The monitoring of profits distributed to shareholders through the capital and reserves statement
The statement of capital and reserves, contained in the RS section of the tax return model, is not merely a summary of the items reported in equity’s balance sheet. In fact, in order to compile the statement, a reclassification for tax purposes of the various items of shareholders’ equity is required.
This is confirmed both in paragraph 5 of Article 1 of the Decree of 26 May 2017 (the measure that amended the regulation of dividends and capital gains) and in the previous decree of 2 April 2008. In these provisions, it is established that the amount of the reserves formed from the profits produced by the company, as well as the decreases in the same reserves due to resolutions to distribute profits, must be reported in the statement of capital and reserves in the RS section of tax return.
This reclassification is due in order to know the tax treatment that will be reserved for shareholders (especially if individuals with qualified shareholdings) and for the company, in case of distribution or use of capital or reserves. As a result of the decrease in the corporate tax income rate (from 33% to 24%), the taxable portion of dividend to be paid by the shareholder, an individual with a qualified shareholding, will be different:
- 40% in case of distribution of reserves of profits produced until 31 December 2007;
- 48.72% in case of distribution of reserves of profits produced until 31 December 2016;
- 58.14% in case of distribution of reserves of profits produced until 31 December 2017.
For this last category of profit reserves, a new line has been included in the tax return model (line RS 136 A), whereas those one for 2018 are allocated to profit reserves in the general line RS 134.
It should be noted that, as a result of the 2018 Budget Law, the taxation of dividends has been modified, in fact, in case of distribution of profit reserves originating from 2018, regardless of whether they are qualified shareholdings or not, a withholding tax of 26% is directly applied to the individual shareholder by the IRES entities.
The reclassification will be useful also if the distribution relates to profits produced up to 2017 but deliberate between January 1, 2018 and December 31, 2022, in which case, instead of the withholding tax, the shareholder will be able to apply the above mentioned percentages, taking into account the year in which these reserves originated.
The statement in the tax return model is also important to verify whether the company complies with the different priorities imposed by the legislator with regard to the distribution of reserves:
- Reserves of profits with respect to capital reserves, as required by Article 47, Section 1, TUIR;;
- Older reserves than ones that originated more recently (Article 1, paragraph 4, Decree dated May 26, 2017).