How to approach contributions made by shareholders to the 118 account of the Spanish General Accounting Plan

Account 118 of the Spanish General Accounting Plan called "contributions from shareholders or owners" (aportaciones de socios o propietarios) was introduced upon the entry into force of the 2007 Spanish General Accounting Plan (Royal Decree 1514/2007) to record a specific type of contributions made by shareholders to the company's equity.

This mechanism has become well established in practice as a simple, streamlined and cost-effective alternative for strengthening a company's net equity, avoiding the notarial and registration costs inherent in capital increases and the tax implications associated with loans and donations.

Accounting regulations and uses

Contributions to account 118 of the Spanish General Accounting Plan are a non-statutory mechanism that is not regulated under corporate law. Their regulation is purely accounting in accordance with the Spanish General Accounting Plan and article 9 of the Resolution of the Spanish Institute of Accounting and Auditing dated 5 March 2019. 

For accounting purposes, these contributions are included in group 1 "basic financing" (financiación básica), subgroup 11 "reserves and other equity instruments" (reservas y otros instrumentos de patrimonio) of the Spanish General Accounting Plan and are recorded on the balance sheet within equity (shareholders' funds), under heading A-1.VI "other shareholders' contributions" (otras aportaciones de socios). 

Furthermore, for accounting purposes they are distinct from debt instruments classified as liabilities and from income, and they are taken into account when determining whether a company with accumulated losses is in a statutory ground for dissolution or must mandatorily reduce its share capital. These contributions are, therefore, very useful to rebalance the company's equity, although the current Spanish General Accounting Plan does not limit their use to this purpose and allows them to be made for other purposes (for example, improving the company's liquidity or financing a business project). 

Nature of the contributions and absence of consideration

Shareholders can make in-cash contributions or in-kind contributions of assets and rights, provided that they can be economically valued, without receiving any shares or any consideration in exchange. 

Proportionality rule

Only the shareholders can make this type of contributions and in proportion to their stake in the company's share capital. Any excess over that proportion should be accounted for according to its true economic nature (in practice, as a donation), thereby forfeiting the favourable tax treatment that characterises these contributions.

Definitive nature and distribution regime

This is a definitive, non-refundable contribution, that is to say, it does not generate any payment obligation by the company or any credit right for the contributing shareholder. 

However, if approved by a general shareholders' meeting, the amount of these contributions may subsequently be distributed from the company's available reserves, provided that the applicable corporate provisions are complied with. It should be noted that the right to such distribution corresponds to all the shareholders, regardless of whether or not they made the original contributions.

A simple and streamlined process

No public deed or registration is required, making it a streamlined process without notary and registration costs. It is sufficient to formalise their approval by means of a resolution of the general shareholders' meeting, in line with the doctrine of the Supreme Court, which establishes that, in order for them not to be considered loans, the company must "prove that the shareholders' contributions were made to the company's equity, that is to compensate for losses or, in general, as non-refundable contributions" (Supreme Court resolution (Civil Chamber) number 696/2016, dated 24 November).

However, when the contributions consist of assets or rights, the formalities inherent to the transfer of each type of asset must be complied with. Thus, for example, any contribution of shares will require a public deed while any contribution of real estate will require a public deed and its subsequent registration with the Land Registry.

Osborne Clarke comment

Contributions to account 118 of the Spanish General Accounting Plan are an efficient and cost-effective tool that enables companies to remedy equity deficiencies that may trigger statutory dissolution or strengthen their financial structure for other purposes, without incurring the costs and complexity associated with other financing alternatives. 

To ensure legal certainty and proper accounting treatment of these contributions, it is advisable that they are made in proportion to each shareholder's stake in the share capital and formalised by a resolution of the general shareholders' meeting evidencing that the contributions are made to equity and do not give rise to any credit right for the contributing shareholder.