Distribution of Dividends in Romania

Having finished, as of May 30, 2016 with the filing of the financial statements and accompanying documents, the administrative and fiscal closure of the year 2015, it is now time for the Shareholders of companies that have recorded profits to think about the possible very welcome distribution of dividends.

In this regard, Article 194(1)(a) of the Companies Act (Lege 31/1990) gives the Shareholders’ Meeting the right and duty to approve the annual financial statements and determine the allocation of the year’s profit.

Before deciding on the quantum of dividends to be distributed, it should be borne in mind that the Law requires in Article 183, paragraph 1, the mandatory allocation of at least 5% of the net profit to the reserve fund (in Romanian“fond de rezerva“), technically the legal reserve; Article 183 is found in the general provisions referring to companies.

This mandatory provision is necessary as long as the reserve does not reach one-fifth of the Share Capital (20%), Paragraph 1.

Having approved the distribution of the dividend, the subsequent payment is the time at which the obligation arises on the distributing company to withhold the withholding tax and settle it later.

The new Tax Code (Lege 227/2015) provides in Article 43, Paragraph 1, for this obligation. Paragraph 2 stipulates that the distribution of the dividend by Romanian company to another Romanian or non-Romanian company shall be taxed at the rate of 5 percent as withholding and final tax (unless in the case of non-Romanian “mother” that the International Convention is more favorable).

Additionally, the rule stipulates that withholding must be settled by the 25th of the month following the month of payment.

Exceptions to the above rules are provided for dividend flows between companies that have durable, non-speculative corporate ties.

We remain available for further clarification.