Payments to Company Owners

Payments to the company’s owners are an integral part of corporate financial relations and are regulated by several legislative acts of the Republic of Belarus. The main forms of such payments are dividends for shareholders and profit distribution among the participants of limited liability companies. However, in recent years, there have been some changes in the legislation that affect the procedure and conditions of these payments. In the context of the dynamically changing economic situation in Belarus, the issues of profit distribution and payment of dividends to company owners are becoming particularly relevant. Some legislative updates aim to improve these processes, ensuring a balance between the interests of the state, business and owners.

Legal Basis for Payments to Owners

Let’s consider the legal basis for payments to owners and shareholders of companies of various organizational and legal forms.

Payment of a Part of the Profit by a Limited Liability Company (LLC)

The distribution of profits among the participants of a limited liability company (LLC) is regulated by the company’s charter and internal documents. In general, the order of profit distribution in an LLC depends on each participant’s share in the authorized capital. Unlike joint-stock companies, there are no shares in an LLC, and all members of the company share profits in proportion to their shares in the authorized capital unless otherwise provided by the articles of association.

Profit Distribution Procedure in LLC

The profit-sharing procedure begins with a general meeting of the participants, which decides the distribution of profits earned for the year. The main regulatory acts regulating the payment procedure are the Civil Code of the Republic of Belarus and the Law “On Limited Liability Companies”. The company’s members may decide to pay dividends, which can be paid in cash or other company assets. However, it is worth noting that when deciding on the payment of dividends, a number of conditions must be observed, such as the availability of profits and the absence of debt to government agencies and creditors. Payments must be made from the remaining profits after taxes and mandatory payments.

Conditions and Restrictions on the Payment of a Portion of the Profit

One of the main conditions for the payment of dividends is that the profit must be received by the end of the financial year. If the company has no profit, the payment of dividends is impossible. It is also important to consider that dividends cannot be paid if this violates the company’s financial stability or threatens its creditors’ interests. There is a mandatory requirement that dividends can be paid only after paying all taxes and fees and after fulfilling obligations to employees and other counterparties. 

Payment of Dividends by a Joint-Stock Company (JSC)

The payment of dividends is regulated by the regulations on business companies and the Articles of Association of the Joint Stock Company. The procedure for declaring and paying dividends in a joint-stock company begins with adopting a decision at the general meeting of shareholders. It is important that the decision to pay dividends is made based on the company’s financial results, and dividends can be paid in cash, securities, or other assets. After paying all mandatory taxes and payments, the total dividend amount is determined based on the company’s net profit.

The process of declaring dividends in a joint-stock company is strictly regulated. The terms of payment and the amount of dividends should be prescribed in the company’s articles of association. Shareholders are informed about the upcoming payment through the company’s official channels. 

Specifics of Payment of Dividends on Preferred Shares

Preferred shares have a special status, and holders of such shares can qualify for additional or fixed dividends. Unlike ordinary shares, preferred shares give their holders the right to receive fixed dividends in the first place, regardless of the company’s financial results. This means that if there is insufficient profit to pay dividends on ordinary shares, preferred shareholders will receive their dividends first. Such dividends are usually set at a fixed amount and do not depend on the company’s financial results. However, preferred shareholders, as a rule, do not have the right to vote at general meetings of shareholders, which limits their influence on the company’s strategic decisions.

Specifics of Payment of Dividends by JSC, including to Foreign Owners of Belarusian Companies

In the Republic of Belarus, the payment of dividends and the distribution of a portion of profits among company owners, including foreign participants, are regulated by several legislative acts and subject to certain conditions and restrictions.

General Conditions for the Payment of Dividends

In joint-stock companies, dividends are paid based on a resolution of the general meeting of shareholders. To pay dividends, it is necessary to:

• Fully form the company’s authorized capital.
• Ensure that the company’s net assets exceed the amount of the authorized capital and do not decrease after the payment of dividends.
• To confirm the company’s solvency, ensuring its ability to fulfil obligations after payment of dividends.

Restrictions on Payments to Foreign Owners

Temporary restrictions on the payment of profits and dividends to foreign participants from “unfriendly” states started on April 24, 2024, and are valid until December 31, 2025.

The restrictions apply if the profit and dividends paid during a calendar year exceed 80,000 base units (currently more than 1 million US dollars). In this case, the approval of the regional (Minsk city) executive committee is required to make the payment. The procedure for obtaining a permit includes submitting an application and reviewing it within 30 calendar days.

Conditions for Obtaining Permission to Pay Dividends

To obtain a permit, a belarusian legal entity must meet the following criteria:

• There is no net loss for the previous year and the current year’s reporting period.
• Compliance with the minimum number of employees compared to the previous period.
• No arrears of taxes, fees, loans and wages.
• Ensuring the average monthly salary level is not lower than the established minimum amount.
• The declared profits and dividends should not exceed 50% of the average volume of foreign direct investment over the previous 5 years.

Procedure for Payment of Dividends to Foreign Participants

After obtaining permission, dividends can be transferred to the foreign owner’s bank account. However, if permission cannot be obtained, the payment is made by transferring the amount to a special account with a special mode of operation in a Belarusian bank. The funds in such an account can only be used for certain purposes, such as investment projects in Belarus, repayment of loan arrears, purchase of government securities, or placement of irrevocable deposits.

Thus, the payment of dividends and the distribution of profits to foreign owners in Belarus are strictly regulated. 

Taxes on Payments to Owners of Companies

The income tax is withheld and transferred to the budget by the company that pays the dividends.

The company withholds 13% income tax from payments to owners, including foreign individuals, and transfers it to the budget.

Other income tax rates, more preferential, are applied in some cases:

• 6% – when the owner is a tax resident of Belarus and the company’s profits have not been distributed for the previous three years.
• 0% – when the recipient of payments is a tax resident of Belarus and the company has not distributed profits in the previous 5 years, as well as among residents of the Great Stone Park, JSC Sino-Belarusian Investment Fund and CJSC Sino-Belarusian Investment Fund Management Company.
• 5% – when dividends and part of the profits are paid to the owner. The company is a resident of the Hi-Tech Park.
• Starting from January 11, 2024, the tax may be 25% when the total income of the dividend recipient for the year exceeds 200,000 rubles. The 25% rate is applied to the amount that exceeds 200,000 rubles. In this case, the tax is considered by the tax inspectorate, not by the company that makes payments.
• From January 1, 2024, to December 31, 2026, foreign companies from unfriendly business-owning countries in Belarus are taxed on dividends at a rate of 25%.

Recommendations to Companies on Payments to Owners

1. Adapt Local Documents to New Requirements

Companies must review and update their internal documentation to comply with the new legal requirements. The new law applies first to charters and agreements with participants (shareholders) from other countries. 

It is necessary to clearly define the profit distribution procedure, including the payment terms of dividends and other payments to owners. 

It is also important to document the procedure for obtaining permits to pay profits to foreign owners, especially if the amounts of payments exceed the established limits. 

It is recommended that accounting and financial statements be updated to comply with the current taxation and profit distribution procedures. Data on dividend payments should also be included in the reports, as the tax authorities may require confirmation of their legitimacy.

2. Interact with Tax Consultants

We recommend that companies regularly interact with tax consultants, especially when paying dividends and a portion of profits to owners. 

It is important to clarify all the nuances of taxation in advance, especially if payments relate to foreign owners or permits for large payments are required. 

You should regularly monitor changes in tax legislation and consult with tax consultants or lawyers to avoid fines and penalties. If you have any doubts about the correctness of the dividend tax calculations, you should consult with the tax authorities before making payments.

3. Minimize Risks when Making Payments to Owners

Companies can use several strategies to minimize the risks of paying dividends to owners. 

First, it is important to maintain financial discipline, ensuring sufficient profit and liquidity for payments. 

Secondly, the company must closely monitor compliance with restrictions on payments to foreign owners to avoid sanctions related to international politics or currency controls. Thirdly, it is possible to consider paying dividends in instalments to avoid exceeding the limits established by law and avoid the need to obtain a permit. 

Finally, companies can audit their financial statements to confirm the legality of payments and minimize the risks associated with tax audits.

Conclusion

Payments to company owners are an important element of financial and tax planning, which requires accuracy and knowledge of current legislation. The correct approach to calculating taxes and choosing optimal payment schemes can significantly affect a company’s financial condition. At EOR, we provide professional team selection and tax calculation services so that you can focus on business development by entrusting us with payment management and tax burden issues. Please contact us for advice and professional assistance in recruitment, personnel management and financial issues.