One of the main goals of creating a legal entity is to make a profit from its activities. However, in order to receive income in the form of dividends, it is not enough to have positive financial results, it is also necessary to resolve correctly the issue of formalizing their payment. In practice, quite often there are disputes concerning the procedure, timing and grounds for paying dividends. The most common of them are discussed in this article.

Contents:

1. Procedure for distribution of dividends

1.1. Grounds for paying dividends

The basis for the payment of dividends is the decision of its direct owners (members or shareholders, depending on the organizational and legal form of the company) [1].

10.06.2023 Paying dividends, selling shares and real estate by owners and shareholders from the states recognized by Russian authorities as unfriendly

In order for the decision to pay dividends to be considered legitimate and there being no further grounds for challenging it, the company needs to analyze the possibility of paying dividends before making an appropriate decision.

Starting from 2020, the position of the regulatory authorities comes down to the fact that income in the form of dividends paid to shareholders (members) of business entities based on the results of the work of these business entities for the quarter, six months and nine months of the reporting year, is not subject to further requalification for tax purposes[2]. Therefore, even if the company receives a negative net profit at the end of the year, the payment of interim dividends is considered legitimate.

However, it is not recommended to pay dividends in the presence of a loss based on the results of the financial year.

Also, the company is not entitled to make a decision on the payment of dividends in the following cases [3]:

  • until full payment of the entire authorized capital;
  • until the redemption of all shares (participatory interests), which the company is to redeem at the request of one of the members;
  • if, on the day of the decision to pay dividends, the company meets the signs of bankruptcy;
  • if on the day of such a decision the value of the company’s net assets is less than its authorized capital.

Also, with regard to the already declared dividends, the company is not entitled to pay funds in the following cases:

Often there are questions about whether the owner can demand the company to pay dividends.

The right to demand the payment of dividends arises only after the adoption of the relevant decision[4]. Thus, even if the company has net profit, it is impossible to demand its payment without holding a general meeting of members (shareholders).

1.2. Periodicity of dividend payment

The company has the right, quarterly, every six months or once a year, to make a decision on the distribution of its net profit among the members of the company[5].

In some cases, the Articles of Association of the company provides for a different frequency of payment of dividends (for example, once a year, once every six months), but not more often than the frequency established by law.

Violation of the established frequency for payment of dividends, as a rule, is considered solely as a subject of civil law disputes between the members and their company[6].

Nevertheless, there is a practice of disputes with the tax authorities, according to which the tax authorities reclassify such amounts as ordinary wage payments, indicating, among other things, that the company did not comply with the frequency of dividend payments[7].

Thus, it is not recommended to make decisions on the payment of dividends more often than the period established by law – once a quarter (unless otherwise specified in the articles of association).

If the company needs to pay dividends in parts, it is recommended to indicate the full amount of dividends in the decision on the distribution of net profit. At the same time, the payment of dividends shall be carried out in tranches during the periods of payment of dividends.

1.3. Payment of dividends from profits of previous years

If the company has no profit for the reporting period, then the members at the general meeting may decide to pay dividends from the profits of previous years (on the distribution of past profits), since such a decision requires only the fact of net profit availability[8]. In this case it doesn’t matter when it was formed.

The procedure for distributing profits for dividends to members at the expense of profits of previous years is carried out in the same way as in the case of such a decision based on the results of the current quarter, half a year or year.

It should be borne in mind that if there is a loss at the end of the financial year, retained earnings must first be used to cover it and, in part of the remaining net profit, a decision should be made to pay dividends.

1.4. Changing the already adopted decision on the payment of dividends

At the moment, the position of the judicial bodies comes down to the fact that the cancellation of an already made decision on the payment of dividends is unacceptable, since the main purpose of the creation and operation of a legal entity is to make profit[9]. The current legislation also does not contain provisions that give the general meeting of members (shareholders) the authority to cancel the decisions adopted earlier[10].

At the same time, if the company has financial difficulties, it is permissible to conclude an agreement on the installment payment of dividends[11].

2. Procedure for payment of dividends

2.1. Terms of payment of dividends

The terms of payment of dividends for a joint-stock company are:

— 25 business days — to all registered shareholders;

— 10 business days — to a nominal holder and a trustee who is a professional participant in the securities market[12].

The term is calculated from the date of drawing up the list of persons entitled to participate in the meeting. As a general rule, it must be prepared no earlier than 10 days from the date of the decision to hold the general meeting of shareholders and no more than 25 days before the date of the meeting[13].

In limited liability companies, the payment of dividends is carried out within the terms established by the articles of association, but in any case not more than within sixty days from the date of the decision on the distribution of profits [14].

Any excess of dividend payment deadlines is a violation and entails liability for the company.

2.2. Violation of the deadline for payment of dividends, payment of dividends not in full

The following liability may be imposed on the company for violation of the deadline for paying dividends or paying dividends not in full:

  1. 1. At the request of a member, interest may be accrued on the unpaid amount of dividends for the use of money had and received under Article 395 of the Civil Code of the Russian Federation [15].
  2. 2. An administrative fine may be imposed on a joint-stock company in the following amounts [16]:
    • for the head of the organization in the amount of 20 — 30 thousand rubles;
    • for the organization — 500 — 700 thousand rubles.

The controlling party in this category of cases is the Central Bank of the Russian Federation, which conducts inspections based on complaints from shareholders [17].

3. Grounds for canceling the payment of dividends

In connection with the presence of liability for violation of the terms of payment for distributed dividends, in practice, the question often arises how to cancel the payment due to changed circumstances.

As mentioned earlier, the company has the right not to pay dividends during the existence of circumstances preventing their payment, namely:

  • if on the day of payment the company meets the signs of bankruptcy or the payment of dividends itself will cause bankruptcy;
  • if on the day of payment the value of the company’s net assets is less than the amount of its authorized capital.

However, there are other situations in which the payment of distributed dividends is undesirable.

Since the company is not entitled to cancel the already made decision on the payment of dividends, there are the following grounds for not paying them:

  1. Voluntary refusal of a shareholder (member) to receive dividends.

The refusal must be clear, directly expressing the intention of the shareholder (member) to refuse to receive dividends, and also be made in writing [18].

It should be borne in mind that, in accordance with numerous clarifications from regulatory authorities, in the event of a refusal to pay dividends, a shareholder (member) still receives income, and therefore is subject to payment of personal income tax (tax on income received from equity participation in other organizations) from the amount of dividends, in respect of which there was a refusal [19].

  1. Dividends unclaimed by the recipient

Such a situation is possible if the company does not have accurate and necessary address data or bank details.

In this case, income in the form of dividends not claimed by the members of a business company or partnership, restored as part of retained earnings of a business company or partnership, are not taken into account when calculating the taxable base [20].

In this case, the member of the company is not deprived of the right to apply with a claim for the payment of such dividends. The claim may be filed by a member within three years from the date of the decision to pay them, unless a longer period for filing the specified claim is established by the articles of association of the company [21].

4. New requirements for JSC regarding the approval and disclosure of dividend policies

14.06.2023 A draft law has been prepared to introduce the obligation for public joint-stock companies (JSC) to disclose information about their dividend policies. “The main idea of the draft law is to establish provisions requiring public companies to approve and disclose their dividend policies, to use them as a reference when making decisions on dividend payments (declarations). The draft law also stipulates that the dividend policy should contain certain information that allows investors to make more informed decisions about acquiring shares of a public company,” according to the explanatory note to the document (TASS).

[1] Article 28 of the Federal Law “On Limited Liability Companies”, Clause 3, Article 42 of the Federal Law “On Joint-Stock Companies”.

[2] Letter of the Ministry of Finance No. 03-03-10/90152 dated October 15, 2020, letter of the Federal Tax Service of Russia No. СД-4-3/17130@ dated October 19, 2020.

[3] Article 43 of the Federal Law “On Joint-Stock Companies”, Article 29 of the Federal Law “On Limited Liability Companies”.

[4] Clause 15 of Resolution No. 19 of the Plenum of the Supreme Arbitration Court of the Russian Federation dated November 18, 2003 “On Certain Issues of the Application of the Federal Law “On Joint-Stock Companies”, Resolution of the Tenth Arbitration Court of Appeal No. 10АП-22178/2020 dated February 11, 2021 in case No. A41-20967/2020.

[5] Clause 1, Article 28 of the Federal Law “On Limited Liability Companies”, Clause 1, Article 42 of the Federal Law “On Joint-Stock Companies”.

[6] Clause 1, Article 43 of the Federal Law “On Limited Liability Companies”, Clause 7, Article 49 of the Federal Law “On Joint-Stock Companies”.

[7] Rulings of the Eleventh Arbitration Court of Appeal No. 11АП-18295/2015, No. 11АП-18299/2015 dated February 4, 2016 in case No. A55-8231/2015; of the Arbitration Court of the Volga District No. Ф06-7195/2016 dated April 13, 2016 in case No. A55-8231/2015; Determination of the Supreme Court of the Russian Federation No. 306-КГ16-8176 dated July 12, 2016  in case No. A55-8231/2015, as well as: Resolutions of the Eleventh Arbitration Court of Appeal No. 11АП-18739/2015, No. 11АП-18743/2015 dated February 16, 2016 in case No. А55-8232/2015; of the Arbitration Court of the Volga District No. Ф06-8308/2016 dated May 30, 2016 in case No. А55-8232/2015, Ruling of the Seventeenth Arbitration Court of Appeal No. 17АП-10458/2018-ГК dated September 7, 2018 in case No. А50-10661/2018; of the Arbitration Court of the Ural District No. Ф09-8604/18 dated January 16, 2019 in case No. A50-10661/2018.

[8] Clause 1, Article 28 of the Federal Law “On Limited Liability Companies”, Article 42 of the Federal Law “On Joint-Stock Companies”.

[9] Decree No. A66-3719-04 of the Federal Antimonopoly Service of the North-Western District dated December 1, 2004, Determination of the Supreme Arbitration Court of the Russian Federation No. ВАС-5019/12 dated April 20, 2012.

[10] Ruling of the Arbitration Court of the Moscow District No. Ф05-3047/2016 dated April 13, 2016 in case No. A40-80953/2015.

[11] Ruling dated July 10, 2019 in case No. А76-31476/2017 of the Arbitration Court of the Ural District, Decision dated October 13, 2020 in case No. А44-4056/2020 of the Arbitration Court of the Novgorod Region.

[12] Clause 6, Article 42 of the Federal Law “On Joint-Stock Companies”.

[13] Clause 1, Article 51 of the Federal Law “On Joint-Stock Companies”.

[14] Clause 3, Article 28 of the Federal Law “On Limited Liability Companies”.

[15] Clause 18 of Resolution No. 90 of the Plenum of the Supreme Court of the Russian Federation, No. 14 of the Plenum of the Supreme Arbitration Court of the Russian Federation dated December 09, 1999, paragraph 2, Clause 16 of resolution №19 of the Plenum of the Supreme Arbitration Court of the Russian Federation dated November 18, 2003 “On Certain Issues of Application of the Federal Law “On Joint-Stock Companies”.

[16] Article 15.20, Part 1 of Article 23.74 of the Code of Administrative Offenses of the Russian Federation.

[17] Decision of the Federal Antimonopoly Service of the North-Western District dated March 22, 2011 in case No. А13-7816/2010.

[18] Letter of the Ministry of Finance of Russia dated August 31, 2021 No. 03-04-05/70305.

[19] Letters of the Ministry of Finance dated October 23, 2019 No. 03-04-06/81252, dated October 4, 2010 No. 03-04-06/2-233, letter of the Ministry of Finance of Russia dated May 26, 2021 No. 03-03-06/1/40615.

[20] Subclause 3.4, Clause 1, Article 251 of the Tax Code of the Russian Federation, letter of the Ministry of Finance of Russia No. 03-03-06/1/40615.

[21] Clause 9, Article 42 of the Federal Law “On Joint-Stock Companies”, Clause 4. Article 28 of the Federal Law “On Limited Liability Companies”.

Corporate finance Financial director General director JSC LLC Taxation