Dividend advance payment rules
Written by: Gábor Molnár
8 Sep, 2020
Accounting · Tax counseling

Is your business well-run and profitable? Do you want to get dividends already during the year, not just the next year following the business year?

If so, there is a solution to it. It is also possible to pay a dividend in advance during the year.

The Accounting Act states that the owners of the company decide on the dividend once a year, when the annual accounts are also approved.

However, in real life, the owners would like to withdraw dividends during the year, for which the Civil Code provides an opportunity in the form of a dividend advance payment.

According to the Civil Code, the owners can decide on the Dividend advance payment in the possession of the interim financial statements (interim balance sheet and income statement). So, in practice, this means that the accountant first prepares an interim report, according to which if there is enough cover (a dividend payment limit has to be calculated), the members can decide to pay a dividend in advance. The interim balance sheet cannot be older than 6 months, and it is very important to note that even if there is dividend coverage, a dividend can only be paid in advance if it does not jeopardize the solvency of the company.

This is a decision and responsibility of the owners, and there is no restriction in the Civil Code on how many times this can happen during the year. This is quite difficult to accept from an accounting point of view, and even the experience of accountants gained during NAV (Tax Administration) audits comes into play. Most of all, we fear that the NAV may classify the high-frequency dividend advance payment as a salary in the event of a check, given its regularity.

In practice, the above described facts mean that the accountant prepares the interim balance sheet for a given balance sheet date, calculates the dividend payment limit and communicates the result to the owners. If there is coverage for the dividend advance payment, then the owners can organize a general meeting to analyze the interim report, accept and decide on the advance payment of the dividend. The decisions of the general meeting are recorded in writing, this is considered as the minutes of the general meeting, which are signed and will be the basic document for the advance payment of the dividends.

A copy of the signed minutes, together with a copy of the signed interim report, are then sent to the accountant, who calculates the taxes on the dividend paid in advance.

Taxes are deductible by the company from the gross dividend of the private owner and only the net amount (i.e. the amount less taxes) can be paid.

The amount deducted from taxes is communicated by the accountant to the owners, who pay it as a net dividend paid in advance.

The above detailed procedure requires a chronological order, so the preparation of the interim balance sheet must precede the decision on the advance payment of the dividend, and this must precede the payment.

The personal income tax and the social contribution tax are levied on the dividends and on the dividend advances only if the individual is the owner.

A gross dividend can only be paid to a company.

Before paying a dividend in advance from your business to the owners, we recommend that you should contact your accountant and agree with him or her on the correct tax calculation.

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