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An expert in corporate and international corporate law. He has many years of experience in establishing and reorganizing companies, supporting M&A transactions, as well as providing legal support for opening and running a business in the EU, Asia, and North America.
Receipt of dividends by a legal entity
Dividends are one of the main forms of profit distribution between participants (shareholders) of companies and an important element of the investment policy of companies.
At the same time, the procedure for the payment of dividends and their receipt by legal entities has significant legal features, which are regulated by the national legislation of Ukraine, international agreements and corporate norms.
According to the Law of Ukraine “On joint-stock companies”, dividends can be paid only after the company has ensured the repayment of its obligations and created reserves defined by law or the statute. It is important to note that dividends are paid only from the net profit of the company, that is, after paying all taxes and fees.
Before starting to pay dividends, the company must fulfill a number of conditions.
The main ones are:
- Making a decision on profit distribution. The general meeting of shareholders or participants of the company must decide on the distribution of profits and the payment of dividends. This decision includes determining the amount of dividends, as well as the terms and form of their payment.
- Availability of profit. The company must have net income sufficient to pay dividends. If the company is in debt to creditors or has not fulfilled its tax obligations, the payment of dividends is prohibited.
- Fulfillment of obligations to the state. Before paying dividends, the company must fulfill all tax and duty obligations, including income tax.
The dividend payment procedure consists of:
- Decision of the general meeting. General meetings of shareholders or participants decide on the payment of dividends, determine the amount of dividends, the term and form of their payment. This decision must be documented and meet the statutory requirements of the company.
- Notification of shareholders or participants. After the decision is made, all participants or shareholders must be notified of the conditions for paying dividends, including the terms and procedure for receiving them.
- Payment of dividends. Dividends can be paid in cash or, in cases provided by the statute, in other assets (for example, shares).
Dividends can be paid in different forms:
- Monetary form – the most common form is the payment of dividends in cash.
- Non-monetary assets – in some cases, dividends may be paid in kind, such as additional shares or other securities.
- Reinvested dividends – legal entities can decide to reinvest received dividends in the company, which allows to increase the share of the shareholder in the company without actually receiving cash.
Taxation of dividends in Ukraine is governed by the provisions of the Tax Code. In particular, dividends received by legal entities are subject to taxation.
The income tax rate for residents of Ukraine is 18%, however, certain types of dividends may be subject to other rates or preferential conditions.
Dividends received by a legal entity from abroad are also subject to taxation in accordance with international agreements on the avoidance of double taxation signed by Ukraine. In this case, the company can use the mechanism of offset of taxes paid abroad.
For foreign investors who receive dividends from Ukraine, a repatriation tax may be applied, the rate of which is set at the level of 15%. However, in the case of international agreements on the avoidance of double taxation, this rate may be reduced.
The legislation also provides for a number of restrictions on the payment of dividends.
In particular, dividends cannot be paid if:
- The company is in the process of liquidation or bankruptcy.
- The company has debts to creditors.
- The company has not fulfilled its tax obligations.
- Also, the company’s charter may establish additional conditions and restrictions on the payment of dividends.
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