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The terms for the distribution of profit at corporations, past and present – has everything changed?

The way in which the statutory rules for the distribution of profit at corporations are interpreted has changed in a fundamental way, which is why we recommend giving the following paragraphs your full attention if you plan to distribute and pay out shares in the profit generated by your business.

Under an earlier interpretation of the rules governing the distribution of profit, it was assumed that the provision expressed in previous case law of the Supreme Court would still apply even after the Corporations Act (Act No. 90/2012 Coll.) came into force, according to which the profit accounted for in the approved annual financial statements (or extraordinary financial statements) must not be paid out once six months have passed since the balance date – i.e., the distribution of profit was possible only up until 30 June of the following fiscal year (in the case of those businesses whose fiscal year is identical with the calendar year). Following the above-described understanding of the law, paying out advances on a claim for a profit share was only possible based on certain circumstances, and based on interim financial statements.

However, legal experts have since moved away from this concept for a variety of reasons; they now claim that the profit as determined in the annual or extraordinary financial statements (approved by the general meeting) may be distributed even after the 6-month period has lapsed, up until the end of the following fiscal year (i.e., as a rule, until 31 December). This would mean that the relevant period for making advance payments on claims for a profit share moves to the period prior to the compilation and approval of the (annual or extraordinary) statements for the preceding fiscal year.

Accordingly, dividends may be paid e.g. in 2019 (up until 31 December 2019) on the earnings accounted for in the financial statements for the fiscal year 2018 (which ended on 31 December 2018), once these statements have been approved by the general meeting. Unless and until the financial statements for 2018 have been compiled and approved, the only allowed payouts in 2019 are advance payments towards the dividend.

Aside from the above-mentioned (i) approval of the (regular or extraordinary) financial statements for the previous fiscal year by the general meeting, the decision of the general meeting on how the company's profit shall be used and the decision by the statutory body on the payout of a profit share are subject to the following additional requirements: (ii) the company does not become insolvent upon payment of the share in profit, (iii) the company passes the balance sheet test within the meaning of Sec. 161 (4) of the Corporations Act (for limited liability companies) or Sec. 350 of the Corporations Act (for joint-stock companies), and (iv) the company does not account for any expenses towards the development of asset positions on the balance sheet (other than expenses which satisfy the requirements set out in Sec. 28 (7) of the Accounting Act (Act No. 563/1991 Coll.).

An amendment to the Corporations Act is currently being prepared which will expressly confirm the above interpretation as to the time period during which profit may be distributed; if the amendment bill passes in its current language, it will put an end to speculations regarding this issue.

 

Source:
Corporations Act (Act No. 90/2012 Coll.)
Accounting Act (Act No. 563/1991 Coll.)
Štenglová, I., Havel, B., Cileček, F., Kuhn, P., Šuk, P.: "Zákon o obchodních korporacích. Komentář" (Commentary on the Corporations Act), 2nd ed., C. H. Beck, Prague, 2017