Return of a participant’s contribution to an LLC: legal, financial and tax aspects in 2026

The return of a capital contribution to an LLC participant is one of the most complex issues of corporate governance, combining elements of corporate, civil and tax law and affecting companies’ financial stability. In 2026 its relevance increased due to tighter control by the Tax Service over transactions involving reduction of share capital, distributions to participants and reallocation of corporate rights.

General grounds for returning a contribution

1. Participant’s withdrawal
   A participant may withdraw from the LLC at any time without the consent of others, and the company is obliged to pay the value of that participant’s share.
2. Participant’s expulsion
   The contribution is returned pursuant to a resolution of the general meeting on expulsion, initiated by the other co‑owners.
3. Reduction of share capital
   Part of the contribution may be returned if the general meeting resolves to reduce the capital, for example due to excess capital or restructuring.
4. Company liquidation
   The participant receives a portion of the company’s assets after settlements with creditors.

In all cases, the procedure and timing of payment are determined by law and the charter and must also comply with accounting and tax rules so that the transaction is not reclassified as a dividend distribution.

Valuation of the participant’s share.  The key issue when returning a contribution is determining the fair value of the participant’s share. Under Article 24 of the Law, it is determined as of the date the withdrawal application is filed (or the relevant meeting resolution is adopted) on the basis of the financial statements for the previous reporting period.
In practice this causes difficulties:

• if the company does not keep regular records, the valuation may be only approximate;
• disputes arise over the market value of assets;
• participants who disagree with the valuation may bring court claims.

In such cases it is recommended to perform an independent valuation or to set out the valuation mechanism in the charter, for example by involving an auditor agreed by the parties.

Form and timing of payment.  The contribution may be returned in cash or in kind, as formalised by a shareholders’ resolution, and in the case of in‑kind return by a transfer‑acceptance deed stating the composition, value and transfer date of the assets. The payment period usually does not exceed one year from the participant’s withdrawal date (it may be shorter if so provided by the charter), and any delay entails an obligation to pay inflation losses and interest under Article 625 of the Civil Code of Ukraine.

Accounting and corporate records.  In accounting, a reduction of share capital due to the return of a contribution is reflected by the following entries:

• reduction of equity;
• recognition of a liability to the participant;
• settlement of that liability in cash or in assets.

The payment decision is formalised by minutes of the general meeting specifying the reasons, amount and method of return. Changes to the Unified State Register are made after the payment or formal reduction of the share; the state registrar updates the data upon the manager’s application.

Tax implications.  If only the nominal value of the contribution is returned, no taxable income arises either for the LLC or for the participant. A payment exceeding the nominal value may be treated as income: for legal entities it is taxable under paragraph 135.5 of the Tax Code, and for individuals it is subject to personal income tax at 18% and a 1.5% military levy. In accounting there is a risk that such a transaction may be reclassified as a hidden profit distribution, so proper supporting documents are required: the meeting resolution, deed, financial statements and calculation of the share value.

Court practice.  Ukrainian courts generally protect participants who reasonably claim return of their contribution, and the Supreme Court has stated that a company may not delay payment if its balance‑sheet equity allows it to settle with the participant. At the same time, where the company operates at a loss or has negative equity, the return of a contribution may be regarded as a violation of creditors’ interests, which often leads to disputes within bankruptcy proceedings and to liability of company officers. Therefore, before deciding on a return of contribution, the manager should assess the balance sheet, creditor risks and the impact on the company’s liquidity.

Impact on ownership structure. After a contribution is returned, the participant’s share is either cancelled or redistributed among the remaining participants in proportion to their shares. This affects voting, control over the company and profitability.
Accordingly, these changes must be properly reflected in the charter, updated in the Unified State Register and, where necessary, in shareholders’ agreements. If the company plans to attract investment, returning a contribution to one participant may signal internal instability to potential partners, so it is advisable to communicate such decisions in advance and transparently.

Practical recommendations.  To mitigate legal and tax risks, experts recommend:

• clearly defining in the charter the withdrawal procedure and share valuation mechanism;
• documenting every decision in minutes and properly supporting the valuation;
• avoiding return of contributions in loss‑making periods without reducing capital;
• agreeing payment procedures with the accountant and tax advisor;
• recording these transactions via a separate account or separate analytical records in the accounting system.

It is important to remember that notarisation of signatures on documents for state registration of changes is mandatory, even if there is an internal corporate exit agreement with the participant. Returning a contribution is a strategic decision that affects the property and management interests of participants and the tax security of the company, so it should follow a financial analysis, proper documentation and legal support. In case of questions on contribution return, share valuation or corporate changes, it is advisable to seek professional advice to avoid tax risks and corporate conflicts.

Author – Oleksandr Nakonechnyi, attorney, head of the Corporate and Commercial Law Practice at WINNER Law Firm.