Capital Repayment Prohibition: What Founders Need to Know About Art. 680 CO

What is the capital repayment prohibition?

The so-called capital repayment prohibition is set out in Art. 680 para. 2 of the Swiss Code of Obligations (CO). It states that shareholders’ contributions – i.e. paid-in share capital and related legal reserves – may not be repaid to them as long as the company exists.

The aim is to protect company assets and thus also creditors’ interests. The contributed capital is intended to serve as permanent financing for the business.

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Relevance for founders

Especially when setting up an AG (Ltd.) or GmbH, this principle is key:

• Contributions made at incorporation (e.g. CHF 100,000 for an AG) become the property of the company.
• This capital is no longer freely available to shareholders.
• Repayments are only allowed as formally approved profit distributions.

A violation can lead to repayment obligations – even years later – and have civil and tax consequences.

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How to avoid unlawful repayment

To avoid breaches, repayments must only come from free equity:

Free equity = balance sheet profit + voluntary reserves + legal reserves above the minimum threshold.

Example:

• Share capital: CHF 100,000
• Legal reserve (20%): CHF 20,000
• Balance sheet profit: CHF 25,000
• Voluntary reserves: CHF 15,000
• Permissible distribution: CHF 40,000 (profit + voluntary reserves)

Important: hidden distributions (e.g. excessive salaries to shareholders) are also considered repayments if they don’t withstand a third-party comparison.

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Permissible repayment – only via capital reduction

The only legally secure way is a formal capital reduction under Art. 732 ff. CO, which requires:

• Amendment of the articles of association by general meeting resolution
• Creditor call (protection procedure)
• Registration in the commercial register

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Typical mistakes to avoid

• Repayment without available profit
• Charging private expenses to company assets
• Undocumented hidden profit distributions
• Incorrect presentation in financial statements

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Conclusion

The prohibition protects the integrity of company capital. For founders: once equity is paid in, it is permanently tied to the company – there is no repayment right.

Recommendation: always have repayments or distributions reviewed by your fiduciary to avoid legal risks and repayment claims.

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