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Quarterly distribution of dividends - benefits vs costs

In July 2018, Romania joined the European Union countries where companies can distribute dividends to shareholders on a quarterly basis. This change in the Company Law is extremely welcome and has been long awaited and demanded by the business community.

2018-08-08 15:48:06

In this category of changes to be made to the Company Law, there are other very important ones, such as the impossibility of a shareholder to be a sole shareholder in two companies. Regarding the distribution of dividends to shareholders, the new regulations (Law no. 163/2018) provide, in short, that they can be distributed as follows:

i. Quarterly, optionally, within the time limit set by the General Shareholders' Meeting on the basis of the interim financial statements; and

ii. Annually, after the regularization performed through the annual financial statements, unless otherwise provided in the Articles of Incorporation. Quarterly distributions will be achieved within certain limits: quarterly net profit plus any reported earnings and amounts withdrawn from reserves, minus any reported losses and amounts deposited in reserves.

Of course, if we consider aspects such as: quarterly remuneration of shareholders for the investment made to the extent that it is profitable, the flow of funding between companies of the same group, the release of the amounts of money that could be reinvested or the stimulation of investments in micro-enterprises, we can we appreciate the benefits of the new changes.

However, there are certain aspects that, if weighed against the benefits of this change, could balance or even tilt it towards the side of the disadvantages. This is especially true of the costs that such an operation may generate. Thus, a distribution decision must be preceded by a cost vs. benefits analysis that should be performed by each taxpayer who may opt for the quarterly distribution of dividends.

Below we listed a number of aspects that might be considered disadvantageous:
  • Companies that opt for the quarterly distribution of dividends are required to prepare interim financial statements. There is currently no template for these financial statements, and given that this benefit could be implemented from the third quarter of 2018, uncertainty about the format could defeat pioneers who would like to benefit from the provisions of Law no. 163/2018. Moreover, with regard to the preparation of financial statements, they will have to be approved by the General Shareholders' Meeting, a procedure that is often not an easy one for companies with several shareholders or associates.

  • If companies are required to audit their annual financial statements, they are also required to audit the interim financial statements. This would entail an extra cost, not to mention the actual time needed to be allocated to such a process. Thus, the above mentioned could be considered a major disadvantage and a key factor in the decision to implement or not the provisions of this Law.

  • If companies are required to submit annual financial statements to censors, they will have the same obligation for interim financial statements. Again, an administrative aspect that generates additional costs and which could place an obstacle to the option to distribute dividends quarterly.

  • Compliance with the provisions of Company Law on the formal conditions for the approval of shareholders / associates for the distribution of dividends not modified by Law no. 163/2018 and hindering the process of approving distribution (i.e. approval of financial statements, approval of dividend distribution).

  • Correlation of the decision to distribute quarterly dividends with the company‚Ä≤s business strategy and the provisions of Law no. 227/2015 regarding the Fiscal Code. In the present case, there may be errors in the quarterly profit tax calculations for companies choosing to apply the tax exemption of the reinvested profits calculated quarterly or annually, as the case may be, and which also plan to distribute dividends quarterly.

  • The taxpayers who compute, declare and pay the annual tax by means of anticipated payments made on quarterly basis, would be at a disadvantage in case of quarterly dividend distributions if the quarterly results decreased compared to the previous year. Thus, taxpayers who want to make quarterly dividend distributions may avoid choosing this way of declaring and paying tax.

In conclusion, the legislative amendments brought by Law no. 163/2018 increase the investment attractiveness in Romania, but the complex procedure, the additional costs and certain aspects not fully covered by the legislation can discourage investors from seeing the advantages of this law.

Andreea Mitirita, Partner, PwC Romania
Stefan Cristescu, Senior Consultant, PwC Romania

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