Dividend distribution and ERTE
Limitations on the distribution of dividends for companies under ERTE.
It is not trivial to point out that the pandemic generated by COVID 19 has had a considerable economic impact on the majority of companies, which has forced all legislators to adopt emergency measures in the business sector with the aim of alleviating and helping the companies affected. One of the star legislative measures during the pandemic was the use of temporary lay-offs (ERTE), establishing a flexible regulation, increasing incentives for companies, as well as extending their duration. In this respect, the ERTE proved to be a basic tool for combating the crisis caused by COVID-19.
However, can companies that take advantage of temporary lay-offs (ERTE) distribute dividends? The legislator, in order to avoid opportunistic behaviour by companies seeking to distribute as dividends the subsidy received indirectly from the savings in Social Security contributions, limited the distribution of dividends by companies under ERTEs through article 5.2 of Royal Decree-Law 18/2020 of 12 May (subsequently reproduced identically by Royal Decree-Law 24/2020 of 26 June), which reads as follows: “Mercantile companies or other legal entities that avail themselves of the temporary redundancy plans regulated in Article 1 of this Royal Decree-Law and that use the public resources allocated to them may not proceed to the distribution of dividends corresponding to the tax year in which these temporary redundancy plans are applied, except if they previously pay the amount corresponding to the exemption applied to social security contributions.”
This limitation also has two exceptions:
- It does not apply to those companies that, on 29 February 2020, had fewer than fifty employees, or similar, registered with the Social Security.
- That the entity pays the amount corresponding to the exemption applied to Social Security contributions and has waived it.
Leaving the exceptions aside, one of the questions that arises from the literal wording of the rule is whether the limitation affects dividends agreed during the financial year in which the ERTE is formalised and whether it also affects the distribution of other accumulated surpluses from previous financial years.
This question is controversial and to date there is no uniform criterion, so we have to accept the wording of the provision in order to interpret it as closely as possible to the legislator’s intentions. In this respect, our humble interpretation of the rule is that the limitation is only applicable to dividends generated during the tax year in which the ERTE is applied, i.e. dividends that have their origin in the result of this year, not affecting the profit reserves of previous years.
This interpretation is in line with the conclusion of the General Council of Economists of Spain in response to the consultation made by the Ministry of Economic Affairs and Digital Transformation: “In the interpretation of that Ministry, article 5.2 of Royal Decree-Law 18/2020, by establishing that they may not proceed with the distribution of dividends corresponding to the tax year in which these temporary redundancy plans are applied, determines limits to the distribution of dividends corresponding to 2020 (the year in which the redundancy plans are applied) and which will be distributed, consequently, in the financial year 2021.”
That said, to date there is no known resolution that provides complete certainty to the conclusion of the General Council of Economists of Spain, so companies under ERTE will have to be cautious when deciding whether or not to distribute dividends against available reserves generated in previous years. It should be noted that the temporary lay-offs linked to the pandemic crisis have been extended on the basis of several Royal Decree-Laws, the latest being Royal Decree-Law 18/2021 of 28 September, which establishes a limit until 28 February 2022.
This means that those companies that have taken advantage of the ERTEs due to the pandemic crisis will not be able to distribute dividends on account of the profit for the financial year 2021, and possibly 2022 (depending on whether the legislator grants further extensions), unless they fall within any of the exceptions indicated above, or decide to distribute dividends out of the profit for the financial year prior to the financial year in which the ERTEs are applied.
And given the impossibility of distributing dividends due to compliance with the provisions of Article 5.2 of Royal Decree-Law 18/2020, can the shareholders exercise the right of separation set out in Article 348 bis of the Capital Companies Act?
Does the tax year in which the company has availed itself of the ERTE count towards the calculation of the three years in which profits are obtained as indicated in the aforementioned Article 348 bis? In this regard, and as we indicated in the AddNEWS of May 2020, the shareholders may not exercise the right of separation provided for in article 348 bis of the LSC; likewise, the tax year in which the companies avail themselves of the ERTE will not count towards the calculation of the three years for obtaining the profits established in the aforementioned article.
Lastly, it is necessary to point out the insolvency and corporate consequences arising from the distribution of dividends in the event that the company has benefited from ERTE aid:
- From a corporate perspective, the corporate resolution that gives rise to the distribution of dividends in the event that the company has benefited from ERTE aid may be challenged in accordance with article 204.1 of the LSC, with any of the directors, third parties that can prove a legitimate interest and shareholders who have acquired such status prior to the adoption of the resolution, provided that they represent, individually or jointly, in principle at least one per cent of the capital.
- In the event that the ERTE companies, which have distributed dividends, file for insolvency proceedings due to the impossibility of overcoming the devastating economic effects of the pandemic, (i) the insolvency administrator would have action against the shareholders who have breached their duties, personally liable for the debts of the company prior to the declaration of insolvency or the exercise of the liability actions of the insolvent legal entity against its administrators or liquidators, de jure or de facto, and (ii) acts detrimental to the assets carried out by the debtor within the two years prior to the date of the declaration may be rescinded, as well as the acts of the debtor prior to the date of the declaration of insolvency may also be challenged.
In view of the numerous questions that may arise from the distribution of dividends for companies benefiting from ERTEs, both for the shareholders and for their management bodies, AddVANTE provides comprehensive advice, not only from a corporate perspective, but also from the synergy between the areas affected by this regulation, such as labour, insolvency and the aforementioned corporate areas.