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Can dividends be paid if losses incurred in previous years are replaced by profits?
Can dividends be paid if losses incurred in previous years are replaced by profits?
The payment of dividends to founders and shareholders is widely used in the economy at a time when efforts to ensure transparency are ongoing. At first glance, formalizing these operations may seem simple, but there are certain nuances that must be followed. In many cases, as a result of the company's activities, profit is formed in the current year, but losses from previous years are taken into account when calculating profit tax, and this raises questions about the procedures for dividend payments. So, if losses are offset by profit, can dividends be paid out of the net profit accumulated from previous years? Tax experts comment on this issue.
Let’s clarify the matter with examples:
Example 1:"AA" LLC closed 2022 with a loss of 50,000 AZN. Additionally, in 2023, the company formed a pre-tax profit of 80,000 AZN. In this case, how much dividend can the LLC pay?
To clarify this, we must refer to the Tax Code:
Article 121.1 of the Tax Code states that the portion of the company's deductible expenses that exceeds the income is carried forward for up to five years and is compensated against the profit of the following years without any restrictions based on the years. Simply put, losses are compensated against the profits of the next five years without restrictions. Therefore, when calculating the profit tax for 2023 for "AA" LLC, the losses of 2022 will be deducted:
80,000 – 50,000 = 30,000 AZN;
30,000 x 20% = 6,000 AZN.
So, the company will be charged 6,000 AZN as profit tax. As a result, it appears that the net (undistributed) profit of the LLC as of 01.01.2024 will be 24,000 AZN, and the company can pay dividends in this amount:
(80,000 – 50,000 – 6,000) = 24,000 AZN.
Example 2: "BB" LLC closed 2022 with a profit of 50,000 AZN. However, in 2023, the company formed a loss of 80,000 AZN. In this case, how much dividend can the LLC pay?
If we calculate the net profit (loss) of the company as of 01.01.2024, we see that a loss of 30,000 AZN has occurred:
50,000 – 80,000 = -30,000 AZN.
Therefore, the company will not be able to pay any dividends based on the results of previous years in 2024.
Example 3: The company closed 2021 with a net profit of 40,000 AZN, and 2022 with a net profit of 50,000 AZN. However, it ended 2023 with a loss of 100,000 AZN.
In this case, can the company pay dividends in 2023 or 2024?
Yes, the company could have paid dividends in 2023 from the accumulated undistributed profit of previous years. The total undistributed profit for 2021 and 2022 is 90,000 AZN (40,000 + 50,000 = 90,000 AZN).
The company could have freely distributed this amount to the shareholders in 2023. However, because the company's activity in 2023 resulted in a loss of 100,000 AZN, it will no longer be able to pay dividends in 2024.
Considering that the company did not pay any dividends in 2023, it will still not be able to pay dividends in 2024. Based on the results of 2021, 2022, and 2023, the company will have a net loss of 10,000 AZN:
(40,000 + 50,000) – 100,000 = -10,000 AZN.
Taxpayers should be cautious when paying dividends to avoid the risk of additional taxes being assessed and financial penalties being imposed by tax authorities during audits, especially if any unrecognized dividends are paid out.
The payment of dividends to founders and shareholders is widely used in the economy at a time when efforts to ensure transparency are ongoing. At first glance, formalizing these operations may seem simple, but there are certain nuances that must be followed. In many cases, as a result of the company's activities, profit is formed in the current year, but losses from previous years are taken into account when calculating profit tax, and this raises questions about the procedures for dividend payments. So, if losses are offset by profit, can dividends be paid out of the net profit accumulated from previous years? Tax experts comment on this issue.
Let’s clarify the matter with examples:
Example 1:"AA" LLC closed 2022 with a loss of 50,000 AZN. Additionally, in 2023, the company formed a pre-tax profit of 80,000 AZN. In this case, how much dividend can the LLC pay?
To clarify this, we must refer to the Tax Code:
Article 121.1 of the Tax Code states that the portion of the company's deductible expenses that exceeds the income is carried forward for up to five years and is compensated against the profit of the following years without any restrictions based on the years. Simply put, losses are compensated against the profits of the next five years without restrictions. Therefore, when calculating the profit tax for 2023 for "AA" LLC, the losses of 2022 will be deducted:
80,000 – 50,000 = 30,000 AZN;
30,000 x 20% = 6,000 AZN.
So, the company will be charged 6,000 AZN as profit tax. As a result, it appears that the net (undistributed) profit of the LLC as of 01.01.2024 will be 24,000 AZN, and the company can pay dividends in this amount:
(80,000 – 50,000 – 6,000) = 24,000 AZN.
Example 2: "BB" LLC closed 2022 with a profit of 50,000 AZN. However, in 2023, the company formed a loss of 80,000 AZN. In this case, how much dividend can the LLC pay?
If we calculate the net profit (loss) of the company as of 01.01.2024, we see that a loss of 30,000 AZN has occurred:
50,000 – 80,000 = -30,000 AZN.
Therefore, the company will not be able to pay any dividends based on the results of previous years in 2024.
Example 3: The company closed 2021 with a net profit of 40,000 AZN, and 2022 with a net profit of 50,000 AZN. However, it ended 2023 with a loss of 100,000 AZN.
In this case, can the company pay dividends in 2023 or 2024?
Yes, the company could have paid dividends in 2023 from the accumulated undistributed profit of previous years. The total undistributed profit for 2021 and 2022 is 90,000 AZN (40,000 + 50,000 = 90,000 AZN).
The company could have freely distributed this amount to the shareholders in 2023. However, because the company's activity in 2023 resulted in a loss of 100,000 AZN, it will no longer be able to pay dividends in 2024.
Considering that the company did not pay any dividends in 2023, it will still not be able to pay dividends in 2024. Based on the results of 2021, 2022, and 2023, the company will have a net loss of 10,000 AZN:
(40,000 + 50,000) – 100,000 = -10,000 AZN.
Taxpayers should be cautious when paying dividends to avoid the risk of additional taxes being assessed and financial penalties being imposed by tax authorities during audits, especially if any unrecognized dividends are paid out.