Capital Return

A Capital Return is a Corporate Actions Event whereby the initial capital paid by the shareholders is paid back to those shareholders. A Capital Return differs from a (Cash) Dividend in the sense that a Capital Return is paid by decreasing a company’s equity, whereas a (Cash) Dividend is paid from the Company’s profits.

  • When a company pays back part of all of the invested money to the investor hereby decreasing the total value of the investment.
  • A transfer of wealth back to the investors by the company. When the company pays a Capital Return, it will decrease its outstanding capital accordingly.
  • Equities
  • REIT’s
  • Closed End Funds
  • Structured Products

Longer Description from the point of view of different market participants

Once the Capital Return has been approved at the AGM, the board of the company will announce the event and the payout rate. On the Pay Date of the event, the issuer will need to make sure that the Paying Agent has (or has access to) the funds for distribution.

The Registrar will need to record all the eligible positions as per close of day Record Date.

The Agent Bank will need to create the Event in the systems of the CSD (or in their own systems) and initiate messaging downstream. Assuming that payment is triggered automatically, the Agent needs to ensure that the funds are in the account so that all payments can be initiated correctly and on time.

Numbering Agencies need to update the status of the shares to “Ex-Entitlement” or something that reflects that the transaction has taken place. The nominal value of the shares need to be changed (decreased) on Ex Date.

Any exchange that is listing the security will continue to list the security and should (in theory) see no change in the share price as a result of the event.

Any index that included the security will continue to include the security in the index. The price of the individual share should (in theory) stay the same and the same applies to the total market capitalisation of the company.

At CSD level the cash proceeds need to be booked to participants. To effect this, bookings (so called Payments free of Delivery) need to be made to Participants. Open Trades that are in “matched” status as of Record Date of the Capital Return need to compensated (Cash Claims), meaning that an additional trade has to be created (Payment free of Delivery) to deliver the cash proceeds from the seller to the buyer. Messaging is generated at the issuer CSD and sent down the chain. The CSD needs to make sure that the cash amounts coming in and out are Reconciling with each other otherwise it would make a loss.

At Custodian level the cash proceeds need to be booked to Clients. To effect this, bookings (so called Payments free of Delivery) need to be made to Clients. Open Trades that are in “matched” status as of Record Date of the Capital Return need to compensated (Cash Claims), meaning that an additional trade has to be created (Payment free of Delivery) to deliver the cash proceeds from the seller to the buyer. Messaging is received from the Issuer CSD (and often ingested by automated systems) and subsequent messaging is generated and sent further down the chain. The Custodian needs to make sure that the cash amounts coming in and out are Reconciling with each other otherwise it would make a potential loss.

At Broker level the cash proceeds need to be booked. To effect this, bookings (so called Payments free of Delivery) need to be made to Clients. Open Trades that are in “matched” status as of Record Date of the Capital Return need to compensated (Cash Claims), meaning that an additional trade has to be created (Payment free of Delivery) to deliver the Cash Proceeds from the seller to the buyer. Messaging is received from the Custodian (and often ingested by automated systems) and subsequent messaging is generated and sent further down the chain. The Broker needs to make sure that the cash amounts coming in and out are Reconciling with each other otherwise it would make a potential loss.

If the stock is on loan or held as collateral, then both the stock lending brokers (or all 3 if it’s 3rd-party lending) and collateral agents need to effect the transaction in their books. Stock may have to be recalled before the important dates of the event. In case of a Capital Return, the Cash Proceeds may have to be realigned back to the lender (depending on the terms and conditions under which the loan/collateral was agreed).

Fund Manager need to include the change in the fund accounting and possibly in the NAV. Or if the Fund Manager uses a Transfer Agent, then this is a task for the Transfer Agent.

    • In case the fund manager uses a Transfer Agent, then the transfer Agent needs to handle the transactions as a result of the Capital Return.
    • These transactions need to be included in investment statements that are sent to investors also.

Vendors will have to update their systems with the correct information for the security and send messaging to their clients about it. On the Ex Date of the Event, the security will have to be updated with an “Ex Dividend” Status.

    • At Retail Bank level the cash proceeds need to be booked into Beneficial Owners Accounts. To effect this, bookings need to be made to clients. Open Trades that are in “matched” status as of Record Date of the Capital Return event need to compensated (cash claims), meaning that an additional payment has to be created to deliver the additional cash proceeds from the seller to the buyer. It has to be noted though that the amount of claims at Retail Bank level is likely to be minimal. Messaging is received from the higher up in the chain (and often ingested by automated systems) and subsequent messaging is generated and sent further down the chain. What is interesting to see here is that this seems to be the End Point for Swift Messaging as a means to inform underlying clients. At this level it’s often just a text message or a short description with the event and a reference to where source documentation can be found (online).
    • When the beneficial owner holds the securities through for example a Fund or an ETF, then the Retail Bank does in that case not need to take action on the event (it’s part of the fund manager’s tasks)

Beneficial owner will have to take note of the changes and reconcile these within their systems (if applicable). This can via real time messaging that they may receive, but it should also be in their periodic investment statements.

Background

The main differences are relating to tax treatment.

By lowering the equity side of the balance, the company raises the leverage (debt/equity) and therefore the risk profile of the company.

    • Capital Account of some form
    • Sale of company assets
    • Unspecified
    • Shares Premium Account / Reserves

Other Aspects

  • CAEV
    • CAPD
  • CAMV
    • MAND
  • CAEP
    • DISN
  • CAOP
    • CASH
  • Qualifier CAEV = CAPD 
  • CAOP = CASH
  • Mandatory event => field 22F: CAMV = MAND

SMPG actually has made a Return of Capital Matrix, specifying a couple of sub-events and their Distinguishing Characters. It’s quite hard to find if you don’t know where to look for it as it is a tab in a spreadsheet that has a different name. If you click on the image below, it will take you to the spreadsheet on the SMPG website directly. It’s the tab called “Return of Capital”.

 

Sub-typs of Capital Return

As can be seen, there are a further 3 subtypes of the CAPD each with their distinguishing Characteristics. However, the characteristic that most stands out is the “Source of Capital”. So depending on where the funds come from a different event type should be used:

CAPG: Capital Gains Distribution. Distribution of profits resulting from the sale of company assets.

DECR: Decrease in Value: Reduction of face value of a single share or the value of fund assets. This event may result in no cash proceeds being paid.

SHPR: Shares Premium Dividend: This corporate action event pays shareholders an amount in cash issued from the shares premium reserve of the company.

1 Company to decide for a Return of Capital (often advised by management consultants, accountants and industry experts)

2 Company to appoint a Paying Agent

3 Company to officially announce and publish the details of the event

4 Paying agent to distribute the information among all industry participants

5 Paying agent to pay the money on the payment date

6 All Industry players to pay underlying clients and process cash compensations (claims)



  • Announcement Date
  • Ex Date
  • Record Date
  • Pay Date
  • MT54X (PfoD transactions)
  • MT564
  • MT566
  • Sese.025 (PfoD transactions)
  • Seev.031
  • Seev.036

!!Important!! You should contact your own Tax Advisor for your specific Tax queries. No rights can be derived from any information on this website or from any of the websites that the below text links to. This topic is included for Information purposes only. Taxes differ per country and are subject to change. The tax status of investors may also depend on the type of account the shares are held in.

 

As a starting point it may be good to notice the different names for Taxes that could potentially be involved (depending on jurisdiction):

  • Capital Gains Tax (CGT) – Capital Gains Tax is a tax on the profit when you sell (or ‘dispose of’) something (an ‘asset’) that’s increased in value. It’s the gain you make that’s taxed, not the amount of money you receive. More information about Capital Gains Tax can be found here for several countries: https://en.wikipedia.org/wiki/Capital_gains_tax. Capital Gains Tax does NOT usually apply to Dividend Payments if the Dividend is paid in Cash.
  • Withholding Tax – a tax deducted at source, especially one levied by some countries on interest or dividends paid to a person resident outside that country. A list of Withholding Taxes around the world can be found here. https://www.dlapiperintelligence.com/goingglobal/tax/index.html?t=17-withholding-tax
  • Dividend Tax – A dividend tax is the tax imposed by a tax authority on dividends received by shareholders (stockholders) of a company. Under most Jurisdictions, Dividend Tax is a form of Income Tax and taxed accordingly at the individual level.
  • Income Tax – Income tax is a tax that governments impose on income generated by businesses and individuals within their jurisdiction. It’s often charged at different rates depending on the source of income and the individuals total earnings. To get an idea about different tax rates charged around the world, please check this table: https://home.kpmg/xx/en/home/services/tax/tax-tools-and-resources/tax-rates-online/individual-income-tax-rates-table.html. Note that these rates can change in time. Note that there may be several layers of taxing authorities, for example; federal and provincial.
  • Stamp Duty – a tax that is charged in the UK and may be applicable to Corporate Action Events, like for example a Dividend Reinvestment Plan. More information can be found here: https://www.gov.uk/tax-buy-shares



For the issuer there is no Dividend Tax to be paid on the Capital Return Proceeds. There is no Capital Gains Tax on Capital Return Events for investors but it is important to realise that it can reduce the investor’s adjusted Cost Basis of the shares depending on in which country you are and what type of account you hold the securities in. This is important to realise when selling the shares from a Tax Planning perspective as it may affect your CGT liabilities.




On May 28, 2009, the shareholders of Nobelcorp approved a return of capital to shareholders through a reduction in par value in an aggregate amount equal to 0.25 CHF per share, which was paid in four installments as follows:

August 2009:

CHF 0.10

November 2009:

CHF 0.05

February 2010:

CHF 0.05

May 2010:

CHF 0.05

Under current Swiss tax law, distributions to shareholders in the form of a reduction in par value are exempt from Swiss withholding tax. However, the company urged shareholders to consult Noble’s Proxy Statements relating to its Change of Incorporation, its 2009 General Meeting of Shareholders and its 2010 General Meeting of Shareholders each as filed with the U.S. Securities and Exchange Commission. Investors were also urged to consult their tax advisor for more information.

Open trades that are in “matched” status on Record Date will be compensated, meaning that additional trades will be created to compensate the buyer who is entitled to the cash proceeds of the Capital Return Event.

With Capital Returns there are no fractions

Assumption used for this example:

1) the investor holds 100,000 shares in company “ABC” before the event takes effect

2) the market price of the shares before the event = EUR 5.00

3) the nominal value of the shares before the event = EUR 1.00

4) Return of Capital (EUR 0.50 per share)

In the example the shareholder will keep all of their 100,000 shares, while the market price stays the same and the nominal value drops from EUR 1.00 to EUR 0.50.

In theory, a return of capital event has no influence on the market price of the shares. It does, however, influence the nominal value of the shares (and of the company).

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