By opinion ref. No. 33-00-165#1 of 9 June 2022, the National Revenue Agency (НАП) introduced substantial changes to the approach to the tax treatment of the advance payment of dividends by commercial companies. The change introduced also takes into account the current case-law in tax matters, abandoning the previous interpretation under which the advance payment of dividends was treated as a hidden distribution of profit.

Explanation of the nature of the advance distribution of dividends

The НАП defines the advance distribution of the current profit (before the close of the financial year) as a distribution of a dividend within the meaning of § 1, item 4, letters „а“ and „б“ of the Supplementary Provisions of the Corporate Income Tax Act (ЗКПО) and § 1, item 5, letters „а“ and „б“ of the Supplementary Provisions of the Personal Income Tax Act (ЗДДФЛ). This applies in cases where, for the year, a net accounting profit equal to or greater than the amount distributed in advance has been reported.

Usual practices in the distribution of profit

As a rule, the distribution of profit takes place after the close of the accounting and tax year, once the exact amount of the profit after taxation has been determined. Only then are dividends paid to partners or shareholders.

Practice regarding advance distribution

In some cases, the sole owner of the capital or the general meeting of the partners/shareholders (in an OOD and an AD) may adopt a decision on the advance payment of a dividend on the basis of current financial results, before the end of the reporting year. The Supreme Administrative Court, in Decision No. 1304 of 11 February 2022 in administrative case No. 5699/2021, held that there is no statutory prohibition on adopting such a decision, provided that it is supported by a well-founded forecast of the annual profit that permits the distribution of a dividend.

Conditions for the advance payment of dividends

According to the opinion of the НАП, the main requirements for the advance distribution of dividends include:

  • A decision of the general meeting (ОС) of the partners/shareholders on the advance distribution;
  • A well-founded forecast of the expected net accounting profit on an annual basis;
  • Evidence supporting the forecast and creating an audit trail for the decision of the ОС.
Consequences where the profit is not realised

If it is ultimately established that the amount distributed in advance is greater than the actual net profit for the year, this will constitute a hidden distribution of profit under § 1, item 5 of the Supplementary Provisions of ЗКПО and § 1, item 8 of the Supplementary Provisions of ЗДДФЛ. This rule, however, applies only to the part exceeding the amount of the net profit realised for the year that is intended for distribution. If the taxable person intends to seek a refund of the tax already paid on the amount distributed in advance, the decision of the general meeting or the company's articles of association/statutes must expressly state that the partner or shareholder is obliged to return the excess to the company, and this refund must actually be carried out.

If you need legal advice or assistance, contact us on tel.: 0887550706 or by e-mail: [email protected]