Dividend

What it means

A dividend - in an s. r. o. more precisely a profit share - is an amount paid to a member out of profit already taxed at company level. It is not pay for work and not a company cost, but a distribution of what remained after tax.

It is decided by the general meeting on the basis of approved annual accounts. What can be distributed is the distributable profit after the mandatory transfer to the reserve fund and after clearing accumulated losses.

A profit share must be told apart from a payout from other parts of equity, such as the return of a capital contribution made on top of the registered capital. That is not a distribution of profit but the return of capital the shareholder put in, so a different tax treatment applies, as do different conditions in the articles.

How it works in practice

On payment, withholding tax or another regime applies depending on the recipient - individual, company, resident or non-resident - and on any double tax treaty. The paying company remits the withholding, not the recipient.

A profit share carries no social contributions the way salary does, which is why it is weighed against director’s remuneration. The choice always combines the tax and contribution effect with the need for provable income.

After the year-end close we prepare for the client a proposal on profit distribution together with the papers for the general meeting and a calculation of how much may be paid out. We also check that the company stays solvent afterwards - a large profit in the accounts is not cash in the bank when it is tied up in stock and receivables.

What to watch out for

A payment without a general meeting resolution, beyond distributable profit, or while losses stand uncovered is invalid and is treated as other income with all that follows. Money drawn "against dividends" during the year is a loan to the member, not a profit share.

A profit share must not be paid if doing so would push the company into insolvency. A shareholder who received such a payment has to return it, and a managing director who allowed it is liable for the resulting damage. Before deciding on a payout, one looks not only at the profit but also at what falls due over the coming months.