The rules for distributing dividends in capital companies are set out in Royal Legislative Decree 1/2010, of July the 2nd, which approves the Capital Companies Law (hereinafter, LSC). However, these rules appear dispersed throughout the entire legal text, so below we summarize the criteria that must be taken into account by the General Meeting when approving the distribution:
The distribution of the dividend must be agreed, in any case, in accordance with the provisions of article 273 LSC, charged to freely available profits or reserves. Thus, the distribution may be made against the voluntary reserve, the share premium reserve, the profit and the remainder, while the distribution against the share capital, the legal reserve and the amortized capital reserve will not take place. In the case of the statutory reserve, we must comply with what is stipulated by the Bylaws.
It will be an essential requirement for the distribution to provide the legal reserve with 10% of the profits until reaching at least 20% of the share capital, as provided in article 274 LSC.
Another aspect to consider when proceeding with the distribution of dividends is that related to R&D expenses, since as can be deduced from article 273 LSC, an available reserve must be set aside that is at least equal to the amount of the research and development that appear on the balance sheet assets, if these exist.
In the case of companies that have shares or participations acquired through treasury stock (which appear subtracted from own funds), article 142 LSC establishes the obligation to maintain a reserve for their amount as long as they are not sold.
The last requirement is established by article 326 LSC, according to which, for the company to be able to distribute dividends after a capital reduction, the legal reserve must reach at least 10% of the share capital. If the legal reserve is less than 10%, then the distribution cannot take place until such percentage is reached.
Finally, article 273 of the LSC provides that dividends may only be distributed from the profit for the year, or from freely available reserves, if the value of the net assets is not or, as a result of the distribution, is not lower than the share capital. Furthermore, in the event that there are losses from previous years that would make the net equity value lower than the share capital figure, it will be used to compensate for these losses.
Below, we show an example of dividend distribution applying each of the requirements already analyzed, for a company that presents the following items on its balance sheet in thousands of euros:
Example 1:
ASSET | NET WORTH |
20 R&D expenses | Share Capital………… 100 |
Legal reserve………… 18 | |
Voluntary reservation… 40 | |
Losses……………… (10) | |
Treasury stock …………… (5) | |
Benefits……………… 10 | |
TOTAL NET WORTH = 153 |
Dividends to be distributed= 50 (profit + freely available reserves) – 1 (to provide legal reserve) – 20 (to reserve for the amount of R&D expenses) – 5 (to provide reserve for the amount of treasury stock) = 24
The dividend distribution does not reduce the net equity by an amount less than the share capital: 153 (PN) – 24 (dividend distribution) = 129. The net equity is reduced to the amount of 129, which is higher than the share capital (100 ). Therefore, the amount of 24 may be distributed as dividends.
Example 2:
Another company presents the following items on its balance sheet in thousands of euros:
ASSET | NET WORTH |
5 R&D expenses | Share Capital ……………100 |
Legal reserve ………………18 | |
Share premium reserve…15 | |
Losses …………………… (30) | |
Treasury stock ……………… (5) | |
Benefits………………… 100 | |
TOTAL NET WORTH = 198 |
Dividends to be distributed= 115 (profit + freely available reserves) – 2 (to provide legal reserve) – 5 (to reserve for the amount of R&D expenses) – 5 (to provide reserve for the amount of treasury stock) = 103
The distribution of dividend by the 103 indicated would reduce the net equity by an amount less than the share capital: 198 (PN) – 103 (dividend distribution) = 95, therefore, the net equity would be reduced to the amount of 95, which is less than the social capital (100), that is, we cannot distribute the 103.
In this case, the amount of 98 could be distributed as dividends, which is what exceeds the Net Asset Value of the share capital, without leaving the share capital below its current amount, which is 100.
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