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On 1 January 2021, a major amendment to Act No. 90/2012 Coll., on Business Corporations (the "BCC"), published in the Collection of Laws under No. 33/2020, will come into force. This is a very extensive amendment that introduces significant changes to the existing legislation. These changes include also a change in the rules on the payment of profit shares and other own resources of the company.
A corporation may only pay out a share of profits or other own resources if the statutory conditions for their payment are met. The basic condition is that profits or other own resources may be distributed only on the basis of ordinary or extraordinary financial statements approved by the supreme body of the corporation. In addition, a number of tests must be met to ensure that the distribution of profits or other own funds will not undermine the economic stability of the corporation (see below).
At the same time, the legislation provides that if the conditions for the payment of a profit share are not met, a shareholder of a corporation does not have to return a profit share that has already been paid once, if he or she had a good faith belief that the conditions were met. In case of doubt, the good faith of the shareholder is presumed.
This construction is abandoned in the amended ZOK and in the event that the conditions for the payment of the company's profit share are not met and such payment is nevertheless made, the shareholder will be obliged to return the profit share without further delay. The exception will be public limited companies, for which the rule will continue to apply that a shareholder who had a good faith belief that the conditions for the payment of a share of profits or other own resources had been met will not have to return the share of profits or other resources.
(A) Balance sheet test
Another change in the profit sharing context is the tightening and standardization of the so-called balance sheet tests. The balance sheet test determines the maximum amount eligible for distribution as a profit share based on several financial ratios (profit and loss, profit and loss from previous years, funds generated by the company, etc.). It therefore acts as a guarantee that the company does not pay out more than it can realistically afford. This maximum amount available for distribution will now not include all funds made up of profits, but only those that the company is free to use.
At the same time, development costs will now be included in the balance sheet test if they are shown in the assets of the balance sheet. Thus, a limited liability company or cooperative will not be able to distribute profits or other own funds unless the amount to be distributed is at least equal to the unamortised portion of the development costs, under penalty of nullity.
At the same time, the balance sheet test will be extended to cooperatives in addition to limited liability companies and joint stock companies.
B) Equity test
In addition to the balance sheet test, all limited liability companies and cooperatives will now have to apply the so-called equity capital test, which was previously only required for public limited companies, before deciding on the distribution of profits. This test ensures both financial stability and a more accurate representation of the share capital figure. Thus, it will not be possible to distribute profits or other own resources of the company if the equity capital falls below the amount of the subscribed share capital increased by funds which the corporation is not entitled to dispose of, or if the equity capital after such distribution is even negative, again under the penalty of nullity.
C) Insolvency test
The insolvency test remains in force, i.e. the rule that a corporation may not pay out a share of profits or (newly) other own resources if this would cause it to become insolvent; again, a decision contrary to this rule would be subject to the sanction of nullity.
If the profits or other own resources are not paid out by the corporation by the end of the accounting period, they will be transferred to the retained earnings account of previous years. Thus, a situation may arise where, for example, a general meeting of the corporation decides to distribute profits or other own resources, but the statutory body refuses to pay out those profits or other own resources after the insolvency test has been applied. In such a case, it may be possible to wait until the end of the accounting period to pay out the profit or other own resources until the company's economic situation improves. If the share of profit or other own resources is not paid by the end of the financial year, the right to receive it shall cease and it shall be transferred to the retained earnings account of previous years.
This procedure may result in other own resources being transformed into profit through an accounting operation, which may cause complications for companies in practice.
The amendment introduces a new rule prohibiting (subject to statutory exceptions) the provision of gratuitous benefits to partners or persons close to them. The aim of this amendment is to prevent circumvention of the rules for payment of profit shares or other own resources by so-called disguised or hidden profit payments.
The amendment also responds to case law developments in relation to the length of applicability of ordinary or extraordinary financial statements for the distribution of profit sharing, where it will continue to be explicitly stated that profits may be distributed on the basis of ordinary or extraordinary financial statements until the end of the financial year following the financial year for which the financial statements were prepared.
The profit-sharing advance arrangement will be extended. First of all, it should be noted that the amendment (unlike the regulation of the payment of profit sharing, which has now been explicitly extended to other own resources) does not allow advances on other own resources, on the grounds that the legislator considers that there is no justification for advances on other own resources. In addition, we note that the definition of profit includes funds in the retained earnings account of previous years. Therefore, if, because of the insolvency test, other own resources are not paid out by the end of the accounting period and are transferred (transformed) to the retained earnings account of previous years, we consider that it will be possible to advance them in the next accounting period.
In addition, it will be newly clarified by when the advance on profit sharing is to be returned if the corporation does not decide to distribute the profit for the relevant accounting period. In such a case, the amendment provides that the return of the advance on the profit share is to take place within three months from the date on which the relevant financial statements should have been approved. If, within this period, the supreme body of the corporation does not decide on the distribution of the profit that could be set off against the advance, the shareholder will be obliged to repay the advance in full to the company. This rule will presumably also apply to the settlement of any difference between the advance paid and the actual amount of profit distributed.
The amendment to the ZOK introduces a number of changes in the area of the payment of profit sharing and other own resources. It tightens the conditions for their payment and clarifies the rules for their repayment in the event of a breach of the conditions for their payment. The amendment also extends the arrangements for advances on profit sharing.
Are you a statutory body of a business corporation and do not know what rules must be applied for the payment of profit sharing and other own resources? Or, are you a shareholder of a business corporation and need advice on your rights to a profit sharing payment of other own, or conversely, do you not know when you will be required to return a profit sharing or other own resource payment once it has been made? Contact us and we will be happy to advise you on these and other related issues.