The making of additional cash contributions by the sole owner of the capital or by the partners constitutes a specific form of temporary financing of the company. Its principal purpose is to overcome temporary financial difficulties. In practice, such contributions are frequently used to cover company losses, to secure working capital, or to realise investment intentions.
Additional Cash Contributions as a Specific Type of Loan
These contributions may be made only in compliance with the requirements laid down in Article 134 of the Commerce Act (ТЗ). Otherwise, for tax purposes, they will be treated as an ordinary cash loan. It is also important to note that, where a partner is excluded for failing to make an additional contribution, the case law shows that the decision of the General Meeting may be set aside by the court.
Additional Contributions Are Not Included in the Company's Capital
Additional cash contributions do not lead to a change in the company's capital. Nevertheless, they may be converted into capital at a later stage. Where the company is unable to repay the contributed funds to the partners or the sole owner, these funds are frequently used to increase the company's registered capital.
Decision of the General Meeting Concerning Additional Contributions
Under Article 134 of the ТЗ, in order to cover losses or in the event of a temporary need for funds, the partners may be required to make additional contributions for a fixed period. In an EOOD, this decision is taken by the sole owner of the capital.
Conditions for Lawfully Making Additional Contributions
For the contribution of additional funds to be carried out correctly, the following conditions must be met:
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Decision of the General Meeting – The decision under Article 134 of the ТЗ must be adopted by the General Meeting by a majority exceeding 3/4 of the capital. The articles of association may provide for an even higher majority. If a partner who was not present, or who voted "against", decides to leave the company, he has a period of one month in which to do so. Should he remain and fail to make the contribution within the fixed period, the remaining partners may exclude him.
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Losses incurred and a temporary need for funds – The genuine need for additional contributions must be clearly reasoned in the minutes of the General Meeting. Economic indicators justifying the need for financing must be presented, whether for covering losses or for investment in the commercial activity.
Tax Aspects of the Additional Contributions
According to the National Revenue Agency (НАП), Article 134 of the ТЗ contains two principal conditions which must be satisfied simultaneously:
- The existence of losses.
- A temporary need for funds to cover them.
From the standpoint of the Corporate Income Tax Act (ЗКПО), the tax authorities treat the provision of funds for investment or working capital as a loan, and therefore, for tax purposes, a market rate of interest must be determined.
Case Law
The Supreme Administrative Court (ВАС) holds that additional contributions must be substantiated by documentary evidence and that the company could not have covered its losses by alternative methods, such as reducing its capital or obtaining external financing. The accounting records must prove the genuine need for such contributions.
The Supreme Court of Cassation (ВКС), in cases concerning the exclusion of partners, has often held that the conditions for additional contributions are alternative. This means that they may be used both to cover accumulated losses and to secure working capital or investment funds.
Amount of the Contributions, and the Period for Payment and Repayment
Additional contributions are usually proportionate to the partners' shareholding. Nevertheless, the General Meeting may decide to set a different ratio.
The period for repaying the additional contributions is a key element of the decision under Article 134 of the ТЗ. It must be aligned with the genuine need for financing and the anticipated period for overcoming the financial difficulties. The time frame may operate in favour of the company, of the partners, or of both parties. If the period does not correspond to the actual need for the funds, it would be contrary to the purpose of the law, which provides for additional contributions as a temporary means of overcoming financial difficulties.
Will the Company Pay Interest?
By default, additional cash contributions are interest-free. This makes them a preferred mechanism for securing working capital, particularly for newly established companies with minimal capital.
Nevertheless, there is no legal obstacle to the General Meeting deciding that the company shall pay interest on the contributions provided. The rate of interest is determined by the partners or by the sole owner of the capital and may be below market levels.
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