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I. Introduction

Once again, it’s the time of year for the “campaign” for the formulation and approval of the annual accounts of companies whose financial year ended on 31st December, and with this, queries arise regarding the allocation of the financial results.

In this article, we shall deal with the practical questions often posed by companies regarding the distribution of dividends as part of the allocation of the results of the financial year, and likewise the paying out of interim dividends.

II. What is the maximum number of dividends which may be distributed?

Article 273 of the Capital Companies Act (Ley de Sociedades de Capital) hereinafter referred to as “LSC” establishes limits for the distribution of dividends:

a) Legal reserves should be covered; otherwise, a legal reserve of a minimum of 10% of the profits of the financial year should be applied, until said reserve represents at least 20% of the company’s capital (article 274.1 of LSC).

b) The legally obligatory reserves should be covered, where appropriate.

c) The value of net worth does not fall below the company’s capital, as a consequence of the distribution of dividends.

d) The amount of available reserves, is, as a minimum, equal to the amount of the costs corresponding to research and development, as reflected in the assets on the balance sheet.

Thus, if the aforementioned requirements are met, there is no reason why profits may not be allocated to the distribution of dividends to the shareholders or partners of a company.

III. Is there a limitation on the distribution of dividends due to accumulated losses in previous financial years?

The fact that a company has accumulated losses does not impede per se the distribution of dividends.

However, in accordance con article 273.2 of the LSC, dividends may be only be paid out, providing that, as a consequence of their distribution, the value of net worth is not lower than the company’s capital.

However, if the value of net worth of the company is already lower than the company’s capital due to losses in previous financial years, then profits must be allocated to offsetting such losses.

Therefore, if accumulated losses exist, it must be ensured that both before and after the distribution, net worth is equal or greater than the company’s capital.

IV. Can dividends be drawn even if losses have occurred?

Although a priori we may think that dividends may only be distributed when the financial year has yielded profits, the fact is that it is also possible to pay out dividends against freely available reserves, with the limits set forth in section (II) above, as provided for in article 273.2 of the LSC.

Indeed, dividends may also be paid out against reserves provided for in the company by laws, if so agreed by the general meeting and the corresponding articles of the by laws are modified to limit the availability of the reserves.

V. Do any other obligations exist concerning the paying out of dividends?

In accordance with article 93.a) of the LSC, the shareholders or partners are entitled to participate in the distribution of company profits. However, the LSC does not provide for the obligation to pay out dividends, only for the faculty of the general meeting itself to decide on the allocation of the financial result (articles 160.a) and 273.1 of the LSC).

On the other hand, for unlisted companies, article 348bis of the LSC does establish an exit right for partners and shareholders who may have voted in favour of the distribution of profits, after the fifth financial year from the date of the company’s registration on the Commercial Registry, when the general meeting does not agree upon the paying out of dividends of, at least, a third of the legally distributable profits (please see our article regarding article 349bis of the LSC dated January 2017 – ADD LINK-).

VI. Can profits be paid out to shareholders and partners before approving the annual accounts?

Indeed. As well as distributing dividends through the application of the profits of the financial year, it is also possible to distribute dividends to shareholders and partners before knowing the result of the financial year. This may be interesting, for example, when a subsidiary company, participated 100% by its parent company has liquidity, although it is in a situation of insolvency.

For this, article 277 of the LSC requires:

a) that the directors prepare a statement of accounts confirming the existence of sufficient liquidity to pay the interim dividend (said statement of accounts must be subsequently included in the annual report of the current financial year).

b) that the amount to be distributed does not exceed the results obtained since the end of the last financial year, once the losses carried forward from previous financial years and the amounts to be transferred to the reserves required by law have been deducted, as well as the estimated tax due on said profits.

VII. Who is authorised to take the decision to distribute dividends or to pay out interim dividends to shareholders or partners?

The only body authorised to decide upon the distribution of dividends through the allocation of profits, in accordance with the approved balance sheet, is the general meeting (article 273.1 LSC).

Meanwhile, the paying out of interim dividends may be agreed upon by the general meeting or the directors, in accordance with the requirements set forth in section VI above (article 277 LSC).

VIII. When and how may dividends be distributed or interim dividends be paid out?

The agreement on the distribution of dividends shall be reflected in the minutes of the general meeting in which (i) the annual accounts are approved and (ii) the allocation of the results of the financial year is decided.

According to 276 of LSC, said agreement of the general meeting shall determine the time and the manner of the payment of the dividends; and if such details are not so determined, the dividend shall be payable at the registered office of the company from the next day following the date of the resolution, and it is understood to be a cash payment.

Likewise, when the payment of interim dividends is decided upon, and if in the minutes of the general meeting or administration body the moment or manner of payment are not stipulated, it shall also be understood that, by analogy, payment shall take place at the registered office of the company from the next day following the date of the resolution, and in cash.

Carla Villavicencio

For more information, please contact  va@vila.es

2nd of March 2018

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