Dividends: practical guides and steps

Dividends reward shareholders when a company pays out part of its profits. Paying them follows company law rules first, then a tax regime of its own. These guides help SME directors and investors decide when and how to distribute.

When can a company pay dividends?

Everything starts with approval of the annual accounts. The general meeting then decides how to allocate the profit. In an SRL, the board also checks two tests before any distribution. The net asset test protects creditors, while the liquidity test checks that the company can keep paying its debts.

A distribution that ignores these tests exposes directors to personal liability. Moreover, shareholders may have to pay amounts back if they knew about the irregularity.

Withholding tax and its exceptions

In principle, the company withholds 30% tax on each dividend. For an individual, that deduction usually settles the tax in full. However, several regimes reduce the bill.

• VVPRbis, with a reduced rate for certain SME shares issued against a cash contribution.
• The liquidation reserve, which lets you pay out set-aside profits later on favourable terms.
• The dividends received deduction, which avoids double taxation between companies.
• A small slice of dividends, exempt from personal income tax when claimed in the return.

Our guide to dividend taxation details the conditions of each regime.

Dividends or salary?

A director who also holds shares often chooses between salary and distribution. Pay remains deductible for the company, but it bears social contributions and progressive tax. A distribution, by contrast, comes from profits that have already borne corporate income tax. The right mix therefore depends on your needs and the company's situation.

Watch out for a common trap. The reduced corporate tax rate for SMEs requires, among other things, a minimum salary for the director. Scrapping all pay in favour of distributions can therefore cost more than it seems. Our guide to optimising your business taxation compares these options. Tax benefits for SMEs also sets out the conditions for the reduced rate.

Mistakes to avoid

• Paying an interim dividend without meeting the legal conditions.
• Forgetting to declare and pay the withholding tax on time.
• Draining cash just when the business needs it.
• Choosing a reduced regime without checking its conditions.
• Distributing without recording both tests in a written report.

A distribution policy takes several years to prepare, together with your accountant. Official rates and forms are available on the FPS Finance website.