Profit Distribution and Loss Coverage

After the annual financial statements have been approved, a company may adopt a decision on the distribution of its net profit or, if the financial year ended with a loss, determine how that loss will be covered.

Serbian legislation does not prescribe a deadline for distributing profit or covering losses. As a result, retained earnings may remain undistributed for several years, while uncovered losses may be carried forward until the shareholders adopt an appropriate resolution.

Profit generated during the current financial year may only be distributed after the annual financial statements have been approved. Until then, the company may distribute retained earnings from previous years that have not yet been allocated and, where the legal requirements are met, declare interim dividends.

Once the financial statements have been approved, the profit is first used to cover losses carried forward from previous years and then to create statutory reserves where required by law. The remaining profit may be allocated to reserves established under the company’s constitutional documents or distributed to shareholders as dividends.

The amount available for distribution includes all retained earnings existing at the time the resolution is adopted, regardless of the year in which they were generated. The shareholders may decide to distribute only part of the available profit and leave the remaining balance undistributed.

Dividends

A dividend represents the portion of profit distributed to shareholders or members as a return on their investment in the company’s capital. Dividends may be paid only if the company has distributable profits and all statutory requirements have been satisfied.

The decision to distribute dividends is adopted by the shareholders’ meeting together with the profit distribution resolution. The decision specifies the amount of the dividend, the persons entitled to receive it, and the payment deadline. For both limited liability companies and joint-stock companies, dividends must be paid within six months from the date of the resolution.

Methods of Dividend Distribution

As a general rule, dividends are distributed in proportion to each shareholder’s ownership interest in the company’s share capital. However, the company’s founding document may provide for a different distribution ratio.

In joint-stock companies, dividends may be paid either in cash or in the company’s shares, provided that such payment is approved by the profit distribution resolution. Where dividends are paid in shares, the decision must be approved by the shareholders of the relevant class of shares, and all shareholders within that class must be treated equally.

Restrictions on Dividend Payments

The law imposes several safeguards designed to protect the company’s capital and its creditors. Dividends and other payments to shareholders may not be made if, following the payment, the company’s net assets would fall below the amount of its registered share capital plus any mandatory reserves, except where the law expressly permits a reduction of share capital.

In addition, the total amount available for distribution is limited to the current year’s profit, retained earnings from previous years, and reserves designated for distribution, reduced by any accumulated losses and mandatory reserves.

These rules are intended to preserve the company’s financial stability and protect the interests of its creditors.