What is a dividend?
A dividend is a distribution of profit by a company to its shareholders or partners, made in accordance with corporate law, the company’s constitutional documents and the resolution of the competent corporate body. In practical terms, it is one of the main ways in which investors receive an economic return from holding shares or interests in a company.
In Polish corporate practice, dividends are most commonly associated with limited liability companies, joint-stock companies and simple joint-stock companies. A dividend may usually be paid only from distributable profit determined on the basis of approved financial statements, including retained earnings or amounts transferred from reserve or supplementary capital where permitted by law, after the required corporate approvals have been adopted. The articles of association or statute may also contain specific rules on the allocation of profit, dividend preference, payment dates or limitations on distributions.
A dividend is not an automatic entitlement arising simply because a company generated profit. The decision to distribute profit generally requires a shareholders’ resolution or a resolution of the general meeting, depending on the company type. Until such a resolution is adopted, profit may be retained in the company, allocated to reserve capital, used to cover losses or assigned for other corporate purposes.
How does a dividend work?
The dividend process usually begins with the preparation and approval of annual financial statements. The company then determines whether distributable profit exists and whether payment would be consistent with statutory rules, the company’s financial position and internal corporate documents. The competent corporate body adopts a resolution specifying, among other matters, the amount allocated for dividend and the persons entitled to receive it.
In companies with several shareholders, dividend entitlement is generally linked to shareholding. However, special rights may exist. For example, some shares or interests may be privileged as to dividend, if such privilege is properly provided for in the company documents and permitted by law. In practice, this makes it important to review the articles of association, shareholder agreements and any prior corporate resolutions before deciding on a distribution.
Dividends also have a tax dimension. A dividend payment may trigger withholding tax obligations and reporting requirements. The tax treatment may depend on the shareholder’s status, tax residence, applicable double tax treaty, EU rules, beneficial ownership analysis and domestic anti-abuse provisions. For this reason, dividend planning should be coordinated with corporate, accounting and tax review.
When is legal advice on dividends needed?
Legal support may be required when a company is preparing an annual shareholders’ or general meeting, approving financial statements, adopting a profit distribution resolution or assessing whether a dividend can be lawfully paid. Advice is also useful where the company has accumulated losses, reserve or supplementary capital, preferred shares, shareholder disputes or complex ownership structures.
Shareholders may need assistance in verifying whether they are entitled to a dividend, whether the amount was calculated correctly, whether corporate resolutions were adopted properly and whether minority shareholder rights were respected. In disputes, dividend issues may be connected with access to financial information, challenging resolutions, unequal treatment of shareholders or abuse of majority rights.
Entrepreneurs and investors should also seek advice before structuring dividend flows within a group of companies. In holding structures, cross-border payments or transactions involving related parties, dividend decisions may raise issues under corporate law, tax law, transfer pricing regulations, financial reporting standards and compliance procedures.
A timely consultation with a lawyer can help avoid invalid or defective resolutions, unlawful distributions, tax exposure, management liability, shareholder disputes and financial losses. This is particularly important where a dividend is to be paid from a company with a changing financial situation, external financing, pending litigation or planned restructuring.
Legal support in dividend matters
Support of a law firm in dividend-related matters may include in particular:
- reviewing whether a company may lawfully distribute profit to shareholders,
- preparing or reviewing resolutions on profit distribution and dividend payment,
- analysing articles of association, statutes and shareholder agreements,
- advising on dividend rights, preferred shares and minority shareholder protection,
- supporting shareholders’ meetings and corporate approval procedures,
- assessing management board risks connected with unlawful distributions,
- coordinating corporate advice with tax, accounting and financial reporting issues,
- assisting in disputes concerning dividend entitlement or defective resolutions,
- advising on dividend payments in holding and cross-border structures.
Need legal assistance with a dividend payment, profit distribution resolution or shareholder dispute? Contact us.
See also
- Shareholder rights
- Share capital
- Corporate tax
- Financial reporting