Understanding the Capital Contribution Principle: Explaining the Reduction of the KER in the Case of a Premium

What does the "capital contribution principle" actually mean?

Imagine you’re giving money to your company—not as a loan, but as a genuine investment. This is called a capital contribution. In return, you receive shares in the company. This principle, under which contributed capital is not subject to tax, is known as the capital contribution principle —an important rule in tax law.

The capital contribution principle prevents the repayment of equity by a company from being taxed as profit. Sound dry? Don’t worry—we’ll explain it step by step in a way that’s easy to understand, practical, and illustrated with examples.

What are capital reserves, and what does KER stand for?

When a company receives money from its partners or shareholders, that money is allocated either to the paid-in capital or to the capital reserve.

The capital reserve —KER for short—is essentially a kind of savings account for the company. It is funded, for example, by:

• Payments that exceed the par value of the shares (known as a premium).
• Contributions by the shareholders without their receiving additional shares.

This means: If you buy shares in a GmbH for 1,000 euros and pay an additional 500 euros on top of that, this “bonus” goes into the capital reserve—that is, the agio.

Where does the premium come from?

Agio sounds complicated, but it’s easy to understand. Imagine that a share in a business officially costs 1,000 euros. But you pay 1,500 euros because the company is already doing well. The extra amount—the 500 euros—is the agio.

So, agio does not directly increase the common stock capital, but rather the capital reserve. And that is precisely where the capital contribution principle comes into play.

Why is the capital contribution principle so important?

Imagine that, years later, your company distributes some of that money again—in other words, gives you money back. If that money were considered profit, you’d have to pay taxes on it. But thanks to the capital contribution principle, you can get it back tax-free —if it’s treated as a repayment of your original contribution.

In short:

• Dividend distributions —subject to tax.
• Reimbursement of contributions (based on the KER principle) – tax-free.

When is the capital reserve (KER) reduced?

Now things are getting interesting. That’s because the tax authorities keep a close eye on when you’re allowed to say, “That was a capital contribution—not a dividend.”

When a company repays money to its shareholders, it must be able to prove:

• How much capital each shareholder originally contributed.
• That the payment is in fact a repayment of this principal.

Without this documentation, the capital reserve may not be reduced. In that case, the payment is considered a dividend—and is subject to tax. That is why clear documentation is crucial. The law requires that the amount of the tax-recognized capital reserve be recorded for each shareholder in what is known as the “declaration of determination.”

The Role of the Agio in the KER Reduction

If you paid a premium when you made your deposit, it was allocated to the capital reserve. The big question now is: Can I “withdraw” that amount when I make a withdrawal?

The answer: Yes, but only if you can prove it. And this proof is provided through what is known as the KER balance in the tax return.

Without proper documentation? No chance. In that case, the tax office will classify the payment as profit and tax it. And that can get really expensive.

A real-life example

Let’s take Lisa as an example. She invests in a GmbH: 10,000 euros in share capital and 5,000 euros in share premium. A year later, the GmbH pays her 5,000 euros. In order for Lisa to receive this money tax-free, the company must have documented the share premium amount as Lisa’s capital reserve in its tax return.

If it doesn't, the refund is considered a profit. And just like that—withholding tax is due.

What can you do as an investor or business owner?

Do you want to get the most out of the capital contribution principle and repatriate capital tax-free? Then keep the following in mind:

• Accurate and complete documentation of your contributions (especially the premium).
• Annual determination of the capital reserve for each shareholder.
• Seek advice from a tax professional if you're unsure.

Conclusion: Plan Smart, Save on Taxes

The capital contribution principle offers many advantages—especially if you’re planning for the long term. It allows you to recover the capital you’ve contributed tax-free later on. But only if you keep detailed records of what you’ve contributed, especially when it comes to the premium.

Our tip: Seek tax advice when you make contributions or plan to make withdrawals. This is the only way to make the most of the capital contribution principle—and avoid costly tax pitfalls.

So, did you learn anything new today? Write it down—or talk to your tax advisor. Your money will thank you for it!