Interim Dividends – Profit Distribution During the Year: Conditions, Restrictions, and Tax Aspects

Interim dividends allow companies to distribute part of their realized profit to owners before the end of the financial year, but strictly under clearly defined legal conditions. Although this practice is becoming increasingly common in business, the law precisely regulates when and how such distributions are permitted.

Under the Companies Act, interim dividends represent a temporary distribution of profit prior to the approval of annual financial statements. This means that a company may distribute part of its profit to shareholders or members during the year, but only if it has actually generated profits and has sufficient liquidity.

To adopt such a decision, interim financial statements and accounting records must confirm that the company has sufficient funds for distribution, without jeopardizing its ongoing operations and obligations to creditors. The law explicitly prohibits any distribution if, after the payout, the company’s net assets fall below the level of share capital and mandatory reserves.

In joint-stock companies, the decision is made by the shareholders’ meeting or the board of directors, while in limited liability companies it is made by the members of the company.

It is important to emphasize that interim dividends may only be paid out of profits actually earned up to the date of the interim financial statements, including results from previous years and any accumulated losses. In other words, distribution of expected or future profits is not permitted.

This model of distribution is most commonly used by stable companies with reliable cash flows and strong financial positions, allowing owners to access part of the profit earlier. However, certain risks also exist. If it is later determined that the company did not have sufficient distributable profit, management may be held liable, as well as obliged to return improperly distributed funds.

In addition, interim dividends are subject to tax rules. For individuals, capital income tax is applied, while for legal entities specific tax regulations and international double taxation treaties apply.

The law also obliges management to continuously monitor the company’s financial position after the decision on profit distribution has been made. If there is a significant deterioration in business performance or a decrease in asset value, the company is required to adjust or revise previously adopted profit distribution decisions.