How to distribute back to shareholder corporate funds from in-kind contribution?

[pastet89]

I was told in-kind contributions do not generate profit, and therefore these funds can't be distributed back to the shareholder as dividends. Because only profits can be distributed as dividends.

In this case, in what other form can these funds be distributed back to the shareholder?

 

[Don]

Capital payouts can be in the form of money, or other assets, depending on the bylaws of the company.

 

[pastet89]

Capital payouts can be in the form of money, or other assets, depending on the bylaws of the company.

Thanks but I am not sure I understand what you mean.

 

[Don]

Thanks but I am not sure I understand what you mean.

An in-kind contribution will be recorded as assets and equity capital (e.g., reserves or share capital).
Shareholders can decide that the company is over-capitalized and reduce the capital, resulting in money paid back to the shareholders. In such case, it's not regarded as profit distribution since you're paying back the initially contributed amount.

 

[pastet89]

An in-kind contribution will be recorded as assets and equity capital (e.g., reserves or share capital).
Shareholders can decide that the company is over-capitalized and reduce the capital, resulting in money paid back to the shareholders. In such case, it's not regarded as profit distribution since you're paying back the initially contributed amount.

OK, but how is this officially called... "capital payback", "capital payout"? How is it taxable and does it have anything to do with shares selling?

The problem is: I have unrealized profit, which, if I deposit to the company as an in-kind contribution, that will not be taxable. But I was expecting later to distribute it as dividend which would be fine tax-wise. But if I need to sell the increased shares, that would be taxable on a higher rate.

 

[Don]

OK, but how is this officially called... "capital payback", "capital payout"? How is it taxable and does it have anything to do with shares selling?

The problem is: I have unrealized profit, which, if I deposit to the company as an in-kind contribution, that will not be taxable. But I was expecting later to distribute it as dividend which would be fine tax-wise. But if I need to sell the increased shares, that would be taxable on a higher rate.

Normally you would need to prepare valuation acts and declare such payments with tax authorities to get exemption from taxation later on (up to the extent of the contribution).

Officially it can be called capital reduction as an example :

Capital Reduction: Definition, How It Works, and Example

Capital reduction is the process of decreasing a company's shareholder equity through share cancellations and share repurchases.

www.investopedia.com

 

[CyprusBusiness]

Please allow me to clarify. The Deed of contribution is a common law equitable instrument with which no formal issuance of shares is made. It is consodered non-reimbursable and non-refundable and can only be used for future share issuance.

Dividends can only be declared out of distributable reserves (capital contribution reserve is not distributable).

As such, the only options for redemptio are:

(1) share increase and subsequent reduction of capital (usually this requires a court order at least in Cyprus)

(2) Upon liquidation of the company

For more flexibility usually in corporate structuring scenarios we recommend other instruments such as convertible loans, redeemable preference shares with dividend right and redemption rights at the Boards discretion.

PM me if you need any assistance

 

[Don]

Please allow me to clarify. The Deed of contribution is a common law equitable instrument with which no formal issuance of shares is made. It is consodered non-reimbursable and non-refundable and can only be used for future share issuance.

Dividends can only be declared out of distributable reserves (capital contribution reserve is not distributable).

As such, the only options for redemptio are:

(1) share increase and subsequent reduction of capital (usually this requires a court order at least in Cyprus)

(2) Upon liquidation of the company

For more flexibility usually in corporate structuring scenarios we recommend other instruments such as convertible loans, redeemable preference shares with dividend right and redemption rights at the Boards discretion.

PM me if you need any assistance

The way it works might be different depending on the jurisdiction, so it would be helpful if OP provided more information about the country (the above refers to Cyprus only).