As the deadline to complete financial statements is drawing closer (for most companies) it is time to recall the legislative conditions for possible considerations on the distribution of profit and other equity funds. From the tax perspective, most distributions of dividends among capital companies are exempt from income tax; however, the interpretation of the legal framework, which limited the deadline to make a decision on profit distribution, has shifted.
Recently, there has been a significant shift in the interpretation of the rules for the distribution of equity funds of capital companies. There was a change in the use of the regular financial statements for making a decision on the distribution of profit after the expiry of the six-month deadline for the approval of the financial statements by the General Meeting from the end of the reporting period as stipulated by law. There is a new interpretation that distribution based on regular financial statements may also take place after more than six months after the expiry of the reporting period.
The above-specified approach has never resulted from the wording of law; it was inferred in judicature in the period of the then-effective Commercial Code. The Supreme Court inferred that the deadline to call the regular General Meeting to approve the regular financial statements is also the deadline within which the financial statements may give a true and fair view of accounting and within which thus shareholders can make qualified decisions on profit distribution. This conclusion, albeit criticised, was enforced in practice.
After the effective date of the new Civil Code and the Act on Business Corporations, it was still unclear whether the above-mentioned court interpretation would be adopted in respect of the new law. Similarly as a number of other unclear issues, this matter was discussed for quite a long time, however, the professional legal public has come to the conclusion that under the new law this approach will not be implemented. The key argument is the expansion of rules to pay out equity to include the insolvency test, which was not required by the Commercial Code.
In addition to the limits for the equity distribution contained in the provisions for a limited liability company and a joint-stock company, the Act on Business Corporations also stipulated a “golden” rule with respect to the payment, which is fully within the competence of the statutory bodies. The rule is the above insolvency test. The Act refers to the definition of bankruptcy under the Insolvency Act. In practice, it means that a statutory body should make an economic consideration and a corresponding calculation before funds are provided to shareholders.
We may conclude that a decision on the distribution of profit or other equity funds based on regular financial statements approved by the General Meeting may also be made in the second half of the following reporting period without any worries that the former judicature interpretation will prevail. The Act does not prohibit (and so it is permissible) deciding on the distribution of profit, even repeatedly, until the end of the following reporting period. From the perspective of statutory bodies, compliance with legal requirements for distribution and performance of insolvency testing before the payment should always be appropriately documented.
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The article is part of dReport – June 2018, Tax news; Grants and investment Incentives and Legal news
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