Quarterly Dividends Distribution is finally possible in Romania

Mihaela Mitache

Amelia Savu

For investors in Romanian companies, these recent changes are of special interest, bringing about new possibilities to cash in on their investment results earlier, rather than in the future.

Distribution of dividends during the year is permitted in most Member States of the European Union (EU), thus providing flexible cash management. In Romania, the limitation to distribute dividends only after year-end, and only after the approval by the shareholders or associates of the annual financial statements, has been the rule since 1990 when the first private companies were founded after the fall of the communist regime. The approval of the financial statements could be done, after publishing by the government of the draft financial statements, between February and May of the next year, for the result of the previous year. So, if no dividends are remaining from previous years, the shareholders would have to wait until February of the next year to make a new distribution of dividends.

In July of this year, the Law no. 163/2018 for the modification of the accounting rules was published, which introduced the possibility of companies dividing the distribution of dividends quarterly during the financial year, not only once a year as it had been the case.

It is important to mention the situation when a company has accounting losses brought forward: the losses must be covered with priority and only afterwards, if there is still any remaining profit, dividends may be distributed. 

Recently, in September 2018, the application procedure further explained that entities who opt for the allocation of quarterly dividends would have to draw up and register with the authorities a set of interim financial statements, consisting of balance sheets, profit and loss accounts and any significant accounting policies.

In order to prepare the interim financial statements, an inventory of the assets, liabilities and equity of the company should also be provided.

At the same time, in the general accounts, a new account ‘Claims representing the dividends distributed during the financial year’ should be created in order to keep a record of the dividends distributed, according to the law, during the course of the financial year which follows, to be settled after approval of the annual financial statements.

According to the order recently published, for entities which have opted for the distribution of quarterly dividends, on the basis of interim financial statements, the amounts of interim dividends distributed should also be recorded in the interim financial statements as claims of shareholders or associates. The settlement of the dividends allocated during the financial year must be done in the next year after the approval of the annual financial statements, and the dividends distributed and paid during the financial year which exceed the annual net profit will have to be reimbursed by the shareholders within 60 days of the date of approval of the annual financial statements. The reimbursement obligation is for persons who cashed dividends on a quarterly basis, and the management of the company is obliged to pursue the recovery of these sums and to take appropriate measures for this purpose.

 

Dividend tax

Domestic: As a general rule, dividends paid by a Romanian company to another Romanian company or individual are subject to a 5% tax. However, the dividends paid by a Romanian company are non-taxable if the beneficiary of the dividend has held, at the time of the distribution, a minimum of 10% of the Romanian company for an uninterrupted period of at least one year.

Non-resident: As a general rule, dividends paid to non-resident companies or individuals are subject to a 5% withholding tax. However, as Romania is an EU member state, the EU Parent-Subsidiary directive can be applied. Therefore, dividends paid by Romanian tax on profit companies to tax on profit or similar companies resident in one of the EU member states are exempt from taxation if the beneficiary of the dividend has held, at the time of distribution, a minimum of 10% of the shares of the Romanian company for an uninterrupted period of at least one year.

In order to apply the provisions of the relevant Double Taxation Treaty (DTT), the non-resident recipient of the income should provide to the Romanian payer a tax residence certificate attesting its tax residency for the purpose of the DTT. In case the tax rates mentioned in the domestic legislation differ from the rates mentioned in the applicable DTT, then the most favourable rate will apply.

In conclusion, for the year 2018, investors in Romanian companies who would like to apply the quarterly distribution of dividends in 2018 should know that they can share as dividends the profit for the first three quarters of the year on the basis of the interim reports on the date of 30 September 2018.

 

XLNC MAGAZINE | No. 02 | November 2018

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