Corporate / M&A

Disbursing Dividends to Foreign Shareholders from Moldovan Limited Liability Companies: Practical Considerations

Statistically, as of 1 September 2012, the Moldovan trade register reflects information on over 162,000 registered entrepreneurs. Approximately 49% are limited liability companies (LLC). By 1 January 2012, the number of companies with foreign capital incorporated in Moldova exceeded 81001, most being limited liability companies. This article looks at what LLC management and shareholders must consider when deciding on dividends.

Introduction

Under Moldovan leg­is­la­tion, for­eign per­sons can freely incor­po­rate LLCs in Moldo­va. In con­trast with oth­er juris­dic­tions, two-tier 100% sub­sidiaries in the form of LLCs are per­mit­ted. Fur­ther, for­eign­ers may admin­is­ter LLCs, sub­ject to ful­fill­ing local leg­is­la­tion require­ments.

Under the Lim­it­ed Lia­bil­i­ty Com­pa­nies Act No. 135-XVI/2007 (Act No. 135), the deci­sion on div­i­dends is the exclu­sive com­pe­tence2 of the gen­er­al assem­bly of share­hold­ers or sole share­hold­er (GAS). But cer­tain for­mal steps must be observed.

Step 1: Annual reports; convocation of and decisions by the GAS

LLCs must sub­mit income dec­la­ra­tions3 and finan­cial reports (oth­er statu­to­ry reports) by 31 March of the year fol­low­ing the end of the finan­cial year4. Such reports are the LLC’s man­age­ment oblig­a­tion. To this end, the man­age­ment must con­vene (not ear­li­er than 30 days and not lat­er than 90 days as of the end of the finan­cial year) an ordi­nary GAS (OGAS). Under Art.75 of Act No. 135, the man­age­ment must present the OGAS a report on its activ­i­ty, the LLC’s annu­al prof­it-loss bal­ance and inven­to­ry of assets, and oth­er reports. Fail­ure by the LLC’s man­age­ment to con­vene an OGAS is a ground for man­age­ment revo­ca­tion.

Sub­ject to ful­fill­ing the quo­rum require­ments, the OGAS must decide5 on the fol­low­ing:

    • approv­ing the LLC’s annu­al reports of man­age­ment or coun­cil, and inter­nal and exter­nal audi­tors6 (if any);
    • approv­ing the prof­it-loss bal­ance; and
    • approv­ing the dis­burse­ment of net prof­its (div­i­dends).

An OGAS can also decide on any oth­er ques­tions, such as: (i) reg­u­lar­i­sa­tion of the cor­po­rate income tax; (ii) con­sti­tu­tion of / con­tri­bu­tion to the reserve fund7 (oth­er funds); (iii) pay­ment of bonus­es; (iv) instruc­tion to effect the with­hold­ing of income tax; (v) use of part of the net prof­it to pay bank com­mis­sions8 in con­nec­tion with the div­i­dends; and (vi) instruc­tion to obtain cer­tifi­cates attest­ing tax with­hold­ings.

All above deci­sions must be tak­en by 12 plus one vote of the LLC’s share­hold­ers and by an open vote, unless oth­er­wise pro­vid­ed in the con­sti­tu­tive doc­u­ments. Share­hold­ers may alter the mech­a­nism of pro­por­tion­al dis­burse­ment of div­i­dends if a unan­i­mous vote of all share­hold­ers is manda­to­ry (Art.39(2), 58(1)1) of Act No. 135).

Pay­ment of div­i­dends is sub­ject to the fol­low­ing require­ments:

  • only shareholder(s) can decide on the size of div­i­dends to be paid;
  • div­i­dends can be paid out only upon pay­ment of the per­tain­ing tax­es (eg, cor­po­rate income tax of 12% of the prof­it, with­hold­ing tax, etc.);
  • div­i­dends are paid to shareholder(s) pro­por­tion­al­ly to their share stakes, unless oth­er­wise decid­ed by all share­hold­ers;
  • div­i­dends are to be paid with­in 30 days from the GAS deci­sion, unless oth­er­wise agreed by all share­hold­ers;
  • div­i­dends may not be paid: (i) before all con­tri­bu­tions into the share cap­i­tal are ful­ly wired; (ii) if, after pay­ment, the LLC’s net asset val­ue will decrease under the LLC’s size of share cap­i­tal plus size of its reserve fund; and (iii) in case of insol­ven­cy pro­ceed­ings or if the pay­ment can cause insol­ven­cy.
  • div­i­dends paid in breach of the above are sub­ject to reim­burse­ment.

Should the man­age­ment fail to con­vene an OGAS, any share­hold­er hold­ing more than 10% of the vot­ing rights may demand a con­vo­ca­tion of the GAS.

In LLCs with one share­hold­er, the deci­sions are to take the form of res­o­lu­tions of the sole share­hold­er.

Step 2: Protocol of GAS; withholding; execution

The pro­to­col of the GAS must be signed by all share­hold­ers, except when the LLC’s statute pro­vides that it must be signed by the pres­i­dent of assem­bly joint­ly with the per­son draft­ing the text (Art.56(4) of Act No.135). Although there is no oblig­a­tion to legalise sig­na­tures on pro­to­cols, it is good prac­tice to legalise9. If made out­side Moldo­va, legal­i­sa­tion must be accom­pa­nies by an apos­tille or super-legal­i­sa­tion, except when bilat­er­al treaties on recog­ni­tion of civ­il doc­u­ments are in place (eg, Roma­nia, Ukraine, etc.).

If made in a lan­guage oth­er than Roman­ian, the pro­to­col must be trans­lat­ed and legalised10.

Upon receiv­ing the GAS’ pro­to­col, it must be exe­cut­ed by the LLC’s man­age­ment.

For­eign share­hold­ers resid­ing in coun­tries with which Moldo­va has a dou­ble tax­a­tion treaty (DTT) should pro­duce tax res­i­den­cy cer­tifi­cates before the LLC makes pay­ments. Tax res­i­den­cy cer­tifi­cate pre­sent­ed on time oblige the LLC to apply the reduced with­hold­ing under the DTT11.

Should no DTT be in place or in case of fail­ure to pro­duce tax res­i­den­cy cer­tifi­cate, the LLC applies a local with­hold­ing tax of 6% on the div­i­dends12. The local tax will like­ly not be accept­ed abroad for the pur­pose of avoid­ing dou­ble tax­a­tion.

Upon com­plet­ing div­i­dend pay­ments, it is rec­om­mend­ed the man­age­ment report this fact to the shareholder(s).

Step 3: Proof of paid income tax

LLCs must report with­hold­ing tax­es retained on behalf of non-res­i­dents.

To prove the paid income tax, either the LLC or for­eign share­hold­er may apply (in the year fol­low­ing the year in which tax was paid) for a cer­tifi­cate13. The cer­tifi­cate is issued by the Main State Tax Inspec­torate of Moldo­va. The cer­tifi­cate can then receive an apos­tille, if required14.

Should no double taxation treaty be in place or in case of failure to produce tax residency certificate, the LLC applies a local withholding tax of 6% on the dividends. The local tax will likely not be accepted abroad for the purpose of avoiding double taxation.

1
http://www.cis.gov.md/content/6#6.
2
Art.39, 49 of the Act No. 135.
3
Moldovan Tax Code.
4
A finan­cial year in Moldo­va lasts: 1 Jan­u­ary — 31 Decem­ber.
5
Art.50(3) of Act No. 135. Please also note such deci­sions can­not be made by cor­re­spon­dence.
6
Inter­nal audi­tor not com­pul­so­ry if num­ber of share­hold­ers below 15 (Art.77 of Act No. 135).
7
Art.31 of Act No.135: each LLC must con­sti­tute a reserve cap­i­tal (fund) amount­ing to not less than 10% of its share cap­i­tal.
8
In prac­tice, when div­i­dends in high amounts are involved, to avoid dis­cus­sions on whether bank com­mis­sions per­tain­ing to pay­ments are tax deductible, share­hold­ers often agree to cov­er such costs from the net prof­it.
9
Such approach reduces the risk that local author­i­ties challenge/refuse to recog­nise GAS deci­sions.
10
A Moldovan may refuse to legalise a trans­la­tion if the orig­i­nal is not an offi­cial doc­u­ment.
11
Eg, 5% on the amount of the gross div­i­dends if the share­hold­er is a res­i­dent of Aus­tria and holds at least 25% of the share cap­i­tal of the LLC (Art.10 of the Moldo­va-Aus­tria DTT).
12
Art.90¹ of Tax Code.
13
Gov­ern­ment Deci­sion no.9/2010.
14
Gov­ern­ment Deci­sion no.163/2007.