On the technical side we are discussing about the law no. 163/2018 amending Article 19(3) of the Accounting Law (no. 82/1991), amending and supplementing the Companies Law (no. 31/1990), and amending Law no. 1/2005 on the organization and functioning of cooperatives was published in the Official Journal of Romania, Part I, no. 595 of 12 July 2018.
One of the most frequent asked question by the new investors on the Romanian market – is there an interim distribution available in Romania? No there is not, or so it was, till one week ago.
What happens in reality with this amending article of the accounting law, is in fact a legalization of the common practice that happens in small and medium size companies. Because if there is to be candid about those companies, who did see a balance sheet without unsettled advances to directors/employees/administrators?
Because the law allows for the distribution of dividends quarterly, as compared to the previous regulation under which dividends could only be distributed once a year, represents a tremendous step forward in normalizing the market of SMEs. From large companies’ perspective, this amendment consolidate a fiscal environment that will keep Romania on the map of possible attractive investments.
The downside, compared with other more mature economical environments, is the interim financial statements:
- If the company opts for the quarterly distribution of dividends, it will be required to prepare interim financial statements.
- The interim financial statements are subject to audit, if the entities preparing them are required to have a statutory audit of their annual financial statements, or if they opt to have their annual financial statements audited, in accordance with the law.
So, this good to have legislative provision, has some disadvantages in how the requirements to be met are formulated. Why? Because your internal department will be loaded with additional tasks at every quarter, so another resource may need to be on boarded and for sure your external accounting company/auditor will remodel the actual budget to cover the extra hours for the new requirements.
How quarterly distribution of dividends will work in Romania:
- Optionally, based on the interim financial statements, dividends may be distributed quarterly, proportionately with the participation in the paid-up share capital.
- Articles of Incorporation must allow quarterly distributions, so you may need to liaise with the legal team to be sure that the actual version is in line with the new law.
- Distribution is made within the level of the quarterly net accounting profit, plus any retained earnings carried forward and amounts withdrawn from available reserves less any loss carried forward and amounts deposited in reserves.
- Quarterly dividends are paid within the time limit set by the general meeting of shareholders, so an official decision for this distribution needs to be in place along the interim financial statements.
- In the case of partial distribution of dividends to shareholders during the financial year, the partially distributed dividends should be set out in the annual financial statements and the resulting differences should be settled accordingly.
- The deadline for settlement of differences should be paid within 60 days of the date of approval of the annual financial statements for the previous financial year.
- Dividends paid contrary to the above requirements should be refunded if the company proves that the shareholders knew of the irregularity of the distribution.
What about the accounting team:
- Companies choosing for the quarterly distribution of dividends are required to prepare interim financial statements accounting for the partially distributed dividends.
- Dividends can be distributed only after shareholders’ approval of the interim financial statements.
- Naturally the accounting team must ensure that the quarterly P/L is finalized and the dividends are not exceeding the available net profit.
- Distributions must be reflected in both accounting entries and interim financial statements.
Outstanding points regarding the interim distributions:
- For now the Romanian tax code is not providing regulations and guidance regarding the tax on dividends, how this will be settled if quarterly distributions occurred.
- Another situation is that after the approval of the annual financial statements, there will be amounts to recover from shareholders / associates because the final dividends are lower than the interim dividends paid. There is no ruling in place about how will the additional dividend tax be recovered.
- Additional specifications regarding the accounting recognition as a receivable position in accordance with the Romanian regulations vs IFRS. This will trigger reclassifications, due to different perspectives in recognition.
In conclusion, as consultants we recommend for the next quarter to act with caution in applying interim distributions. Further clarification regarding the above matters are expected from the Ministry of Finance in the next weeks/months.
On the other hand, we (along other specialists) are remarking that organizing the activity as a micro-enterprise seems more and more tempting. Because as I was saying at the beginning at this article, one of the reasons why small business (“one man show”) preferred to be registered as an independent activity was the fact that it was easier to access the money earned.
Now, that the Law no. 163/2018 is no longer a reason for the organization of self-employment, the micro-enterprise is being increasingly attractive to small entrepreneurs.