Dividends distributed to shareholders in a Cyprus company will be either a final dividend or an interim dividend. Final dividends are paid once a year and are calculated on the basis of the company's financial statements for the financial year concerned.
Interim dividends can be paid at any time throughout the year and are calculated before the company's annual earnings have been determined. Typically, interim dividends are decided solely by the board. Interim and final dividends are subject to different treatment in law.
The assessment of whether dividend can be distributed is inextricably linked to whether there are profits available for distribution (or divisible profits). 'Profits available for distribution' is not to be equated with the accounting or business notion of 'profit', the latter generally being a narrower notion than the legal construct of 'profits available for distribution'.
The notion of 'profit' per se is not defined in our Companies Law, Cap. 113, as amended (the "Law"). The Supreme Court of Cyprus adopted the definition of "profits" set out in English judicial precedent, which states that the term implies a comparison between the state of a business at two specific dates usually separated by an interval of a year. The fundamental meaning is the amount of gain made by the business during the year.
Before recommending or making a distribution, as applicable, the directors of a company should have regard to their common law and equitable duties, and their statutory duties. Directors must have regard to the company's best interests generally and could be liable if they pay a dividend in an imprudent manner. This determination is only possible on a case-by-case basis.
The articles of association of a company are of pivotal importance in the determination of whether and how dividend can be distributed to the shareholders. Articles may provide for the dividend rights of shares or special arrangements regarding the distribution of dividend to shareholders.
Additional criteria apply for distributions by a public company under the Law. These criteria result from the transposition of applicable EU legal instruments, which have been transposed into Cyprus law.
The purpose of the distributions regime applicable to public companies is not for the benefit of shareholders but rather to protect creditors. Creditors have no recourse to shareholders in a limited liability company beyond the amount of paid-up share capital and, therefore, it would be detrimental if shareholders were able to remove resources from the company by way of distribution to the disadvantage of creditors who had traded with the company on credit, with the expectation of resources being available to settle their debt.
As held by the Court of Justice of the European Union in Hirmann v. Immofinanz regarding restrictions on distributions, the intention of applicable Union law is to prevent inappropriate distributions from subscribed capital to shareholders in their capacity as shareholders to which they are not entitled.
Beyond the applicable criteria to distributions by Cyprus public companies, a public company may only be able to distribute interim dividends where certain statutory requirements are met. Any distribution made by a Cyprus public company in contravention of applicable law may need to be returned by shareholders under certain circumstances.
Overall, the recommendation, declaration and distribution of dividends by Cyprus companies are aspects which should be performed with caution, based on the circumstances prevailing each time.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.