Dividend Payments

One of our clients approached us with the following question:

At the beginning of the year, the participants of the LLC decided to distribute the profit of previous reporting periods by paying dividends to the participants. The relevant minutes of the participants' meeting, which formalized this decision, also stated that the payment of such dividends should be made in the 4th quarter of the current year. In the 4th quarter of the current year, the head of the LLC issued an order for the payment of these dividends to the participants, on the basis of which they were paid, and their accrual was reflected in the accounting records. The withholding and payment of personal income tax (PIT) and military levy on these dividends also occurred in the 4th quarter of the current year – after and based on the aforementioned order of the head of the LLC. Do you see any tax risks in this situation?

In our opinion, such actions by the management of the LLC do not comply with the requirements of the current legislation of Ukraine for the following reasons:

• According to clause 170.5.1 PКУ, the LLC is a tax agent for individuals – participants «at the time of accrual of dividends in their favor»,
• According to 170.5.4. PКУ, the income of individual participants of the LLC «is finally taxed by the tax agent at the time of its accrual to the taxpayer».
• The procedure for withholding and transferring personal income tax (PIT) from individuals' income (including income in the form of accrued dividends) by tax agents to the budget is set out in clause 168.1 PКУ. Thus, according to the provisions of this clause, PIT must be paid to the budget either at the moment of dividend payment (if such payment occurs before the end of the 30th calendar day after their accrual), or no later than the 30th calendar day after the accrual of income in the form of dividends to individuals.
• Thus, when determining the date of the LLC's obligation to transfer personal income tax (PIT) and military levy to the budget from the amounts of dividends accrued to participants, the key issue is the date (period) of accrual of such income to individuals (and, as a consequence – the date of reflecting in the LLC's accounting records the debt to participants for dividends due to them).
• According to the norms of current Ukrainian legislation, all issues of profit distribution (including its allocation for dividend payment) fall within the exclusive competence of the General Meeting of Participants. Accordingly, the head of the LLC cannot (by issuing any orders or otherwise) establish the period (date) of dividend accrual to participants – only the LLC participants can do this during the General Meeting. Any decisions of the participants are formalized by the relevant Minutes of the General Meeting.
• In turn, the head of the LLC, within their own powers, can only «ensure the implementation of the decisions of the General Meeting».
• The minutes of the LLC participants' meeting decided on the accrual of dividends – any subsequent orders of the LLC head regulated only the periodicity, sequence, and amounts of their payment to participants.
• Separately, we draw your attention to the fact that our position regarding the date of dividend accrual period fully coincides with the position of the employees of the State Fiscal Service of Ukraine, as presented by them in the official publication of ДФСУ – http://www.visnuk.com.ua/uk/publication/100004440-dividendi-narakhuvannya-viplata-oblik . As we can see, tax authorities are also confident that the entry Dr 443 Cr 671 (i.e., accrual of dividends to LLC participants) must be made «on the date of the decision (this is the date of the general meeting, which is specified in the minutes of such meeting)».

Given the above, we are forced to state that for the operations of accrual and payment of dividends by the LLC to participants, carried out by it during the current year, an incomplete and untimely transfer of personal income tax (PIT) and military levy amounts to the budget was made.

Director of Audit Services
Certified Auditor
Safinsky Viktor