How do you distribute an extraordinary dividend in an ApS in 2024?
A dividend is part of the profit paid out to a company’s shareholders. Capital companies like ApS and A/S can distribute dividends after the first fiscal year ends and the annual report is approved at the annual general meeting. Extraordinary dividends are distributed during the year, not at the annual general meeting.
How do you distribute an extraordinary dividend in an ApS in 2024?
In this blog, we answer the question: How do you distribute an extraordinary dividend in an ApS in 2024?
A dividend is part of the profit that is paid out to the shareholders of a company.
Only capital companies like ApS and A/S – can pay – or, as we also say – can distribute a dividend.
Sole proprietors do not get dividends from their business profit.
There are two types of dividends:
1: Ordinary dividends;
2: Extraordinary dividends.
An ordinary dividend is distributed with the approval of an annual report.
In Denmark, the annual report must be approved at the latest six months after the end of a fiscal year, and after approval, it is submitted to the Business Authority.
An extraordinary dividend is distributed during the year and not in connection with the approval of the annual report.
To distribute a dividend, you must call a meeting for the shareholders and the management.
The first time a dividend can be distributed is after the first fiscal year ends.
And it is a requirement that there is more equity capital than share capital.
We call the amount of profit that can be distributed as dividends for free reserves.
If the equity capital is lower than the original share capital, you cannot distribute a dividend.
This can be the case if the company has had a deficit.
A meeting where the shareholders and the management meet is called a general meeting.
The general meeting where the annual report is approved is called the annual general meeting or, in short, “AGM”.
A general meeting where an extraordinary dividend is distributed is called an extraordinary general meeting or, in short, “EGM”.
During the general meeting, you need to write a protocol which sums up what was discussed and agreed upon at the general meeting.
We also call the protocol for minutes.
The dividend must be declared to the tax office on the 10th day of the following month.
Also, any dividend tax withheld from the distributed dividend should be paid on the 10th day of the following month to “Skattekontoen”.
In general, dividends paid to individuals require that the company withholds dividend tax.
Typically between 15% for non-residents to 27% for residents.
And in general, dividends paid to companies which own 10% or more of the shares are generally not subject to withholding tax.
Resident companies that own less than 10% of the company that distributes the dividend generally are subject to a 15,4% withholding tax which equals 22% in tax on 70% of the dividend.
You can read more about dividend tax here:
Link to blog about taxation of dividends
Template for the extraordinary general meeting minutes where the extraordinary dividend is distributed
Which types of companies can distribute an extraordinary dividend?
Most capital companies can distribute an extraordinary dividend, i.e. limited liability companies like ApS and A/S.
But only after the first fiscal year has ended.
And only if your company has free reserves meaning that the equity capital must exceed the share capital and not be reserved for other purposes.
How should the dividend be split between the shareholders?
The dividend is split according to the ownership of shares.
If you own 20% of the shares in the company, you should get 20% of the dividend.
In the rare cases where shares in a company are divided into sub-classes, f.ex. A-shares and B-shares, there can be a different allocation of the dividend than the percentage of ownership. But this is mainly relevant for large companies.
Who decides the distribution of the extraordinary dividend?
It is the company’s management or board of directors (if you have a board of directors in your company) that decides on the actual distribution of the extraordinary dividend, and they are also responsible for ensuring that the distribution takes place within what can be said to be justifiable about the company’s financial situation.
This means that you must not distribute so much extraordinary dividend that it can cause future losses for creditors, the tax office or the company f.ex.
What happens if the company distributes too many dividends or does not otherwise follow the rules for distributing dividends?
As a starting point, the entire dividend must be paid back with interest.
If the recipient of the dividend does not have the opportunity to pay the dividend back, the company’s management or board of directors will generally be liable to pay compensation to the company.
The recipient of the dividend may also find that the dividend is considered a shareholder loan by the tax office if he or she is a majority shareholder.
And this can be very expensive, as a situation of double taxation can arise here.
Read more about the taxation of shareholder loans here:
Link to blog about shareholder loans and their taxation
How are dividends taxed?
We have written a blog about the taxation of dividends here:
Link to blog about taxation of dividends
Distribution of extraordinary dividend within six months after the latest annual report has been approved
If the distribution of the extraordinary dividend happens within six months after the approval of the latest annual report, limited liability companies can decide to use the latest annual report to document that the company is in a position to distribute the dividend responsibly.
Distribution of extraordinary dividend more than six months after the latest annual report has been approved
If you distribute the extraordinary dividend six months after an annual report has been approved, you should always prepare a balance sheet showing the current status of the company finances.
This is called an “intermediate balance”.
The intermediate balance is made to ensure that the decision on the distribution of dividends is made based on the latest figures.
If you have an audit requirement for the annual report, then the auditor must issue an audited statement about the financial situation also.
The distribution of an extraordinary dividend is decided at an extraordinary general meeting
The extraordinary dividend can be distributed based on previous profits from an approved annual report, as well as new profits and free reserves that have arisen after the annual report was approved.
You cannot distribute an extraordinary dividend during the company’s first fiscal year.
You must, therefore, always wait until the first fiscal year has ended and the annual report is approved at the ordinary general meeting (this happens in the year after the first fiscal year has ended).
Or you can distribute the first dividend at the first annual general meeting as an ordinary dividend.
It is also a legal requirement that you document the decision to distribute the dividend at an extraordinary general meeting by writing a protocol.
This protocol is also referred to as minutes.
Here you can download a template for your general meeting minutes, which can be used at the extraordinary general meeting:
Do you need to regularly distribute extraordinary dividends?
If you need to pay out extraordinary dividends on an ongoing basis, you can authorise the management of the company to be able to decide on the distribution of dividends without having to arrange an extraordinary general meeting each time.
The decision to grant this permission to the management can be taken at a general meeting and does not need to be entered into the articles of association.
In our template, you will see the option to add this permission as well.
Are you entitled to receive an extraordinary dividend?
A shareholder is not entitled to receive an extraordinary dividend just because the company has made a profit.
It is the majority of the shareholders who decide whether an extraordinary dividend should be distributed or not.
Extraordinary dividends other than cash
If funds other than cash are distributed, an assessment report from an auditor often must be made.
In some individual cases, however, a management statement may be sufficient.
You can read more about that here:
Link to the Danish Business Authority’s rules
Holding companies
If a holding company owns shares in other companies, where the value has increased as a result of generating a profit, this increased value will be reflected in the increase of the equity capital in the holding company as well when using the method of adjusting the value of the owned companies called “reserve for inner value” in the annual report.
This reserve that reflects the increased value in the owned companies is not considered a free reserve and cannot be distributed as a dividend.
So even though the equity capital is higher than the share capital in the holding company due to having adjusted the value of the companies owned by the holding company, the holding company must first receive a dividend from the companies it owns, which is then considered free reserves, before you can distribute a dividend from the holding company to the shareholders of the holding company.
Would you like to learn how to prepare minutes for the Annual General Meeting (AGM)?
(This blog was last updated: 30.3.2024)
FAQ
What is an extraordinary dividend in the context of an ApS?
An extraordinary dividend is a profit distribution made to shareholders that occurs outside the annual general meeting, during the fiscal year.
When can an ApS distribute dividends for the first time?
An ApS can distribute dividends after the end of its first fiscal year, provided there is more equity than share capital, referred to as free reserves.
What are the requirements for distributing dividends in an ApS?
The equity capital must exceed the share capital, indicating that the company has free reserves available for distribution.
How is the distribution of an extraordinary dividend initiated in an ApS?
It requires calling an extraordinary general meeting (EGM) involving the shareholders and the management to approve the distribution.
What is the taxation rule on dividends distributed to individuals and companies?
Dividends to individuals typically incur withholding tax, while dividends to companies holding 10% or more shares are generally not subject to withholding tax.
Who decides the distribution of an extraordinary dividend in an ApS?
The company’s management or board of directors decides on the distribution, ensuring it aligns with the company's financial health.
What happens if an ApS distributes dividends improperly?
The dividends must be repaid with interest, and the company’s management or directors may be liable for compensation.
How are dividends split among shareholders in an ApS?
Dividends are distributed in proportion to each shareholder's ownership of shares in the company.
Can extraordinary dividends be distributed as non-cash assets?
Yes, but it often requires an auditor’s assessment report, though in some cases a management statement might suffice.
What is the significance of an intermediate balance sheet in the context of distributing extraordinary dividends?
It’s necessary for distributing dividends more than six months after the last annual report to ensure decisions are based on the latest financial situation.