The Impact of the Amendment to the Act on Business Corporations on Accounting
From 1 January 2021, an amendment to Act No. 90/2012 Coll., on Business Corporations and Cooperatives (Business Corporations Act), which brings a number of changes, will take effect. In today’s article, we will focus on those changes that are important from the viewpoint of CFOs and accountants.
The reason for the amendment to the Act on Business Corporations (hereinafter the “BCA”) was the ambiguity of some provisions of the existing BCA, as well as the effort to bring Czech legislation in line with European Union law.
If you are interested in the practical impact of the amendment to the BCA on company owners and management, we recommend that you watch the free webcast of 9 September 2020 The Great Amendment to the Business Corporations Act prepared by our colleagues from the Legal Department. You will learn how to deal with changes and how to prepare effectively for their arrival.
We will now focus on changes in four areas that are interesting from an accounting and reporting perspective.
Distribution of profit and other own resources
The amendment to the BCA significantly changes the rules for the payment of profit shares in a business corporation. As amended until 31 December 2020, only the distribution of profit is addressed; from 1 January 2021, the share in other own resources will be explicitly added.
Section 34 (1) of the BCA, as amended, states that profit and other own resources according to the financial statements can be distributed until the end of the reporting period following the reporting period for which the financial statements were prepared. This wording is in line with the Supreme Court judgment of 27 March 2019 (Resolution 27 Cdo 3885/2017).
It will continue to be the case that the distribution of profit is decided by the supreme body of the company (General Meeting), while the payment is decided by the statutory body (board of directors or statutory executive).
The share in profit and other own resources is due within three months of the decision of the General Meeting, unless the law, Memorandum of Association or supreme body determines otherwise.
The balance sheet test, which should precede the distribution of profit, is moved to Section 34 (2) so it now applies not only to joint-stock and limited liability companies but also to cooperatives. A maximum of the sum of the profit or loss for the last reporting period ended, accumulated profits or losses brought forward and other funds which the capital company or cooperative may use at its discretion, less allocations to reserve and other funds, may be distributed. At the same time, the amendment to the BCA provides that in the event of a failure to perform this test, the decision of the General Meeting has no legal effects.
Advances on profit share
The advance on the profit share may be paid only on the basis of interim financial statements, which will demonstrate that the business corporation has sufficient resources to distribute profit. The interim financial statements need not be audited and are not subject to approval by the General Meeting. Advances can only be paid on profit, not in relation to other own resources.
The amendment to the BCA newly stipulates that the advance on the profit share is repaid within three months from the date on which the ordinary or extraordinary financial statements have been or should have been approved, in the event that the advances exceed the “final” profit share.
Restriction on the distribution and payment of profit shares or other own resources
In Section 40 of the BCA, the amendment stipulates an equity test that prohibits profit distribution when not passed. Equity cannot drop below the amount of the subscribed capital increased by funds that cannot be distributed by law or Memorandum of Association. Until the amendment, the BCA imposed this test only on joint-stock companies; it will newly be applicable to limited liability companies and cooperatives as well. When the equity test is not passed, the resolutions of the General Meeting have no legal effect.
Section 40 (3) continues to stipulate that a business corporation cannot pay profit shares or other own resources if this resulted in its bankruptcy. This also applies to the payment of profit share advances. It is newly stipulated that the right to a profit share or other own resources that was not paid until the end of the reporting period due to this reason expires. Unpaid profit or other own resources will be allocated to retained earnings brought forward.
A paragraph from Act No. 563/1991 Coll., on Accounting, dealing with restrictions on the distribution of profit or other own resources in case development costs are recognised in the balance sheet assets, was transferred to the BCA (Section 40 (2)) and reworded. In this case, the amount to be distributed is reduced by the amount of development costs not written off.
Publishing of financial statements of business corporations
Together with the amendment to the BCA, Act No. 304/2013 Coll., on Public Registers of Legal and Natural Persons and on the Register of Trusts, was also amended. One of the reasons for this was the frequent non-fulfilment of the obligation of business corporations to enter ordinary and extraordinary financial statements in the Collection of Deeds in the Commercial Register.
As is the case already, registry courts will have the option of imposing procedural fines of up to CZK 100,000 on business corporations which fail to meet this obligation also after 1 January 2021.
Under the newly inserted Section 105a, if a company fails to meet this obligation repeatedly, registry courts will even be entitled to decide on a dissolution of the company by liquidation without a liquidation petition.
The registry courts are granted this possibility in case a business corporation fails to enter ordinary or extraordinary financial statements in the Collection of Deeds at least for two consecutive reporting periods, despite being called to do so within an additional period of one month.
If a business corporation is inactive and calls cannot be delivered to it, the registry court will be entitled to initiate proceedings on its dissolution without meeting further requirements.
The registry court can issue a resolution on the dissolution of a business corporation without liquidation one year after the information on the initiation of the dissolution proceedings has been entered into a public register at the earliest.