Dividend advances

12 April 2024 | Knowledge, News, The Right Focus

Limited liability companies often exercise the option to pay dividend advances. This allows shareholders to receive funds before the current accounts have been approved and a profit distribution resolution has been passed. However – provided, of course, that the company has sufficient funds – it is important to bear in mind the conditions that must be met for dividend advances to be paid.

When can companies pay dividend advances

The first condition for the payment of advances is the authorisation of the management board. This can only be given in the articles of association, which can be tailored to the needs of a particular company – either by using general wording or by specifying the scope of the board’s discretion. For example, by limiting the amount of advances.

If no such authorisation is given in the current articles of association, these may be amended. In such a case, a shareholders’ resolution is required, which should generally be recorded in the minutes drawn up in the form of a notarial deed (one exception being companies established using model articles of association in the S-24 ICT system). It should be noted that amendments to the articles of association become effective only upon registration in the National Court Register (KRS).

Another condition for payment is that the company’s approved accounts for the previous financial year must show a profit.

The company must also have sufficient funds to make the payment and its projected financial results must show the prospect of making a profit for a particular financial year. If they clearly show a loss, no advance can be paid.

Maximum dividend advance

The Companies & Partnerships Code does not allow complete freedom in determining the amount of such advances, providing that an advance may not exceed half of the profits made since the end of the previous financial year, plus any reserve capital created from profits, which the management board may use to make advance payments, less any uncovered losses and treasury shares. Importantly, the articles of association may reduce the maximum advance amount provided for by law.

Before deciding to make the payment, the company’s management board must carefully analyse the financial results to ensure that the amount of advances to be paid is in line with the legislation.

Need to repay the advance

Payment should be made with awareness of the risk that the funds may have to be returned to the company. This may be the case if advances have been paid to shareholders in a particular financial year and the company subsequently makes a loss or the profit made was less than the advances paid.

In such a case, shareholders are obliged to repay:

  • Full advances – if the company has made a loss
  • The part corresponding to the excess of the profit attributable to a shareholder for a particular financial year – if the company’s profit is lower than the advances paid

Similarly, shareholders are obliged to repay the advance received if it has not been paid in accordance with the articles of association or the Act.

Any questions? Contact:

Adam Czarnota

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Contact us:

Adam Czarnota

Adam Czarnota

Advocate, Senior Associate

+48 787 389 207

a.czarnota@kochanski.pl

Rafał Rapala

Rafał Rapala

Attorney at Law, Partner, Head of Corporate Practice, Shareholders Conflicts

+48 608 444 650

r.rapala@kochanski.pl