The Act on trade corporations introduced within the recodification of private law a possibility so that trade corporations pay out advances for shares in profit. This article will make you acquainted with possibilities of the pay-out of share in profit – when, to whom and how much it is possible to pay out, who decides on the payout and how the payout of the advance is settled.

Legal treatment

• § 40 of the Act no. 90/2012 Coll., on trade companies and cooperations (Act on trade corporations)

Delimitation of the advance for shares in profit

Starting from the year 2014 the advance for share in profit is a new possibility how to pay out a share in profit to partners of a trade corporation during the year. According to the in the past valid Commercial Code this possibility was prohibited. In the practice the companies evaded this prohibition often for instance by providing an interest-free loan which was subsequently offsetted to paid out shares in profit. We are speaking about an advance for share in profit only before the decision of the general meeting on the division of profit among partners, then we are already speaking about own share in profit.

The conditions for the payout of the advance for shares in profit are stipulated in the Act on trade corporations. However, the Bookkeeping Act and the related implementing provision have reacted to this news so far only by introducing a new item of reports – Decided on the advances for payout of share in profit.

Conditions for the payout of the advance for shares in profit

The basic conditions for the payout of advances for share in profit are stipulated by the Act on trade corporations. The advances may be paid out by all trade corporations, namely based on the interim financial statements from which it derives, that the trade corporation has enough financial resources for the division of the profit. The advance for payout of profit cannot be higher than the total sum of the economic result of the current accounting period (based on the interim financial statements), of the retained income from past years and other profit funds, reduced by the loss carried forward and when it is relevant at the given trade corporation, by the mandatory allocation into reserve fund. The advance for profit cannot be paid out, when the trade corporation would sustain herewith a bankruptcy according to the Act on bankruptcy and ways of its solution (Insolvency Act). In contrast to the decision on the division of profit which is put into the competency of the general meeting, the decision on the advances for shares in profit is put into the competency of the statutory body, which puts a big responsibility on it. Should the advance for shares in profit be in contrary to law – the trade corporation would sustain herewith a bankruptcy, the advance would be higher than the maximal possible amount is etc. – the statutory body would not act with due care and it would be obliged to make compensation for eventual damages to the trade corporation.

When the trade corporation is obliged to have financial statements reviewed by an auditor, the interim financial statements has to be reviewed by the auditor as well, based on which the statutory body will decide on the payout of advances for shares in profit. The interim financial statements, just like the ordinary financial statements, has to fulfil certain requirements. For instance an annex to financial statements has to be compiled as well. For instance the interpretation of the National accounting board no. I-31 is being concerned with these requirements and recommendations for its compilation.

Above the scope of terms stipulated by the Act on trade corporations there can be other conditions for the payout of advances stipulated by the articles of incorporation of a trade corporation which may thus limit or fully exclude the payout of advances.

Settlement of the advance

The general meeting decides on the division of profit based on the ordinary financial statements. Three different situations may happen as a result of the decision. When the general meeting decides on the payout of shares in profit which are higher than paid out advances, the trade corporations will pay off a difference to partners. When the general meeting decides on the payout of shares in profit which are identical with paid out advances, only the mutual billing of the advance and share happens.

From the standpoint of solution, the most complicated situation is when the general meeting decides on the payout of shares in profit which are lower than paid out advances. At this place a question incurs whether the partner is obliged to return the paid out advance for the share in profit or only its part. However, you can´t find a precise answer in the Act on trade corporations. When interpreting, the lawyers tend to the fact that the partner should return the advance, provided that he is required by the company to do that. The statutory should assess preferentially whether it is possible to decide on the fact that the excess payment will be an advance for the next share in profit. Only in the case when this decision is not possible, the statutory body should call the partners on returning the excess payment.

Conclusion

In the environment of trade corporations the advances for shares in profit are still an innovation. A lot of questions are not solved and answered yet. The approval process of the amendment to the Bookkeeping Act and the related implementing provision is currently running, with the scheduled force from January 1st, 2016. We will notify you of eventual news in this issue in next issues of this bulletin.