Paying dividends from an OÜ

Who decides to pay dividends, and how?

Approving the annual report and distributing profit are matters for the shareholders (ÄS § 168 lg 1 p 5) [1]. After the end of the financial year, the management board prepares the annual report and submits it to the shareholders together with a proposal for the distribution of profit (ÄS § 179 lg 1 and 2) [5].

A shareholders' resolution is adopted if more than half of the votes represented at the general meeting are cast in favour, unless the law or the articles of association require a larger majority (ÄS § 174 lg 1) [6]. If the resolution is adopted without a meeting, on a draft sent out by the management board, more than half of the votes of all shareholders is required (ÄS § 174 lg 2) [6].

If the company has one shareholder, a resolution may be adopted without calling a meeting; it is made in writing and signed by the shareholder, and it states, among other things, the shareholders' names, the number of votes and the time of the resolution (ÄS § 173 lg 6) [7]. The same simpler procedure may be used with several shareholders, provided that they all agree to the resolution and sign it (ÄS § 173 lg 7) [7].

ÄS § 335 applies accordingly to the profit distribution resolution (ÄS § 179 lg 5) [5]: the resolution states the amount of net profit, the allocations to the legal reserve and to other reserves, the part of the profit to be distributed and any other use of the profit (ÄS § 335 lg 2) [8].

How much can be paid out as dividends?

Payments may be made only out of net profit or undistributed profit of previous financial years, less uncovered losses of previous years, and only on the basis of an approved annual report (ÄS § 157 lg 1) [2]. The following restrictions also apply.

• Net assets requirement. No payments may be made if the net assets shown in the approved annual report for the last financial year are, or would become, less than the total of the share capital and those reserves that may not be paid out to shareholders under the law or the articles of association (ÄS § 157 lg 3) [2]. Net assets are the total assets on the balance sheet minus the total liabilities shown on the liabilities side (ÄS § 171 lg 2 p 1) [9].
• Legal reserve. If the articles of association provide for a legal reserve, it may not be less than 1/10 of the share capital (ÄS § 160 lg 2) [10]. In each financial year at least 1/20 of the net profit must be transferred to the legal reserve; once the reserve reaches the amount set in the articles of association, it is no longer increased out of net profit (ÄS § 160 lg 3) [10]. No payments to shareholders may be made out of the legal reserve (ÄS § 161 lg 2) [11].
• Development costs. If the company capitalises development expenditure as an intangible fixed asset and it has not been fully amortised, profit may not be distributed unless the total of the reserves available for distribution and the undistributed profit of previous periods is at least equal to the unamortised development expenditure (ÄS § 157 lg 3¹) [2].

If a shareholder has received a payment they were not entitled to, they must return it (ÄS § 158 lg 1) [12].

How are dividends divided between the shareholders?

A dividend is paid to each shareholder in proportion to the nominal value of their share, unless the articles of association provide otherwise (ÄS § 157 lg 2) [2]. According to the Supreme Court (Riigikohus), the shareholders may set a sufficiently specific rule in the articles that differs from the law. If, however, the articles leave each decision on a different rule to the shareholders, the law may be departed from only if, in addition to the general majority, all shareholders whose rights are to be restricted vote in favour. Where the dividend is distributed under a sufficiently specific different rule laid down in the articles, the consent of those shareholders to the profit distribution resolution is not required if they voted for such articles or the articles took effect before they became shareholders (RK 2-22-10897/31) [13].

A dividend is paid in money; with the shareholder's consent it may also be paid in other assets (ÄS § 157 lg 5) [2]. A shareholder has the right to demand payment of the dividend set by the shareholders' resolution (ÄS § 157 lg 4) [2].

How are dividends taxed?

A resident company pays income tax on profit distributed as dividends when it pays them out in monetary or non-monetary form (TuMS § 50 lg 1) [3]. Profit is taxed when it is distributed, regardless of the manner and form of distribution (TuMS § 1 lg 3) [14]. The tax rate is 22% (TuMS § 4 lg 1) [4], and for this object of taxation the taxable amount is divided by 0.78 before it is multiplied by the rate (TuMS § 4 lg 1¹) [4].

The company files a tax return with the Tax and Customs Board (Maksu- ja Tolliamet) and pays the income tax by the 10th day of the calendar month following the taxation period (TuMS § 54 lg 2 and 4) [15].

The Act lists cases in which a dividend is not subject to the income tax under TuMS § 50 lg 1. For example, this applies where the resident company paying the dividend has itself received the underlying dividend from a company resident in a contracting state or the Swiss Confederation that is liable to income tax (other than a company in a jurisdiction that does not cooperate in tax matters), and at the time it received the dividend it held at least 10% of that company's shares, holdings or votes (TuMS § 50 lg 1¹ p 1) [3].

What the law says

• „Osanikele võib teha väljamakseid puhaskasumist või eelmiste majandusaastate jaotamata kasumist, millest on maha arvatud eelmiste aastate katmata kahjum, kinnitatud majandusaasta aruande alusel.“ [2] (translation: payments may be made to shareholders out of net profit or undistributed profit of previous financial years, less uncovered losses of previous years, on the basis of an approved annual report; ÄS § 157 lg 1) – no dividends before the annual report has been approved.
• „Osanikule makstakse osa kasumist (dividend) võrdeliselt tema osa nimiväärtusega, kui põhikirjaga ei ole ette nähtud teisiti.“ [2] (translation: a shareholder is paid a part of the profit (dividend) in proportion to the nominal value of their share, unless the articles of association provide otherwise; ÄS § 157 lg 2) – by default, profit is split by the size of the shares.
• „Reservkapitalist ei või teha osanikele väljamakseid.“ [11] (translation: no payments may be made to shareholders out of the legal reserve; ÄS § 161 lg 2) – the legal reserve is not a source of dividends.
• „Kui osanikule on tehtud väljamakse, mida tal ei olnud õigust saada, peab ta alusetult saadu tagastama.“ [12] (translation: if a shareholder has received a payment they were not entitled to, they must return what they received without legal basis; ÄS § 158 lg 1) – a prohibited payment has to be repaid.
• „Dividend makstakse välja rahas.“ [2] (translation: a dividend is paid in money; ÄS § 157 lg 5) – other assets only with the shareholder's consent.

What to do

1. After the end of the financial year, the management board prepares the annual report and submits it to the shareholders together with a proposal for the distribution of profit (ÄS § 179 lg 1 and 2) [5].
2. Check from the report that the amount to be distributed does not exceed net profit and undistributed profit less uncovered losses, and that net assets will not fall below the total of the share capital and the reserves that may not be paid out (ÄS § 157 lg 1 and 3) [2].
3. The shareholders approve the report and adopt the profit distribution resolution (ÄS § 168 lg 1 p 5) [1]; a sole shareholder may adopt the resolution without calling a meeting, but it must be made in writing and signed (ÄS § 173 lg 6) [7]. State in the resolution the amount of net profit, the allocations to reserves and the part of the profit to be distributed (ÄS § 335 lg 2) [8].
4. The management board files the approved annual report, together with the profit distribution proposal, with the commercial register within six months of the end of the financial year (ÄS § 179 lg 4) [5].
5. Pay the dividend in money or, with the shareholder's consent, in other assets (ÄS § 157 lg 5) [2]. File the tax return and pay the income tax by the 10th day of the calendar month following the taxation period (TuMS § 54 lg 2 and 4) [15].

Frequently asked questions

What happens if a dividend was paid unlawfully?

The shareholder must return what they received without legal basis (ÄS § 158 lg 1) [12]. If the shareholder, when receiving the payment, did not know and did not have to know that there was no basis for it, repayment may be demanded only if it is needed to satisfy the claims of the company's creditors (ÄS § 158 lg 2) [12]. The members of the management and supervisory boards who caused the unlawful payment are jointly and severally liable with the shareholder for its return (ÄS § 158 lg 6) [12]. The claims expire five years after the payments were made (ÄS § 158 lg 5) [12].

What if net assets have fallen below half of the share capital?

The shareholders must then decide to reduce or increase the share capital, take other measures, dissolve, merge, divide or transform the company, or file a bankruptcy petition (ÄS § 176) [16]. No payments may be made while net assets are less than the total of the share capital and the reserves that may not be paid out (ÄS § 157 lg 3) [2].

Can the company lend money to a shareholder instead of paying a dividend?

A private limited company may not grant a loan to its shareholder whose share represents more than 5 per cent of the share capital (ÄS § 159 lg 1 p 1) [17]. A transaction in breach of this ban is void (ÄS § 159 lg 4) [17].

Does the shareholder have to pay income tax on the dividend personally?

The income tax is paid by the company when it pays out the dividend (TuMS § 50 lg 1) [3]. An individual's taxable income does not include dividends that are taxed with the company's income tax (TuMS § 12 lg 2) [18].

Can the profit distribution resolution be challenged?

A court may, on an action, declare invalid a shareholders' resolution that is contrary to the law or the articles of association; the limitation period for the claim is three months from the adoption of the resolution (ÄS § 178 lg 1) [19]. A shareholder who took part in the resolution may demand that it be declared invalid only if they had their objection recorded in the minutes (ÄS § 178 lg 3) [19].