Dividends are a part of the net profit of a joint-stock company, paid to a shareholder per one share of a certain type and/or class owned by him/her. What are the conditions for obtaining dividends for LLC and what pitfalls can be in the process are in the following.
Legal basis of dividends
Article 116 of the Civil Code of Ukraine (hereinafter - CCU) and Art. 10 of the Law of Ukraine “On Companies” (hereinafter - Companies Law) stipulates that a participant of the company has the right to participate in the distribution of profits of a company and to receive its share (dividends).
The Law of Ukraine “On Joint Stock Companies” provides a detailed definition of the concept of “dividends”. In addition, this law defines the procedure and terms for the payment of dividends, as well as liability for their non-payment.
Unfortunately, the CCU as well as Companies Law do not contain such norms for LLC. In addition, the legislator uses the concept a share of profit regarding LLC, but not dividends.
At the same time, for the purpose of taxation, a dividend payment is made by a legal entity, in particular an issuer of corporate rights, investment certificates or other securities, in favour of the owner of such corporate rights, investment certificates and other securities certifying the investor's right to share in the property (assets) of the issuer, in connection with the distribution of part of its profit, calculated according to the accounting rules (sub-para. 14.1.49 of para. 14.1 of Art. 14 of the Tax Code of Ukraine, hereinafter - TCU).
Dividends for taxation purposes are equated with a cash payment made by a legal entity in favour of its founder and/or participant (s) in connection with the distribution of the net profit (its part).
Dividends distribution and payment
Unlike joint-stock companies, regulations governing the activities of companies do not include requirements regarding the order and periodicity of the payment of the share of profit to the participants of LLC.
The issue of distribution of profits of LLC and payment of its share belongs to the exclusive competence of the highest body of the company – the general meeting of participants and is regulated by the constituent documents (Art. 59 of the Companies Law).
Thus, according to Art. 4 of the Companies Law and Art. 57 of the Commercial Code of Ukraine (hereinafter - Commercial Code), the constituent documents of LLC should contain information on the procedure for distribution of profits.
Unlike joint-stock companies, for LLC there is also no period for which the company can calculate dividends, and the term of their payment. It is therefore necessary to provide in the statute all procedural issues related to the distribution of company profits, in particular regarding the frequency of distribution and the terms of payment of its part to the participants.
However, even if the statute does not contain detailed rules on the payment of a part of the profit, it is not desirable to despair, since the law assigns these powers to the competence of the general meeting of the members of the partnership. The issue of distribution of profits can be resolved at such a meeting and is executed in the form of a protocol.
Legislation establishes that the general meeting convenes the members of LLC not less than twice a year, unless otherwise provided by constituent documents. Participants of the company, possessing in aggregate more than 20% of the votes, have the right to demand the convening of an extraordinary general meeting of participants at any time and on any occasion relating to the activities of the company. If, within 25 days, the head of the company did not comply with the specified requirement, they are entitled to convene a general meeting of the participants.
Anyone of the members of a limited liability company is entitled to request the consideration of the issue at a general meeting of participants, provided that he/she raised the issue by no later than 25 days prior to the beginning of the meeting.
So, the participants of the partnership at their request can initiate the convening of a general meeting of participants and raise the issue of distribution of profits in the company.
Right of dividend obtaining
Article 10 of the Companies Law determines who is entitled to obtain dividends of LLC. Persons, who are members of the partnership at the beginning of the period of payment of dividends, have such a right. Consequently, dividends are paid only to participants in force at the time of the beginning of payment and in proportion to their share.
Thus, if a participant, for example, sold his/her share in the statute capital of the company, then he/she is unlikely to be able to qualify for participation in the profits of the company after completed sales.
Also, it is not necessary to waste time and have legal proceedings to the company on the dividend payment, if the general meeting of participants did not make a decision on their payment. The jurisprudence, which is based on the decisions of the Supreme Court of Ukraine and the Supreme Economic Court of Ukraine, provides that, when considering cases in disputes regarding the collection of sums of dividends, economic courts should rely on the fact that in accordance with para. “д” of sec. 5 and sec. 6 of Art. 41, Art. 59 of the Companies Law, para. 11, 12 of sec. 2 of Art. 33 of the Law of Ukraine “On Joint-Stock Companies”, Art. 15 of the Law of Ukraine “On Cooperation”, the approval of the annual results of the activity of a legal entity, the procedure for distributing profits, the term and procedure for the payment of the share of profit (dividends) belongs to the exclusive competence of the general meeting.
The court has the right to decide on the collection of dividends only if there is a decision of the general meeting of the legal entity to direct the profits to the payment of dividends, on the basis of which is to be determined the amount of dividends owned by the plaintiff (shareholder, member), the terms and procedure for their payment.
Consequently, if the general meeting of the participants made a decision on the payment of dividends, the participant can safely go to court and expect a positive decision. If such decision is not made, the court can not perform the function of general meeting and appoint a dividend payment.
Form of dividend payment
Dividends may be paid both in cash and in kind. The conditions for the payment of dividends must be defined in the statute of the company or in the decision of the general meeting of participants on the distribution of profits.
There are no restrictions on the form of payment of dividends to LLC, as opposed to joint-stock companies. However, if your LLC is the unified tax payer, the payment of dividends in non-monetary form may be considered by the fiscal authorities as a violation of para. 291.6 of Art. 291 of TCU. This paragraph stipulates that the unified tax payers can make payments for the goods shipped (services provided) only in monetary form. Then it will be necessary to prove the right and try to convince the taxpayers that the payment of dividends is not an entrepreneurial activity and during the payment there is no shipment of goods or services.
Consequences of dividends non-payment
The legislator attributes obtaining of a share of profit (dividends) to rights, and not to the obligations of the participant. Therefore, the profit may not be distributed and the dividends may not be paid, but if most of the members of the company vote for it. However, if the general meeting of the participants has decided to pay the share of profit to the participants, the company can not ignore the decision of the supreme management body and is obliged to comply with it within the terms specified in the decision of the meeting. Also, it is not possible to distribute profits so that one participant has dividends accrued, and others − no.
