With the Companies Act (Act No. 90/2012 Sb.) taking effect on 1 January 2014, new rules and alternatives apply to dividend distribution.
The possibility to pay advances on shares in profit, which was expressly prohibited in the previously applicable Commercial Code (Act No. 513/1991 Sb.), is perhaps one of the most interesting new developments in dividend distribution.
Other alternatives include dividend distribution to persons other than shareholders or stockholders and distribution of profit in kind. Decisions regarding the distribution of profit reported by the company are made by the general meeting and the distribution itself is then approved by the company’s executive body. However, in distributing the profit, the executive body must ensure that the payment complies with applicable statutory rules. Decisions regarding advances on shares in profit can be made based merely on interim financial statements showing that the company has sufficient funds to distribute profit. The main restriction on the payment of advances on shares in profit is the insolvency test. Under the test, the company may not pay a share in profit if doing so could result in insolvency of the company under the Insolvency Act (Act No. 182/2006 Sb.). The amount of the advance paid may not be higher than the sum of the profit for the current period, retained earnings and other funds created from profit. The amount must then be reduced by accumulated losses and the mandatory reserve fund.
How advances on shares in profit should be accounted for
Although it should be accounted for as every classical prepayment, this type of advance is not carried to accounts by means of account class 3. As at the moment of the relevant body’s decision to pay and determine the exact advance amount, the advance will be carried to the liability account and the relevant account of class 43 – Profit/loss. It is advisable to create a new general ledger account in account group 43 – Profit/loss showing the balance as at the balance sheet date. The relevant accounting procedure has been included in Czech Accounting Standards No. 002 and No. 018. The decision to pay advances on shares in profit is reported in the new balance sheet item “A.V.2 Decisions to pay advances on shares in profit /-/ˮ (given that the account in account class 43 will have a positive balance, it must be reported as negative in liabilities in the financial statements). The profit/loss for the current period item will then be designated as A.V.1.
Another fact that must be taken into account in connection with the payment of advances on shares in profit is that it must be carried to accounts in compliance with Section 38n of the Income Taxes Act (Act No. 586/1992 Sb.) (special-rate withholding tax). That means that the amount must be paid to the shareholders net of withholding tax paid to the relevant tax authority.