In brief: Moroccan law requires every SARL to allocate 5% of annual net profits to a legal reserve until it reaches 20% of share capital. For SAs, the threshold is 10%. This reserve is non-distributable and protects the company against future losses. Learn more about LLC formation in Morocco.
Understanding the Legal Reserve Requirement for SARLs in Morocco
In Morocco, Limited Liability Companies (Sociétés à Responsabilité Limitée - SARL) are subject to specific legal requirements, one of which is the constitution of a legal reserve. This is a crucial aspect of financial management and compliance for SARLs operating in the country. For a complete guide to business creation in Morocco, including SARL incorporation, see our dedicated article.
What is the Legal Reserve?
The legal reserve is a portion of the company’s annual net profits that must be set aside to reinforce the company’s equity and provide a buffer against potential future losses. Moroccan commercial law mandates this allocation for all capital companies, including SARLs and SAs (Sociétés Anonymes).
The legal framework is established by two key laws:
- Article 329 of Law 17-95 governs legal reserve requirements for Sociétés Anonymes (SA).
- Article 89 of Law 5-96 governs legal reserve requirements for Sociétés à Responsabilité Limitée (SARL).
Both laws require companies to allocate 5% of their annual net profit to the legal reserve fund. This requirement also exists in other European countries.
How Does the Legal Reserve Work?
Allocation Percentage and Threshold
SARLs and SAs are required to allocate 5% of their annual net profits to the legal reserve. However, the maximum threshold differs by company type:
- SA (Société Anonyme): allocation continues until the reserve reaches 10% of the company’s share capital (Article 329, Law 17-95).
- SARL (Société à Responsabilité Limitée): allocation continues until the reserve reaches 20% of the company’s share capital (Article 89, Law 5-96).
Once the threshold is reached, the company is no longer required to make the 5% allocation. If the reserve falls below the threshold — for example, after absorbing losses — the company must resume the annual allocation.
Treatment of Prior Losses
When a company has accumulated losses from previous years, the legal reserve is calculated on the positive difference between the current year’s net profit and the prior losses carried forward. If this difference is zero or negative, no allocation is required for that fiscal year.
Usage Restrictions
Funds in the legal reserve are not freely distributable to shareholders. They are meant to provide financial stability and are only used under specific conditions stipulated by law.
Practical Example of Legal Reserve Calculation
Consider an SARL with a share capital of 500,000 MAD. The legal reserve threshold is 20% x 500,000 = 100,000 MAD.
- Year 1: Net profit of 200,000 MAD. Allocation = 5% x 200,000 = 10,000 MAD. Cumulative reserve = 10,000 MAD.
- Year 2: Net profit of 300,000 MAD. Allocation = 5% x 300,000 = 15,000 MAD. Cumulative reserve = 25,000 MAD.
- Year 3: Net profit of 400,000 MAD. Allocation = 5% x 400,000 = 20,000 MAD. Cumulative reserve = 45,000 MAD.
This process continues each year until the cumulative reserve reaches 100,000 MAD. Once the threshold is met, the 5% allocation is no longer required.
Accounting Treatment of the Legal Reserve
The allocation to the legal reserve is recorded when the profit is distributed, in compliance with accounting rules in Morocco. The standard accounting entry is:
- Debit: Account 1191 — Net profit for the year
- Credit: Account 1140 — Legal reserve
This entry is recorded after the approval of the annual financial statements by the Ordinary General Meeting (AGO), which typically takes place within six months of the fiscal year-end.
AGO Resolution for Profit Allocation
The profit allocation, including the legal reserve contribution, is decided during the company’s Ordinary General Meeting (Assemblée Générale Ordinaire). The standard resolution specifies the net profit amount, the 5% allocation to the legal reserve, and then the distribution of the remaining balance between dividends and retained earnings.
The minutes of the AGO must explicitly reflect this allocation. In case of a tax audit or legal review, the absence of this documentation can lead to complications for the company.
Can the Legal Reserve Be Distributed?
No, the legal reserve cannot be distributed to shareholders as dividends. It is considered an unavailable reserve and forms an integral part of the company’s equity.
However, the legal reserve may be used to absorb losses when other reserves and retained earnings are insufficient. In such cases, it must be reconstituted as soon as the company returns to profitability.
The legal reserve can also be incorporated into the share capital through a capital increase, but this operation does not release the company from the obligation to reconstitute the reserve up to the legal threshold based on the new capital amount.
Rules When Share Capital Changes
When the company’s share capital is modified, the following rules apply:
- Capital increase: the company must continue allocating to the reserve until it reaches the legal threshold (10% for SA, 20% for SARL) calculated on the new share capital.
- Capital reduction due to losses: the reserve must be reconstituted up to the threshold based on the new capital. Any excess becomes distributable.
- Capital reduction not due to losses: any portion of the legal reserve exceeding the threshold based on the new capital becomes distributable.
Difference Between Legal, Statutory, and Optional Reserves
It is important to distinguish between the three types of reserves:
- Legal reserve: mandated by law (5% of net profit). It is not distributable, and its threshold is set by legislation (10% for SA, 20% for SARL).
- Statutory reserve: established by the company’s articles of association. Its rate and ceiling are freely determined by the shareholders when drafting the statutes. It is also non-distributable as long as the articles remain unchanged.
- Optional reserve (réserve facultative): decided freely by the AGO. It can be distributed later by decision of the general meeting.
Penalties for Non-Compliance
Failure to constitute the legal reserve exposes the company to several risks:
- Nullity of the resolution: any profit allocation decision that does not respect the 5% deduction may be annulled by a court.
- Fictitious dividends: distributing dividends without first allocating to the legal reserve constitutes a fictitious dividend, which carries criminal penalties for directors and managers.
- Director liability: managers or board members may face personal liability, including criminal responsibility.
It is therefore essential for every company to strictly comply with this obligation for each profitable fiscal year.
Why is the Legal Reserve Important?
- Financial Security: it acts as a safeguard, ensuring the company has funds to cover future uncertainties or losses.
- Investor Confidence: maintaining this reserve demonstrates prudent financial management and enhances investor trust.
- Legal Compliance: adhering to the requirements is essential for avoiding penalties and maintaining good standing.
For SARLs operating in Morocco, it is essential to be well-informed about regulatory requirements to ensure smooth and compliant business operations. Consulting with legal and financial experts is advisable for detailed guidance tailored to your company’s specific situation. Contact Upsilon Consulting for expert assistance with your legal and accounting obligations.
Frequently Asked Questions
What is the legal reserve for an LLC in Morocco?
The legal reserve is a mandatory allocation of 5% of net profits that every LLC (SARL) in Morocco must set aside each year until the reserve reaches 20% of the share capital. This reserve is non-distributable and serves as a financial cushion to protect the company and its creditors against future losses.
What happens if a company does not allocate to the legal reserve in Morocco?
Failure to allocate to the legal reserve can result in the nullity of the profit distribution resolution. Distributing dividends without first allocating 5% to the legal reserve constitutes a fictitious dividend, which carries criminal penalties for directors and managers. The tax administration may also challenge the distribution during an audit.
Can the legal reserve be used to cover losses in Morocco?
The legal reserve is intended to strengthen the company’s financial position and is not meant to be distributed. However, it can be used to absorb losses in certain circumstances, particularly when the company’s equity falls below the legally required minimum. Using the reserve requires a decision by the extraordinary general meeting.
