the authorized capital remaining at the disposal of the company will not be subject to income tax if the company reduces the authorized capital to the value of net assets.