Tax treatment of non-capital contributions in private companies
Tax treatment of non-capital contributions in private companies
One wonders if non-capital contributions from a natural person as a member of a Private Company could be considered by the tax administration as an ”income” and therefore be taxed accordingly.
Non-capital contributions to a Private Company are provided for in Article 78 of Law 4072/2012. Due to the fact that such contributions cannot be matter to a capital contribution, they shall be specified in the statute and shall be made for a definite or indefinite period. Their value is not assessed on the basis of Articles 9-9a of Law 2190/1920; by contrast it is determined by the partners in the statute.
The accounting of such contributions according to Nos. 1790/2015 and 2861/2016 opinions of the Accounting Standardisation Council (SAC) of the Accounting Standardisation & Audit of legal bodies under public law Committee provides an indication. According to these opinions, non-capital contributions cannot be reliably measured and therefore cannot be recognized in substance accounts (debit assets and capital credit). Moreover, non-capital contributions may not be considered as capital; otherwise, i.e. if these accounting rules allowed the capitalization of work, one could argue and define work in huge amounts of capital forming a capital without any value given in return.
It reliably follows that in the context of the difficulty to value non-capital contribution, sound basis is provided for the taxation of this contribution as an income. In addition, there are no specific arrangements even for an implied evaluation of it.
The implementation of the non-capital partner’s obligations does not affect his contribution. Furthermore, he retains his rights stemming from his share. This thought suggests the conclusion (due to the absence of any other special provision in the law) that the complete implementation of the obligation undertaken by the partner as a non-capital contribution leads to complete payment of the liability/contribution and does not affect shares that remain the same in number and kind as (no longer unpaid) non-capital contribution shares, assessed, in principle, by the face value at the time of their issuance.
In addition, in case of full payment (not redemption under Article 82 of Law 4072/2012) of the non-capital contribution, capital increase does not take place and therefore, the fulfillment of the non-capital contribution can be treated neither as capital formation nor as capital transaction in order to be taxed accordingly.
Furthermore, the third paragraph of Article 78 of Law 4072/2012, lays down that where the non-capital contribution is not provided, the company may request the court either the fulfillment or the cancellation of shares corresponding to the contribution which was not paid. This implies that the shares of non-capital contributions are issued, having legal effects from the outset, but they are burdened with restrictions on their transfer (quasi resolutive condition) if the non-capital contribution has not been paid (Article 83).
In terms of tax law, in Articles 10 et seq. of Law 4172/2013 (Income Tax Code) personal income taxation is defined as the duty annually chargeable on the income earned by individuals. This income can derive from various sources: income arising from employment and pensions, from business activity, cadastral income, capital income.
Regarding taxation of income from employment and pensions (Article 12 et seq.), ministerial circular no. 1139/2015 states that there is no legal and tax distinction between work carried out by the partner as a contribution (in the context of the partnership agreement in accordance with Article 742 of the Greek Civil Code) and work carried out by the partner in the context of a contract of employment. Fees received by any partner in the first case are not deductible from the gross income of the company (ministerial circular no. 1113/2015), because “these fees are actually considered as an entitlement to a share in the profits“.
More interesting is the arrangement of the fourth paragraph of Articles 13, according to which, “the market value of the benefits in kind received by an employee or partner or shareholder of a legal person or legal entity in the form of stock option rights shall be determined by the time of exercising the option or transferring it, and whether the employment relationship continues to apply“. However, this arrangement is quite restrictive because it refers solely to the case of stock option. The administration authority has not issued any act defining if this arrangement is also implied in the case of partners who are not under an employment relationship with the company.
Furthermore, according to Article 35 of the Income Tax Code, “income from capital includes income obtained by an individual that arises during the tax year in cash or in kind in the form of dividends, interest, fees and income from real estate”.
However, the provisions of Articles 35 et seq. of the Income Tax Code do not apply where the ownership of intangible property is transferred, but only where the use or the right of use is provided. In the relevant ministerial circular no. 1042/2015, the issues of remuneration in cash are regulated and there is no provision for the assessment of remuneration in kind, although Article 35 includes remuneration in kind (which in a broad sense could include entitlement to a share).
Article 42 of the Income Tax Code provides for income tax arising from capital gains obtained on securities’ transfer. In the present case it is investigated whether the acquisition of non-capital contribution shares and the redemption of them pertain to the case of securities’ transfer and whether capital gains are established. Specific circulars etc. on this subject have not been issued. In principle, the concept of transfer is narrow. This is clearly evidenced in the clarification arrangement of this article, according to which contribution of securities to cover or increase share capital is also considered as transfer. Moreover, since the value of non-capital contribution is conventionally determined (without an objective determination system) it is doubtful whether the initial purchase price of the shares can be determined, and according to the law, in this case the initial value is presumed zero.
Following the above considerations, it is concluded that the non-capital contribution from the partner (individual) in a Private Company is not taxed as an income of any kind after its fulfillment. This conclusion is reached without excessive (even unacceptable) broad – proportionate interpretation of the relevant provisions. Furthermore, the arrangements of the Income Tax Code (Law 4172/2013) are subsequent to the Law concerning Private Companies. Thus, when the Legislator regulated the income tax from various sources, he had in mind the case of non-capital contributions of the partner of a Private Company. If he actually had as his goal the taxation of these contributions, he would have explicitly regulated it, but this did not occur.
 As referred to explanatory memorandum to this article “…benefits that cannot be matter to a capital contribution because by their nature they cannot be included in the balance sheet … they are contributions encountered in private companies…”.
 V. Antonopoulos, Private Company, 3rd Edition, Sakkoulas Publication, 2014, p. 152.
The liability of the members of the management board towards the company
1.The corporate organization of the Société Anonyme (SA) results in the conferral of the management of corporate affairs to an independent body, the Board of Directors (BoD). In order to offset the fact of transfer of management authority from shareholders to an independent body, which can be constituted by third parties, Law 2190/1920, as amended by Law 3604/2007, provides for the civil liability of the members of the Management Board against the company and the conditions under which the company may release its Management Board from it.
The liability of the members of the Management Board, from a legislative policy viewpoint, forms part of good corporate governance. This kind of liability, at the level of economic approach of the law, stems from the problem of the agency between the principal and the agent and of the trust of another’s property which arises on this agency. It is an internal liability, as it exists only towards the company and not towards shareholders or corporate creditors. The new law extends the liability to third persons, not to members of the Management Board, which have been granted powers by the latter.
Article 22a of Law 2190/1920, shows that the Management Board shall be liable to the company for any negligence in administrating corporate affairs, especially if the balance sheet contains omissions or false statements that conceal the real economic situation of the company. However the members of the Management Board are exempted if they prove that they paid the diligence of a prudent businessman, which is based on the status of each member and the tasks assigned. Members of the Management Board shall also not be liable for acts or omissions based on a lawful decision of the General Assembly or on a reasonable business decision, taken in good faith, based on sufficient information and only in the corporate interest.
Thus, damaging business choices do not create without any further act liability of the Management Board, provided that they relied on sufficient information and were made guided by the corporate interest, as this obviously would prevent the development of any business initiative.
That which plays a crucial role in the liability system of Law 2190/1920 plays paragraph 4 of Article 22a, according to which, the company may, by decision of the Management Board, waive its claims for compensation or to reconcile them after a period of 2 years from the genesis of the claim and only in those cases that the General Assembly consents and the minority representing one fifth of the capital represented at the Assembly does not have objections. The objective of this regulation is to prevent the company from an early renunciation or compromise before all the consequences of that act or omission in corporate business and property appear, and also give the company reasonable time to react.
As regards the exemption procedure, as defined in Article 35 of Law 2190/1920, after the adoption of the balance sheet the General Assembly shall decide by a special roll-call vote on the exemption of the Management Board and the Auditors from any liability, except in cases of Article 22a.
- As far as it concerns the extent of the exemption of the members of the Management Board, the formulation of those two articles leads us to the following conclusions:
As derived by the second subparagraph of Article 35 (1), the exemption of the Management Board concerns administration or management operations, except those specified in Article 22, i.e. omissions in the drafting of the balance sheet, false statements concealing the actual situation of the company, breach of obligations of drafting, publishing financial statements, non-disclosure of particular interests of the members of the Management Board and pursuit of their own interests.
Furthermore, the exemption provided for in Article 35 does not result in renunciation on behalf of the company as far as it concerns corporate actions arising, which can only exist towards the members of the Management Board rather towards the Management Board as a body.
Therefore, the possibility of exemption of the members of the Management Board from their liability is, for the most part, seriously constrained, since the renunciation of the company from claims is in any case possible only after two years after the arising of the claim. Furthermore, the formulation of the fourth paragraph claims that the liability of the members of the Management Board cannot be a priori excluded or reduced conventionally with specific statutory provision or decision of the General Assembly. This is not subject to the freedom of disposal of the shareholders, only on the basis of strictly delineated conditions.
Lastly, emphasis is laid on the fact that the exemption does not refer to claims of third parties (e.g. creditors of the SA) and individual shareholders towards the members of the Management Board, particularly claims for direct, personal damage from operations of the members of the Management Board, which are based on ordinary law rules (e.g. Article 914 of the Greek Civil Code for torts). This exemption does not entail criminal liability of the members of the Management Board.
III. Regarding the exemption procedure, the following is observed.
The General Assembly decides on the exemption by special roll-call vote, which must take place after the vote on the approval of the financial statements. That is to say that conducting a special vote is required for the exemption, because, compared with the approval of the balance sheet, the rules the granting of it are different. Consequently, it is not permitted to conduct simultaneous voting for both issues. The decision is taken with the ordinary quorum of shareholders representing 1/5 of the paid up share capital and an absolute majority (50% +1) of the votes represented thereat.
The decision is made solely on annual (regular) General Assembly and concerns the management of the financial year in question. As a consequence, the extraordinary General Assembly cannot grant an exemption.
Finally, there is “internal” unit between these two topics and hence these two decisions must relate to each other in terms of time on the ground that the exemption decision is based on the approval of the balance sheet and concerns the management of the financial year in question. Thus, the Management Board is obliged to introduce these two issues to be discussed as agenda items together without inserting any other subject between each other. Therefore, the relevant decisions should be taken at the same session of the General Assembly.
However, it is common ground that when the exemption decision is not taken at the same session during which the decision approving the annual financial statements is taken, penalties for the exemption decision, in principle, do not occur, unless the adoption of this decision took place in a separate meeting deliberately to circumvent the rules and other provisions of applicable law.
 M. D. Marinos, The Liability of the Management Board of the SA and exculpatory clauses by contract or statutory arrangement, ChrID 2012, p. 401.
 Ibid, p. 403-404.
 See also I. Markou, Société Anonyme Law, edited by Evangelos Perakis (Athens, Nomiki Vivliothiki, 2000), Vol. 4, The General Assembly, no. 35, p. 203.
 M. D. Marinos, The Liability of the Management Board of the SA and exculpatory clauses by contract or statutory arrangement, ChrID 2012, p. 407.
 I. Markou, Société Anonyme Law, edited by Evangelos Perakis (Athens, Nomiki Vivliothiki, 2000), Vol. 4, The General Assembly, no. 35, p. 207.