A for-profit company is basically set up with the aim of distributing profits to the owners in proportion to their shareholding in the company, i.e. dividends. Dividends can only be approved in Hungary upon the adoption of the year-end accounts, and during the year it is possible to declare and pay an interim dividend. We take a look at the conditions and tax implications below.
Conditions for paying an interim dividend
After closing the accounts for the financial year and adopting the financial statements, the main decision-making body of a company can decide to pay a dividend and the amount of the dividend. The dividend decision can only be taken at that time, when the annual financial statements are adopted. If you want to distribute profits after the adoption of the annual financial statements, i.e. in the period between two sets of accounts, the company can assess and pay an interim dividend.
Based on the provisions of the Hungarian Civil Code (Act V of 2013), the decision on paying an interim dividend is taken by the single member or the members’ meeting in the case of a limited liability company, or by the founder or general meeting in the case of a joint stock company, or by the board of directors based on authorisation in the articles of association. If the company has a supervisory board too, its prior approval is also required for the decision on the interim dividend.
An interim dividend may be paid if
- the interim balance sheet shows that the company has the necessary funds to pay dividends;
- the payment does not exceed the amount of unrestricted retained earnings plus the after-tax profit or loss as shown in the interim balance sheet; and
- the company’s adjusted equity capital less the retained earnings and any positive valuation reserve does not fall below the amount of its registered capital as a result of the payment.
Interim dividends may only and exclusively be paid based on an interim balance sheet approved by the main decision-making body. This interim balance sheet must be prepared in accordance with the general rules of the Hungarian Accounting Act. If the company is subject to an audit, the interim balance sheet must be accompanied by an audit opinion.
As a general rule, any member/shareholder who was a member/shareholder of the company at the time decision to pay the interim dividend was made is entitled to receive the dividend. The members of the company may pay dividends/interim dividends at different rates if this is provided for in the articles of association.
Tax payment liability
If the company is owned by another company and the company pays dividends or interim dividends to that owning company, it is not liable to pay tax.
By contrast, if the owner is a private individual, the interim dividend is taxable. While dividends are subject to personal income tax and social contribution tax, an interim dividend is only subject to personal income tax. Social contribution tax is payable when the interim dividend becomes a dividend.
If, after payment of the interim dividend, it transpires from the annual financial statements that no dividend can be paid, or only a smaller dividend is approved – i.e. the interim dividend does not become a dividend, or only partly – then this amount is reclassified as a loan on which interest is payable. If the individual does not pay the interest, they will have earned income from interest relief under the Personal Income Tax Act. Any amount that does not become a dividend must be repaid by the members/shareholders at the request of the company.
In the case of a company liable to pay corporate tax, a paid interim dividend must be included in the information in the corporate tax return for the year – regardless of whether it was converted into a dividend or not.
The rules for paying and accounting for dividends should be regularly reviewed and scrutinised in each reporting period, and even separately in the case of an interim dividend payable during the year. The staff at WTS Klient Hungary’s accounting division with over 25 years of experience are ready to help clients with any questions they may have on this topic.
