COVID-19: Current regulations restricting profit distributions
Political discussions have recently focused on limiting distributions of profits. Such calls have focused in particular on companies who receive state aid during the COVID-19 crisis. Not all legal initiatives have been implemented. The following article provides an overview of the current situation regarding the possibility of distributing net profits as well as other limitations.
1. Prohibition of distributions under Sec. 82 para 5 Austrian Limited Liability Companies Act (GmbHG)
As reported in our blog entry COVID-19: An obstacle for distributing dividends?, there is a general ban on distributions of last year’s profit of GmbHs to the extent that the net profit is offset by losses in the current year:
If company assets have been significantly or permanently (not only temporarily) reduced by losses and depreciations, the net profit may not be distributed in accordance with Sec. 82 (5) GmbHG in the amount of the depreciation.
It is important to consider that the date of approval of financial statements is decisive, and not the date of distribution of profits or dividends. The approval of financial statements must normally take place in the first 8 months of a financial year. Due to the COVID-19 measures, the approval of financial statements and submission to the Austrian Business Register may be carried out until the end of the 2020 (see blog entry https://steuernachrichten.pwc.at/en/blog/2020/04/09/additional-extension-of-due-dates-for-annual-financial-statements/).
2. Other general prohibitions on distributions
For stock corporations (AGs), there is no such prohibition on distributions regarding losses incurred in the interim period. Nevertheless, board members must act in the best interests of the company when making suggestions on the appropriation of profits and must consider any (negative) events which have occurred after year-end.
For partnerships, the withdrawal of profits is prohibited if these will result in obvious damage of the company. This is particularly the case if the outflow of liquidity threatens the continued existence or the creditworthiness of the company, or limits the company in any other way in its development or in achieving its goals, e.g. in realizing projects which have already been agreed.
3. Additional prohibitions on distributions in connection with COVID-19 subsidies
No general statutory ban on distributions in connection with state aid, as demanded by various actors, has been implemented. Instead, a directive issued by the Austrian finance minister on 8 April 2020 envisages certain conditions on claims for state guarantees and direct loans via the COVID-19 Financing Agency of the Austrian Federal Government (COFAG). As a result, there are currently only disbursement restrictions and other restrictions in relation to guarantees or direct loans from the Corona Support Fund. However, unlike the general prohibition on distributions for GmbHs, these apply to all company forms, from single-person companies to listed stock corporations (AGs).
Point 12 of the guidelines, which were issued as an annex to the directive, sets out the following requirements for companies, although COFAG is able to impose further obligations on applicants in individual cases:
- No payment of disproportionate (excessive) remuneration, remuneration components, or other disproportionate payments to owners or the bodies, employees and principal agents of the company.
- In particular, no payment of bonuses in the current financial year to board members or managing directors in excess of 50% of the bonus payments for the previous year – interestingly, bonuses to other (even senior) employees are not subject to restrictions, provided these do not constitute “disproportionate remuneration components”.
- Adjustment of amounts withdrawn by, or of profits distributed to, the owners of the company during the term of the financial support to take account of economic circumstances.
- Ban on dividends and profit distributions for the period 16 March 2020 to 16 March 2021 – distribution resolutions relating to the last retained profit can still be passed in this period, but the time of payment (due date) must be after expiry of the period.
- Appropriate dividend and profit distribution policy for the remaining period
- No release of reserves to increase the net profit
- No use of liquidity received from financial measures (i.e. from a state-supported credit facility) for payment of profit distributions, to buy back own shares, or to make bonus payments to board members or managing directors.
It is still unclear whether these restrictions will also apply to direct subsidies from the Corona Support Fund. Corresponding guidelines are currently being developed and publication is anticipated in the coming days.
If the company only claims subsidies for short-time working, the company will not be prevented from distributing any profits generated to the owners.
For further details on current restrictions and simplifications, you are welcome to contact us at any time. We are looking forward to your message.