Reserve in a legal context
The term reserve refers in legal terms to a variety of provisions, reservations, or securities that serve different functions across various areas of law. The term is often used in the context of finance, insurance law, corporate law, tax law, and other areas. The following provides a comprehensive overview of the legal aspects of reserves, taking into account the respective special regulations.
Definition and general significance of the reserve
In a legal context, a reserve is generally understood to be a set-aside amount, provision, or reservation to secure existing or future obligations. The purpose of creating reserves is to cushion risks and to ensure the financial or legal stability of a natural or legal person.
Reserve in corporate law
Capital reserves and earned reserves
In corporate law, particularly in commercial law, reserves are shown as part of equity. The Commercial Code (HGB) and the Stock Corporation Act (AktG) fundamentally distinguish between capital reserves (§ 272 (2) HGB) and earned reserves (§ 272 (3) HGB):
- Capital reserves: This includes, for example, share premiums upon issuance of shares as well as additional contributions from shareholders.
- Earned reserves: These are provisions formed from retained earnings, for example, the statutory reserve (§ 150 AktG), statutory reserves as per articles of association, and voluntary reserves.
Statutory reserve in a stock corporation
The statutory reserve is a special form of reserve which, according to § 150 AktG, must be created mandatorily. A stock corporation must annually allocate at least five percent of its net income, reduced by any loss carryforward, to the statutory reserve until this reserve, together with capital reserves, reaches ten percent of the share capital.
Reserve in tax law
Tax treatment of reserves
In tax law, reserves play a role primarily in profit determination. It is important to distinguish between provisions and accruals:
- Provisions (reserves): These are portions of equity formed from taxed profits. They serve to preserve economic capacity and are not treated as an expense for tax purposes.
- Accruals: In contrast, accruals are outstanding liabilities that may be deducted as expenses in determining profit.
Reserves under § 6b EStG
The Income Tax Act allows, in certain cases (§ 6b EStG), the creation of tax reserves, particularly upon the sale of certain business assets. The resulting reserve can be used to avoid or defer taxation, provided reinvestment requirements are met.
Reserve in insurance law
Term and purpose of technical reserves
In insurance law, technical reserves (also known as actuarial reserves) represent the obligations of an insurance company towards policyholders. They ensure that future payment commitments under concluded insurance contracts are met.
Legal basis
The formation and management of reserves in the insurance sector are governed in particular by the Insurance Supervision Act (VAG), the Commercial Code, and regulatory requirements such as the Solvency Ordinance and Solvency II.
Risk reserves and fluctuation provisions
Other reserve-like positions in the insurance sector include risk reserves and fluctuation provisions, which are intended to cushion volatility or extraordinary loss events.
Reserve in banking and financial regulatory law
Equity reserves and regulatory requirements
Banks are required to maintain various types of reserves to ensure their liquidity. The most important reserves are regulated in the Capital Requirements Regulation (CRR) and in legal requirements set by BaFin:
- General bank reserves: This includes general provisions under § 340g HGB, which are formed to cover general credit risks.
- Special items with a reserve component: According to HGB, further items can be formed to cover risks.
Minimum reserve policy of central banks
The minimum reserve (central bank reserve) refers to the deposits credit institutions are required to hold with the central bank. This reserve obligates banks to deposit a certain percentage of customer funds to ensure liquidity in the financial system.
Reserve in inheritance law
Reserves can also play a role in inheritance law, for example, when assets are set aside as reserves in the context of estate execution or estate administration until all estate liabilities have been settled. This prevents assets from being distributed prematurely and protects the satisfaction of estate creditors.
Reserve in international law
In international law and international commercial law, the terms ‘reservations’ or ‘reservations’ are used when a state invokes specific exceptions to international treaties. Here as well, the term ‘reserve’ is used in the sense of a legal reservation, although it represents a different systematic legal classification than in national law.
Conceptual distinction: reserve, provision, accrual
In legal terminology, a precise distinction between reserve (often used synonymously with provision), accrual, and reservation is important:
- Reserve/provision: Part of equity designated to strengthen the company’s substance, freely available as long as it is not earmarked
- Accrual: Liability item to cover uncertain obligations
- Reservation (in international law): Conditional consent to international treaties under certain reserved points
Literature and further sources
For more in-depth information on the individual areas of law, relevant expert commentaries and statutory texts are recommended, in particular:
- § 150 AktG (Statutory reserve)
- § 272 HGB (Structure of equity capital)
- Insurance Supervision Act (VAG)
- Capital Requirements Regulation (CRR)
- Income Tax Act (EStG)
Summary
Die reserve is a term used in many areas of law and generally refers, in legal terms, to a provision or reservation created to strengthen the financial or legal position. The specific structure, function, and legal significance vary depending on the area of application, particularly between corporate law, tax law, insurance law, and banking supervisory law. Compliance with the respective legal requirements is crucial for the lawful and appropriate creation and use of reserves.
Frequently Asked Questions
Which legal regulations govern the formation of provisions and reserves in corporations?
In Germany, the formation of provisions and reserves in corporations is primarily governed by the Commercial Code (HGB) and the Stock Corporation Act (AktG). According to § 150 AktG, stock corporations are in particular required to form the so-called statutory reserve from their annual surplus, as long as this and other capital reserves together account for less than ten percent of the share capital. The GmbH Act (GmbHG), on the other hand, contains no specific requirements for the formation of provisions, so the general regulations of the HGB and the respective articles of association apply here. In addition, there are tax regulations, e.g. in the Income Tax Act (EStG), which influence certain accruals or reserves. Provisions shown in the balance sheet must be properly reported and documented in the commercial balance sheet, and the principle of clarity and truth (§ 238 HGB) must always be observed.
What are the legal differences between disclosed and hidden reserves?
Disclosed reserves are shown in the balance sheet and are visible as part of equity, whereas hidden reserves arise from undervaluation of assets or overvaluation of liabilities and are not separately presented in the balance sheet. The handling of disclosed reserves is primarily regulated by law, particularly in the HGB and AktG. The accounting and formation of disclosed reserves are subject to strict provisions regarding dividend protection and dissolution. In contrast, hidden reserves are legally relevant for company valuation, especially in mergers, conversions, insolvency, and tax audits. The creation of hidden reserves is generally permitted as long as it is based on recognized valuation principles (§ 253 HGB), but they must not be used arbitrarily or to mislead.
To what extent are provisions relevant for creditor protection from a legal perspective?
The formation of provisions serves, among other things, creditor protection by retaining part of the profits within the company, thereby strengthening liable equity capital. The AktG explicitly provides for this, e.g., the statutory reserve must be formed before distributions (§ 150 AktG). In addition, certain reserves such as capital reserves (§ 272 (2) HGB) are subject to a distribution ban (§ 58 (2) AktG). The purpose of these regulations is to ensure that in the event of insolvency, creditors find a larger pool of assets to satisfy their claims. Violations of these regulations can result in both civil and criminal consequences for the management, especially in case of unlawful distribution or withholding of provisions.
What are the legal requirements for dissolving provisions?
The dissolution of provisions depends on the respective provision and its legal basis. Statutory provisions, especially those formed under § 150 AktG, may in principle only be used to offset losses or for capital increases by conversion into share capital. Voluntary provisions, on the other hand, can be dissolved by shareholder resolution and – unless other restrictions apply – can also be used for profit distribution. In every case, proper accounting treatment and documentation must be observed under both commercial (§ 273 HGB) and tax law. Hidden reserves usually become apparent only in connection with a disposal or when determining the book value and then lead to corresponding tax consequences.
What are the disclosure and documentation obligations concerning provisions?
According to §§ 242 and 264 HGB, corporations are required to properly prepare their balance sheet and notes, in which disclosed reserves must be separately reported and explained. According to the BilRUG (Accounting Directive Implementation Act), a differentiated presentation of the various types of reserves (statutory, as per the articles of association, other, and capital reserves) is also required. Incorrect or omitted disclosure can lead to liability towards shareholders, creditors, and tax authorities. Management is especially obliged to fully and comprehensibly document the origin, changes, and use of reserves.
What options and limitations exist for the formation of provisions from a corporate law perspective?
In addition to statutory provisions, corporate law also allows for provisions specified in the articles of association and voluntary provisions, provided the articles or partnership agreement permit this and no legal regulations oppose it. The articles can, for example, require the formation of certain retained earnings or impose specific restrictions on use. However, there are limits where the formation of provisions would result in an anticipated distribution of profits against the will of the shareholders, or where statutory distribution restrictions are disregarded. In addition, the voting rights of shareholders or stockholders must always be respected when decisions are made about profit retention and the formation of provisions.
How are provisions treated legally in the event of insolvency?
In the event of insolvency, provisions – both disclosed and hidden reserves – generally form part of the insolvency estate and are available to satisfy creditors’ claims. The legal treatment is governed by the provisions of the Insolvency Act (InsO). The insolvency administrator is obliged to use even the funds tied up in provisions as part of the estate. Statutory provisions have a particular protective function, as they were protected from premature access by third parties and are only released in the insolvency process. The improper dissolution of reserves just before filing for insolvency can result in liability and criminal consequences for management (§ 64 GmbHG, § 93 AktG).
