Convertible Loans and Debt-to-Equity Conversion in North Macedonia

Why Companies Consider Debt-to-Equity Conversion

A Macedonian company may receive financing from its shareholder or from an external investor in the form of a loan. As the business develops, the parties may prefer to replace all or part of that debt with an equity contribution. This is commonly described as a convertible loan or debt-to-equity conversion. The commercial reasons differ: a startup may seek early-stage financing before a valuation is agreed, while an established subsidiary may wish to reduce liabilities to its parent company and reinforce its capital base.

The legal mechanism forms part of broader business and corporate law in North Macedonia. Unlike a cash capital increase, a qualifying loan conversion uses an existing financing relationship as the basis for the capital contribution, subject to the statutory procedure and registration requirements.

Legal Basis: Article 256-a of the Law on Trading Companies

Article 256-a permits an increase of the basic capital through new contributions by transforming a loan granted either by an existing shareholder (partner) or by a third party acting as an investor. Article 432(4) addresses the introduction of the transformed loan into the capital-increase procedure. The framework was expanded in 2022 to accommodate third-party investors, in addition to existing shareholders.

Existing Shareholder Loans

A shareholder may convert an eligible loan into an additional contribution. In a wholly owned subsidiary, the parent company can remain the sole shareholder following the increase; in a company with several shareholders, the parties must examine the effect on the relative participation percentages and the rights of other shareholders. A shareholder conversion may be used for intragroup restructuring as well as investment financing.

Third-Party Investor Loans

A loan granted by a third-party investor for conversion must be made exclusively in money. Under Article 256-a(3), conversion must occur no later than the expiry of the third year from conclusion of the loan agreement. This express time limit is tied to the third-party loan described in paragraph 2. It should not automatically be applied to existing shareholder loans, although the agreement and proposed registration must still be reviewed for compliance with the law.

What Must the Conversion Agreement Contain?

Article 256-a(5) requires the agreement on a loan transformed into a contribution to state the total loan amount, the loan repayment terms, the conditions for conversion, the period during which conversion may take place, and the percentage participation acquired by the investor — or the method for determining that percentage if it cannot be fixed at signing. Under paragraph 6, the agreement must be in writing, signed by the investor and by the manager and founder(s) as consenting parties, and notarised.

An existing loan agreement containing a general conversion option is not necessarily sufficient. Parties should check whether it contains every statutory element and satisfies the formal requirements. Depending on the original documentation and the transaction, an appropriately drafted conversion agreement may be required before filing.

Can Accrued Interest Be Converted?

On a literal reading of Article 256-a, the provision governs the transformation of a loan — that is, the principal obligation — into a contribution. Accrued interest is a separate obligation arising from the loan relationship and is not, on its face, captured by the conversion mechanism. The treatment of interest should therefore be verified with the Trade Register before documentation is finalised; it should not be assumed that the entire accounting balance can be converted.

If interest remains payable, the company and lender should address repayment, continued accrual or another lawful settlement mechanism. Tax and withholding-tax consequences require separate analysis, particularly for non-resident lenders.

Corporate Approvals and Registration

The conversion is implemented through an increase of the company’s basic capital. Depending on the ownership structure, the steps may involve shareholder decisions, compliance with applicable pre-emption or priority rights, preparation of the conversion agreement, updated constitutional documents, evidence of the outstanding debt and an application to the Trade Register maintained by the Central Registry.

The statutory and registration requirements should be reviewed together. In a multi-shareholder company, the voting threshold and existing shareholders’ participation rights can materially affect the timetable and the investor’s expected percentage. The capital increase takes effect through the applicable registration process, rather than merely through an accounting entry.

Where conversion forms part of a broader restructuring or investment transaction, the corporate steps should be coordinated with the legal requirements for mergers and acquisitions in North Macedonia.

Foreign Shareholder Loans: Additional Reporting

Where a Macedonian company borrows from a non-resident parent or investor, the foreign-exchange framework introduces a separate reporting dimension. Cross-border credit transactions must be reported to the National Bank in accordance with the applicable rules. Conversion of outstanding principal changes the status of the credit transaction and may require updated reporting. The resulting direct-investment change may also need registration with the Central Registry within the applicable statutory deadline.

This reporting should be coordinated with the company’s accounting records and the corporate registration. For further background on cross-border financing obligations, see our guide to cross-border financing in North Macedonia.

Can the Investor Recover the Funds After Conversion?

A critical commercial difference is that a loan is ordinarily repayable under its contractual terms, while a capital contribution is subject to the company-law rules on maintenance and reduction of capital. Once a loan has been converted into registered capital, the investor cannot simply demand repayment of the converted amount as debt.

Potential routes for recovering value include a lawful capital reduction, distribution of profits, sale of the ownership interest or liquidation, each subject to its own conditions, creditor protection rules and tax consequences. For an overview of available mechanisms, see our guide to foreign-investor exit options. For companies expecting to repay the shareholder in the foreseeable future, partial rather than full conversion may deserve consideration.

Practical Example

Assume a foreign parent company has advanced a EUR 1 million loan to its wholly owned Macedonian subsidiary. The parent and subsidiary consider converting EUR 700,000 of outstanding principal into registered capital while leaving EUR 300,000 as a loan. The conversion may reduce debt and reinforce equity without changing the parent’s 100% ownership. However, the parties must verify the debt balance, satisfy Article 256-a, complete the capital-increase registration, address the remaining loan and interest, and update foreign-exchange reporting. The EUR 700,000 converted into capital will no longer be repayable simply under the loan agreement.

Checklist Before Proceeding

• Before committing to the conversion, the parties should conduct focused legal due diligence covering the loan documents, creditor restrictions, corporate approvals and reporting history.
• Confirm whether the lender is an existing shareholder or a third-party investor and identify the applicable timing requirements.
• Reconcile the disbursed principal and accrued interest separately, with supporting accounting and banking records.
• Review loan agreements, security arrangements, third-party consent restrictions and the proposed conversion terms.
• Determine post-conversion ownership percentages and check shareholder approvals and priority rights.
• Prepare compliant agreements, corporate resolutions, notarisation and foreign-document formalities.
• Coordinate Trade Register filing, accounting entries, National Bank reporting, direct-investment registration and tax review.
• Consider whether partial rather than full conversion better serves the investor’s exit expectations and the company’s future capital needs.

Frequently Asked Questions

Can a foreign parent company convert its loan into capital?

Generally, yes, if the relevant requirements of Article 256-a and the capital-increase procedure are met. Cross-border reporting and supporting documentation require particular attention.

Does every convertible loan have to be converted within three years?

No. Article 256-a(3) expressly addresses loans from third-party investors under paragraph 2. Existing shareholder loans should be analysed separately.

Does a conversion automatically change the shareholder structure?

Not necessarily. A sole shareholder may retain 100% ownership, while a third-party conversion or conversion in a multi-shareholder company may alter ownership percentages.

Is accrued interest automatically eligible for conversion?

No such assumption should be made. The statutory wording and current registration approach should be checked separately for interest and principal.

Is the converted capital freely repayable?

No. Once registered as capital, it is subject to the legal rules governing capital maintenance, reductions and distributions.

Conclusion

Convertible loans offer flexibility at the financing stage, but their conversion into registered capital is a formal corporate transaction with lasting consequences. Companies and investors should align the financing agreement, capital-increase documentation, regulatory reporting and future exit expectations before implementing the conversion.

Lalicic & Partners advises Macedonian and international businesses on corporate structuring, shareholder financing, capital increases and related regulatory matters.

Legal basis: Law on Trading Companies, Articles 256-a and 432(4); Law on Foreign Exchange Operations, as applicable; NBRM Instruction on individual reporting for loans received from non-residents. 

This article provides general information, not advice on a particular transaction. Administrative practice and tax consequences should be checked before implementation.

 Last updated: October 2026

Note: The above does not constitute legal advice and in no way can be accepted or understood as an instruction to act in a specific case. Each legal situation has its own characteristics that should be reviewed at separately, and for that reason we recommend that you contact a professional – a lawyer – for legal advice.