Payment Of Profit Sharing In The Light Of The Recodification Of The Country's Civil Law

The Czech Republic's new Civil Code and its Business Corporation Act are effective since 1 January 2014. These two acts represent the leading elements of the re-codification of Czech civil law, which -- apart from many other changes -- has brought changes also in the area of payment of profit sharing.

For the purpose of this article, the term "Memorandum of Association" also incorporates articles of association and deeds of incorporation, the term "Shareholder" also encompasses stockholders, and "Company" refers to both a limited liability company and joint stock company.

Process of approval and payment of profit sharing

The fundamental precondition for payment of a profit sharing on the profit of the company is an ordinary or extraordinary balance sheet report that shows that a distributable profit exists and that has been approved by a general meeting. The distribution shall be approved by a general meeting. The task of the executive directors or of the board of directors of the Company is to duly verify the fulfillment of the conditions for the payment of profit sharing, define the legitimate persons who shall receive payment of such profit sharing, and appropriately decide about the payment of profit sharing.

Restriction of the payment of profit sharing

Different restrictions applied to the payment of profit sharing may be regulated by a memorandum of association. The shareholders may agree in the memorandum of association e.g. that the right to profit sharing applies only to the shareholders owning a particular type of a share or that profit sharing is payable only when the established financial targets are reached.

The Business Corporation Act defines the relevant legal restrictions for the payment of profit sharing. Such payment is forbidden when it would involve bankruptcy for a company. Under the Business Corporation Act, the amount designated for payment as a share in the company's profit must not be higher than the financial result for the last accounting period reported in the financial statements, reduced by the mandatory allocation to the reserve fund by unpaid losses from previous years, and increased by the retained profit from previous years. Moreover, the joint stock company is not permitted to distribute profit if the equity determined from the annual or extraordinary financial statements is less than the company's registered capital, or would be less than the company's registered capital as a result of distributing the...