Difference between dividends and interim dividends

Difference between dividends and interim dividends

When a company generates profits, it may remunerate its shareholders by distributing dividends. An ordinary dividend is the classic distribution approved after the financial year has been closed and the annual accounts have been approved by the general meeting.

It is calculated on the basis of results that have already been verified and, where appropriate, on freely distributable reserves, always within the legal limits. For that reason, the ordinary dividend rests on confirmed earnings or, as the case may be, on freely distributable reserves, with very limited legal and financial risk.

By contrast, an interim dividend is an advance on the final dividend paid during the financial year itself. There is not yet a definitive picture of the year-end result, so the law requires greater prudence: it must be shown that sufficient profit has already been generated since the start of the year, that mandatory coverages remain intact, and that the company has the liquidity required to make the payment without compromising its ordinary operations.

Although shareholders may perceive both distributions similarly, the essential difference lies in timing, after closing versus before closing, and in the accounting basis, confirmed profit versus estimated profit. The ordinary dividend is approved by the general meeting, whereas the interim dividend is normally approved by the board of directors or the sole director, unless the by-laws provide otherwise.

How interim dividends operate

To approve an interim dividend, the management body prepares a mid-year balance sheet that shows performance from the prior year-end up to the relevant date.

Using that information, it verifies in substance that accumulated profit is sufficient and that the company has cash on hand to pay without strain, meaning without neglecting suppliers, payroll, rent and other commitments. If those conditions are met, the company approves the payment, sets the amount to be distributed and the payment date, and notifies the shareholders. Later, when the year ends, the final accounts are reviewed and approved.

If the final result is broadly in line with expectations, the advance is simply added to the ordinary dividend approved at that time. If the final result is lower than anticipated, the interim amount already paid is adjusted by reducing the year-end dividend. In exceptional cases, which are rare when decisions are taken prudently, if too much was advanced without sufficient basis, corrective measures would have to be taken.

The key point is straightforward: the interim dividend allows the company to reward shareholders without waiting for year-end, but it requires prudence so as not to over-advance. Sound documentation is therefore essential: the interim balance sheet, the explanation of the calculation, the minutes of the approving resolution and, where applicable, the auditor’s report. Properly designed, the interim dividend enables earlier remuneration without waiting for the annual meeting, while risks remain under control.

Tax treatment of interim dividends

For the shareholder, the tax treatment of an interim dividend is the same as that of an ordinary dividend. When the payment is made, the company withholds the applicable amount and the shareholder declares the income in the personal income tax return for the tax year in which it was received, within the savings base as investment income.
The fact that it is an advance does not change the tax treatment for the recipient. If later, once the accounts are approved, the final dividend differs, the adjustment is made in that subsequent distribution and does not reopen the taxation of the interim amount already received.

For the company, the interim dividend is an application of profits that reduces equity. In the accounts, a liability to shareholders is recognised when the resolution is adopted and it is extinguished upon payment.

It is not a deductible expense for corporate income tax purposes, just as an ordinary dividend is not, because it is a distribution of profit rather than a cost incurred to obtain income. Proper cash-flow planning and reliance on realistic figures avoid tensions and help maintain a coherent distribution policy.

It should be recalled that, if an adjustment is made upon approval of the accounts because the final profit was lower than estimated, that adjustment does not reopen the taxation of the interim payment already received: the shareholder has already been taxed on the amount collected and any reduction is reflected by lowering the complementary dividend or, if necessary, by compensating in future years as determined by the corporate resolutions and within the legal framework.

Despite the features that distinguish them from ordinary dividends, the tax regime is identical:

• Up to 6,000 euros at 19 percent.
• from 6,000 to 50,000 euros at 21 percent.
• From 50,000 euros upwards at 23 percent.

In short, an interim dividend is taxed like any other dividend, with withholding at source and inclusion in the savings base, while for the company it is an application of profit that calls for prudence, adequate accounting support and sound liquidity management. Properly designed, it aligns expectations with shareholders, smooths the distribution policy over the year and preserves financial discipline.