In brief: Capital reduction is a legal operation that consists of reducing the amount of a company’s share capital, either to absorb losses (accounting clean-up) or to reimburse shareholders. Governed by Loi 17-95 (Art. 208 to 217) for SAs and Loi 5-96 (Art. 46) for SARLs, it requires an EGM decision, compliance with creditors’ right of opposition and the completion of publicity formalities.
Definition and grounds for capital reduction
Capital reduction consists of lowering the amount of share capital as it appears in the company’s articles of association. This operation may be motivated by very different reasons, which determine its legal and tax regime.
Capital reduction motivated by losses
When a company accumulates carried-forward losses that absorb a significant portion of its equity, capital reduction to absorb losses allows the accounting situation to be cleaned up. By cancelling the losses through an equivalent reduction in capital, the company restores consistency between its share capital and its actual net position.
This operation is sometimes mandatory: when the company’s equity falls below half of the share capital, the members must decide, under the conditions provided by law, on early dissolution or regularization of the situation, notably through a capital reduction followed, where applicable, by a capital increase.
Capital reduction not motivated by losses
Capital reduction may also occur in the absence of losses, in the following cases:
- Partial reimbursement to shareholders: the company returns part of their contributions to shareholders, when the capital is deemed excessive relative to the needs of the business;
- Share buyback: the company buys back its own securities for cancellation, for example upon the withdrawal of a shareholder;
- Capital adjustment: bringing the capital into line with the actual size of the business.
Capital reduction in the SA (Loi 17-95, Art. 208-217)
EGM decision
Capital reduction in a société anonyme (SA) is decided by the extraordinary general meeting (EGM), under the following conditions:
- Quorum: 50% of shares with voting rights at the first notice, 25% at the second notice;
- Majority: two-thirds (2/3) of the votes of shareholders present or represented.
The EGM may delegate to the board of directors (or management board) the powers necessary to carry out the reduction within a specified period.
Special report by the statutory auditor
The statutory auditor must prepare a special report on the grounds and conditions of the capital reduction. This report is presented to the EGM before the vote. The statutory auditor verifies in particular:
- The accuracy of the information provided by the board of directors;
- Compliance with equality between shareholders: the reduction must be distributed proportionally among all shareholders, unless agreed unanimously otherwise;
- Maintenance of the minimum legal capital after reduction.
Methods of reduction
Capital reduction in the SA may be carried out in two ways:
- Reduction of the nominal value of shares: each share retains the same number but sees its face value reduced. For example, shares of 100 MAD are reduced to 70 MAD;
- Reduction of the number of securities: a certain number of shares are cancelled, proportionally to each shareholder’s holding. For example, cancellation of one share in four for a 25% reduction.
Minimum capital post-reduction
Capital reduction may in no case bring the share capital below the legal minimum provided by Loi 17-95:
- 300,000 MAD for SAs not making a public offering;
- 3,000,000 MAD for SAs making a public offering.
If the reduction would bring the capital below these thresholds, the company must simultaneously carry out a capital increase or convert to another legal form (SARL, SAS).
Creditors’ right of opposition
When the capital reduction is not motivated by losses, creditors whose claim predates the filing of the EGM minutes with the court registry benefit from a right of opposition (Art. 212).
- Period: creditors have 30 days from the publication of the reduction decision in the Official Bulletin to file an opposition with the commercial court;
- Effect of opposition: the court may either dismiss the opposition or order repayment of the claim or the constitution of sufficient guarantees for the benefit of the opposing creditor;
- Suspension: the capital reduction cannot be carried out until the opposition period has expired or the oppositions have been resolved.
Important: when the reduction is motivated by losses, the right of opposition does not apply, as the operation does not reduce the company’s net assets (it merely records an existing situation in accounting terms).
Capital reduction in the SARL (Loi 5-96, Art. 46)
EGM decision
In the SARL, capital reduction is decided by the extraordinary general meeting by a majority of three-quarters (75%) of the share capital (Art. 75 of Loi 5-96).
No minimum capital
Unlike the SA, the SARL is not subject to any minimum legal capital. Capital reduction may therefore bring the capital to any amount desired by the members, without a regulatory floor. In practice, it is recommended to maintain sufficient capital to ensure the company’s credibility with its partners.
Creditor protection
The creditors’ right of opposition also applies in the SARL, under the same conditions as for the SA, when the reduction is not motivated by losses. Creditors have 30 days to file an opposition.
Formalities to be completed
Regardless of the company’s legal form, capital reduction requires the completion of precise formalities:
1. Minutes of the EGM
The EGM minutes record the reduction decision, its grounds, its methods and the new amount of share capital. They are signed by the manager (SARL) or the chairman of the board of directors (SA).
2. Amendment of the articles of association
The company’s articles of association are amended to reflect the new amount of share capital, the new distribution of interests or shares and, where applicable, the new nominal value of the securities.
3. Legal publication
The reduction decision must be the subject of a dual publication:
- Insertion in a Journal d’Annonces Légales (JAL) in the locality of the registered office;
- Publication in the Official Bulletin (BO).
These publications start the creditors’ opposition period (30 days).
4. Amended registration in the trade register
The manager or legal representative of the company files with the commercial court registry:
- The certified true copy of the EGM minutes;
- The updated articles of association;
- Proof of publication;
- The amended registration form.
Tax implications of capital reduction
Reduction to absorb losses
When the capital reduction aims to absorb losses, the operation is tax-neutral:
- No proportional registration duties: the formality is subject to the fixed fee;
- No impact on corporate tax (IS): the accounting operation generates neither taxable income nor deductible expense;
- Absorbed losses are no longer available for carry-forward to subsequent financial years.
Reduction with reimbursement to shareholders
When the capital reduction is accompanied by a reimbursement to shareholders, the tax administration may reclassify all or part of the reimbursement as a distribution of income:
- If the amount reimbursed exceeds the nominal amount of contributions, the excess is treated as a dividend subject to withholding tax at a rate of 15% (resident natural persons) or 10% (resident legal persons);
- Registration duties may apply to the amounts reimbursed depending on the conditions of the operation.
Share buyback followed by cancellation
The buyback by the company of its own shares for cancellation constitutes a particular method of capital reduction. Any capital gain realized by the selling shareholder is subject to tax under standard conditions (income tax or corporate tax depending on the nature of the seller).
Distinction between capital reduction and capital amortization
It is essential not to confuse capital reduction with capital amortization:
- Capital reduction: definitive decrease in share capital, with amendment of articles of association and reduction of the number of securities or their nominal value;
- Capital amortization: early reimbursement to shareholders of all or part of the nominal value of their shares, without reducing share capital. Amortized shares are converted into dividend shares, which retain the right to dividends and the liquidation surplus but lose the right to a first dividend and reimbursement of the nominal value.
Capital amortization is reserved for sociétés anonymes (Art. 202 to 207 of Loi 17-95) and is only possible if the articles of association expressly provide for it.
At Upsilon Consulting, our chartered accountancy firm in Casablanca assists businesses in all share capital operations: reduction, increase, conversion and restructuring. We ensure legal, accounting and tax compliance for each operation.
Frequently asked questions
Does capital reduction necessarily require a statutory auditor?
In SAs, yes: the statutory auditor must prepare a special report on the conditions and grounds for the capital reduction, which they present to the EGM (Art. 210 of Loi 17-95). In SARLs, the statutory auditor’s report is only required if the company has appointed one. In the absence of a statutory auditor, the manager directly presents the necessary information to the members for their decision on the reduction.
Can creditors block a capital reduction?
Creditors whose claim predates the date of publication of the reduction decision have a right of opposition for 30 days. If the court upholds the opposition, it may order repayment of the claim or the constitution of guarantees. However, this right only applies when the reduction is not motivated by losses. In the case of a reduction to absorb losses, creditors cannot file an opposition.
Can a SARL reduce its capital to 1 MAD?
Legally, Loi 5-96 sets no minimum capital for the SARL. It is therefore theoretically possible to reduce the capital to 1 MAD. However, in practice, a symbolic capital may undermine the company’s credibility with banks, suppliers and business partners. It is recommended to maintain capital commensurate with the business activity and financing needs of the company.
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This article is written by the team of chartered accountants at Upsilon Consulting, a firm registered with the Order of Chartered Accountants (OEC) of Morocco.
Need assistance with a capital operation for your company? Contact Upsilon Consulting for tailored advice.
