Rücklagen: Everything you need to know about forming reserves for the AG, UG & GmbH

Every corporation (AG, GmbH, UG) in Germany must set aside Rücklagen (reserves) and list them in the Bilanz (balance sheet). This is your guide to the different types of reserves and which legal obligations exist for the AG, GmbH and UG.

 

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Contents

Rücklagen: What are reserves?

Rücklagen is a German accounting term. Put simply, reserves are a company’s savings (Sparguthaben). The formation of reserves is mandatory for all companies, but there are also separate regulations for the AG and the UG. These additional obligations do not apply to the GmbH.

An important thing to know about reserves is that, in principle, on the Bilaz (balance sheet) there are two different types of reserves: offenen Rücklagen (open reserves) and stillen Rücklagen (hidden reserves). Let’s unpack what these mean below.

What are Offenen Rücklagen (open reserves)?

In accounting, offene rücklagen are open reserves that are recorded in a separate reserve account. What are their characteristics?

Reserves serve as additional debt capital and thus increase the creditworthiness of the company.
They are considered variable equity in terms of the appropriation of profits and the purpose for which they are used.
All reserves appear separately from subscribed capital on the liabilities side of the balance sheet

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Stille Rücklagen (hidden reserves)

Stille Rücklagen (hidden reserves) are, as the name suggests, hidden. They don’t appear on the balance sheet as part of equity (Eigenkapital). Hidden reserves arise when assets are undervalued or liabilities are overvalued. Thus, it causes the balance sheet profit or equity to appear lower than is on a given Bilanzstichtag (balance sheet date).

Rücklagen vs. Rückstellungen: What’s the difference?

Rücklagen (reserves) are different from Rückstellungen (provisions or accruals). Rückstellungen are open liabilities that count as debt capital.

 

How to build reserves in limited liability companies

All companies must create Kapitalrücklagen (capital reserves), which are shown separately on the balance sheet. But how are reserves formed in GmbHs, UGs and AGs? Reserves are usually formed from the net profit for the year by way of a resolution of the company. Instead of distributing the profit, the shareholders decide at an official meeting (Gesellschafterversammlung for UGs and GmbHs or Hauptversammlung for AGs) to retain all or part of the annual surplus to increase the company’s equity capital. Other typical events that lead to the formation of reserves in a company include:

  • Additional contributions from shareholders
  • Capital reductions of share or nominal capital
  • Payments above par value

 

How are reserves recorded on the balance sheet?

Companies record reserves as a component of equity capital (Eigenkapital). As they are part of the company’s assets, they are on the liabilities (Passiva) side of the balance sheet (Bilanz). And, often appearing after the share capital (Kapital) (§ 266 HGB).

Within the balance sheet structure, the different types of reserves have different classifications:

  1. Eigenkapital (equity capital)
    1. Gezeichnetes Kapital (subscribed capital)
    2. Kapitalrücklage (capital surplus)
    3. Gewinnrücklagen (retained earnings)

      1. gesetzliche Rücklage (legal reserves – as required by law)
      2. Reserve for shares of controlling or majority shareholders
      3. Satzungsmäßige Rücklagen (statutory reserves – as required by the company’s articles of association)
      4. andere Gewinnrücklagen (other revenue reserves)

 

Kapitalrücklage (capital reserve)

As per the German commercial code (§ 272 para. 2 HGB), the capital reserves include the following:

  • Share issuance amounts, including Bezugsanteilen (subscription shares), that exceed the nominal value or, when there is no nominal value, exceed the accounting par value.
  • Amounts received from issuing bonds for conversion rights and option rights to acquire shares.
  • Any additional payments made by shareholders in exchange for Vorzugsaktie (preferred stock or preference shares)
  • Other additional payments made by shareholders into equity.

While the GmbH and the UG have the freedom to utilise their capital reserves, the AG (public limited company) can only withdraw them under certain conditions, precisely defined in § 150 (3) and (4) of the Aktiengesetz (stock corporation act). For more information, refer to the “Dissolution of Reserves” section.

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Gewinnrücklagen (retained earnings)

Gewinnrücklagen (retained earnings) are the profits a company retains after paying taxes and expenses. These earnings come from the surplus of income over expenses in the current or previous financial years. Before allocating or using these funds, the company must first pay corporation tax. Retained earnings are a result of the company’s self-financing activities. German law recognises three types of revenue reserves: gesetzliche Rücklage (legal reserves) required by regulations, satzungsmäßige Rücklagen (statutory reserves) mandated by the company’s articles of association, and freiwillige Rücklagen (voluntary reserves) chosen by the company.

How does the UG build gesetzliche Rücklage (statutory reserves)?

When it comes to setting aside reserves for a UG (haftungsbeschränkt), specific rules apply. The obligation to retain earnings is a requirement established in the GmbH Act, which applies to the UG. According to § 5a, section 3, GmbHG, every UG must allocate 25% of its annual net profit (after subtracting any losses carried forward from the previous year) as revenue reserves. Additionally, this means that a maximum of 75% of the UG’s profits can be distributed among shareholders.

In simple terms, retention means saving a portion of the profits to create reserves.

How long does the UG have to retain the reserves?

The requirement to set aside reserves ends when the shareholders of the UG (limited liability company) decide to convert the company’s equity capital into share capital exceeding €24,999. The purpose of accumulating reserves is to enable the UG’s share capital to eventually reach the minimum required for it to be renamed as a GmbH (limited liability company). However, this name change is optional. If the share capital is increased to €25,000 or more, even if the company remains a UG, there is no longer a need to reserve profits.

There is no specific time limit to achieve the target amount. Additionally, there is no expiration date for the requirement to reserve profits. If the share capital limit of €25,000 is not reached, the obligation to retain reserves continues indefinitely.

A simple example

Let’s say an entrepreneurial company earns a profit of €15,000 after taxes in a year. According to the legal requirement, 25% of this profit, which is €3,750, must be set aside as a legal reserve. This reserve serves as a financial buffer for the company. The remaining amount of €11,250 can be distributed among the partners as profits, which they can then use as they wish. So, in this example, the company retains €3,750 for future needs and shares €11,250 among the partners as their share of the profits.

Building reserves in difficult financial years

For the UG, the amount available to distribute to its shareholders is the difference between profit and the required amount retained. If an entrepreneurial company is in financial difficulty, it has the flexibility to reduce the amount of retained earnings.
But what if there’s no surplus for the year, or if the losses carried forward completely offset the surplus? In such situations, there’s no obligation to retain profits, which means that the legal requirement to build up reserves doesn’t apply for that financial year.

Important: In this case, no profits can be distributed to shareholders.

How to build gesetzliche Rücklage (legal reserves) to safeguard capital

In Germany, AGs (public limited companies or stock companies) and partnerships limited by shares must set aside part of their profits as gesetzliche Rücklage (legal reserves) to protect their creditors in the long term, as per the German Stock Corporation Act (§ 150 para. 2 AktG). But what exactly is involved in forming reserves?

As with the UG, the AG is also required to set up a legal reserve from retained earnings. The legal reserve for an AG should be set at 5% of the annual surplus after deducting any losses carried forward from previous years. This requirement remains in force until the total of the legal reserve and the capital reserve reaches 10% of the company’s share capital (Grundkapital). Once this threshold is reached, the obligation to build up a legal reserve no longer applies to public limited companies.
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How to build satzungsgemäße Rücklage (statutory reserves) for limited companies

In a company’s articles of association, shareholders can decide that a certain percentage of annual profits should be set aside as a revenue reserve. This practice helps to build up the company’s equity gradually over time.

Business accounting in Germany: 

Reserves for ownership interests

Companies are required to set up a reserve for “shares in a controlling or majority-owned company” (according to § 272 para. 4 HGB). This type of reserve is particularly relevant in a holding structure. The amount of the reserve should be equal to the value of the shares in the company shown as fixed assets on the balance sheet. This reserve can only be released if the shares are sold or withdrawn. In addition to the statutory reserve requirement, limited liability companies also must have a reserve for company shares.

Freiwillige Gewinnrücklage (voluntary reserves)

Some firms may prefer to set up a voluntary rather than a compulsory revenue reserve, which gives them greater flexibility in setting the annual amount. This is particularly advantageous for companies whose profits tend to fluctuate, as it makes it possible to avoid negative consequences.

Similarly, AGs have the option of allocating reserves voluntarily. When approving the annual accounts, the board of directors and the supervisory board may allocate up to 50% of the annual surplus to other revenue reserves.

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How are reserves dissolved?

Once a reserve has been established, it is usually not easy to withdraw it without specific conditions. The law clearly outlines the circumstances under which reserves can be dissolved.

How can the UG use its reserves?

The rules in the GmbHG explain when and how a UG’s reserves can be used:

  • To increase the share capital from company funds (§ 57c GmbHG).
  • To offset a net loss for the year that is not covered by profits carried forward from the previous year.
  • To offset a loss carried forward from the previous year if it is not covered by the net profit for the year.

 

How can the AG use its reserves?

AGs (stock corporations) are subject to stricter and more comprehensive rules (Section 150 (3) and (4) AktG). If the legal reserve and the capital reserve amount to less than 10% of the share capital, the revenue reserves may only be used for the following purposes:

  1. To offset a net loss for the year that is not covered by profits carried forward from the previous year and which cannot be offset by releasing other retained earnings.
  2. To offset a loss carried forward from the previous year which is not covered by the profits of the current year and which cannot be offset by releasing other retained earnings.

 

If the total reserves exceed 10% of the share capital, the rules for releasing reserves are somewhat less strict. The company may use the reserves in the following ways:

  1. To offset a net loss for the year that is not covered by profits carried forward from the previous year, provided there is no distribution of profits.
  2. To offset a loss carried forward from the previous year that is not covered by the profits of the current year, provided there is no distribution of profit.
  3. To use the reserves for a capital increase from company funds according to §§ 207-220 AktG.

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FAQs

1. How are reserves formed in a holding company when the parent company is a UG?

The formation of reserves in a holding company follows the same principles as in a regular UG. If the parent company isn’t an operational business, the reserves are formed from the profit distributions of its subsidiaries. The parent company must also set aside 25% of its profits as retained earnings.

2. Can different types of reserves be set off against each other?

Yes, it is possible to offset capital reserves (Kapitalrücklagen) against legal reserves (gesetzliche Rücklagen), which reduces the company’s own funds.

3. How are reserves determined?

The amount of reserves is decided by the general meeting of the UG or GmbH before the balance sheet date. In the case of a public limited company, the general meeting decides on the appropriation of profits.

4. Why is there a legal reserve requirement for the UG?

The main reason for creating reserves is to boost capital and safeguard creditors. The UG legal structure was introduced to enable the establishment of a limited liability company with a lower initial capital requirement. Previously, entrepreneurs had to form a GmbH with a minimum share capital of €25,000, which was often challenging without enough external funding. The UG makes it possible to set up a limited liability company with only one euro of share capital per shareholder. The obligation to retain profits ensures that the UG’s liability capital grows over time.

5. What are the advantages of building reserves for a UG?

  • Reducing the risk of insolvency and improving creditworthiness: Building up reserves helps to reduce the risk of insolvency for the UG. A low share capital can lead to financial difficulties, making the company vulnerable in the event of losses or liabilities. By allocating the retention amount, the UG can gradually reduce this risk.
  • Enhancing the balance sheet structure: Reserves contribute to a stronger balance sheet and are seen in many industries as a sign of prudent financial management. Lenders and stakeholders perceive companies with substantial reserves as having better creditworthiness and financial stability.
  • Absorbing unexpected losses: Reserves play a vital role during economic crises or unforeseen financial challenges. They provide a cushion to absorb losses and reduce reliance on external borrowing, which may be difficult to obtain in such circumstances.

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6. Does the UG retention requirement apply to profits before or after tax?

Die UG-Gewinne unterliegen der Körperschaftsteuer. Dies gilt auch für den Anteil, der als Rücklage eingestellt wird. Relevant für die Berechnung ist also der Jahresüberschuss nach Steuern.

The UG’s profits are subject to corporation tax (Körperschaftsteuer), including the portion allocated as a reserve. The calculation is therefore based on the net profit for the year.

7. What happens if the obligation to have reserves is breached?

If a breach of the reserve requirement is discovered during insolvency proceedings, the partners are usually personally liable.
Claims become statute-barred after ten years. Non-compliance with this obligation represents a significant liability risk for the founders of a UG.

Hidden profit distributions, such as excessive salaries paid to managing directors, are also penalised.
These salary payments reduce the net profit for the year and distort the balance sheet. If the salaries are found to be unreasonable, the annual accounts lose their validity and the company can demand repayment from the director.

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