Advance payment on a dividend

An advance payment on a dividend is a very common mechanism used in a limited liability company during the financial year; however, a few details should be borne in mind to ensure that the use of this mechanism is carried out lege artis (in accordance with the law).

One of the most important issues is granting the management board appropriate authorisation to pay advances on dividends, which may be provided exclusively in the articles of association. Accordingly, a mere resolution on the payment of an advance on a dividend will be an insufficient basis for the management board to make such a payment. Therefore, it is worth remembering this issue already at the stage of drafting the company’s articles of association. Of course, if the relevant contractual provisions are lacking, this matter may be addressed by amending the articles of association (Note: an amendment authorising the management board to pay advances on dividends becomes effective only upon its entry in the register, and not upon the adoption of the resolution).

As a rule, the distribution of profit or the covering of a loss takes place after approval of the company’s financial statements. At that time, the shareholders’ meeting decides on the allocation of profit, for example whether it is to be distributed to shareholders or transferred to reserve capital, etc. Therefore, the mechanism set out in Article 194 of the Commercial Companies Code regarding advances on dividends constitutes an exception to the rule mentioned above.

It is also worth paying attention to Article 195 § 1 of the Commercial Companies Code, which sets out the conditions for the payment of an advance on a dividend. Pursuant to this provision, a company may pay an advance on the expected dividend if its approved financial statements for the previous financial year show a profit. The advance may not exceed one half of the profit earned since the end of the previous financial year, increased by reserve capital created from profit that the management board may use for paying advances, and reduced by uncovered losses and treasury shares.

Accordingly, an advance on a dividend may be paid only after approval of the financial statements for the previous financial year and solely against the expected dividends for the current financial year.

It should also be borne in mind that, pursuant to Article 195 § 1¹ of the Commercial Companies Code, if in a given financial year an advance on the expected dividend has been paid to shareholders and the company records a loss or achieves a profit lower than the amounts paid as advances, the shareholders are obliged to return the advances:

• in full – if a loss is recorded, or
• in the part exceeding the profit attributable to the shareholder for that financial year – if the profit achieved is lower than the advances paid on the expected dividend.

The payment of an advance on a dividend is a very commonly used mechanism during the operation of a limited liability company. Therefore, it is important to bear in mind the conditions required for the effective payment of such an advance, especially since, if shareholders receive advances in breach of the articles of association or statutory provisions, they are obliged to return them pursuant to Article 198 of the Commercial Companies Code.