How to pay dividends legally

Key rules

• Approved accounts: No dividend can be paid until the general meeting has approved the accounts and decided on the dividend.
• Legal reserve: Set aside 10% of profit until the reserve reaches 20% of share capital.
• Equity floor: Never pay a dividend that would leave net equity below share capital.
• Withholding: A dividend to a resident individual has 19% withheld on account of income tax.
• Clawback: An improper dividend can be reclaimed, and administrators can be personally liable.

The four conditions

A dividend is valid only when all four of these are true:

1. The annual accounts are approved.
2. The general meeting has decided to pay the dividend.
3. The legal reserve is topped up.
4. Net equity (patrimonio neto) stays at least equal to share capital after the payout.

If one is missing, the payment is improper. Paying it out anyway can be clawed back (see the last section).

Step 1: Approve the accounts

The administrators prepare the annual accounts within three months of year-end. The general meeting approves them within six months of year-end. For a calendar year, that means by 30 June.

After approval, file the accounts with the Mercantile Registry within one month. In the usual case that is by 30 July. The timeline below shows the order.

Step 2: Get the meeting to decide the dividend

Approving the accounts is not enough. The meeting must also decide what to do with the profit, and that decision must include the dividend. The meeting sets the amount and the payment date. If it sets no date, the dividend is due as soon as the decision is made. Put a date in the minutes.

Step 3: Check the reserve and equity limits

Set aside 10% of profit for the legal reserve until it reaches 20% of share capital. Do this before paying anything out.

Then check net equity after the payout. It must not fall below share capital. If it would, you cannot pay that amount. You can only distribute profit that is left after covering prior losses and the required reserves.

If the company has unamortised R&D costs on its books, free reserves must be at least enough to cover them. The FAQ below covers this.

Interim dividends

An SL can pay a dividend on account before the accounts are approved. The by-laws must allow it, and the general meeting or the administrators must agree. The administrators must draw up an accounting statement that shows enough cash and profits earned in the year. The amount cannot exceed profits earned since the last year-end, less required reserves and prior losses.

Tax when you pay

A dividend paid to a resident individual carries a 19% withholding on account of income tax (IRPF). The company withholds it and pays it to the tax office. The salary-or-dividend page explains how this fits with the owner's overall tax.

If you pay improperly

Shareholders who received an improper dividend must give it back, but only if the company shows they knew of the problem or could not have been unaware of it. Administrators can also be liable for damages to the company, shareholders and creditors, and may be liable together with the recipients. The warning below sets this out. Take advice before paying if the numbers are close.

Timeline and deadlines

• General meeting approves the accounts and decides on the dividend, its amount and its payment date: within six months of year-end Deadline: 30 June.

• File the approved accounts with the Mercantile Registry: within one month of approval Deadline: 30 July.

• Pay the dividend: on the date the meeting set, or on the day of the resolution if it set none

Checklist

• Hold the general meeting and get the accounts approved.

• Make sure the meeting's decision on the result includes the dividend, its amount and its payment date.

• For an interim dividend, confirm the by-laws allow it and have the administrators draw up a statement showing enough cash and profits earned in the year.

• Withhold 19% income tax when you pay a dividend to a resident individual, as explained in the salary-or-dividends article.

What to watch out for

• An improper dividend can be clawed back: Shareholders who received a dividend in breach of the law must return it if the company shows they knew of the irregularity or could not have been unaware of it. The company can bring the claim, and the right to claim runs for a limited period. Only pay after the accounts are approved and the meeting has decided on the dividend, and keep the minutes and accounts on file.

• Administrators can be personally liable: Administrators can be liable for damages to the company, its shareholders and its creditors, and may be jointly liable with the people who received the money. If you are an administrator, check the reserve and net equity tests before every payout and stop if the company would fall short.

Frequently asked questions

Can an SL pay an interim dividend before the accounts are approved?

Yes, an SL can pay an interim dividend (dividendo a cuenta), but only if the by-laws allow it and the general meeting or the administrators agree to it.

When is the dividend actually due once the meeting approves it?

The dividend is due on the payment date the general meeting sets in its decision. If the meeting sets no date, payment is due on the day of the resolution itself. So set a date in the minutes if you want time to arrange the cash.

Do unamortised R&D costs limit how much dividend I can pay?

Yes, if the company has unamortised research and development costs, free reserves must cover them before you distribute profit. Check this alongside the net equity test, because it can reduce the amount you can pay out. Ask your accountant whether the balance sheet carries any such costs.