When a company makes profits or has distributable sums, the partners may decide to allocate all or part of them by distributing dividends. This article provides you with explanations on how dividend distribution works. And the payment of dividends, their taxation, as well as the system of interim dividends. You may want to read up first on paying dividends to your shareholders.
How dividend distribution works
For there to be a distribution of dividends, the competent body must decide beforehand. Depending on the legal form of the company, the procedure to be followed will be different. But it will ultimately be up to the general meeting of partners or shareholders to vote on the distribution of dividends. The distribution can be decided on the occasion of the annual meeting (the meeting approving the accounts for the financial year) or at a subsequent meeting.
Once it has been decided to pay dividends, the company must pay them to shareholders within 9 months of the end of the financial year. The dividend is normally paid in cash but it is also possible, under certain conditions, to pay it in shares or in kind (goods, equipment, etc.).
Amounts that can be distributed
In order to be able to distribute a dividend, the company must have distributable reserves. The sums that can be distributed to partners or shareholders are as follows:
- Any amounts appearing in distributable reserves
- The possible carry forward to new profit
When a company makes a profit, it is not necessarily distributable: it can distribute it on condition that there are no previous losses to be cleared, that the legal reserve must endow (up to the threshold of 10% of the share capital) and that any statutory reserves are also mandatory. Finally, to distribute a dividend, the formation expenses, the capital increase costs and the research and development costs must be amortized. However, if free reserves of an amount at least equal to the unamortized part of these costs are established, it will be possible to distribute dividends.
The distribution of an interim dividend consists of anticipating the profit that will be made over the financial year. It is therefore a rather risky operation which requires a rather heavy formalism:
- An interim balance sheet must be produced and must generate a distributable profit
- This balance sheet must be certified by an auditor
- A general assembly must be convened to decide
Taxation of dividends
The taxation of dividends depends on the quality of the partner (natural person or a legal person). A single flat-rate deduction is applied to dividends. An option for the taxation of dividends at the progressive income tax scale is however possible. If the partner or shareholder is a legal person, the dividends that it receives will be directly taxed there. Learning about dividends can be tricky and it takes practice but there are many benefits relating to them and some people pay themselves in dividends over regular wages. This is when you need to learn in detail about this type of practice.