In our opinion, the allocation of profits carried forward to dividends complies with the legal requirements in this field, as long as these results arise from current profits of previous financial years. However, an adverse aspect for companies is related to taxation of this subsequent distribution, due to the risk that tax authorities might reclassify this operation and, implicitly, apply penalties for late payment of dividends, starting with the 1st of January of the financial year following the one in which the carry forward of the profits of the previous financial year has been approved, and until the payment of related tax.result carried forward, dividends, general meeting of shareholders, dividend tax

Bunget, Ovidiu-Constantin

English

Research Papers in Economics

  1-5 
Opinions on allocation of profit carried forward to dividends 
 
 
Abstract  
 
In  our  opinion,  the  allocation  of  profits  carried  forward  to  dividends  complies  with  the  legal 
requirements in this field, as long as these results arise from current profits of previous financial 
years.  However,  an  adverse  aspect  for  companies  is  related  to  taxation  of  this  subsequent 
distribution, due to the risk that tax authorities might reclassify this operation and, implicitly, apply 
penalties  for  late  payment  of  dividends,  starting  with  the  1
st  of  January  of  the  financial  year 
following the one in which the carry forward of the profits of the previous financial year has been 
approved, and until the payment of related tax. 
 
Key Words: result carried forward, dividends, general meeting of shareholders, dividend tax 
 
 
Introduction 
 
In 2009, companies’ administrators have raised a series of questions on how to counteract the 
effects  of  the  American  financial  crisis  on  economic  activities  in  Europe,  in  general,  and  in 
Romania, in particular. Among these questions are the following: 
1) can companies reconsider the decision to distribute dividends from the profits of the previous 
financial year, in general, and 2008, in particular? 
2) can companies reconsider the decisions to allocate net profits to results carried forward from 
previous financial years (net profit carried forward)? 
Although the two questions are closely related, we will refer below to the second question. 
 
1. Background 
 
In previous financial years, companies have recorded substantial profits due to general economic 
growth in Romania. In this respect, the support of investment programmes required a series of 
funds  that  shareholders  agreed  to  temporarily  make  available  to  companies,  but  not  as  net 
uncollected dividends converted into interest bearing loans, but through net retained results, so 
that the company benefits from a higher volume of funds to support investment programmes, 
equal to the size of dividend tax which the company would have paid for a dividend distribution.  
Furthermore, working capital was insufficient to finance current operations, and retained profits 
(carried forward)  represented the handiest financing source for management.  Another  solution 
would  have  been  to  resort  to  bank  loans,  but,  in  the  present  circumstances  it  is  difficult  to 
anticipate the financial impact of costs involved by such an approach (fees, interest expenses, 
commissions, etc.). 
Also, if profits would have been allocated to dividends, in many cases the amounts required for 
their payment would have been generated from collections of the financial year following the one 
for which they were distributed, subject to the general meeting’s approval. 
The situation described meets quite frequently in limited liability companies (sometimes micro 
companies), where the administrator   shareholder postpones payment of dividends by carrying 
forward  the  profits  of  the  financial  years,  due  to  lack  of  liquidities  combined  with  the 
“convenience” of not paying dividend tax, withheld at source at the rate of 16%. 
Administrators raised the question if a decision of the general meeting of shareholders for carrying 
forward the company’s net profit from previous financial years could be reconsidered in order to 
allocate these results carried forward to dividends? 
 
2. Current legal situation 
   2-5 
Art. 111 paragraph 2 point a) of Company Law provides that the general meeting of shareholders 
(for  joint  stock  companies)  is  required  “to  discuss,  approve  or  amend  the  annual  financial 
statements based on reports prepared by the board of directors, respectively the management and 
the oversight board, internal auditors, or as appropriate, financial auditors, and to determine the 
dividend”. Also, article 194 paragraph 1 letter a), provides that, among other main obligations, the 
general meeting has to approve the annual financial statements and to decide the distribution of 
net profits (for companies with limited liability). 
The size of dividend in the process of distributing net profits fluctuates within a limited interval 
between zero and the level of distributable profits. 
In other words, the publication of the decision of the general meeting by means of Trade Register 
and  Official  Gazette  has  the  effect  that  the  decision  becomes  opposable  to  the 
associates/shareholders who were absent from the meeting (those who were present and voted 
against or abstained are presumed to be aware of the decision taken), as well as to third parties. 
Even  if  Company  Law  no.  31/1990  does  not  expressly  provide  that  the  general  meeting  of 
shareholders  could  reconsider  the  decision  (decisions)  of  previous  years,  in  general,  it  is 
appreciated
1 that “revoking the previous decision is possible if it is done in compliance with the 
principle of symmetry of legal acts and if this does not prejudice the rights of third parties. Thus, if 
the symmetry principle is applied, the ordinary general meeting, which is competent to decide on 
company’s profit distribution, might also decide to revoke the previous decision, subject to the 
same legal or statutory quorum and majority conditions.” 
According to article 132 paragraph 1 of Company Law no. 31/1990, the decision that complies with 
the law and the company’s by laws is binding (pacta sunt servanta) and, therefore it is opposable 
as such to all associates, including those who were absent or voted against. On the other hand, 
general meeting’s decisions that are violating the law or the company’s by laws can be disputed in 
court by means of nullity / annulment actions introduced by those associates who voted against 
and asked for their vote to be recorded in the meeting’s minute, as well as by those who were 
absent. Also, based on article 61 of Law no. 31/1990, the decisions may be contested by any 
prejudiced creditors (including the state, through its institutions). 
 
3. Is it legal to reconsider a decision regarding carry forward of profits? 
 
In the case discussed, respectively reconsideration of a decision establishing: 
    either a zero dividend and full carry forward of profits, 
    or partial allocation of net profits to dividends, 
due to lack of liquidities, at a later stage, when the company has available liquidities (situation 
determined by investment efforts, financial problems, etc.), meaning that the new decision decides 
to fully or partially allocate profits carried forward to dividends, leads us to a solution for the 
conflict between social interests and personal interests of shareholders or associates. 
Article 136
1 of Company Law no. 31 provides that “shareholders must exert their rights in good 
faith,  by  considering  the  legitimate  rights  and  interests  of  the  company  and  of  the  other 
shareholders.” Based on this law, we appreciate that the importance of company interests and the 
role of affectio societatis have decreased. Affectio societas involves subordination of shareholders’ 
individual  interests  to  the  company’s  general  interest.  This  principle  applies  not  only  to  share 
capital companies (joint stock companies), but also to joint ventures (intuitu personae and intuitu 
pecuniae),  limited  liability  companies.  Our  assertion  is  based  on  the  fact  that  the  law  uses 
conjunction  “and”,  what  makes  us  believe  that  shareholders’  interests  benefit  of  the  same 
protection as company’s interests. 
The provision of article 131
1 was introduced in our commercial law in the context of implementing 
corporate governance, following the example of other Member States based on the Anglo Saxon 
model concerning corporations. According to the French doctrine, the main principle of corporate 
governance  is  the  following:  share  capital  companies  must  be  managed  in  the  interests  of 
                                                 
1 Lavinia Tec – “Distributed Dividends - Financing Source in Times of Crisis”, Romanian Tax Magazine no. 3/2009, 
page 4.   3-5 
shareholders. In this context, affectio societatis, which both Romanian and French doctrines have 
qualified as behavioural norm, seems to be incompatible with corporate governance
2. 
The set up of a company aims firstly to fulfil an activity for the financial benefit of the investor – 
shareholder  or  associate,  and  the  company’s  by laws  represent  an  investment  agreement. 
Investors, individuals or companies, associate themselves not for altruistic ideas and charity or 
generosity, but for gaining from investments and implicitly, for disposing of these gains at anytime. 
The procedural regime for profit distribution is covered by article 117
2 paragraph 1 and article 153
5 
paragraph  2  of  Company  Law  no.  31,  according  to  the  management  system  of  joint stock 
companies (unitary or dualist): “The annual financial statements, the annual report of the board of 
directors, respectively the report of management and the one of the oversight board, as well as 
the  proposal  on  dividends  distribution,  shall  be  made  available  to  the  shareholders  at  the 
company’s headquarters, at the date of calling in the general meeting”, for the unitary system, 
respectively “The management submits to the oversight board its detailed proposal regarding the 
distribution of profits resulted from the balance sheet of the financial year, which it intends to 
present to the general meeting”, for the dualist system. 
If  the  proposal  for  allocation  to  dividends  was  approved  by  the  ordinary  general  meeting  of 
shareholders/associates, according to article 67, dividends shall be paid “within the time limit set 
by the general meeting of shareholders or, as the case may be, the deadline set by special laws, 
but no later than 6 months from the date when the financial statements for the closed financial 
year were approved.” 
Based on the legal provisions mentioned above, we can assert that the proposal for dividends 
distribution  must  be  approved  in  the  same  general  meeting  that  reviews  and  approves  the 
financial statements for the financial year ended. However, this interpretation does not restrain the 
general meeting of shareholders/associates to decide distribution of zero dividends (no dividends 
will be distributed), although there is a distributable net profit, or to allocate the profit partially to 
dividends, partially to other reserves, and partially to results carried forward (retained profit), by 
taking into account the company’s actual situation (e.g. lack of liquidities) and other circumstances 
(e.g. economic crisis) or legal restrictions (economic prudence), such as: 
  “Dividends will be distributed only from profits derived according to the law.”
3; 
  “If there is a loss in net assets, subscribed share capital will be completed or reduced before any 
profit distribution or allocation.”
4; 
  “If set up costs were not fully depreciated, there will be no profit distribution, unless reserves 
available for distribution and profits carried forward are at least equal with the outstanding costs.”
5 
   “If  development  costs  were  not  fully  depreciated,  there  will  be  no profit  distribution,  unless 
reserves  available  for  distribution  and  profits  carried  forward  are  at  least  equal  with  the 
outstanding costs.”
6 
 
4. Accounting and tax treatment 
 
According  to  article  67  paragraph  3  of  Company  Law  no.  31/1990,  the  source  for  setting up 
dividends consists of “profits derived according to the law”, without distinction between current net 
profits (of the previous year) or net profits carried forward. “In the lack of financial statements or 
contrary to their results, the founder, administrator or legal representative of a company, who 
receives  or  pays  dividends,  in  any  form,  from  fictive  profits  or  profits  which  could  not  be 
distributed, shall be punished with imprisonment from 2 to 8 years.”
7 
Also, according to article 19 paragraphs 1 and 2 of Accounting Law no. 82/1991, accounting profit 
or loss is determined cumulatively, from the beginning of the financial year, and the final result of 
                                                 
2 Ibidem, page 5. 
3 Article 67 paragraph 3 of Company Law no. 31/1990. 
4 Article 69 Ibidem. 
5 Point 72, paragraph 2 of Accounting Regulations in Accordance with the 4
th Directive of the European Economic 
Communities Approved by Order of the Ministry of Finance no. 1752/2005. 
6 Point 75, paragraph 3 Ibidem. 
7 Article 272
1 paragraph 2 of Company Law no. 31/1990.   4-5 
the financial year is set at the end of the financial year (in Romania, the financial year usually is 
the calendar year, and consequently, closing date is 31 December). 
“Profit distribution shall be recorded in accounting according to its destinations, after the approval 
of the financial statements.”
8 Therefore, allocation of net profits is left to the general meeting of 
shareholders, and it is not necessary profits to be distributed in full to associates/shareholders. 
The decision of shareholders/associates to give up, at least temporarily, to one of their rights, does 
not restrain them to reconsider their initial decision, subject to the conditions required by law in 
respect to jurisdiction of general meetings (qui potest plus potest minus). 
Legal  distributions  that  may  be  approved  by  the  ordinary  general  meeting  /  meeting  of 
shareholders / associates are: 
    amounts allocated to reserves (legal reserves and other reserves); 
    amounts allocated for covering losses from previous years; 
    dividends; 
    other allocations. 
The difference between total net profits of the year and total distributions performed represents 
retained profits (which, obviously, may include also profits not distributed as dividends), on which 
the  general  meeting  did  not  decide  in  terms  of  destination.  Therefore,  there  is  a  distinction 
between  profits  distributed  to  shareholders  (dividends),  profits  representing  final  allocations 
(covering losses from previous years, reserves and other allocations) and  profits on which there is 
no final decision yet (result carried forward # 117 Result carried forward). 
In terms of tax treatment, the document by which the ordinary general meeting / meeting of 
shareholders / associates decides not to distribute the full net profit, followed by a subsequent 
distribution, in another financial year, might be considered an act made for tax purposes. In our 
opinion,  this  act  might  be  reclassified  under  article  11  paragraph  1  of  the  Fiscal  Code:  “In 
determining any tax amount within the meaning of this code, the tax authorities may disregard 
transaction  which  does  not  have  an  economic  purpose  or  they  may  reclassify  the  form  of  a 
transaction to reflect its economic substance.” The carry forward of the net results of a financial 
year, followed by its distribution as dividends in another financial year, may be reclassified by tax 
authorities as a distribution already from its postponement (e.g. if the company operated normally, 
had liquidities, etc.) and tax authorities are  entitled to calculate penalties for late payment of 
dividends (currently, 0,1% per day) starting with the 1
st of January of the financial year following 
the one in which the general meeting of shareholders took place, which has approved the carry 
forward of profits (e.g. 01.01.2009 for net profits carried forward related to the financial year 
ended as at 31.12.2007), and until the payment of the related tax (thus, considering another fiscal 
situation). Of course, there will be a different situation if it can be proved that such behaviour of 
shareholders/associates has/had an economic substance, respectively maintaining the company’s 
activity, and that ongoing concern prevailed over the shareholders’/associates’ interests, who have 
acted “in good faith”, within the meaning stated at article 131
1 of Company Law no. 31/1990 (e.g. 
in economic crisis periods, limited access to bank loans, etc.).  
 
Conclusions 
 
Subject to the quorum conditions required to be legal, a new ordinary general meeting / meeting 
of shareholders / associates may reconsider in terms of distributing dividends from results carried 
forward from previous financial years, with proper recognition of the operation in the financial year 
in which the distribution took place. 
However, depending on the actual situation in which profits have been carried forward (not being 
distributed in the financial year following the one for which the distribution is made), it is likely 
that tax authorities will treat the operation as a form of avoiding payment of dividend tax, and 
they  may  want  to  calculate  late  payment  penalties  (accesorium  sequitur  principalem).  The 
company which was required to withhold and to pay the dividend tax to the state budget has the 
obligation to prove the contrary, respectively the actual tax status
9. 
                                                 
8 Article 19 paragraph 3 of Accounting Law no. 82/1991. 
9 Article 65 paragraph 1 of Government Ordinance no. 92/2003 regarding the Fiscal Procedure Code.   5-5 
 
Bibliography 
 
1.  Radu  Bufan,  Mircea   tefan  Mihnea     Codul  fiscal  comentat,  Wolters  Kluwer  Printing  House, 
Bucharest, 2008 
Ovidiu Constantin Bunget   Contabilitatea românească: între reformă  i convergenŃă, Economică 
Printing House, Bucharest 2005 
3. HoraŃiu Sasu, Lucian łâŃu, Drago  Pătroi   Codul de procedură fiscală. Comentarii  i explicaŃii, 
C.H. Beck Printing House, Bucharest, 2008 
4. *** Law no. 31/1990, Company Law 
5. *** Law no. 82/1991, Accounting Law 
 

Opinions on allocation of profit carried forward to dividends

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