Authors: Ondřej Florián, Radek Wejmelka
As we mentioned in the previous issue of our Guide, one of the changes brought by the amendment to the Companies Act are amended rules for the distribution of profit and other equity funds. In this context, the legislature has granted the requirements stemming from legal practice and reflected some conclusions from judicial decisions. As a result, the amendment permits the distribution of profit and other equity funds throughout the entire accounting period. However, at the same time, the rules governing the limits on the distribution of profit and equity funds payments have been unified and tightened.
A share in profit or other equity funds is determined based on the financial statements (annual or extraordinary) approved by the company’s general meeting. Although it was inferred by the practice of the courts in the past, the Act now expressly provides that a resolution to distribute profit or other equity funds may be adopted at any time during the accounting period following the accounting period for which the financial statements are prepared. As a result, it is not necessary for the general meeting to adopt a resolution on the distribution of profit or other equity funds by the deadline for approving the financial statements (i.e. within 6 months of the end of the given accounting period, the deadline for which still remains preserved).
In practice, this means that if a company does not yet want to distribute its profit, it may keep it as retained earnings and the general meeting may adopt a resolution to distribute the profit at a more opportune time during the accounting period.
In the case of a limited liability company and a joint-stock company, the total to be distributed must not exceed the sum of the company’s profit/loss for the latest account period, retained earnings/ accumulated losses, other profit/loss and other available funds (funds that may be dealt with by the company at its discretion) less additions to the reserve and other funds created in compliance with law and the memorandum (articles) of association.
If the company reports development costs in its assets, the sum to be distributed must be equal to at least the non-written-off part of the item in the company’s assets. The amount to be distributed will be then reduced by the sum of the non-written-off development costs shown in the company’s assets.
If a decision is adopted in conflict with these rules, it has no legal effect.
Profit or other equity funds cannot be distributed if the equity as reported in the latest financial statements or the equity after the distribution of profit or other equity funds falls below the level of the registered capital plus the funds that may not be dealt with by the company at its discretion. This rule in this form previously applied to joint-stock companies only. Following the amendment, it will now also apply to limited liability companies.
A share in profit or other equity funds is payable within 3 months of the date on which the resolution to distribute the share is adopted. There is no change compared to the existing regulation. However, the law or the memorandum or articles of association may stipulate otherwise. Similarly, another payment date may be determined by a resolution of the general meeting.
For example, the law prescribes a different payment date for unlimited companies and general partners in limited partnership companies where no resolution to distribute profit is adopted. Therefore, the share is payable within 6 months of the end of the accounting period.
The decision to distribute shares in profit or other equity funds is made by the company’s executive body that must not pay the share if the distribution is in conflict with law.
If the distribution rendered the company insolvent, no share in profit or other equity funds may be paid and no advance on the share in profit may be paid. The right to a share in profit that was not paid for this reason by the end of the current accounting period will extinguish and the share must be carried to the retained earnings account. This means that the payment is suspended in the event of the company’s potential insolvency due to the distribution of profit and other equity funds. If the situation is not overcome by the end of the current accounting period, the right to a share in profit or other equity funds will extinguish by the operation of law and the shares are carried to the retained earnings account. This rule does not apply to unlimited companies and general partners in limited partnership companies.
The executive body may decide to pay an advance on a share in profit based on the interim financial statements. This constitutes the provision of a part of a share in profit during the current accounting period before the profit is finally distributed based on the annual (or extraordinary) financial statements.
The amount of the share in profit may not exceed the sum of the company’s profit for the current accounting period, retained earnings and other available funds created from profit (funds that may be dealt with by the company at its discretion), less additions to reserve and other funds created under law and the memorandum (articles) of association.
If the payment of the share in profit is approved providing that the amount to be distributed also includes the paid advance, the advance need not be refunded and will be set off against the distributed profit. However, if the profit is not distributed, the advance must be refunded within 3 months of the day on which the annual (or extraordinary) financial statements were or should have been approved.
These provisions will first apply to advances on shares in profit or in other equity funds paid during the 2010 accounting period or in the accounting period beginning after the effective date of the amendment (in the case of fiscal years).
In general, gratuitous performance may be provided but only in the case of standard occasional gifts, reasonable donations for purposes beneficial to the public or, alternatively, performance that complies with moral obligation and respect for decency, and in the case of benefits provided under law.
Do not forget to keep track of our Guide to the Corporate World after the Amendment that will present other individual changes and new concepts as outlined in the previous issue.
Our corporate team is always ready to assist you in making the necessary preparations for the planned changes.
