Term and Meaning of Reserves in the Legal Context
The term “Reserves” refers, in a legal sense, to funds, assets, rights, or other holdings that are set aside for a specific purpose and not used immediately. Reserves are applied in numerous areas of law, notably in finance, tax, commercial, and insurance law. The term includes both tangible and intangible items that are created to secure certain obligations, for future investments, or for liquidity management purposes.
Types and Classification of Reserves
Commercial Law Reserves
In commercial law, reserves are a central element of accounting and are subject to specific statutory requirements. Section 272 of the German Commercial Code (HGB) distinguishes between disclosed (open) and hidden reserves. Open reserves are expressly indicated in the balance sheet (e.g. statutory, bylaw-based, or other profit reserves). Hidden reserves arise through undervaluation of assets or overvaluation of liabilities; they are permissible under accounting rules but are not immediately apparent from the balance sheet.Types of commercial law reserves:
- Statutory reserves: Must be created by corporations in accordance with Section 150 of the German Stock Corporation Act (AktG).
- Bylaw-based reserves: Created on the basis of contractual agreements, such as articles of association or partnership agreements.
- Other profit reserves: Can be voluntarily accumulated to strengthen capital or for risk provision.
Tax Law Reserves
In tax law, different rules apply regarding the creation and valuation of reserves. Tax recognition is governed in particular by the Income Tax Act (EStG) and the Corporate Income Tax Act (KStG). Provisions (so-called liabilities), which are created for uncertain obligations or imminent losses, play a crucial role here. Not all reserves permitted under commercial law are recognized for tax purposes.Examples of tax law reserves:
- Tax provisions: For taxes not yet assessed.
- Pension provisions: For promised company pension benefits.
- Provisions for imminent losses and others: Permissible under Section 249 (1) Sentence 1 HGB, but tax recognition is limited according to Section 5 (1) EStG.
Insurance Law Reserves
In the insurance sector, reserves serve to ensure that insurance companies are always able to meet their obligations to policyholders. These provisions are regulated by the Insurance Supervision Act (VAG) and differ depending on the type of insurance branch.Important insurance law reserves:
- Premium provisions: For future insurance benefits.
- Claim provisions: For incurred but not yet settled claims.
- Fluctuation reserves: To cover unexpected accumulation of losses.
Capital Market Law Reserves
Reserves are also created in capital market law, especially by banks and investment companies, for liquidity and risk provision. These are, for example, in the form of capital reserves to meet regulatory capital requirements according to the German Banking Act (KWG) and the Capital Requirements Regulation (CRR).
Creation, Use, and Dissolution of Reserves
Requirements for the Creation of Reserves
The creation of reserves requires a specific necessity or legal obligation. In commercial law, this relates to future expenses, risks, or losses. In insurance law, there are often official requirements for the minimum level of certain provisions.
Use of Reserves
The designated use of the reserve is generally to cover the previously specified obligation. For example, reserves can be drawn upon to finance investments or to cover losses during economically challenging times.
Dissolution and Treatment When the Reason for the Reserve Ceases to Exist
If the reason for the formation of a reserve ceases to exist, it must be dissolved. The dissolution takes place according to the respective area of law with a corresponding effect on the balance sheet. For tax purposes, failure to dissolve it can lead to additions during corporate taxation.
Disclosure and Control of Reserves
Disclosure Obligations
The creation and existence of disclosed reserves must be presented in the balance sheet, in notes, and, where applicable, in the management report. In particular, corporations are subject to detailed disclosure requirements under the HGB and supplementary European regulations (e.g. Directive 2013/34/EU).
Control and Audit
Reserves are subject to control by supervisory authorities (BaFin in the insurance and banking sectors) and audit by external auditors. Proper creation, valuation, and use are essential for accuracy and clarity of financial statements.
International Classification and Special Features
Comparison of International Standards
International accounting standards (IFRS) provide for similar, though sometimes more extensive or divergent, regulations for the formation of reserves. This applies particularly to the recognition of provisions and disclosure obligations in international financial statements.
Special Provisions
In certain legal areas such as foundation law, in cooperatives, or for public corporations, there are also independent regulations for the creation and management of reserves. Non-profit organizations, for example, are subject to special reserve requirements to ensure the sustainable use of funds.
Summary
Reserves, in the legal sense, are important instruments to ensure financial stability, fulfillment of legal and contractual obligations, and risk provision. Their creation, use, and disclosure are comprehensively regulated by numerous rules in commercial, tax, insurance, capital market, and other legal fields. Correct accounting treatment and control of reserves are essential prerequisites for the transparency and reliability of corporate and institutional reporting.
Frequently Asked Questions
What legal requirements apply to the creation of reserves in corporations?
The creation of reserves is strictly regulated by law for corporations such as GmbH and stock corporation (AG). For the AG, fundamental obligations arise from Section 150 of the German Stock Corporation Act (AktG): The AG must allocate at least 5% of the net profit for the year, reduced by any loss carried forward from the previous year, annually to the statutory reserve until, together with the capital reserve, it reaches 10% of the share capital. As a rule, the GmbH has more freedom in the formation of reserves under Section 29 GmbHG, but should – particularly with respect to creditor protection and adequate capitalization – provide for voluntary reserves in its articles of association. Additionally, there are special requirements for certain industries and types of entities, such as credit institutions (§ 340f HGB, KWG) or insurance companies (VAG). Breaches of these regulations can result in both civil (e.g. nullity of resolutions) and criminal consequences (such as fraudulent insolvency or balance sheet falsification).
To what extent are reserves protected from creditor access?
Legally, reserves formed generally represent corporate assets that serve to protect creditors, but are not independently protected from creditor access in the event of insolvency. Reserves, especially statutory reserves, are part of liable equity and may be used in insolvency proceedings to satisfy creditor claims. However, statutory provisions – for instance, restrictions on distribution under Section 58 AktG or Section 29 GmbHG – limit the ability to distribute reserves to satisfy claims outside insolvency proceedings. Pre-insolvency withdrawals or distributions from reserves are also subject to potential clawback actions under the Insolvency Code (§§ 129 ff. InsO) and may be reversed to ensure fair creditor satisfaction.
What role do reserves play in dividend distribution?
The ability to distribute profits to shareholders or partners is closely linked to the formation of reserves, as parts of the annual surplus must initially be allocated to statutory or bylaw-based reserves. Only the profit remaining after these allocations can be distributed (Section 58 (3) AktG; Section 29 (1) GmbHG). If additional reserves are required by the AG’s bylaws or the GmbH’s articles of association, these must also be considered in advance. The statutory and bylaw-based reserves serve, among other things, to protect creditors and stabilize equity. If a company violates these distribution restrictions, shareholders or partners may be required to repay unlawfully received amounts (Section 62 AktG; Section 31 GmbHG).
What disclosure obligations apply to reserves in annual financial statements?
Under the German Commercial Code (HGB), corporations are required to clearly present the scope and changes in reserves in the annual financial statements and in the notes (§§ 266, 272, 285 HGB). These obligations serve as an information function for shareholders, creditors, and the public and are a prerequisite for proper audit by the auditor. In particular, statutory, bylaw-based, and other profit reserves must be shown separately. Breaches of these disclosure obligations may lead to objections to the financial statements, management liability, and, in serious cases, criminal liability (§ 331 HGB, § 400 AktG).
What co-determination rights does the shareholders’ meeting have with regard to reserves?
In the formation, dissolution, and use of reserves, the shareholders’ meeting (for the GmbH) or the general meeting (for the AG) has significant co-determination rights in some cases. While statutory reserves are mandatory and not at the shareholders’ discretion, the use of bylaw-based or voluntary reserves is often subject to resolutions by the relevant body (§ 58 AktG, § 29 GmbHG). Shareholders can in particular decide on the allocation of additional amounts to free reserves or their use, for example, to increase dividends or cover losses. Bylaw or contractual provisions may expand or restrict these co-determination rights.
What are the legal consequences of incorrect reserve creation or improper use?
Errors in the creation or use of reserves – such as failure to form legally required reserves or unauthorized withdrawals – can lead to significant legal consequences. Management may be personally liable to the company under certain circumstances (§ 93 (2) AktG, § 43 GmbHG). Incorrectly reported reserves in financial statements can constitute criminal balance sheet and embezzlement offenses pursuant to §§ 331 HGB, 266a StGB. Furthermore, improper distributions may give rise to repayment claims by the company against shareholders or partners (§ 62 AktG, § 31 GmbHG). Recurrent or intentional violations increase liability and criminal risk.
What special rules apply to reserves in the dissolution and liquidation of a company?
In the event of liquidation of a company, reserves are part of the total capital, which is distributed to shareholders after all creditors have been satisfied (§§ 72 ff. GmbHG, §§ 271 ff. AktG). No distributions may be made to shareholders until all debts have been settled; this includes all types of reserves. Special regulations for certain reserves (for example, pension provisions) may exist if, in the course of liquidation, they serve specific purposes or must benefit third parties. In the case of insolvency, the rules of the Insolvency Code apply, under which all reserves form part of the insolvency estate.
Who bears the burden of proof for proper reserve creation in the event of a dispute?
If, in the event of a dispute – for example, in liability proceedings against managing directors or the board – questions concerning reserve creation arise, the burden of proof for proper reserve policy generally lies with the officer seeking relief from liability claims. This particularly requires keeping records of annual financial statements, minutes of shareholders’ or general meetings, and documentation of all reserve movements. As part of management liability, it will then be examined whether legal and bylaw-based provisions have been observed; a lack of documentation is generally detrimental to the defendant.
