Asset-holding companies may be used in financial planning in a number of ways, including but not limited to the holding of passive assets, the holding of assets on behalf of a trust or as an investment vehicle for the beneficial owners (“BOs”).
However, potential investors should be aware of any provisions of local companies legislation which may restrict flexibility when it comes to vesting assets or cash in these companies or retrieving assets through distributions.
Share capital is the monetary value of cash and assets contributed to a company by shareholders in exchange for shares. Shares are often registered in the name of nominee shareholders on behalf of the BO in order to maintain confidentially for the BO. The monetary value of consideration paid for the shares must be credited to the ‘share capital account’.
Where a company issues shares at a price above the par value of the shares, the company has issued the shares at a ‘premium’. The surplus paid to the company is credited to a separate account called the ‘share premium account’.
The share premium (capital surplus) may or may not be available to distribute to shareholders depending upon the applicable law of the particular jurisdiction.
Capital Maintenance Rules
The capital maintenance rules are essentially a package of measures designed to ensure that the capital of a company is preserved within the company as a separate account in order to pay creditors. These rules have been repealed or amended in many offshore jurisdictions. However, they remain applicable throughout the EU and in some major financial centres such as Hong Kong and Singapore.
The underlying idea is that only profits may be distributed by a company to its shareholders while it is a going concern. Distributions to shareholders cannot be made from the share capital accounts. This will "maintain" the capital whereas a distribution to shareholders would deplete the assets of the company.
This principle is implemented by restrictions on distributions to shareholders and restrictions on reduction of the share capital figures in the accounts.
Asset Holding & Shareholder Loans
The restrictive provisions of the capital maintenance rules tend to impede the requirements of a BO of a typical asset-holding vehicle.
A prerequisite of a typical asset-holding company is that the BO has the freedom to make unrestricted capital contributions to the company and also withdraw funds from the company when they so desire. The same freedoms are required by trustees who choose to hold trust assets through an underlying company.
In jurisdictions where capital maintenance rules apply, shareholder loans can offer an effective method of financing an asset-holding company while retaining distribution and investment flexibility for the BO.
Private companies do not seek outside investment, so often their only source of finance is share capital from shareholders and borrowing. Rather than borrow from lending institutions at commercial rates, companies may borrow from shareholders so that the shareholders become creditors of the company. This form of borrowing is referred to as a ‘shareholder loan’.
A shareholder loan is not treated as capital and is not added to the share capital accounts. Instead, it is treated as a liability owed to the lender (shareholder). As such, shareholder loans are not subject to the capital maintenance rules.
Typically, shareholder loans are interest-free and repayable upon demand or according to the agree terms in the ‘loan agreement’ between the company and the shareholder.
Accordingly, the beneficial owner may at any time make a written demand to the company for repayment, in whole or in part, of the outstanding balance of the loan. These distributions are treated as loans repayments and are not subject to capital maintenance rules.
Know The Rules
Many of the traditional offshore jurisdictions have amended or repealed the capital maintenance rules in order to permit flexible and liberal financing of asset-holding companies. However, in jurisdictions where the capital maintenance rules apply, shareholder loans can offer investors a method of financing that provides them with the required level of control of their assets.