June, for most of us, is the time of beginning summer, approaching holidays and leave from work. Statutory bodies of companies with the accounting period of calendar year should not ignore the duty of calling a general meeting for the purpose approving a regular financial statement for the past accounting period, settlement of economic outturn, and possibly for a decision on division of profit. Let us take a look at this issue in closer context from the perspective of limited liability companies.  

A general meeting for approving the financial statement must take place by the end of the six month after the end of the accounting period at the latest. Within this deadline, it is also necessary to decide about the settlement of economic outturn, and possibly about the payment of profit sharing. A regular financial statement is the basis for decisions made at the general meeting. If the company fulfils the conditions set by the accounting act, the financial statement must be verified by an auditor. 

Options for settlement of economic outturn 

After the approval of the financial statement, it is possible to proceed to a decision on settlement of the economic outturn.  

The profit can be used for allocations to funds pursuant to the Memorandum of Association, to the payment of profit sharing, to settlement of losses from previous years or it can be transferred to undivided profit from previous years.  

Losses can be covered from profits from previous years or it can be left as part of own equity. The losses can also be prescribed for payment to partners. 

 Decision on payment of profit sharing 

A decision about division of profit can be made at a general meeting for approving the financial statement based on a regular financial statement, before the end of the sixth month of the following year. It is possible to divide, at maximum, the sum of the economic outturn of the last ended accounting period raised by undivided profit from the previous periods and lowered by losses from the previous periods and allocations to funds according to the Memorandum of Association. Profit sharing is payable within three months from the day, when a decision was adopted at a general meeting about its payment, unless specified otherwise in the Memorandum of Association or at the general meeting. The statutory body (the executive or executives), which from the perspective of acting with due managerial care and diligence is responsible for potentially damage arising for the company in connection with the payment of profit sharing that would be in conflict with the law, then decides about payment of profit sharing. It mainly needs to examine, if the decision made at the general meeting was adopted in time and in due manner, if profit can be paid in the scope and in the way specified at the general meeting, and if the company does not bring down bankruptcy on itself by payment of profit. 

In specific cases (for example where the recipient is a natural person or a company that does not meet the conditions for exemption stipulated in article 19, paragraph 3 of the income tax act), the payment of profit sharing is subject to the withholding income tax. 

Advances for profit sharing 

According to the applicable case-law, it is not possible to decide about payment of profit sharing after the expiration of six months following the end of the accounting period. The business corporations act enables advance payment of profit sharing in this period, though. Advance payment can be made based on an interim financial statement, and it is not possible to use funds of reserves created for other purposes, or own sources, which are assigned to other purposes and whose purpose the business corporation is not authorised to change. In this case, too, the so-called insolvency test applies, according to which it is not possible to pay the advance payment, if the company would thereby incur bankruptcy. 

After drawing up and approving a regular financial statement and deciding about the payment of profit sharing, the advance payment is included in the sum approved for payment. We see a risk in the advance payments of profit sharing in case, when the economic outturn needed for payment of the originally intended profit sharing is not generated at the end of the accounting period in sufficient height. The rules do not specifically deal with these situations, but a duty of returning an overpayment of advance payment already made can be deduced from the general rules. If payment of profit sharing is not approved at all at the general meeting, or there is no general meeting, partners would have to return the advance payment already made to a full extent. 

Interim financial statement

We focused on the issue of drawing up an interim financial statement in the past already. Let us take a look at the main rules again. An interim financial statement  is drawn up as of a different date than the balance sheet date. During its compilation, accounting entities do not close book and they carry out inventory taking only for the purposes of valuation of assets and liabilities considering all foreseeable risks and possible losses known at the time of drawing up the financial statement (article 25 paragraph 3 of act no 563/1991, on accounting). Otherwise, though, it is necessary to proceed the same way within an interim financial statement as with a regular financial statement (for example to enter all revenues and costs including accruals in the books, to enter depreciation, adjusting entries and reserves including an estimate of the income tax).  

Do accounting entities with obligatory audit have the duty of auditing of the interim financial statement? Expert opinions differ. The decision, if the statutory body will rely on an interim financial statement without verification by an auditor, or if it uses a higher degree of assurance about all conditions advance payments of profit sharing having been fulfilled, is left to its discretion.  

If you belong among those, who will not meet the deadline for a general meeting for deciding on division of profit, do not forget about the option of using advance payments. We are here for you, in case you are no clear about this, please, do not hesitate to turn to us.