Reducing capital means lowering the share capital figure in the articles of association to offset losses, allocate reserves, return contributions to shareholders or, in an S.A., waive outstanding capital contributions. The general meeting approves it as an amendment to the articles of association and, if the S.A. returns money, its creditors may oppose during one month from the last announcement.
The purpose decides everything else: which balance sheet you need, whether there is a right to object, who is liable for debts and how much it costs in taxes (art. 317 of the Capital Companies Act, LSC). This guide covers the types, the procedure, creditor protection, two examples with figures and what changes if the shares are tokenized.
Types of capital reduction and what each requires
The reduction can be made by lowering the nominal value, redeeming shares or participations or grouping them (art. 317.2 LSC). What changes the requirements is the purpose:
| Purpose | Main requirements | Creditor opposition in the S.A.? |
|---|---|---|
| Offset losses | Use up reserves first (in the S.A., voluntary reserves and the legal reserve above 10%); balance sheet for the previous six months, audited and approved by the general meeting; no payments to shareholders (arts. 321 to 323 LSC) | No (art. 335.a) |
| Allocate the legal reserve | Same rules as a capital reduction for losses (art. 328 LSC) | No (art. 335.b) |
| Allocate voluntary reserves | Resolution meeting the general requirements (arts. 317 and 318 LSC) | Yes: it is not among the exceptions in art. 335 |
| Return contributions | Pro rata of the paid-up amount unless unanimous; in the S.L., shareholders' liability or reserve (arts. 330 to 332 LSC) | Yes, one month (arts. 334 and 336) |
| Buy own shares or participations to redeem them | Offer to all shareholders (arts. 338 and 339 LSC); if paid out of profits or free reserves, the redeemed nominal amount goes to a restricted reserve | Yes, unless paid out of profits or free reserves (art. 335.c) |
| Waive outstanding capital contributions (S.A. only) | General meeting resolution (art. 317.1 LSC) | Yes |
Before calling the meeting, identify the real purpose. A repayment disguised as a reduction for losses is prohibited: a reduction for losses cannot give rise to refunds (art. 321 LSC).
Capital reduction procedure, step by step
- Shareholders' meeting resolution. With the requirements of an amendment to the articles of association (art. 318.1 LSC): in the S.L., more than half of the votes of the share capital (art. 199.a LSC); in the S.A., reinforced quorum of 50% on first call and 25% on second call (arts. 194 and 201 LSC).
- Minimum content. Amount of the reduction, purpose, procedure, execution period and sum to be paid to the shareholders (art. 318.2 LSC).
- Equality. A reduction for losses affects all shares or participations equally, in proportion to their nominal value and respecting privileges (art. 320 LSC). If a repayment does not affect everyone equally, the individual consent of each affected party is required in the S.L. and a separate resolution of the affected parties in the S.A. (art. 329 LSC).
- Publication (S.A.). The resolution is published in the Official Gazette of the Commercial Registry (BORME) and on the company's website or, if it does not have one, in a newspaper with large circulation in the province (art. 319 LSC). If it is for losses, the announcement expressly states the purpose (art. 324 LSC).
- Opposition period. When applicable, the S.A. waits one month from the last announcement before executing (art. 336 LSC).
- Deed and registration. A deed is granted and it is registered in the Commercial Registry. For the reduction to appear in the financial statements of the year, it must be registered before the accounts are prepared (art. 36 of the ICAC Resolution of 5 March 2019).
A numerical limit: the S.A. cannot fall below €60,000 nor the S.L. below one euro, unless the share capital is increased at the same time or the company is transformed (arts. 4 and 343 LSC).
The creditors' right of opposition
In the S.A., creditors whose credits arose before the last announcement of the resolution and have not yet matured may oppose, unless they are already sufficiently secured (art. 334 LSC). They have one month from that announcement (art. 336 LSC). If they oppose, the reduction is not executed until the company provides them with security to their satisfaction or notifies them of a joint and several guarantee from a credit institution for the amount of their credit (art. 337 LSC).
The S.L. does not have a legal right of opposition. In exchange, the shareholders who receive their contribution are jointly and severally liable, up to the amount received, for the company debts prior to the date on which the reduction is enforceable against third parties, for five years (art. 331 LSC). That liability disappears if the company allocates a restricted reserve for the same amount out of profits or free reserves (art. 332 LSC). The articles of association may give creditors an opposition period of three months (art. 333 LSC).
| Aspect | S.A. | S.L. |
|---|---|---|
| Default protection | Creditor opposition for one month | Joint and several liability of shareholders for five years, up to the amount received |
| How to avoid it | Bank guarantee or surety to the creditor who opposes | Restricted reserve equal to the amount returned |
| No opposition or liability | Losses, legal reserve and redemption charged to profits or free reserves (with restricted reserve) | Reductions without repayment to shareholders |
| Rule | Arts. 334 to 337 LSC | Arts. 331 to 333 LSC |
For the issuer, the practical question is simple: if you owe money to a bank or bondholders, a return of contributions in the S.A. opens a one-month window in which they can demand guarantees from you.
Example 1: share capital reduction for losses in an S.A.
An S.A. has a share capital of €600,000 (100,000 shares of €6), a legal reserve of €30,000, no voluntary reserve and accumulated losses of €280,000. Its net equity is €350,000.
| Test | Calculation | Result |
|---|---|---|
| Mandatory reduction? (net equity below 2/3 of share capital during a financial year) | 350,000 < 400,000 | Yes, if a financial year passes without recovery (art. 327 LSC) |
| Cause for dissolution? (net equity below half of share capital) | 350,000 > 300,000 | Not yet (art. 363.1.e LSC) |
| Proposed reduction | Capital: €600,000 – €250,000; legal reserve applied: €30,000 | Share capital of €350,000 (€3.50 per share) and losses at zero |
The reduction is possible because there are no voluntary reserves and the resulting legal reserve does not exceed 10% of the new share capital (art. 322.2 LSC). The balance sheet used as a basis must be closed within the previous six months, audited and approved by the general meeting (art. 323 LSC). Creditors cannot oppose (art. 335.a LSC). And until the legal reserve reaches 10% of the new share capital, €35,000, you cannot distribute dividends (art. 326 LSC).
The entry does not change net equity, only its composition (art. 37 of the ICAC Resolution of 5 March 2019):
| Debit | Credit | Amount |
|---|---|---|
| (100) Share capital: €250,000 (112) Legal reserve: €30,000 | (121) Negative results from previous years | 280,000 € |
Before reducing, consider an alternative: the participating loan counts as net equity for the purposes of share capital reduction and liquidation of companies provided for in commercial legislation (art. 20.Uno.d of Royal Decree-Law 7/1996). With one of €60,000, the net equity for these purposes rises to €410,000 and exceeds two thirds of the share capital.
Accordion operation: reduce to zero and increase at the same time
When losses absorb a large part of the share capital, the general meeting may reduce it to zero or below the legal minimum. It may only do so if it simultaneously resolves an increase to at least that minimum, or the transformation of the company (art. 343.1 LSC). The shareholders retain their pre-emptive subscription right in the increase (art. 343.2 LSC), the reduction only takes effect if the increase is executed (art. 344 LSC) and both are registered at the same time (art. 345 LSC). This is the usual structure to recapitalize with a new investor.
Example 2: repayment of contributions in an S.L.
An S.L. with a share capital of €100,000 (10,000 participations of €10) repays €30,000 by lowering the nominal value to €7. Shareholder A, with 60%, receives €18,000; shareholder B, with 40%, €12,000, pro rata to what was paid up (art. 330 LSC).
| Option | What it implies | Rule |
|---|---|---|
| Without reserve | A is liable up to €18,000 and B up to €12,000 for company debts prior to the reduction being enforceable, for five years | Art. 331 LSC |
| With reserve | The company locks up €30,000 of free reserves in a restricted reserve and no one is liable | Art. 332 LSC |
On taxes, the repayment to an individual shareholder reduces the acquisition value of their shares and the excess is taxed as income from movable capital. If the shares or interests are not admitted to trading on a regulated market, as is the case in an S.L., a special rule applies that looks at the equity of the last closed financial year. And if the reduction comes from undistributed profits, it is taxed as a dividend (art. 33.3.a of the Personal Income Tax Law). If the shareholder is a company, it includes the excess of the market value of what is received over the tax value of its interest (art. 17.6 of the Corporate Income Tax Law).
Also, the shareholders pay a 1% tax on corporate transactions on what they receive: €300 in the example (arts. 19, 23.b, 25.4 and 26 of the consolidated text of the ITPAJD). And if the shares or interests are not admitted to trading on a regulated market, the company declares in January of the following year the repayments to individual shareholders (art. 69.5 of the Personal Income Tax Regulations). Ask for the calculation shareholder by shareholder before calling the general meeting.
Capital reduction in a tokenized issuance
If your S.A. has tokenized shares, the reduction follows the same procedure of the LSC. What changes is the execution on the registry, which is handled by the ERIR, the entity responsible for the administration of the registration and record, also in charge of corporate events (art. 8.4 of the Law 6/2023).
- Nominal or redemption. Lowering the nominal changes the characteristics of the security; redeeming requires cancelling tokens. In both cases, file the amendment to the issuance document with the ERIR (art. 7.2 of Law 6/2023).
- Payments. The repayment is paid to whoever is recorded as legitimate in the registry, and the company that pays in good faith and without gross negligence is released (art. 13 of Law 6/2023).
- Buyback for redemption. The offer must be addressed to all shareholders and published in the BORME and in a newspaper for at least one month (arts. 338 and 339 LSC). Substitution by letter requires that all shares be registered shares, a category tied to certificates (art. 23.d LSC): with shares in an ERIR, publish.
If the reduction prepares the entry of investors, link it with the capital increase and review the final distribution in the cap table. The legal form is decided earlier, in S.L. or S.A. for issuing.
To continue: what to do if equity is negative and how the preemptive subscription right works.
If you need a law firm to prepare the transaction, at HokenFi's partner law firms you can request proposals from the platform.
Are you going to clean up the balance sheet or recapitalize before opening your company to new investors? Take the issuance diagnostic (2 min) or request a proposal.
This content is informative and educational. It does not constitute legal, tax, or investment advice. Check the current version of each regulation in the BOE and on EUR-Lex.
HokenFi is a software and infrastructure provider; it does not provide regulated services (CASP, ESI, EAF, or ERIR). This article is informative and does not constitute financial or legal advice.
Frequently asked questions
What is a capital reduction?
It is the transaction by which the general meeting reduces the share capital figure in the articles of association. It can serve to offset losses, fund the legal reserve or voluntary reserves, return contributions to shareholders or, in the public limited company, forgive unpaid capital contributions. It is done by lowering the nominal value, redeeming shares or interests or grouping them (art. 317 LSC), and it is agreed as an amendment to the articles of association (art. 318 LSC).
When is a capital reduction mandatory?
In the public limited company, when losses leave net equity below two thirds of capital and one financial year passes without recovery (art. 327 LSC). If net equity falls below half of capital, the company enters into a cause for dissolution, unless it increases or reduces capital sufficiently; if it is also insolvent, the appropriate step is to file for insolvency proceedings (art. 363.1.e LSC).
What are the requirements for a capital reduction?
General meeting resolution with the requirements of an amendment to the articles of association, stating the figure, purpose, procedure, execution period and amount to be paid (art. 318 LSC). In the public limited company, publication in the BORME and on the website or in a newspaper (art. 319 LSC). If it is for losses, also a balance sheet for the six preceding months audited and approved by the general meeting (art. 323 LSC).
How is a capital reduction with repayment of contributions taxed?
For the individual shareholder, what is received reduces the acquisition value and the excess is taxed as income from movable capital, with a special rule if the shares or interests are not admitted to trading on a regulated market (art. 33.3.a LIRPF). If the shareholder is a company, it includes the excess over the tax value (art. 17.6 LIS). The shareholders also pay a 1% tax on corporate transactions on what is received.
What is an accordion operation?
It is reducing capital to zero or below the legal minimum and, at the same time, increasing it to at least that minimum, or transforming the company (art. 343 LSC). It is used to clean up losses and bring in new capital. Shareholders retain their pre-emptive subscription right, the reduction is only effective if the increase is executed and both resolutions are registered at the same time (arts. 344 and 345 LSC).
Can creditors object to a capital reduction?
In the public limited company, yes: creditors with claims prior to the last announcement, not due and not secured, have one month to object, unless the reduction is for losses, to fund the legal reserve or charged to profits or free reserves (arts. 334 to 336 LSC). In the private limited company there is no legal objection, but shareholders are liable for five years up to what they received (art. 331 LSC).
