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

→ Vladimir Iurkovski

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 ¹⁄₂ 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.