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In Poland, you can choose to conduct business activities either individually through a sole proprietorship or by establishing a company, which can take the form of a partnership or a capital-based entity. When a business generates profits, one must consider how to distribute them. In the case of a sole proprietorship, the situation is relatively straightforward – the entrepreneur can generally dispose of the funds of their sole proprietorship freely. However, for companies, especially capital ones (so, LLCs, SJSCs, JSCs), distributing profits to shareholders can be more complex. This type of payment to shareholders is referred to as dividends and is subject to specific procedures outlined in the core act of Polish commercial law: The Code of Commercial Companies and Partnerships (hereinafter as: ‘KSH’), the company’s articles of association, or memorandum of association.
It is worth noting that besides business activities, the right to dividends and the principles of their distribution are also crucial in the context of investments (e.g., in stocks of companies listed on the Warsaw Stock Exchange). The rules governing the right to dividends are explained below.
General Principles of the Right to Dividend
As mentioned above, dividends primarly apply to capital companies under commercial law, namely:
- Limited Liability Companies (LLCs),
- Joint-Stock Companies (JSCs),
- Simple Joint-Stock Companies (SJSCs).
Provisions concerning dividends in joint-stock companies also apply accordingly to joint-stock partnerships, so it cannot be definitively stated that dividends are exclusive to capital-based companies (a joint-stock partnership is a partnership-based company).
Dividends represent a reward for using the capital contributed to the company. It should be recalled that shareholders typically contribute capital to the company in the form of money, shares (in LLCs), or stocks (in JSCs and SJSCs). Therefore, individuals who have contributed capital to the company will be entitled to dividends. These individuals are shareholders (in LLCs) or shareholders (in JSCs, SJSCs, and joint-stock partnerships).
A crucial aspect of determining dividends is determining the declaration day, which is the day on which the list of individuals entitled to receive dividends is determined. Both during dividend payments and in establishing the right to their payment essential regulations may also be included in the company’s articles of association and the resolution of the shareholders’ meeting.
When Can Dividends Be Distributed?
General Conditions for Dividend Payment
Earning a Profit
The key prerequisite for distributing dividends to shareholders is the company’s generation of profits in the financial year for which the dividend is paid. In case of recording a loss, as a rule, a resolution on profit distribution will not be possible. In such a situation, shareholders must decide how to cover the loss rather than determine the right and amount of dividends.
Adopting a Resolution by Shareholders/General Meeting of Shareholders on Dividend Payment
In addition to earning a profit, shareholders (or stockholders) must adopt a resolution on its distribution, along with specifying the dividend day. Typically, these resolutions are adopted at the end of the financial year, during the Ordinary General Meeting of Shareholders or the General Meeting of Shareholders.
Determining the Dividend Day
The resolution of shareholders must establish the dividend day, which is the day on which the list of individuals entitled to receive dividends is drawn up.
Possession of Shareholder Status on the Dividend Day
As a general rule, individuals entitled to receive dividends are those who hold shareholder status according to the list established on the dividend day (more on the issue of changes in the composition of shareholders/stockholders below).
Who Has the Right to Dividends in a Limited Liability Company (LLC) in Poland?
In a limited liability company, individuals entitled to dividends for a given financial year are shareholders who held shares on the day of adopting the resolution on profit distribution or on the so-called dividend day, which is differently specified by the shareholders’ meeting as the day on which the list of shareholders entitled to receive dividends is determined.
What happens if changes in the composition of shareholders occur during the financial year? In such a situation, a former shareholder, as a rule, will not be entitled to receive dividends unless the parties regulate this issue differently in the share transfer agreement. Nevertheless, in this case, the obligation to pay the dividend amount and carry out mutual settlements will only exist between the buyer and the seller of the shares without involving the company itself. However, the situation is different after the resolution on profit distribution is adopted, which results in the emergence of a dividend payment claim on the shareholder’s part. In the case of share transfer, this claim does not automatically pass to the acquirer of the shares. Therefore, in such a situation, the shareholder leaving the company will be entitled to receive dividends. However, this issue can also be regulated differently in the agreement, which will be analogous to the transfer of shares before the dividend day.
The dividend payment date falls within two months from the date of adopting the resolution on profit distribution. According to the provisions, the dividend amount cannot exceed the profit for the last financial year, increased by undivided profits from previous years, and the amounts transferred from the established reserve and equity capital accounts available for distribution. The Code also stipulates that this amount must be reduced by uncovered losses, treasury shares, and amounts that, in accordance with the law or the company’s agreement, should be transferred from the profit for the last financial year to the reserve or equity capital.
Who Has the Right to Dividends in a Joint Stock Company (JSC) in Poland?
In a joint-stock company, shareholders have the right to participate in the profit as shown in the financial statements subject to examination by an auditor. Dividends encompass the profit allocated by the general meeting of shareholders for distribution among shareholders. The profit is generally distributed in proportion to the number of shares, taking into account any preferred shares. Many dividend-related regulations in a JSC are similar to those in an LLC.
Individuals entitled to dividends for a given financial year are shareholders who held shares on the day of adopting the resolution on profit distribution or on the dividend day (which is regulated in a manner identical to the dividend day in an LLC). The articles of association may authorize the general meeting of shareholders to determine the dividend day, which can be set later than two months from the date of adopting the resolution on profit distribution. As for the dividend amount, the same regulations apply as in an LLC.
Advance Payment on Dividends: When Can It Be Made?
An essential practical aspect is the advance payment on account of dividends in an LLC. The company can pay an advance payment on the expected dividend if its approved financial statements show a profit for the previous financial year. The advance payment may be at most half of the profit earned since the end of the previous financial year, increased by reserve capital formed from the profit, which the management board can use to pay advances, and reduced by uncovered losses and treasury shares. In the case of companies for which this form of business is the sole source of income, an advance payment on account of dividends can be an excellent way to make regular withdrawals from the company.
Considering the above premises, dividend payment in the first year of an LLC’s operation is impossible. According to Article 198 of the Commercial Companies Code, a shareholder who received such a dividend contrary to the law or the provisions of the company’s agreement is obliged to return it.
Regarding the advance payment on account of dividends, in a JSC, the articles of association may authorize the management board to pay shareholders an advance on account of the expected dividend at the end of the financial year if the company has sufficient funds for payment. Unlike the regulations for LLCs, the payment of an advance requires the supervisory board’s approval. The condition for making an advance payment on dividends is demonstrating a profit in the previous financial year.
It is worth noting that in a situation where financial forecasts regarding profits do not materialize, dividends may be subject to refund. If an advance payment on the expected dividend for a given financial year has been paid to shareholders, and the company incurs a loss or achieves a profit lower than the advances paid, shareholders must refund the advance payments on dividends. Advance payments are refundable:
- In full, in the case of recording a loss, or
- In part corresponds to the amount exceeding the profit attributable to the shareholder for a given financial year, in case of achieving a profit lower than the advances paid on account of the expected dividend.
This means that even after an advance payment on account of dividends, shareholders cannot be sure that these funds will be non-refundable. This situation will persist until the day the resolution on profit distribution is adopted.
Simple Joint Stock-Company (SJSC) – can it distribute dividends?
The Simple Joint-Stock Company (SJSC) is a new type of company designed, among others, for startups. In its structure and specifics, it is similar to a joint-stock company; however, the legislator has introduced several simplifications to make this form of the company more accessible to entrepreneurs (one of such simplifications is the elimination of a minimum amount of share capital).
As mentioned above, many regulations in the SJSC are analogous to those in a joint-stock company, considering the greater accessibility of this form for entrepreneurs. Therefore, shareholders have the right to dividends in the Simple Joint-Stock Company, essentially following the same rules as in a joint-stock company. The rules described in the preceding section will apply accordingly.
In practice, this means that the SJSC must generate profits, which will then be subject to resolution by the appropriate company body for distribution. The Simple Joint Stock Company can make advance payments on account of dividends, but the rules regarding advance payments on account of dividends from other capital-based companies will apply.
Considering that the SJSC will not significantly differ in this regard from a limited liability company or a joint-stock company, the SJSC may be worth considering as a form of conducting business, taking into account its advantages described in the previously cited articles of the law firm’s team.