Increased Capital by Reducing Surplus and Reserves (KK)

Increased Capital by Reducing Surplus and Reserves

Advantages of Increased Capital

In a Kabushiki- Kaisha (a stock company), the amount of capital is stated on the corporate registry. Therefore, a large amount of capital leads to an external evaluation that the company has a lot of financial strength and management is stable, which leads to advantages such as “easier to receive investments or loans from financial institutions.

Disadvantages of Increased Capital

If the amount of capital is increased too much, there is a possibility of increased in corporate tax due to size-based taxation, etc., or being excluded from tax-exempt status. Thus, it is recommend to consult with a tax accountant to determine how much you should increase your capital.

Methods of Increased Capital

The most common method is to issue shares for allocation. On the other hand, the procedure is quite complicated as it requires the actual injection of funds into the company (unless DES is used), and international remittance of funds may be required.

> Share Allocation

The method that does not use above is “transfer of reserves (capital reserves and earned surplus reserves)” or ” transfer of surplus (other capital surplus and other retained earnings)”.

For example, the following transfer can be made.

Outline of Procedures

The general procedure is as follows.

1. Ordinary resolution of the general meeting of shareholders (details are as follows)

• • Amount of reserve or surplus to be reduced
  • Amount of capital to be increased
  • Effective date

2. Applying for registration (Required documents are as follows) 　

• • Minutes of the general meeting of shareholders
  • Document certifying that the amount of reserve or surplus has been appropriated
  • Power of attorney (to judicial scriveners)

Points to note for each item to be reduced

The following points should be noted for each item to be reduced. Please consider which items to be transferred taking these into the account.

Decrease in capital reserves and earned surplus reserves

If any portion of the reserves to be reduced is to be transferred to other than capital, one-month creditor protection procedure is required. Such procedures are not required if the entire amount of the reserves to be reduced is transferred capital.

Other retained earnings

The amount that can be transferred to capital is limited to the amount of other retained earnings recorded on the balance sheet that has been finalized (approved by shareholders at the annual general meeting). Therefore, even if a large profit is recorded during the period, the amount cannot be used for increasement in capital.

On the other hand, in the case of other capital surplus, even the amount recorded during the period can be transferred to the capital.

MK @ 10/22/2022