Contributions to share capital in foreign currency and foreign exchange differences
With economic globalisation, foreign investors often decide to pay capital contributions to Polish companies in foreign currencies. This raises the question of how to convert these amounts into Polish currency.
In determining the amount of a capital contribution to a Polish company to be paid in foreign currency, there are typically two key moments to consider:
- The moment when the amount of the share capital of a new company is established or when a resolution on increase of the share capital of an existing company is adopted (when the amount of the capital in Polish currency should be established)
- The moment when the contribution is actually paid into the company’s account in foreign currency (when payment should be converted into Polish currency for recognition in the company’s accounting books).
If the resolution states the amount of the contribution in foreign currency, then the conversion of this value for purposes of determining the amount of the share capital for the new company or adoption of the resolution on increase of the share capital should be made in accordance with Art. 30(2)(2) of the Accounting Act. This regulation provides that economic operations expressed in foreign currencies shall be reflected in the accounting books as of their date they are conducted, respectively at the average rate announced for the given currency by the National Bank of Poland from the preceding day, in the case of payment of receivables or obligations, if it is not justified to apply the actual rate (referred to in Art. 30(2)(1)), and also in the case of other operations. In other words, for purposes of determining the amount of share capital that is to be covered by a contribution in foreign currency, the exchange rate that should be applied is the average exchange rate announced by the National Bank of Poland for the given currency from the date preceding adoption of the resolution on increase of the share capital.
At what rate should the actual payment be converted?
Doubts arise however with respect to the method of calculating the value of a contribution made in foreign currency at the time of actual payment. The problem is whether in such situation the actual rate from the date of payment should be used or the average rate declared for the currency by the National Bank of Poland from the day preceding the day when the payment is made (under Accounting Act Art. 30(2)).
In analysing this issue, it is worthwhile to consult interpretations by Poland’s Supreme Administrative Court referring to Art. 15a(4) of the Corporate Income Tax Act, which provides that in calculating foreign exchange differences, the rates actually applied in the case of sale or purchase of foreign currencies and receipt of receivables or payment of obligations should be considered, and in other instances, including where the exchange rate actually used on the given date cannot be applied to receipt of receivables or payment of obligations, the average rate announced by the National Bank of Poland from the last business day preceding that date is applied.
In practice, numerous discrepancies have arisen concerning the correct conversion rate for receipt or payment in foreign currency, boiling down to whether to apply the actual exchange rate on the given day or to use the average rate of the National Bank of Poland from the last business day before that date. In reviewing this issue, the Supreme Administrative Court has held that the “actually applied exchange rate” can be referred to only when on that basis, relying on a price of the currency expressed in that rate, the financial operation of conversion essentially occurred, i.e. expression in the given currency of the monetary value originally defined in another currency. Therefore conducting an actual financial transaction is essential. This means that if during the course of economic events no actual conversion occurs, i.e. an actual conversion of a defined amount of currency according to some defined rate, there cannot be said to be an actually applied rate (judgment of 26 January 2016, Case II FSK 3030/13).
This judgment was issued following previous interpretations in which it was found that according to a linguistic interpretation, the “actually applied exchange rate” need not be a realised rate and it need not be connected only to a conducted exchange of currencies, as the rate actually applied is the rate at which the valuation of a foreign exchange transaction is made on a given day, i.e. conversion of the foreign currency into Polish currency (for example, the judgment of the Province Administrative Court in Szczecin of 8 April 2010, Case I SA/SZ 72/10).
Following the interpretation made by the Supreme Administrative Court, it should be stated that in the case of payment toward coverage of share capital in a foreign currency, the rate used for conversion of the payment into Polish currency is the average rate announced by the National Bank of Poland from the last business day preceding the date the funds reach the company’s account.
Foreign exchange differences
Another issue that arises in connection with payment of contributions in foreign currency is the problem of foreign exchange differences resulting from the fact that typically the date when the company is formed or the resolution on increase of the share capital is adopted is not the same as the date when the actual payment to cover the capital is made. Therefore adopting the same exchange rate for both events is generally possibly only when the payment to the company’s account occurs on the same day as formation of the company or adoption of the resolution on increase of the share capital, or when the average rate announced by the National Bank of Poland on the two dates happens to be the same.
In a situation where foreign exchange differences occur the issue of how to settle them must be confronted. In the case of typical foreign exchange differences, not related to the issue of a company’s equity, if the exchange rate on the date of conclusion of an agreement differs from the exchange rate on the date when a payment connected with performance of the agreement is made, the resulting foreign exchange differences are settled under general rules, that is, positive foreign exchange differences are included in financial income and negative foreign exchange differences are included in financial costs (Accounting Act Art. 30(4)).
However, in the case of payments toward share capital, theoretically there are two possible approaches.
Under the first approach, settlement of payments toward share capital is not conducted via the profit and loss account, because payments of this type are carried over directly to capital, which is reflected in the company’s balance sheet. Thus if as a result of foreign exchange differences the actual payment after applying the average rate announced by the National Bank of Poland from the last business day before the date of payment proves lower than the amount called for in the corporate documents specifying the amount of share capital and the amount of the contributions to be made by specific shareholders, then the potential shortfall should be reflected in the item “payment due for basic capital” (share capital). This results from Accounting Act Art. 36(2), under which declared but unpaid capital contributions are booked as due contributions toward capital.
In this context it is important to notice the rules set forth in Art. 154 §3, 163(2), 309 §1 and 329 §1 of the Commercial Companies Code, which prohibit taking up shares in a limited-liability company or joint-stock company at below their nominal value and also require payment of the full contribution to cover the shares (including coverage of the nominal value of the shares as well as any excess, known as agio). Because the capital of a Polish company is expressed in Polish currency and should also be covered in full, the value of the declared cash contributions should correspond to the value of the shares taken up in return—a value defined in Polish currency. This means that the shareholder will be required to make up any missing value in the contribution arising as a result of negative foreign exchange differences. Conversely, any resulting overpayment should be booked in the company’s obligations to the shareholder. If the shareholder than transfers the resulting excess to the company for its disposal, it will be deemed to be a gift constituting income of the company. From the practical side, it would be best for arrangements of this type to be reflected in the company’s corporate documents specifying the amount of the capital as well as the value of the contributions made by the specific shareholders.
The second approach assumes that in the case of foreign exchange differences connected with payment of capital contributions in foreign currency it is possible to apply Art. 36(2b) of the Accounting Act, which provides that costs of the issue of shares incurred by a joint-stock company or an increase in share capital reduce the reserve capital of the company up to the amount of the excess of the value of the issue over the nominal value of the shares, and the remaining portion is applied to financial costs. But this solution can raise doubts on the following issue: whether negative foreign exchange differences essentially constitute a cost of the company, or a shortfall in the contribution constituting a receivable owed by the shareholder. Moreover, this provision applies expressly only to a joint-stock company and there is no express indication that it should apply as relevant to a limited-liability company (as is the case for example in Art. 36a(3) of the Accounting Act, concerning relevant application of provisions referring to a joint-stock company also to sale or redemption of a limited-liability company’s own shares).
Consequences of failure to pay in the entire contribution toward the share capital
The consequences of a finding that contributions toward share capital were not actually paid in full can be far-reaching. Under Art. 291 and 479 of the Commercial Companies Code, if the members of the management board provide false information, intentionally or negligently, in a statement on coverage of the share capital and contributions, they are liable to the company’s creditors, jointly and severally with the company, for three years after the date of registration of the company or registration of the increase in share capital. This liability has a guarantee function, meaning that it is not limited to the amount of the shortfall in capital payments.
The consequences arising under Art. 411 §2 of the Commercial Companies Code should also be mentioned. Under that provision, the right to vote shares in a joint-stock company attaches from the date of full coverage of the shares, unless otherwise provided in the company statute, which means that in the absence of full payment of the contribution for the shares, the shareholder is not entitled to vote at the general meeting. Permitting such a shareholder to exercise the right to vote contrary to this prohibition can expose resolutions of the general meeting to challenge by persons with standing.
How to avoid foreign exchange differences?
There is also a possible solution in which the documents establishing the company or the resolution on increase of the share capital indicates only the value of the contribution in Polish currency, together with an indication that it may be paid in foreign currency, but without stating a specific amount in foreign currency. Then no foreign exchange difference will arise, but the shareholder will be required to pay an amount in foreign currency corresponding to the amount of the contribution expressed in Polish currency using the average exchange rate announced by the National Bank of Poland from the last business day preceding the date of payment.
In summarising the foregoing considerations, it should be stated that when the corporate acts connected with specification of the amount of share capital covered in foreign currency coincide as closely as possible with the time the actual payment for shares is made, it can minimise the problem of foreign exchange differences but will not always eliminate this problem entirely. If negative foreign exchange differences connected with payment of the contribution in foreign currency arise, the most cautious solution would be for the shareholder to make up the shortfall in the contribution. Another solution is to state the value of the contribution in the corporate documents only in Polish currency, and then to make the actual payment in foreign currency yielding that amount in Polish currency using the proper exchange rate of the National Bank of Poland.
Kinga Ziemnicka, legal adviser, Krzysztof Libiszewski, legal adviser, Corporate and M&A Practice, Wardyński & Partners