Time and again, ask a question concerning distribution of profits – how many times can dividends be paid out and are there restrictions?
Up to 31 December 2005, the Commercial Code stated that dividends from either public or private limited companies can be paid once a year, on the basis of the approved annual report. In practice, this wording was interpreted in various ways, for example:
- Can distribution of profits be decided once, with the disbursement also taking place only once, or are recurring disbursements permitted?
- If the report has already been filed with the Commercial Register and it has been decided at the general meeting not to distribute profits, would it be possible to convene an extraordinary general meeting later on and pass a resolution on paying dividends?
- Is it necessary to prepare a new report, approve it and submit to the Commercial Register in order to decide once more on a distribution of profits and payment of dividends?
The current wording of the Commercial Code (hereinafter CC) (as of 23 November 2016) states:
Dividends may be paid to the shareholders from net profit or from retained profit from previous years from which losses from previous years have been deducted, on the basis of the approved annual report. (CC subsection 157 (1), CC subsection 276 (1), CC subsection 277 (1)).
For public and private limited companies, this means that on the basis of the approved annual report, owners can distribute profits and pay dividends as many times as is considered necessary and there are no restrictions in this regard.
Yet there do exist restrictions on the extent of the profit being distributed.
- The first of these has to do with parent companies that prepare annual reports for the consolidated group and distribute profits on the basis of the consolidated group’s annual report. The second sentence of CC subsection 335 (11) sets forth that profit as apparent from the consolidated reports shall not be distributed in so far as this would decrease the net assets of the parent undertaking to a level below the total of share capital and reserves which pursuant to law or the articles of association shall not be paid out to shareholders.
- The second restriction pertains to companies where expenditures related to development activity are capitalized as intangible non-current assets. CC subsection 335 (12) says that if a company capitalizes expenditures related to development activity as intangible non-current assets and the development expenditures are not completely depreciated, profits may not be distributed. The exception is if the sum of reserves that can be used for distributing the profit plus the amount of the retained earnings from previous periods is greater or equal to the undepreciated development expenditures.
Furthermore, public limited companies are subject to a special option of paying shareholders part of the profit for the current year. This is clearly dealt with and CC subsection 277 (3) sets forth that the articles of association may give the management board of a public limited company the right to make advance payments to the shareholders with the consent of the supervisory board after the end of a financial year and before approval of the annual report on account of the presumed profit in the amount of up to one half of the amount subject to distribution among the shareholders.
That means that such an option has to be stated in company’s articles of association, and the management board makes the decision with consent from the supervisory board – in that case, prepayments to shareholders can be made in an amount of up to one-half of the expected profits.
The company’s management board files the information on the profit distribution resolution to the Commercial Register together with the annual report, if the information is not evident from the annual report itself. If the profit distribution resolution is adopted after the submission of the annual report, the aforesaid data shall be submitted together with the next annual report.
Thus if, after submission of the report to the Commercial Register, the company has adopted a decision to distribute profit (either the first or recurrent decision to pay out dividends), it is not necessary to file a new report to the Commercial Register in the middle of the financial year.
Author: Eneli Perolainen
