The resolution on dividend is taken once a year when the financial statements are approved and the company's supreme body decides on the amount and payment of the dividend. Under the effective legal regulations, the untied retained earnings supplemented by the after-tax profit of the previous business year is considered for the purposes of dividend.
What is dividend under the Accounting Act?
The Company’s members are entitled to a proportionate part (dividend) of the after-tax profit for the year as per Act C of 2000 on Accounting* or the after-tax profit supplemented with the untied retained earnings.
Who is entitled to dividend?
Pursuant to the Civil Code, members shall be entitled to dividends if they are included in the register of members as of the time of adopting the decision on the payment of dividends, unless the memorandum and articles of association specifies a different date. The articles of association may allow dividends to be provided to shareholders in kind.
The member is only entitled to the dividend in proportion to his cash contribution already paid. Unless otherwise provided by the articles of association, after-tax profits shall be distributed to members in proportion to their capital contributions.
When is dividend payable?
The vast majority of companies reporting for the normal calendar year are currently in the process of finalising last year's accounts. When the financial statements for the business year are adopted, the company's supreme body decides on the amount of the dividend and its payment. Dividends are declared once a year, when the financial statements are approved.
Comprehensive accounting services from RSM
The amount of dividend
Under the effective legal regulations, the untied retained earnings supplemented by the after-tax profit of the previous business year is considered for the purposes of dividend.
The Accounting Act provides for a limit on dividend payment: dividend may be disbursed only if the amount of equity less the tied-up reserves and the positive valuation reserve does not fall below the amount of subscribed capital following the disbursement of the dividend. This is a very important regulatory tool, as in many cases the tied-up reserve will determine the dividend if the taxpayer recognises a development reserve, for example. The development reserve must be shown separately in the tied-up reserve.
In the case of parent companies, the amount of dividends and shares received (due) not yet included in the previous year's financial statements but recognised in the current year up to the balance sheet date may be considered as an increasing item in the amount of the untied retained earnings and equity.
Please note, however, that negative retained earnings reduce the possibility of paying dividends.
Accounting for dividend: how and when?
The amount of the dividend declared and payable shall be entered in the accounting records in the financial year following the year closed with the financial statements as of the date of the decision to pay dividends.
The dividends payable to shareholders are accounted for on the basis of the shareholders' decision approving the financial statements and on its date, as an item decreasing the retained earnings and increasing liabilities.
In the present case, the decision on the use of the after-tax profit of the 2024 financial statements as dividend will be taken in the period following the current year, i.e. when the financial statements are approved in 2025.
The deadline for the payment of dividends must be specified in the resolution of the general meeting on the dividend.
If the resolution does not specify a deadline, the owner may claim the dividend from the company at any time, and therefore it may become due at any time. Consequently, it must be reported under short-term liabilities, regardless of whether it has remained unpaid for several years.
The declaration and payment of dividend may be separate in time based on the currently effective rules. Immediate disbursement is not required: disbursement may be scheduled based on the cash flow.
Waiver of dividend and its accounting treatment
Under the regulation effective from 1 January 2021, waived dividends were removed from the items reducing the corporate income tax base under the CIT Act, and are now transferred directly to retained earnings. (Previously, corporate income tax regulations included a tax base adjustment item for income recognised in connection with the waiver of declared but unpaid dividends.
This was due to the accounting requirement that the company declaring the dividend had to record the waived dividend as income.)
According to Section 37 (1) h) of Act C of 2000 on Accounting, the amount of the dividend liability waived —if the owner (member) of the company waives their claim arising from the approved dividend—must be recognised as an increase in retained earnings as of the date of the waiver.
The company’s profit after tax is not affected by the waived dividend.
In relation to the waiver of dividends, the question may arise as to whether the owners have the option to waive the approved dividend only partially, or whether, in the case of multiple owners, some owners can waive their dividend while others do not.
As there is no legislation specifying the conditions for dividend waiver, members who do not wish to receive their due dividend, or only wish to claim a portion of it, have the opportunity to waive it partially or fully.
Since no other legal restrictions prohibit this, varying degrees of dividend waiver may be effected provided that the members clearly express their intention to do so, and the exact amount is recorded in the minutes.
Managing and accounting for interim dividend
If interim dividend was paid to the shareholders during the year based on an interim balance sheet, it is important that the interim dividend is classified as actual dividend when the financial statements are approved.
If, following the payment of the interim dividend, the annual financial statements reveal that dividend payment is not possible, or only a smaller amount of dividend is approved—i.e., the interim dividend does not or only partially becomes actual dividend—then the respective amount must be reclassified as a loan, on which interest must be paid.
If the individual fails to pay the interest, then, under the Personal Income Tax Act, he is considered to have received income from interest rate discount. The amount that does not become a dividend must be repaid by the members/shareholders upon the company's request.
