Interim dividend

What it means

An interim dividend is the payment of part of the profit to shareholders during the year, before the annual financial statements are approved. The Commercial Code allows it for both limited liability and joint-stock companies if the articles of association or statutes permit it. It is a form of interim dividend, later confirmed by the ordinary profit distribution.

An interim dividend may be paid only on the basis of interim financial statements showing that the company has sufficient profit. The amount may not exceed the profit earned since the end of the last accounting period, plus retained earnings from prior years and less losses and mandatory transfers to funds. The company must also pass the solvency test.

If the annual financial statements do not confirm sufficient profit, shareholders must return the advances. The interim dividend is therefore conditional, and its final character is determined only after the year ends and the general meeting approves the statements.

How it works in practice

Companies use interim dividends when results during the year are good and shareholders need income before the statements are approved. The procedure is: prepare interim statements, check the solvency test, adopt a resolution of the general meeting or sole shareholder, and pay. Every step should be documented.

An interim dividend is subject to dividend taxation in the same way as an ordinary profit share. The company withholds tax on payment and remits it to the tax administrator within the statutory deadline. A higher rate applies to shareholders from non-treaty states. In the accounts the advance is carried as a receivable from the shareholder until the ordinary profit distribution closes it.

When planning we recommend considering not only profit but also cash and future investment. Even if the law allows an interim dividend, paying out money the company will need in a few months can threaten its stability. Sensible practice is to pay interim dividends with a margin, not from all the available profit.

What to watch out for

The most common mistake is paying an interim dividend without interim statements, based only on an estimate from the accounting software. Such a payment breaches the law, and if the profit later proves insufficient, the directors may be liable for damages. The proper procedure is what protects both directors and shareholders.

Watch out for a change in results in the second half of the year too. If a company pays an interim dividend from a strong first half and reports a loss at year-end, shareholders must return the money even if they have already spent it. The repayment also has tax consequences that should be thought through in advance.