Dividend distribution is a fundamental practice for companies and their shareholders involving the allocation of profits generated by the company. Rather than accumulating these profits as voluntary reserves, the company distributes them to the shareholders.
This process requires a thorough analysis, as the method of dividend distribution can significantly impact financial strategies, taxation, and regulatory compliance in the jurisdictions where both the shareholders and the company operate.
This article examines the main types of dividend distributions and the requirements for ensuring an efficient allocation that complies with current regulations and aligns with the company’s strategic objectives.
Types of Dividend Distribution
Companies can distribute dividends in various forms, depending on their needs and circumstances. The primary types of distribution include:
- Dividends from Current Profits: This periodic distribution stems from the profits generated during a specific period, usually the annual fiscal year.
- Dividends from Voluntary Reserves: Dividends from Voluntary Reserves: Companies typically make this extraordinary distribution for purposes beyond their regular operations, such as the sale of significant assets (e.g., real estate or shares of a business unit).
- Interim Dividends: Under this model, the company distributes part of the anticipated profits before the end of the current fiscal year. Two conditions are necessary:
- Sufficient Liquidity: The company must have adequate liquid funds for the distribution.
- Quantitative Limitations: The amount distributed cannot exceed the profits generated since the end of the previous fiscal year, not including previous losses, the legal reserve (representing at least 20% of the share capital), and the estimated tax liability on those profits.
Requirements and Execution of Dividend Distribution
In Spain, dividend distribution is subject to the following conditions:
- Preservation of Net Equity: Article 273 of the Spanish Companies Act (Ley de Sociedades de Capital) requires companies to ensure that their net equity remains at or above the share capital after any dividend distribution.
- Legal Reserve: Under Article 274 of the Spanish Companies Act, companies must set aside a portion of their profits for a legal reserve. This reserve must continue to grow until it reaches at least 20% of the company’s share capital.
- Approval by the General Shareholders’ Meeting: The General Shareholders’ Meeting must formally approve the dividend distribution.
- Liquidity Report for Interim Dividends: The director must provide a report demonstrating sufficient liquidity to support the distribution.
- Compliance with Tax and Accounting Regulations: Compliance with applicable tax and accounting regulations is critical. Internationally operating companies often rely on bilateral tax treaties to avoid double taxation and optimise the application of tax on dividends.
Conclusion
Dividend distribution is a strategic tool to enhance company-shareholder relations. However, its correct execution requires meticulous analysis, particularly in international companies, where tax and financial regulations are more complex.
Seeking specialised legal and tax advice is essential to ensure effective dividend distribution in compliance with local and international regulations.
If you need legal assistance regarding dividend distribution in Spain,
