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Dividend payment when losses incurred in previous years are replaced with profits
Dividend payment when losses incurred in previous years are replaced with profits
Dividend payments to founders and shareholders are widely used in practice at a time when transparency in the economy continues. At first glance, the formalization of these transactions may seem simple, but there are certain subtleties that must be observed. In many cases, profit is formed in the current year as a result of activity in enterprises, but the losses incurred in previous years are taken into account during the calculation of income tax, and at this time, the procedures for paying dividends are of interest. But if the losses are closed with profits, in this case, is it possible to give dividends on account of the net profits generated for previous years?
Let's clarify the issue with examples:
Example 1: "AA" LLC ended 2022 with a loss of 50,000 manats. Also, in 2023, the company made a pre-tax profit of 80,000 manats. In this case, MMC can pay dividends in what amount?
To clarify this, we need to look at the Tax Code:
Article 121.1 of the Code states that the part of the expenses of the enterprise that is allowed to be deducted from the income, exceeding the income, is transferred to the next period lasting up to five years and is compensated at the expense of the profit of those years without setting a limit on years. In simple terms, losses are compensated at the expense of profits of the next 5 years without limitation. Therefore, when calculating the profit tax for 2023 in "AA" LLC, the losses of 2022 will be deducted:
80,000 – 50,000 = 30,000 manats;
30,000 x 20% = 6,000 manats.
Therefore, the company will be charged 6,000 manat profit tax. As a result, it seems that the net (undistributed) profit of MMC for 01.01.2024 will be AZN 24,000, and the company can pay dividends in this amount:
(80,000 – 50,000 – 6,000) = 24,000 manats.
Example 2: "BB" LLC ended 2022 with a profit of 50,000 manats. In 2023, the company suffered a loss of 80,000 manats. In this case, MMC can pay dividends in what amount?
If we calculate the net profit (loss) of the company as of 01.01.2024, we see that a loss of AZN 30,000 has been formed:
50,000 – 80,000 = -30,000 manats.
Therefore, the enterprise cannot pay any dividends in 2024 based on the results of previous years.
Example 3: The company ended 2021 with a net profit of 40,000 manats, and 2022 with a net profit of 50,000 manats. However, he ended 2023 with a loss of 100,000 manats.
In such a situation, can the company pay dividends in 2023 and also in 2024?
Yes, during 2023, the company can make a dividend payment at the expense of the net profit of previous years. Because actually the accumulated retained earnings for 2021 and 2022 were 90,000 manats:
40,000 + 50,000 = 90,000 manats.
He could pay it to the founders in 2023 in free form. However, according to the financial results of 2023, since the company's activities cost 100,000 manats in losses, it can no longer pay dividends in 2024. Considering that the company did not make any dividend payments in 2023, it still cannot pay dividends to the founders in 2024. Because according to the results of 2021, 2022, 2023, the company has a loss of 10,000 manats:
(40,000 + 50,000) – 100,000 = -10,000 manats.
Taxpayers should be careful with dividend payments so that the payment of any unformed dividend does not lead to the assessment of additional taxes and the imposition of financial sanctions during subsequent audits by the tax authorities.
Dividend payments to founders and shareholders are widely used in practice at a time when transparency in the economy continues. At first glance, the formalization of these transactions may seem simple, but there are certain subtleties that must be observed. In many cases, profit is formed in the current year as a result of activity in enterprises, but the losses incurred in previous years are taken into account during the calculation of income tax, and at this time, the procedures for paying dividends are of interest. But if the losses are closed with profits, in this case, is it possible to give dividends on account of the net profits generated for previous years?
Let's clarify the issue with examples:
Example 1: "AA" LLC ended 2022 with a loss of 50,000 manats. Also, in 2023, the company made a pre-tax profit of 80,000 manats. In this case, MMC can pay dividends in what amount?
To clarify this, we need to look at the Tax Code:
Article 121.1 of the Code states that the part of the expenses of the enterprise that is allowed to be deducted from the income, exceeding the income, is transferred to the next period lasting up to five years and is compensated at the expense of the profit of those years without setting a limit on years. In simple terms, losses are compensated at the expense of profits of the next 5 years without limitation. Therefore, when calculating the profit tax for 2023 in "AA" LLC, the losses of 2022 will be deducted:
80,000 – 50,000 = 30,000 manats;
30,000 x 20% = 6,000 manats.
Therefore, the company will be charged 6,000 manat profit tax. As a result, it seems that the net (undistributed) profit of MMC for 01.01.2024 will be AZN 24,000, and the company can pay dividends in this amount:
(80,000 – 50,000 – 6,000) = 24,000 manats.
Example 2: "BB" LLC ended 2022 with a profit of 50,000 manats. In 2023, the company suffered a loss of 80,000 manats. In this case, MMC can pay dividends in what amount?
If we calculate the net profit (loss) of the company as of 01.01.2024, we see that a loss of AZN 30,000 has been formed:
50,000 – 80,000 = -30,000 manats.
Therefore, the enterprise cannot pay any dividends in 2024 based on the results of previous years.
Example 3: The company ended 2021 with a net profit of 40,000 manats, and 2022 with a net profit of 50,000 manats. However, he ended 2023 with a loss of 100,000 manats.
In such a situation, can the company pay dividends in 2023 and also in 2024?
Yes, during 2023, the company can make a dividend payment at the expense of the net profit of previous years. Because actually the accumulated retained earnings for 2021 and 2022 were 90,000 manats:
40,000 + 50,000 = 90,000 manats.
He could pay it to the founders in 2023 in free form. However, according to the financial results of 2023, since the company's activities cost 100,000 manats in losses, it can no longer pay dividends in 2024. Considering that the company did not make any dividend payments in 2023, it still cannot pay dividends to the founders in 2024. Because according to the results of 2021, 2022, 2023, the company has a loss of 10,000 manats:
(40,000 + 50,000) – 100,000 = -10,000 manats.
Taxpayers should be careful with dividend payments so that the payment of any unformed dividend does not lead to the assessment of additional taxes and the imposition of financial sanctions during subsequent audits by the tax authorities.