Until recently, Romanian companies could distribute dividends to shareholders only on an annual basis and on approval of their annual financial statements at the end of each financial year. This paradigm has changed and companies can now opt to distribute their dividends annually or quarterly.
Quarterly distribution of dividends
The legal provisions allowing Romanian companies to distribute dividends on a quarterly basis came into force on 15 July 2018 and were introduced by Law 163/2018, which amended:
- the Accounting Law 82/1991;
- the Companies Law 31/1990; and
- Law 1/2005 on the organisation and function of cooperative companies.
Before the enactment of Law 163/2018, the legislation provided that companies could distribute dividends to shareholders only on an annual basis, subject to the approval of annual financial statements at year end.
Now, Romanian companies can decide whether to distribute dividends to shareholders:
- quarterly, in proportion to their participation in the paid-up share capital based on the interim financial statements; or
- annually, after any adjustments required according to the annual financial statements, unless the articles of association state otherwise.
The distribution of dividends on a quarterly or annual basis must be approved by the general shareholders' meeting (GSM) and is carried out based on the relevant interim or annual financial statements, which must also be approved by the GSM. Best practice dictates that both the interim distribution of dividends and the interim financial statements should be approved at the same GSM so as to shorten the process and avoid convening two GSMs.
Law 163/2018 provides that profits may be distributed to shareholders on a quarterly basis during the financial year, up to the quarterly net profits made plus any reported profits and amounts withdrawn from reserves available for that purpose, less any losses incurred and amounts deposited in reserves in accordance with any relevant legal or statutory requirements.
Dividends may be paid on a quarterly basis by the deadline set by the GSM or by law. Differences resulting from the distribution of dividends during the year are adjusted according to the annual financial statements.
Adjusting quarterly distribution of dividends
In the case of partial dividend distribution during the financial year, the annual financial statements must show the partially distributed dividends and the resulting differences must be adjusted accordingly.
The amounts distributed during the financial year must be adjusted on approval of the annual financial statements and dividends distributed and paid in excess during the financial year must be returned within 60 days of approval of the annual financial statements. Shareholders who receive quarterly dividends are subject to the restitution obligation and the company's management is obliged to recover these amounts by any measures necessary.
If the company owes additional dividends to shareholders following adjustment in the annual financial statements, these must be paid within 60 days of approval of the annual financial statements. On the other hand, if paid interim dividends must be returned to the company, these dividend payments owed by shareholders following adjustment in the annual financial statements must be paid back to the company within 60 days of approval of the annual financial statements. Otherwise, after this term, the company or the shareholders (as the case may be) will owe a base rate penalty interest calculated according to Romanian law, unless the articles of association or the GSM resolution that approved the financial statements set a higher interest rate.
Registration of partial dividends
Amounts relating to the interim distribution of dividends must be recorded in the company's accounts and reflected in the interim financial statements as receivables against shareholders.
Further, if a company is obliged by law to audit the annual financial statements or if it voluntarily opts to do so, the interim financial statements must also be audited by financial auditors.
These newly acquired corporate rights have been widely welcomed within the Romanian business markets because they offer shareholders more flexibility to decide how to handle their profits and bring Romanian legislation more in line with that of other European countries.
Such novelties may initially be treated with suspicion by Romanian entrepreneurs, because interim distribution of profits from the present year incurs the risk of having to recall the profits received as dividends if the company registers a loss or the dividends granted throughout the year are greater than the company's profits at year end.
For example, cautious shareholders who receive interim dividends during the year may be reluctant to spend them because they may be required to return the money to the company after the end of the financial year. Further, shareholders may be afraid to even approve interim distributions of dividends because of the unpredictable and fluctuating business and fiscal environment in Romania. As a result, they may feel more comfortable waiting for year end before approving the distribution of any dividends available from past annual financial statements.
Time will tell which companies have the courage to embark on this new corporate adventure.
By Vlad Sandulescu, Attorney at Law, Schoenherr