Distribution of dividends – allowed before the closing of the financial year
Until July 2018, the distribution of dividends by Romanian companies was possible only after the financial year was closed and the net profit of the closed financial year was determined. As it can be imagined, such prohibition had implications from a cash-flow perspective for the shareholders of Romanian companies.
In this respect, the Romanian company law allowed for dividends to be distributed only from profits determined according to the law (i.e. after the closing of the financial year). Furthermore, the same law provided that the distribution of dividends, amongst others, in the absence of financial statements was fraud, action punishable with prison for the administrator of the company distributing such dividends.
To disallow such prohibition, the distribution of dividends in advance is possible starting from July 2018 when the company law and accounting law were modified to enable the distribution in advance on quarterly basis.
There are some conditions for allowing the quarterly distribution. The interim distribution can be performed during the year – only up to the quarterly net profit (after the mandatory reserves, if any, are set-up), but the carried forward losses must be off-set before the dividends can be distributed. The interim distribution must be based on interim financial statements approved by the shareholders. Such interim financial statements must be prepared therefore quarterly and they must be audited if the company is subject to mandatory audit (thus, increasing the costs and the administrative burden of the company).
The distribution of quarterly dividends is recorded in accounting as receivable against the shareholders and the settlement of the interim dividends must be performed after the annual financial statements are approved. In case the dividends distributed in advance are higher than the dividends approved through the annual financial statements, the overpaid dividends must be returned in 60 days from the date when the annual financial statements were approved (otherwise, interest would be due).
Having considered the above, the new provision is a step forward, from a cash-flow perspective, for the shareholders of Romanian companies.
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