From time to time, company owners may wish to withdraw part or all of the capital that has accumulated in the business. One of the classic legal tools for doing so is a capital reduction, which can be implemented in several ways, each carrying different risks. This article provides an overview of the key points and briefly outlines the relevant legal framework.
1. Summary
- Capital reduction allows the withdrawal of capital reserves or other elements exceeding the registered share capital.
- Traditional reduction – down to the statutory minimum – is simpler but allows for a smaller withdrawal.
- Reducing the capital to zero and then immediately restoring it allows a larger payout, though with higher administrative risks.
- Alternatively, the capital may first be increased (e.g., from reserves) and then reduced, thereby enlarging the amount that can be withdrawn.
- In all cases, the three‑month creditor protection procedure is mandatory, and payments to shareholders can only be made after registration by the Court of Registration.
2. Why dividend payment is not enough
It is important to note that capital reserves (or any capital element above the registered share capital) cannot be distributed as dividends. Under current legislation, dividends can only be paid out of retained earnings or current year profit. If the company holds significant capital reserves and the owners wish to withdraw them, capital reduction is the appropriate tool.
3. The essence of capital reduction
In a capital reduction, the company decreases its registered share capital. The law prescribes a minimum registered capital depending on company form: HUF 3 million for a limited liability company (Kft.), HUF 5 million for a private company limited by shares (Zrt.), and HUF 20 million for a public company limited by shares (Nyrt.). As a general rule, the capital cannot be reduced below these thresholds.
Under the Civil Code (Ptk.), the owners of a limited liability company, a company limited by shares, or public limited company may also decide to reduce the capital for the purpose of capital withdrawal, loss settlement, or increasing other elements of equity.
According to the Civil Code, shareholders may decide on capital reduction for three purposes: capital withdrawal, loss coverage, or the reallocation of equity. In the case of withdrawal, shareholders receive payments, which proportionally come not only from the registered capital but also from equity exceeding it (such as capital reserves or retained earnings, but excluding tied-up and revaluation reserves).
4. How capital reduction is implemented in practice?
The main steps of a capital reduction are as follows:
- Step 1: Shareholders adopt a resolution on capital reduction (requiring a three‑quarters majority).
- Step 2: Mandatory publication in the Company Gazette, followed by a 30‑day period for creditors to announce claims for security.
- Step 3: Filing with the Court of Registration.
- The above procedure takes approximately three months to complete, provided there are no creditor claims or disputes. Payment to members can only be made after this, i.e., after registration with the company registry.
For companies limited by shares, further conditions apply: the general meeting resolution is only valid if the affected class of shareholders separately consents, as specified in the articles of association. In addition, proper handling of shares must be ensured: printed shares may need to be withdrawn, exchanged, or stamped, while dematerialized shares require registration of the changes with the central securities depository.
5. Three main methods of capital reduction for withdrawal
Where the aim is explicitly to withdraw equity exceeding the registered capital (such as capital reserves), three main methods are available. In each case, the reduction proportionally releases elements of equity beyond the registered capital (except for tied-up and revaluation reserves).
5.1. Traditional (simpler) capital reduction
Under the general rule, the registered capital can be reduced only as far as the statutory minimum. (HUF 5-20 million, depending on the type of company).
Example 1: The registered capital of a limited liability company is reduced from HUF 1,000,000,000 to HUF 3,000,000, which represents a reduction of approximately 99%. Accordingly, the owners may withdraw approximately 99% of the equity capital in excess of the registered capital (e.g., capital reserves, retained earnings).
Example 2: The registered capital of a limited liability company is reduced from HUF 9,000,000 to HUF 3,000,000, which represents a 33% reduction in capital. The owners may withdraw 33% of the capital elements in excess of the registered capital.
Advantage: this is a well-established, safe practice at the court of registry, and there is typically no risk of registration.
Disadvantage: if initial registered capital is not very high, this method is less suitable for withdrawing larger amounts; substantial reserves may remain in the company.
5.2. Temporary reduction of capital below the minimum, even to zero
Section 3:202(4) of the Civil Code (in the case of limited liability companies) and Section 3:308 (3) (in the case companies limited by shares) allow the registered capital to be reduced even below the statutory minimum, provided that the same resolution simultaneously raises it back to at least the statutory minimum (or higher).
Steps in the process:
- Step 1: The capital is temporarily reduced, even to zero.
- Step 2: This amounts to a 100% reduction, enabling the withdrawal of all equity above registered capital (excluding tied-up and revaluation reserves).
- Step 3: Immediately afterwards, the capital is restored to the statutory minimum (or above).
Example: We temporarily reduce the registered capital of a limited liability company from HUF 9,000,000 to HUF 0, then increase it back to HUF 3,000,000, thereby achieving a temporary 100% reduction in capital through the first reduction. This allows the owners to withdraw the same proportion of capital elements exceeding the registered capital, i.e., 100% (with the exception of tied-up and valuation reserves).
Advantage: owners can withdraw the entire excess equity.
This method also helps loss settlement, as one member can inject funds via recapitalization without others benefiting. If this were not possible, money would first have to be contributed for consolidation, and then the member not participating in the capital increase would also bear the benefits of this insofar as the shares would be reduced proportionally.
Disadvantage: although the law expressly allows this, some company court judges may find this solution unusual and may request further statements or explanations in some cases. In rare cases, registration difficulties may also arise.
5.3. First capital increase, then capital reduction
It may happen that the owners first increase the registered capital (even at the expense of the capital reserve, i.e., without involving additional capital contributions) and then reduce this now higher registered capital. This means that the capital reduction is made from a larger registered capital, so the amount that can be withdrawn will also be larger.
Note: A capital increase may require an interim balance sheet. The annual financial statements can serve this purpose for six months after their balance sheet date (typically until June 30).
Advantage: less uncertainty during registration with the court of registry.
Disadvantage: it is a two-step process and may involve additional accounting and administrative tasks.
6. Tax and accounting considerations
There may be significant differences between the capital reduction options described above from a tax and accounting perspective. Therefore, it may be worthwhile to consult with your accountant or tax advisor in advance about, among other things, the following:
- How much should be withdrawn, and from which specific capital element?
- When can the payment be scheduled?
- What tax obligations arise?
- How will all this affect the company's capital structure and ownership structure in the future?