The rules for distribution of profit of companies are changing from the next year

21. 12. 2020

On January 1, 2021, an extensive amendment to the Business Corporations Act will come into effect, which brings substantial changes to the distribution of profits and other own resources, as well as greater responsibility for members of the statutory body. The Business Corporations Act newly regulates, for example, the deadline for taking a decision on profit distribution, circumstances under which it is not possible to pay the profit and also the conditions for the payment of an advance on the share of profit.

Deadline for taking a profit decision

The current legislation did not specify for how long the duly prepared and approved financial statements could be used as a basis for profit distribution. The Supreme Court by issuing a decision (at the time when Commercial Code was still in force) set a relatively unfortunate limit of 6 months, which turned out to be relatively inconvenient. However, the new law stipulates that the share of profit and other own resources may be distributed on the basis of regular or extraordinary financial statements until the end of the accounting period following the accounting period for which the financial statements were prepared.

When the profit cannot be distributed

Neither profit nor other own resources (i.e., including the return of increased capital outside the registered capital) can be distributed if the equity falls below the amount of subscribed equity and increased by funds with which the business corporation is not entitled to freely dispose, or if equity after such a distribution is even negative. Newly, the so-called equity test (or the second balance sheet test) will apply to all capital companies and cooperatives.

The Commercial Corporations Act now contains a total of 3 balance sheet tests - the first balance sheet test was already included in the law before the amendment, however, it will now apply to the distribution of own resources other than profit - namely the limit of the distribution, when the amount to be distributed for limited liability and joint-stock companies may not exceed the sum of the profit or loss for the last completed accounting period, the profit or loss from previous years and other funds that the company may use at its discretion, decreased by allocations to reserves and other funds in accordance with law and the Articles of Association.

The last (third) balance sheet test is applied to a situation where the company has development costs reported in the balance sheet, then the profit can be paid only if the amount to be distributed exceeds the development costs. 

In all cases, the decision of the highest body taken in breach of these tests has no legal effect, i.e. is regarded as the General meeting would have not decided on the payment of the share of profits and its payment would have been in breach of law, and the statutory body shall take full responsibility.

The deadline for the payment of a share of the profit is 3 months, but it can be adjusted in the Articles of Association and determined by the General meeting. Of course, the so-called insolvency test continues to apply.

Advances on the share of profit

It will still be possible to pay advances on the profit share. However, if the actual profit eligible for distribution according to the relevant financial statements is lower than the sum of the advances paid, the new obligation is introduced to pay the received advance back within 3 months from the date when the regular or extraordinary financial statements were or should have been approved (if the company does not have a fiscal year, i.e. by September of the following year at the latest).

The amendment also brings increased responsibility of statutory bodies for assessing the compliance of the distribution of profits and other own resources with legal regulations. According to the current regulation, the distribution of profit must not be in conflict with the Business Corporations Act, and now it must not be in conflict with any law. If a member of the statutory body consents to payment in breach of legal regulations, it is a violation of due diligence.

The above rules are not a complete list of changes introduced by the amendment. However, it is clear that the shareholders and members of the statutory bodies shall pay more attention to the distribution and payment of profits from the beginning of next year.

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