Reinforcing a company’s equity without modifying share capital or going through a notary is entirely possible. Although it may not feature in standard corporate playbooks, Account 118 of the Spanish General Accounting Plan (PGC) enables companies to record shareholder contributions in a fast, secure, and cost-efficient manner—without the formalities of a traditional capital increase.
If your company needs to improve its net equity without delays or unnecessary costs, this accounting mechanism—when applied correctly—can make all the difference.
What is account 118?
Account 118 of the PGC, titled “Other shareholder contributions”, is a component of a company’s equity. It records contributions made by shareholders in their capacity as such, outside the scope of a capital increase, loan, or commercial transaction.
Following the ICAC Resolution of 5 March 2019, the conditions for using this account have been clearly defined:
- Contributions must be made by shareholders in proportion to their shareholding.
- They must involve the voluntary transfer of assets, not governed by other specific accounts.
- They must not constitute liabilities—i.e., they are non-repayable and not in exchange for goods or services.
- Their purpose must be to increase net equity, including for the offsetting of accumulated losses.
This resolution clarified a previously ambiguous area, where Account 118 was often used as a catch-all for various forms of shareholder transfers.
Why choose this over a capital increase?
The main advantage is clear: it avoids notarial and registry-related costs and delays. Unlike a capital increase, which requires notarisation, registration, and other formalities, contributions to Account 118 only require approval by the general shareholders’ meeting, properly documented in meeting minutes.
That said, companies must still file the relevant form under the Transfer Tax and Stamp Duty regime, in the category of corporate transactions—even though such contributions are exempt from taxation, as provided in Article 19.1.2º of the Spanish law.
This approach is especially advantageous when contributions are made through debt-to-equity swaps, i.e., by offsetting shareholder loans. In such cases, it is prudent—though not legally required—to follow the same safeguards applicable to capital increases by credit compensation, including:
- Making available to shareholders, in advance of the meeting, a report by the board of directors detailing the nature and characteristics of the credits, as per Article 301.2 of the Spanish Companies Act.
- Applying, by analogy, the legal provisions relating to non-cash contributions, including valuation requirements for contributed assets.
This strategy can also be leveraged at incorporation: the minimum required capital can be contributed at the outset, and any additional funds can be injected via Account 118 through a subsequent shareholders’ meeting—significantly reducing initial legal costs.
Common mistakes—and how to avoid them
Despite its benefits, misusing Account 118 can lead to serious accounting, tax, and legal consequences.
A common error is to mistake shareholder loans for equity contributions, which may cause the annual accounts to misrepresent the company’s financial position—or worse, to disguise an underlying capital shortfall, potentially triggering dissolution grounds.
Another frequent issue is reimbursing these contributions to shareholders. Since these are non-repayable by definition, returning them without following the rules applicable to reserve distributions could be interpreted by tax authorities as an attempt to avoid dividend taxation and withholding obligations—exposing both the company and its directors to liability.
If such mistakes have occurred and the annual accounts have already been filed or approved, the appropriate course of action is to restate the accounts, expressly acknowledging the error and providing documentation that reflects the true nature of the transaction (e.g., a loan).
Is this mechanism suitable for all companies?
Not always. Since contributions must be made in proportion to existing shareholdings, this method is best suited to companies with a small number of shareholders or a simple and stable ownership structure. In companies with many partners or shareholder disputes, it may be impractical or even inadvisable.
A powerful tool—If applied with precision
When correctly structured and documented, Account 118 offers a legally valid and cost-effective alternative to traditional capital increases. However, it requires strict compliance with accounting, legal, and tax standards. This is not an informal workaround, but a formal mechanism recognized by Spanish GAAP, and must be treated accordingly.
Across Legal: Corporate structuring with legal and accounting precision
At Across Legal, we help companies design and implement shareholder and corporate transactions with legal, accounting, and tax precision—aligned with the PGC, the Companies Act, and applicable tax rules.
Our services include:
- Structuring shareholder contributions and capital increases
- Managing debt-to-equity conversions and non-cash contributions
- Reviewing and restating financial statements
- Legal structuring for incorporations, reorganisations, or capital reinforcement
If you’re considering how to strengthen your company’s equity efficiently and with full legal certainty, or need to review past shareholder transactions, get in touch. We’ll help you make sound, strategic decisions with confidence.
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