For many years the controversial issue stood in practice - whether a dividend can be paid in advance under the Tax Act or not. The opinion of the NRA was - denial of the legal possibility to distribute profits in advance and treating them as "hidden profit distribution". In practice, this meant that in order to distribute a dividend, the financial year must have ended, the company's annual report must have been adopted and a decision must have been taken on how to use or distribute the profit.
On the basis of an appealed audit act on a dispute precisely about the advance distribution of a dividend and its tax treatment, namely whether it is dividend income of the individual or another type of income under the Income Tax Act, there is Decision No 2108 of 31.03.2021 of the ACCA and Decision No. 1304 of 11.02.2022 of the Supreme Administrative Court in Administrative Case No. 5699/2021, VIII , which annul the revision act.
The conclusion of the forensic accounting expert states that, in principle, there is no prohibition in the Accounting Act on the advance distribution of a dividend or advance undisclosed distribution of profits. In the absence of such an express prohibition and in the absence of a sufficiently reasonable forecast that the company will end the year in profit, it is not impossible for the partners to decide in advance to distribute a dividend before the end of the accounting period.
Following these two decisions, a written inquiry was made by the Institute of Certified Public Accountants with reference No. 33- 00-165/11.05.2022 to the Central Office of the NRA , which resulted in a new opinion issued by Letter No. 33-00-165 #1 dated 09.06.2022.
In general terms, the conclusion of the NRA is that the advance distribution of the current profit (before the financial year has expired) constitutes a dividend distribution within the meaning of § 1(4)(b). "a" and "b" of the General Tax Law, respectively § 1, item 5, b. "a" and "b" of the Income Tax Act, where there is a net accounting profit for the year equal to or exceeding the amount distributed in advance. For this purpose, a resolution of the general meeting and a substantiated forecast of net accounting profit for the year, supported by evidence, are necessary.
If you have any questions on this topic or would like more information, please contact our colleagues in the accounting department at Smart Balance.
