Property dividends - is such a payment possible?

Legislative acts understand dividends as part of the company’s profit, which is subject to distribution among the owners. As a rule, such distribution takes place in cash; for this purpose, a proportional ratio of shares, shares or contributions in the authorized capital is used. In some cases, the law allows dividends to be paid using the property assets of the enterprise - all the nuances of such a procedure can be learned from the presented material.

Payment of dividends with property - basic concepts

According to Art. 43 of the Tax Code of the Russian Federation, dividends are any income that was received by a shareholder (participant) from an LLC in the process of distributing profits remaining after paying all required taxes.

The decision to pay dividends is made by the sole participant or the general meeting of all participants of the LLC. After the decision is made, the minutes of the meeting are signed.

Dividends can be received in cash, cash or non-cash, as well as property, if such a procedure is provided for by the organization’s charter. The payment of dividends itself becomes possible only on the condition that the organization’s net income (the amount of net assets) turns out to be greater than the authorized capital and reserve fund, incl. after payment of dividends. The following points must be kept in mind:

1. Dividends are the profit of the participants (the only participant) of the organization, and taxes must be paid on the amount of profit.
2. If dividends are received by an LLC or individual entrepreneur under a special tax regime, income tax or personal income tax is paid regardless of the chosen taxation regime.
3. The income tax/personal income tax rate is from 13% to 15% (depending on the recipient of the profit in the form of dividends).

Important!

Based on sub. 1 clause 3 art. 284 Tax Code of the Russian Federation, sub. 2 clause 1.1 art. 346.15 of the Tax Code of the Russian Federation, from January 1, 2011, income of a Russian LLC in the form of dividends from another Russian LLC, in which the participation share of the first LLC is at least 50% for 1 year continuously, will not be subject to tax according to the simplified tax system (0%) and tax on profit.

How to register and pay dividends with property

Payment of dividends is possible if the company has a profit based on the results of the previous year, and the value of net assets exceeds the amount of the authorized capital. If the size of assets falls below the authorized capital following the distribution of profits, payment of dividends is also not allowed.

Required documents and information

To pay dividends in property form and properly record this procedure, the following information is required:

• data on the size of shares of each owner of the company - this can be obtained from the charter or extract from the Unified State Register of Legal Entities;
• information about profit at the end of the calendar year - it is determined after payment of all taxes and fees, and is recorded in accounting documents (for example, a profit and loss statement, balance sheet, etc.);
• data on the amount of profit that will be used to pay dividends - the owners themselves can determine the amount of distributed profit in a decision of the general meeting (a decision can also be made to direct all profits to production purposes without paying dividends);
• information about the value of property assets that will be distributed among the founders - for this, accounting data or a report from an independent appraiser can be used.

It is the valuation of property that is one of the most difficult issues when paying dividends.

Owners can determine the value of things and objects themselves, but this indicator should not differ significantly from the market valuation - otherwise, the tax authorities will consider such a payment as an attempt to understate the tax base. Therefore, the best option is to seek the services of a professional appraiser - his report will eliminate all claims of the tax authorities.

Based on the above, the following documents will be used to distribute profits in the form of property:

• the current version of the company's charter;
• current extract from the Unified State Register of Legal Entities;
• minutes of the general meeting of participants or the decision of the sole founder;
• profit and loss statement, balance sheet and other accounting documents;
• an extract on the value of property assets or a report from an independent appraiser.

Depending on the conditions of business activity, other documents may be required. For example, if a participant’s share in the authorized capital exceeds 25%, a case of an interconnected or major transaction may be recorded - such situations require additional documentation.

Instructions

The algorithm of actions of enterprise participants when paying dividends in property form is as follows:

• record profit at the end of the year in accounting and tax documents;
• make mandatory payments - taxes, fees, insurance premiums, etc.;
• conduct an assessment of things, items and objects that will be transferred as dividends;
• hold a general meeting and approve a decision on the amount of distributed profit, the form of dividends and the composition of transferred assets;
• transfer to each owner a part of the property specified for him in the protocol, as well as register ownership, if such a requirement is contained in the law (for example, for real estate or vehicles).

Keep in mind that any form of dividend means income for the owner. Therefore, he needs to calculate and pay personal income tax based on the market value of the property received from the enterprise.

Payment protocol

Based on the results of the general meeting of owners, a protocol is drawn up, in which the following issues must be approved:

• profit and loss statement for the past year;
• the amount of profit at the end of the year;
• the amount of profit to be paid as dividends;
• report on the assessment of property to be transferred to the founders;
• procedure and forms of payments (combined payment is allowed - part in money, part in property assets).

The procedure for approving these decisions is determined by the clauses of the charter. As a rule, for a positive decision on each issue you need to get more than 50% or 2/3 of the votes. If any of the participants does not agree with the procedure for distributing profits or the amount of dividends, he can challenge the protocol in court.

The protocol form can be downloaded here.

Sample protocol

Sole founder's decision

Payment of dividends with property - limiting factors

There are several limiting factors that need to be taken into account:

1. The Ministry of Finance and the Federal Tax Service argue that the payment of dividends with property is its sale, and therefore you will have to pay income tax (or a single tax according to the simplified tax system) and VAT.
2. If the payment of dividends with property is made in favor of an individual for whom dividends are the only income in the organization, a notification is submitted to the Federal Tax Service about the impossibility of withholding personal income tax from the individual. In this case, the recipient of dividends undertakes to pay personal income tax independently no later than July 15 of the next year.
3. The LLC charter must list the types of property that can be transferred as dividends (movable, immovable, including securities).

Payment of dividends with property - opinion of the Federal Tax Service and the Ministry of Finance

Officials of the Ministry of Finance and the Federal Tax Service agreed that the payment of dividends with property is nothing more than a transfer of ownership rights to it. Therefore, such a distribution of profit can be considered a sale of property, which results in the obligation to transfer VAT, income tax or a single tax to the budget under the simplified taxation system.

The Ministry of Finance apparently assumes that if an organization wanted to get rid of property, it would first sell it and pay dividends from the proceeds.

Judges' opinion

The judges took a different position on this issue. Thus, in their opinion, based on the articles of the Tax Code, the object of taxation can be the direct sale of goods, profit, the property itself, as well as income or expense .

In cases where we are talking about the transfer of property rights in the form of dividends, there is no movement of funds, which means it is not possible to talk about the fact of sale.

Therefore, the court considers that such payments are not subject to VAT.

What is implementation?

Article 39 of the Tax Code of the Russian Federation states that sales represent the transfer of ownership of goods, performance of work and provision of services by one person to another with the subsequent receipt of monetary compensation. In some cases, sale on a free basis is allowed.

In accordance with the Tax Code, transactions involving the sale of goods, works and services on the territory of the Russian Federation are subject to value added tax. This also includes the sale of collateral, property rights, transfer of ownership, results of work and services provided free of charge.

What is income?

In simple words, income represents cash or benefits in kind received as a result of the activities of an organization . Income can also be qualified as an economic benefit, which is determined in accordance with the chapters of the Tax Code “Individual Income Tax” and “Organizational Income Tax”. Consequently, recognized income is subject to personal income tax and income tax.

The income that a shareholder or member of a company receives when distributing net profit from activities carried out is recognized as dividends. The net profit is the profit remaining after repayment of all obligations to the tax office and funds . The amount of dividends is determined in proportion to the participant’s share in the authorized capital of the organization.

In the trial, which was described above in the article, the tax inspectorate tried to convince the court that the transfer of property to the company's participants was a sale and not a dividend. That is why the tax office decided that it has the right to recalculate the amount of VAT upward. However, the court did not agree with the inspectorate’s position and satisfied the taxpayer’s claim.

Payment of dividends with property - the position of the courts

The courts DO NOT agree with the opinion of the Ministry of Finance of the Russian Federation and the Federal Tax Service of the Russian Federation

– they are convinced that dividends paid by property should be subject to personal income tax, but not VAT or income tax (unified tax under the simplified tax system), since the payment of dividends by property does not equate to its sale. However, the courts put forward a list of necessary conditions, only if they are met, the organization receives the right to pay dividends with property:

1. An organization must have retained earnings after taxes.
2. The charter of the LLC must indicate the possibility of paying dividends with property.

Legislative acts on the topic

Article 42 of the Federal Law of December 26, 1995 N 208-FZ “On Joint-Stock Companies” (hereinafter referred to as Law N 208-FZ) directly provides for the possibility of paying dividends to shareholders not in money, but in other property. Federal Law No. 14-FZ of 02/08/1998 “On Limited Liability Companies” does not contain such a provision, however, given the absence of a legislative prohibition, the LLC has the right, based on the relevant decision of the general meeting of the company’s participants, to transfer to the participant the obligation to pay part of the net profit not cash, but other property, including real estate (see also letter of the Ministry of Economic Development of Russia dated November 27, 2009 N D06-3405).

When dividends are paid in the form of property, the ownership of this property, previously owned by the organization, passes to its participants (clause 32 of the resolution of the Plenum of the Armed Forces of the Russian Federation dated March 17, 2004 N 2, clause 1 of Article 66 and clause 3 of Article 213 of the Civil Code of the Russian Federation ).

According to paragraphs. 1 clause 1 art. 146 of the Tax Code of the Russian Federation recognizes as an object of VAT taxation, including operations for the sale of goods on the territory of the Russian Federation. A product is any property that is sold or intended for sale (clause 3 of Article 38 of the Tax Code of the Russian Federation). The sale of goods is recognized as the transfer on a reimbursable basis (including the exchange of goods) of ownership of them, and in cases provided for by the Tax Code of the Russian Federation, the transfer of ownership of goods on a free basis (clause 1 of Article 39 of the Tax Code of the Russian Federation).

In this regard, according to the Ministry of Finance of Russia, as well as the tax authorities, for tax purposes, the transfer of property as dividends is recognized as a sale and is taxed as a sale (see letters of the Federal Tax Service of Russia dated May 15, 2014 N GD-4-3/ [email protected] , Ministry of Finance of Russia dated December 17, 2009 N 03-11-09/405, Federal Tax Service of Russia for Moscow dated February 5, 2008 N 19-11/010126). In other words, the transfer of property for the payment of dividends is subject to VAT taxation. The tax base in this case is determined in accordance with paragraph 1 of Art. 154 of the Tax Code of the Russian Federation as the value of this property, calculated on the basis of prices determined in accordance with Art. 105.3 of the Tax Code of the Russian Federation, taking into account excise taxes (for excisable goods) and without including VAT.

The judicial authorities on the issue under consideration take a different point of view. Thus, in the decisions of the AS of the East Siberian District dated 02.25.2015 N F02-6656/14 in case N A58-341/2014, the FAS of the Ural District dated 05.23.2011 N F09-1246/11, the judges came to the conclusion: since the legislation allows payment dividends to a shareholder in real estate, the transfer of this property does not form an object of taxation other than income, therefore, it is not a sale of real estate subject to VAT.

The Arbitration Court of the Republic of Sakha, in its decision dated July 21, 2014 N A58-341/2014, refused to satisfy the tax authority’s demands for additional VAT assessment on the following grounds. Indeed, in accordance with paragraph 1 of Art. 39 of the Tax Code of the Russian Federation, sale is recognized as the transfer of ownership rights on a compensated basis. Meanwhile, in accordance with paragraph 1 of Art. 43 of the Tax Code of the Russian Federation, a dividend is any income received by a shareholder (participant) from an organization during the distribution of profits remaining after taxation (including in the form of interest on preferred shares) on shares (stakes) owned by the shareholder (participant) in proportion to the shares of shareholders (participants) in the authorized (share) capital of this organization. At the same time, in accordance with parts 1, 3 of Art. 42 of Law No. 208-FZ, payment of dividends in non-monetary form (other property) is allowed if this is provided for by the company’s charter. Consequently, if, under the circumstances under consideration, for the shareholder the acquisition of the specified property was the receipt of a dividend (income) from the company, then for the company the transfer of the specified property was the payment of a dividend (income), but in no way the sale of a dividend, and therefore not the sale of property in the sense given to implementation by Articles 39, 146 of the Tax Code of the Russian Federation. Otherwise, contrary to the meaning of Articles 39, 43, 146 of the Tax Code of the Russian Federation, it would indicate that the payment of dividends (income) represents the sale of property, that is, subject to VAT. Similar conclusions are presented in the resolutions of the Federal Antimonopoly Service of the Ural District dated August 30, 2005 N F09-3713/05-S2, dated October 3, 2006 N F09-8779/06-S2.

Common mistakes

Error:

A legal entity or individual receives dividends with property, after which they do not pay personal income tax.

A comment:

Payment of personal income tax when receiving dividends from property is mandatory - the courts, the Ministry of Finance and the Federal Tax Service of the Russian Federation agree on this.

Error:

The organization that paid the dividends with property reflected the transfer of property to pay dividends as a sale subject to VAT.

A comment:

This approach is promoted by the Ministry of Finance and the Federal Tax Service, however, the courts argue that the payment of dividends with property does not constitute its sale, and therefore the need to pay VAT.

How to reflect them

The law considers the payment of dividends in property form as a sale, so the company must take this transaction into account in its accounting and tax reporting. However, judicial practice gives a different interpretation - the transfer of property as part of dividends is not a sale, since it is not aimed at generating profit from business activities. If the Federal Tax Service insists on taxation of such a transaction, the inspector’s actions can be appealed.

The procedure for recording payments in accounting is as follows:

• the debit of account 84 reflects retained earnings (if the enterprise has any);
• Code 75-2 reflects calculations for accrued dividends;
• the credit of account 68 reflects calculations for taxes and fees withheld upon transfer of property to the founders.

The property transferred to the founders will be written off from the balance sheet of the enterprise, about which a commission act will be drawn up.

Is it necessary to recover VAT from the residual value when paying dividends using company property? Watch the video below:

Answers to common questions about how dividend payments from property are taxed

Question #1:

In what cases may it be necessary to pay dividends with property?

Answer:

This happens quite rarely. But such a need arises, for example, if there is retained earnings on the balance sheet, however, it is not possible to withdraw funds from current turnover.

Question #2:

To me, as an individual, LLC dividends were paid with property. This is my only income in this company, and therefore I will have to pay personal income tax myself. What if I am not able to find such a large amount to pay personal income tax on property received as dividends?

Answer:

The only option in this situation is to sell the received property or part of it in order to pay personal income tax. The tax must be paid by July 15 of the following year.

Possibility of payment

The law guarantees company owners almost complete freedom of entrepreneurial activity, including when determining the procedure and amount of dividend payments. Here are the rules of this procedure recorded in the Civil Code of the Russian Federation and relevant regulations:

• the standard form of profit distribution is to approve the amount of dividends and pay them in monetary terms;
• the founders of the company may provide for the opportunity to receive part of the profit in the form of property assets - for this, the corresponding clause must be included in the constituent documents in advance;
• The property assets that can be transferred as dividends include things, immovable objects, vehicles and other items that are not excluded from circulation.

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The need to use this option for paying dividends may lie in the lack of available funds at the enterprise, when all of them are invested in a long production process. Obviously, the extraction of working capital can negatively affect the results of operations - in this case, the owners will be able to obtain free property.

• The basis for this form of payment of dividends will be the decision of the general meeting of the company's participants , the results of which are documented in the form of minutes.
• If the company has only one owner, he will make the sole decision .

Any form of dividend payment will be reflected in the accounting documents and is also subject to taxation.