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What is a capital contribution reserve?

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Last updated on 23/09/2021

The following Corporate Q&A provides comprehensive and up to date legal information covering:

  • What is a capital contribution reserve?

What is a capital contribution reserve?

A capital contribution reserve typically arises when an irrevocable gift has been made to a company by a shareholder (ie new shares are not issued in consideration). Such a payment often arises in the context of overseas companies, where a parent company makes a long term loan to a subsidiary at a below market rate of interest. The difference between the face value of the loan, and its discounted value using a market rate of interest, is required to be credited to a capital contribution reserve.

The Privy Council (PC) case of Keller v Williams [2000] 2 BCLC 390 explored the context in which capital contributions might arise and how the funds might be used. The dispute centred on whether the funds paid were to be treated as capital contributions (as shown in the company's records) or as shareholders' loans. The PC, upholding the decision of the lower courts, held ‘…If the shareholders of a company agree to increase its capital without a formal

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Capital contribution reserve definition
What does Capital contribution reserve mean?

Arises when an irrevocable gift has been made to a company by a shareholder. This was relatively rare in the past, but now arises quite commonly where a parent company makes a long term loan to a subsidiary at a below market rate of interest. The difference between the face value of the loan, and its discounted value using a market rate of interest, is required to be credited to a capital contribution reserve.

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