The account 115 (« apport en capitaux propres non rémunéré par des titres ») as mentioned in the Luxembourg chart of accounts, and the share premium account of a Luxembourg company constitute freely distributable reserves, unless otherwise provided in the articles of association of the company. They are neither capital-based reserves, i.e. sourced from capital contributions made by shareholders,  nor profit-based reserves, i.e. sourced from actual profits earned by the company from its business activities, but are contribution-sourced reserve accounts, i.e. sourced from contributions made by shareholders that are not capital contributions.

The Luxembourg law on commercial companies dated 10 August 1915, as amended (the Law) requires that certain Luxembourg companies maintain a legal reserve account. From a literal reading of the Law, the legal reserve must be construed as a profit-based account (“each year at least one-twentieth of the net profits shall be allocated to the creation of a reserve; this allocation shall cease to be compulsory when the reserve has reached an amount equal to one-tenth of the corporate capital, but shall again be compulsory if the reserve falls below such one-tenth”).

Notwithstanding the above, there are two opposite schools of thought amongst Luxembourg legal scholars on the possibility of making allocations to the legal reserve account from another reserve account of the company (e.g. the share premium account and/or the account 115):

• based on a strict literal reading of the Law, traditionalists do not deem it possible to make allocations out of the share premium account or the account 115 to the legal reserve account, since the legal reserve can only be constituted from “net profits”;
• on the other hand, more liberal authors criticise the traditional approach and consider that the share premium account and the account 115 have a wide and liberal spirit. They are of the opinion that contributions can be made out of the share premium account or account 115 to constitute the legal reserve, and, therefore, the legal reserve account should not be considered (necessarily or exclusively) as a profit-based account. Therefore, noting that the Law does not explicitly prohibit transfers from a contribution-based account to a profit-based account, most of the practitioners in Luxembourg deem it is possible to convert amounts in a company’s freely distributable reserve account into legal reserve. It is advisable, however, that the relevant shareholders’ resolution in which the transfer between accounts is approved, clearly states the reasons for such transfer, to ensure that it is in line with the fair view principle of accounting practice and to avoid any confusion as to the origin of the relevant funds.

Our Corporate M&A team can provide further input and answer any particular question on the above and would be happy to assist with the implementation of the relevant corporate steps involved, in coordination with our team of accounting experts at VANDENBULKE Corporate and Trust, who can advise on the relevant accounting treatments and accounting entries of any given operation.