Dividend Distribution

Dividend distribution is the payment of part of the company’s profit to shareholders. In a joint stock company, every shareholder has the right to share in net profit in proportion to its holding (TCC Art. 507), but the general assembly decides on distribution.

Distributable Profit

Dividends may only be distributed from net profit for the period and free reserves (TCC Art. 509). They cannot be distributed before prior years’ losses are covered and legal reserves are set aside. Dividends are distributed in proportion to the amounts paid on shares; the articles may grant a dividend privilege.

General Legal Reserve

5% of annual profit is allocated to the general legal reserve until it reaches 20% of paid-in capital (TCC Art. 519). After this limit is reached, 10% of the amount to be distributed after a 5% dividend is paid to shareholders is still added to the reserve. Share premiums are also added to the general legal reserve.

Interim Dividends

The general assembly may resolve to distribute interim dividends based on interim financial statements and may delegate this power to the board for that financial year. If no profit is made in the period, the interim dividend is offset against free reserves from prior years.

Points to Watch

• Disguised profit distribution: Payments to shareholders not on market terms, loans or free use of assets may be treated as disguised profit distribution for tax purposes; see Shareholder Borrowing Prohibition.
• Unlawful distribution: Dividends received in breach of the Code or the articles may be reclaimed from shareholders not acting in good faith.
• Tax: Withholding tax is deducted from dividends distributed to individual and non-resident shareholders.
• Audit: In companies subject to independent audit, dividends cannot be distributed based on unaudited financial statements.

In a limited liability company, the general assembly also decides on dividends and similar restrictions apply.