When it comes to both dividend and interim dividend payout, all companies that have opted to make such payouts to the capital owners shall have a decision in compliance with the articles of the association in the first place. The interim dividend refers to profit payout during a fiscal year, before the end of the fiscal year, i.e. before the determination of financial results for that year.
The interim dividend can be interesting for the companies that do not have retained earnings from the previous period but they do earn surplus revenue over costs for the current fiscal year.
Whether these are the companies with no retained earnings from previous periods or the reason is the current period in which the surplus revenue over costs is obvious, the interim dividend is determined based on a periodical calculation that is not submitted to the competent authorities, but done internally in order to determine the interim dividend amount that can be payed out.
The conditions for paying out the interim dividend to a company members, i.e. capital owners, are determined by the provisions of the Companies Act, while the tax aspect is determined by the provisions of the Individual Income Tax Law.
The Article 273 of the Companies Act defines the conditions necessary for the interim dividend payout:
– the reports on the company business and financial results created for that purpose clearly indicate that the company has achieved profit in the period for which the interim dividend is paid and that available cash assets of the company are sufficient for payment of that interim dividend;
– the amount of interim dividend that is being paid out is not higher than the total profit made after the end of the previous fiscal year for which the financial reports were made, increased by retained earnings and the amounts of reserves that may be used for those purposes, and decreased by determined losses and the amount that has to be contributed to reserves, pursuant to law or articles of association.
The thing that should be done first is to write a periodical report on business and financial results of the company for the period from the beginning of the year to the payout month, which shell demonstrate that the company has earned the surplus revenue over costs (profit) during that period. Furthermore, the interim dividend payout shall not endanger the liquidity of the company. The dividend can be paid out only if the company has enough available cash assets to make the payment and service its liabilities to its creditors after that without any problems. To be more precise, current liquidity cannot be endangered.
After determining that the company has gained profit for a specific period during the current fiscal year and that it has assets which are available for payout, it is necessary to compare the amount of that profit, increased by the retained earnings and the amounts of reserves that may be used for those purposes, and the amount of determined losses from the previous period and the required reserves prescribed by the law or articles of association. Namely, the provision of the Article 273 Paragraph 1 Item 2 of the Act arises from the priorities that need to be respected while distributing profit and that are defined by the Article 270 of the Act, which stipulates that the profit shall be distributed in the order given below:
- for covering the losses from previous years;
- for reserves, if they are prescribed by a separate act (legal reserves);
- for reserves, if they are prescribed by articles of association (statutory reserves);
- for dividend, pursuant to this Act.
This means that if the company has a determined loss from previous periods in comparison to the period during which it gained the profit, the company cannot distribute that profit in the form of a dividend, i.e. interim dividend, unless it previously covers the loss.
Only after covering the losses from the previous period and creating reserves (if a specific company has such a liability), the company can distribute the profit in the form of a dividend, i.e. interim dividend.
It is just as important to determine based on accounting records if company net assets are higher than the share capital. This is in compliance with the provisions of the Article 275 of the Act, because the Article 184 stipulates that the provisions of the Article 275 Paragraph 1-4, which refer to the limitations to JSC payments are applicable to LLC as well. This Article prescribes additional limitations to the payments made to the company members, as well as the consequences of an unauthorized payout. The Paragraph 1 of this Article stipulates that the company cannot make payments to the members if, in accordance with the latest annual financial statements, the company net assets are lower or would become lower, due to such payment, than the amount of paid share capital increased by the reserves that the company has to maintain pursuant to the law or articles of association, in case such reserves exist, except in the case of the share capital reduction.
So far, we have been talking about the aspect of the interim dividend payout, which affects companies, but there is an equally important aspect of payout to a natural person as capital owner because there is the tax liability related to the withheld tax calculation and payout, prescribed by the Individual Income Tax Law. In accordance with the Article 61 of the Individual Income Tax Law, dividends are considered to be capital income and subject to taxation, regardless of whether they are paid out from the retained earnings or as interim dividends during a year.
According to the Article 87 of the Law, the capital income of a natural person is not included in the calculation of the annual individual income tax base.
Taxpayers who pay capital income tax are natural persons gaining that income. The tax rate is 15%, and it is calculated for the base made of 100% gross income. The dividend payout can be made only after a tax return has been submitted. When submitting the tax return, you will receive the number of the approval (BOP), which must be a part of a reference number when paying net dividend and tax.