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How to tax advance payments for dividends in a company?

Companies are a very popular form of running a business. Most often they run a business on a larger scale. In companies, shareholders do not always handle their affairs. In such a case, the income from the capital employed is the dividend payout. How to tax advance payments for dividends in a company?

Taxation of dividends

Pursuant to Art. 17 sec. 1 point 4 of the Personal Income Tax Act - hereinafter: the PIT Act - income from cash capital is considered to be dividends and other income from participation in the profits of legal persons actually obtained from this share, including:

dividends on shares deposited by members of occupational pension funds in quantitative accounts;
interest on members' shares from the balance sheet surplus (general income) in cooperatives;
division of the property of a liquidated legal person or company;
the value of free or partially paid benefits made to shareholders of companies, determined in accordance with the principles resulting from art. 11 sec. 2–2b.

A more detailed description of the above-mentioned provision is Art. 24 sec. 5 of the PIT Act, according to which the income (revenue) from the share in the profits of legal persons is the income (revenue) actually obtained from this share.

Advance payments against dividends

At the outset, it should be noted that pursuant to Art. 194 of the Commercial Companies Code, the articles of association may authorize the management board to pay the shareholders an advance on the dividend for the financial year, if the company has sufficient funds for the payment. It may pay an advance on the expected dividend if its approved financial statements for the previous financial year show a profit.

Importantly, an advance on dividends may constitute no more than half of the profit earned since the end of the previous financial year, increased by profit reserves that may be at the disposal of the management board for the payment of advances, less uncovered losses and own shares (see Art. 191 of the Commercial Companies Code).

Bearing in mind the above, it should be stated that due to the fact that the provisions of the Commercial Companies Code provide for the possibility of the management board of a limited liability company decision on the payment of an advance on the expected dividend (under certain conditions), such an advance on the dividend at the time of payment constitutes a definitive benefit to the entity that receives it.

As it results from the regulations of the Commercial Companies Code, the company may demand the return of the advance payment only in strictly defined cases, i.e. when the shareholder has received the payment contrary to the provisions of the law or the provisions of the partnership agreement. In other cases, as a rule, the company does not have such rights. This means that as soon as the management board adopts a resolution to allocate the profit for the payment of the advance payment towards the dividend, the profit that will be allocated to this payment will be subject to taxation. You must make an advance tax payment.

Thus, the advance payment for dividends, due to its definitive nature, will be taxed analogously to the dividend income constituting the source of revenues under Art. 17 sec. 1 point 4 of the above-mentioned the PIT Act.

Example 1.

In the previous year, the company had a profit of PLN 1,000,000. It has three shareholders. Its management board is composed of one person. He adopted a resolution on the payment of an advance for dividends. Can a one-person management board adopt such a resolution without consulting the shareholders?

The decision on the payment of advances against the expected dividend rests with the management board. Thus, in the case of a single member, a declaration of the only member is sufficient. In such a case, he does not have to consult the shareholders on his decision.

To sum up, in order to be able to make advance payments towards the expected dividend for a given financial year, the following conditions must be met:

the articles of association must authorize the management board to pay dividends in advance to the shareholders;
the company must have financial resources that allow it to make advance payments for dividends;
the financial statements for the previous financial year must be approved;
profit was shown in the financial statements for the previous financial year;
there should be a profit in the company from the end of the previous financial year to the date the management board adopts a resolution on the payment of advances against dividends.

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Taxation of advance payments against dividends

A 19% flat-rate income tax is charged on dividend income and other income from participation in the profits of legal persons.

Pursuant to Art. 30a paragraph. 6 of the Personal Income Tax Act, the flat-rate tax is collected without reducing the income by tax deductible costs.

In the case of an advance payment for future dividends, the tax advance is collected by the payer.

Example 2.

Management Board of a limited liability company adopted a resolution on the payment of advances against the expected dividend. The shareholders of the company are natural persons. Should the advance payment be reduced by tax?

So, in this case, the payment is made net. Advance tax payments of 19% are collected by the company. Thus, she is the tax payer.

Let us recall that pursuant to Art. 42 sec. 1 above of the PIT Act, the payers referred to in art. 41, transfer the amounts of the collected tax advances and the amounts of the flat-rate tax by the 20th day of the month following the month in which the advance (tax) was collected - to the account of the tax office, which is directed by the head of the tax office competent according to the place of residence of the payer, and if the payer is not a natural person, according to the seat or place of business, if the payer has no seat.

Finally, it should be emphasized that pursuant to Art. 46 sec. 3 of the Accounting Act, if according to separate regulations, write-offs from the financial result of the current financial year are made during the year, they should be shown with a negative sign in a separate item of liabilities "Equity (fund)", in the item "Net profit write-offs in during the financial year (negative value) '. Therefore, this is how we record advance payments for dividends.

In summary, it is common practice to make advance payments against future dividends. In the case of distributions, shareholders receive their income during the year. This solution is therefore extremely beneficial. In the case of advances against future dividends, we must remember that they are taxed at 19%.