The minimum and maximum percentage of integration varies: for companies regulated by the LGSM, it consists of withholding 5% of the net profit until it represents one fifth (20%) of the share capital. In the case of cooperatives, it consists of 10 to 20% of the income until it represents 25% of the capital. From a legal point of view, reserves represent a set of securities and assets that are excluded from distribution and dividends that receive shares to support economic activity. Therefore, these are sums of profit and are intended to increase net wealth. In a society, there may be different types of reserves that may coexist and have a different purpose; On the one hand, the Commercial Code refers to the legal reserve, which is nothing more than the company`s obligation to retain ten percent of the profit of each financial year up to fifty percent of the subscribed capital, in which case it will not be necessary to deduct further from the said ten percent. If the legal reserve is insufficient to cover the capital shortfall, social benefits from subsequent years shall be used for this purpose.” Each year, this exercise is carried out until the legal minimum of the reserve is reached, and now the company is free to continue to allocate funds or not to use them or to use less than 10% if it wishes. If the company does not generate profits in a year or year, it is not obliged to allocate funds to the legal reserve, because this legally required 10% is attributable to liquid profits and these cannot exist in case of losses. In this regard, L.C. Antonio Castillo Sánchez, tax advisor at IDC Asesor Fiscal, Jurídico y Laboral, explains the procedure for the constitution of the legal reserve on profits 2019, the case of a public limited company with variable capital created in 2016, as indicated below: Every company is exposed to risks and losses that can threaten its financial stability and assets.
And remember that one of the legal causes of dissolution and liquidation of a company is the reduction of its assets below the threshold established by law, and this can be avoided if the company has built up sufficient reserves to cover these capital reductions. Until the upper limit of 20% of the share capital is reached, a company must divide the result as follows: In this sense, the statutory reserve is created after the approval of the annual accounts by the meeting. Assuming a cash gain of $5,000,000, the legal reserve use in this case would be ($5,000,000 – income tax) x 10%. It is important to note that if the legal reserve is distributed for purposes other than its capitalization, the manager may repeat against shareholders the value of what is provided to them, and the statutory reserve covers losses if there are no other reserves for this purpose; The legal reserve is mandatory in joint-stock companies in accordance with the provisions of Article 452 of the Commercial Code, a situation that is not based on the simplified joint-stock company, since in this type of company the creation of the legal reserve is optional for the partners. In principle, it complies with Article 452 of the Commercial Code as regards joint-stock companies. The legal reserve is mandatory provided that the company has profits on which it can build it. Indeed, it is not possible to charge more than what is required by law, and the law only requires a reserve of up to 50% of the share capital. In this case, since the amount of $28,715.00 is required to complete the legal reserve of 20% of the share capital. Articles 273 and 274 of the revised text of the Law on Limited Liability Companies, approved by Royal Legislative Decree 1/2010 of 2 July, read as follows: `Article 273. Implementation of Outcome 1. The General Meeting decides on the allocation of the annual result in accordance with the adopted balance sheet.
2. After hedging the statutory or statutory benefits, dividends may only be distributed out of the year`s profit or freely available reserves if the value of the net assets is not less than the share capital or is not less than the share capital as a result of the distribution. For this purpose, profits directly attributable to equity may not be distributed, directly or indirectly. If there are losses from previous years that cause the value of the company`s equity to be less than the amount of share capital, the profit will be used to offset these losses. 3. The distribution of profits shall also be prohibited unless the amount of available reserves is at least equal to the amount of research and development expenditure shown on the assets side of the balance sheet. 4. In any event, an unavailable reserve shall be established in the amount of goodwill shown in the balance sheet and a profit equal to at least five per cent of the amount of such goodwill shall be recognised for that purpose. If there is no or insufficient use, freely available reserves are used. Art.274 Legal reservation 1. In all cases, an amount equal to ten per cent of the annual net income shall be added to the legal reserve until it reaches at least twenty per cent of the share capital. 2.
The statutory reserve, provided that it does not exceed the limit indicated, may be used to offset losses only if there are no other provisions sufficient for this purpose. Therefore, once the requirements set out in the aforementioned commercial laws are met (in particular, the contribution of the legal reserve up to 20% of the capital), it will be up to the General Meeting to decide whether or not to compensate for the negative results of previous years. However, if the losses of previous years result in a value of the company`s equity lower than the share capital, the profit is necessarily used to offset these losses. “Application of anonymous rules concerning legal reserves, balance sheets and profit-sharing.