It is possible to replenish an authorized capitalthrough reinvesting dividends. However, this method is suitable only for profitable companies. What tax consequences could arise in this case?
Basic rules
Dividends are not paid to the founders in case of reinvestment. At the same time, they receive corporate rights in exchange for dividends paid into the authorized capital. Accordingly, the amounts of their contributions to the authorized capital are to be increased by the amount of dividends to be received. That is, there is an increase in the authorized capital at the expense of profit. The relevant amendments should be made to the statute and registered.
Decisions on reinvestment of dividends are adopted by the founders (participants) of the company at the general meeting, which is certified by the protocol. On the basis of this document, the head of the company issues the relevant order and transfers it to the accounting department.
Tax implications
Despite the fact that in the case of reinvestment, the founders do not receive accrued dividends, the rules of taxation are the same as when dividend payment.
It should be recalled that in this case, the company is obliged before or simultaneously with the payment of dividends:
- a legal entity-resident – to calculate and pay to the budget an advance payment of the income tax in accordance with para. 57.11 of the Tax Code of Ukraine (hereinafter − TCU). And not only issuers of corporate rights, registered as taxable income, should pay the advance payment, but also those legal entities registered as the unified tax payers;
- a legal entity − non-resident − in addition to the advance payment on the income tax, it is also necessary to withhold the income tax of non-resident from the amount of accrued dividends (para. 141.4.2 of the TCU);
- an individual (both resident and non resident) – to withhold the personal income tax (hereinafter − PIT) and the war tax from the amounts of accrued dividends (Art. 163, para.167.5.1, para. 167.5.2, sub-para. 1.4 of para. 161 of sub-sec. 10 of sec. XX of TCU).
It should also be remembered that dividends in favour of legal entities are not decreased by the amount of advance payment. That is, the advanced payment is accrued “above” and does not affect the amount of payment. In the case of payment to individuals, the amount of dividends, by contrast, is reduced by the amount of PIT and the war tax.
Transaction for the calculation of dividends and their subsequent reinvestment is not the subject to the value added tax, since it does not fall under the definition of the concepts of “supply of goods”, “supply of services”, specified in paras.14.1.185 and 14.1.191 of TCU.
