Each business year can end with a profit, stagnation, or loss, which companies express through financial statements. After taxation, companies can distribute/cover the profit or loss in the following business year. The profit for 2022 can be distributed in 2023, while the loss in 2022 company can cover in 2023.
The order of profit distribution and loss coverage
The provisions of the Companies Act (Official Gazette no. 111/93 – 18/23) and the Accounting Act (Official Gazette no. 78/15 – 114/22) prescribe the manner of disposal of the established profits of companies. The company’s members decide on the profit distribution or loss covering at the annual meeting. The order of profit distribution and coverage of losses in a limited liability company is prescribed by the provisions of Articles 406 and 406a of the Companies Act and Article 19 of the Accounting Act.
Tax loss carried forward, and his coverage
Suppose a negative tax base is determined when determining the profit tax base. In that case, the taxpayer has declared a tax loss, which can be carried forward and compensated by reducing the tax base in the following five tax periods. In the case of a limited liability company, the profit, after taxation, must first be used to cover losses from previous years (if any). Only when the losses from previous years are fully covered can the company continue with the profit distribution, which means that the company cannot use the current period’s profit for any other purpose as long as there is an uncovered loss in the business books.
Own business shares
Limited liability company can buy back their business shares. If a company decides to do so, it must form reserves for these shares, which will not reduce the company’s registered capital or reserves that the company must create (based on the articles of association) and must not use them for payments to its members.
The company enters into the mentioned reserves an amount corresponding to the amount stated in the financial statements for these business shares. The company’s reserves can only be abolished if it alienates or withdraws its business shares or reduces them by the amount that exceeds its lower stated value. Reserves can be formed from reserves provided for in a collective agreement if the agreement allows such a possibility, but also from the number of other reserves from the profit that exceed the losses carried over from the previous years.
If the company buys back its business shares during the year, it must form reserves for these shares before any further distribution of profits, at the expense of current profit and in the amount paid for them.
Suppose the articles of association or the declaration of incorporation of the d.o.o. provides for forming certain reserves for specific purposes. In that case, these reserves are formed at the expense of realized profit and must not be used for any other purpose than those for which they were formed. The company may include further reserves at its discretion, which it may use for any purpose.
Reserves according to the Accounting Law
When a company distributes its profit in favour of mandatory reserves prescribed by the Companies Law, it must form additional reserves from the remaining profit by Article 19, Paragraph 14 of the Accounting Law.
A trading company that has distributable profit on the balance sheet date must first use them to create other reserves from profit to cover:
- Unwritten development costs are shown in assets, and
- The profit that can be attributed to the participating interests and which is shown in the profit and loss account, in the amount that has not been received nor its payment can be demanded if the financial reporting standards allow or require the specified method of reporting development costs or profit from participating interests.
If the company needs to realize a sufficient profit for all mandatory appropriations, according to the Companies and Accounting Law, the distribution is made first according to the Companies Law. The remaining profit is distributed upon request under Article 19, Paragraph 14 of the Accounting Law.
