What are Dividends?

How Dividends Are Distributed

Dividends are paid out of a company’s net profit—the income remaining after taxes have been settled. The decision to distribute this profit is made by the business owners: in a Limited Liability Company (LLC), this includes the members (founders), while in an Open Joint Stock Company (OJSC), it involves shareholders. Profits can be distributed on an interim basis (quarterly or semi-annually) or at the end of the fiscal year, as stipulated in the company’s charter. Generally, income distribution occurs in proportion to ownership stakes or the number of shares held. In simpler terms, dividends in an OJSC are paid based on shares, with each shareholder receiving an amount proportional to the number of shares they own. In an LLC, profits are allocated among members based on their stakes in the charter capital.

The process of organizing dividend payouts involves several stages:

1. Preparation. It is essential to ensure that the company has net profits available for dividend payments. If the company reports losses for the period, funds cannot be distributed among owners.

2. Meeting. Management convenes a general meeting of the LLC’s members or the OJSC’s shareholders. All owners must be notified in advance of the meeting’s location and time.

3. Decision and Minutes. At the meeting, the distribution of profits and payment of dividends is approved by the majority vote. The results are recorded in the minutes— a document outlining the payment amounts for each recipient.

4. Tax Calculation and Withholding. The accounting department calculates the approved dividend amounts and concurrently withholds the necessary tax. The company acts as a tax agent, calculating personal income tax (PIT) for individuals at the established rate.

5. Payment. The final step is to transfer the funds to the bank accounts of the members (shareholders). This must be completed no later than 60 days from the decision date (unless the charter specifies a shorter timeframe).

Without the proper minutes documenting the meeting, such payment will be deemed illegal. If there is only one founder in the company, he or she can decide on dividends unilaterally, without convening a meeting.

How to Conduct a Meeting of LLC Members

To decide on dividend payments in an LLC, a general meeting of members (founders) must be held. This meeting is usually convened by the executive body (director) of the company. The agenda should include the distribution of profits and payment of dividends. All members must be informed of the date, time, and place of the meeting at least 30 days in advance (unless the charter provides for a shorter notification period).

A sufficient number of members must be present to establish a quorum. Typically, the presence of owners holding more than 50% of the shares (simple majority) is sufficient unless the charter requires otherwise. At the beginning of the meeting, participants elect a chairperson and a secretary, after which agenda items are discussed. The decision regarding payment is made by voting: a simple majority of votes “for” is sufficient to approve the dividends for payment.

The meeting outcomes are documented in the minutes. The minutes of the general meeting of members of the LLC include key details: date and place of the meeting, list of attendees, agenda (including the question of dividend payments), voting results, and decisions made. The decision specifies how much should be allocated for dividends and what amount each member will receive. The minutes are signed by the chairperson and secretary and kept in the company's records.

If there is only one member in the organization, a meeting is not required. That member can document the decision to pay dividends unilaterally (in writing) and sign it as the sole member of the LLC.

How to Conduct a Shareholder Meeting for an OJSC

In an open joint-stock company, the decision to pay dividends is made at a general shareholders' meeting. Typically, the convening of the shareholders' meeting is carried out by the board of directors (supervisory board) of the OJSC. The board also recommends the dividend amount for distribution. Shareholders are notified about the upcoming meeting 30 days prior to the event (via notifications sent out and publication on the company's website). The notification includes the time and place of the event, and the agenda (including the question of dividend payment).

A quorum is required to conduct the meeting— shareholders representing over 50% of voting shares must be present. At the start of the meeting, a chairperson (e.g., the chair of the board of directors) and a secretary are elected, or these roles may be predefined in internal documents. Voting on agenda items occurs based on the principle of "one share—one vote". The decision to pay dividends is made by a majority of votes from shareholders present at the meeting (unless a stricter requirement is set by law or the charter).

The proceedings of the meeting and the decisions made are recorded in the minutes. The minutes capture the voting results and the approved payout amounts. Furthermore, the general meeting of shareholders may set a date for establishing the shareholder register—a list of shareholders entitled to receive dividends. Following this, the company commences the actual payment of dividends to shareholders through bank transfers or depositories, adhering to the established timelines.

If there is only one shareholder in the joint-stock company, a meeting is not necessary, as that individual can independently decide on the dividend payment and document it in writing.

What Taxes Are Due on Dividends

When dividends are paid, the company acts as a tax agent and withholds tax when transferring income to the shareholder or member. The tax on dividends depends on the recipient’s status and is set at special rates. Dividend income is not subject to VAT and is not included in the base for insurance contributions (it is not a taxable item).

The basic tax rates for dividends are as follows:

• Individuals— residents of the Russian Federation: 13% personal income tax (PIT). If the total dividend income of the recipient exceeds 5 million rubles per year, then a tax rate of 15% applies to the excess amount.

• Individuals— non-residents of the Russian Federation: 15% PIT on all received dividends.

• Russian organizations: 13% profit tax on received dividends. (A 0% rate applies if, at the time of the decision, the owner company has continuously held at least 50% of the capital of the company paying dividends for at least a year.)

• Foreign organizations: 15%. Reduced rates may apply under double tax treaties (if there is a valid agreement between the Russian Federation and the non-resident's state).

The withheld tax is remitted by the company to the budget.

How to Report Payments

After paying dividends, the company must report to the tax authorities about this income and the withheld tax. Dividends paid to individuals are reflected in calculations using the form 6-NDFL (report on PIT) for the period in which the payment was made. The amounts of the paid income and the withheld taxes are specified there. Please note: in the report on insurance contributions (RSC), such payments are not included since dividends are not subject to these contributions.

The 6-NDFL report is submitted quarterly. For example, if dividends are paid in the 3rd quarter, their amount and the withheld tax should be included in the 6-NDFL report for the nine-month period (indicating the actual date of income receipt and tax withholding). At the end of the year, these data will also be included in the annual calculation. Additionally, information about paid dividends is included in individual income statements for natural persons, which the company prepares for the tax authority.

If dividends are received by a legal entity (e.g., another company), the withheld amounts (13% or 15%) are reflected in the tax declaration of the receiving company. When applying the zero rate, the recipient independently confirms the right to the benefit in its tax reporting. Therefore, the recipient organization reports the income received, while the tax agent (the company that paid the dividends) only reports on the withholding and remittance of the tax.

When Dividends Cannot Be Paid

The law establishes a number of restrictions under which it is prohibited to distribute profits and pay dividends. Dividends cannot be declared or paid in the following cases:

• Absence of profit or presence of losses. If the financial reporting indicates that the company has no net profit (or it is offset by unallocated losses from the current or previous years), dividends cannot be paid.

• Low value of net assets. Payment is prohibited if, at the time of the decision or on the payment date, the value of the company's net assets is less than the amount of its charter capital (and for OJCs also the amount of the reserve fund, if stipulated) or would become less as a result of the payment.

• Unpaid charter capital. In an LLC, profits cannot be distributed if members have not fully contributed to the company’s charter capital. In an OJSC, dividends are not paid on shares that have not been fully paid by their owners.

• Bankruptcy or liquidation. If the organization is undergoing reorganization, liquidation, or is on the verge of bankruptcy (showing signs of insolvency, insufficient assets), dividend distribution is not permitted.

• Debts to the budget. It is not advisable to distribute profits in the presence of overdue debts for taxes or other mandatory payments. The company must first fulfill its obligations to the budget and creditors.

In the mentioned situations, the company cannot allocate profits for dividend payments. Violating these restrictions can lead to penalties, and illegally paid amounts may be legally reclaimed by the company.

Key Takeaways

Dividends are a portion of the company's profits that are distributed to its owners (shareholders or LLC members). Generally, dividend payments occur annually, but interim payments (quarterly or semi-annually) may also be made based on relevant resolutions. To do this, it is necessary to convene a general meeting of participants (in an LLC) or shareholders (in an OJSC) and document the decision in the minutes.

Taxes. Dividends are subject to tax: for individuals, a personal income tax (PIT) of 13% is withheld (15% if income exceeds 5 million rubles per year), and for organizations—13% (with conditions allowing for a 0% rate). The company acts as a tax agent, withholding tax upon payment and remitting it to the budget. Shareholders are not required to submit a declaration for receiving dividends—the tax is automatically transferred to the treasury.

Reporting. After paying dividends, the company records these payments in its reporting. The amounts of paid dividends and withheld taxes are shown in the 6-NDFL report for the corresponding period. Such payments are not included in the report on insurance contributions since dividends are not subject to them.

Restrictions. There are situations in which dividend payments are prohibited. It is not permissible to distribute profits if the company does not have sufficient net profit (for example, if there are losses) or if the value of assets will fall below the charter capital after the dividend distribution. Moreover, dividends cannot be paid if the charter capital is unpaid or if the company is facing bankruptcy. Violating these restrictions can lead to negative consequences and penalties.

Many Russian companies have a dividend policy that determines what percentage of profits is allocated for dividend payouts. Some investors prefer to invest in dividend stocks—securities from large companies that regularly pay substantial dividends, thus increasing shareholder income. The size of dividends directly depends on financial results: the more profit the business generates, the larger the income its shareholders can receive.