Distribution of funds by a Finnish limited company – distributable equity, solvency and decision-making

Under Finnish company law, distribution of funds covers every way in which a limited company's assets are transferred to its shareholders – not only dividends. Profit in the income statement is also not the same as money available for distribution: the distributable amount is determined by unrestricted equity in the balance sheet, and the company must also remain solvent after the distribution.

Chapter 13 of the Finnish Limited Liability Companies Act sets two key limits: the amount distributed may not exceed unrestricted equity after the statutory deductions, and no distribution may be made if it would jeopardise the company's solvency. Both conditions must be met.

What forms of distribution are available to a limited company?

Under the Finnish Limited Liability Companies Act, a company's funds may be distributed to shareholders only in the forms permitted by law. The main forms are:

Dividends – the most common way to distribute profits.
Distributions from an unrestricted equity fund, such as the reserve for invested unrestricted equity (SVOP).
Reduction of share capital, where the reduction amount is returned to shareholders.
Acquisition or redemption of the company's own shares.
Dissolution and removal from the register, where the remaining assets are distributed to shareholders.

A transaction that reduces the company's assets or increases its liabilities without a business justification is also a distribution of funds. A transaction with a shareholder on terms more favourable than market terms can therefore be a disguised distribution, even if it is not called a dividend.

How much can the company distribute?

A distribution is based on the latest adopted financial statements. If the company is required by law or its articles of association to appoint an auditor, the financial statements must have been audited.

Subject to the solvency test, the company may distribute unrestricted equity less any amounts that the articles of association require to remain undistributed and other items required by law. Material changes in the company's financial position after the financial statements were prepared must also be taken into account. If, for example, significant losses have arisen after the end of the financial year, they cannot be ignored simply because the adopted financial statements looked healthy.

The solvency test is the second mandatory condition

No funds may be distributed if, when the decision is made, it is known or should be known that the company is insolvent or that the distribution will cause insolvency. The balance sheet test and the solvency test are therefore different matters: the balance sheet may show ample unrestricted equity even though the cash position cannot bear the distribution.

Practical example: a company has EUR 400,000 of unrestricted equity in its balance sheet and EUR 250,000 in its bank account. Over the next three months, however, a loan instalment, VAT payments and an already agreed machinery investment fall due, totalling around EUR 220,000. Although a distribution of EUR 400,000 might appear possible on the basis of the balance sheet, a large distribution could leave the company unable to pay its debts. The board must assess future payment obligations before proposing a distribution.

Who decides on dividends and other distributions?

As a rule, the general meeting decides on distributions of funds. The board usually makes a proposal, and the general meeting may also authorise the board to decide on a distribution within the limits set by law. The board is responsible for ensuring that its proposal and any use of an authorisation comply with the law – in particular, for assessing solvency.

The decision, the proposal and their grounds should be carefully documented in the minutes of the general meeting and the board.

What should be considered when distributing from the SVOP reserve?

From a Finnish company-law perspective, the reserve for invested unrestricted equity (SVOP) is unrestricted equity, so its funds may be distributed within the same restrictions and solvency test as other unrestricted equity.

Tax treatment, however, is a separate question. Whether a distribution from the SVOP reserve is taxed as a return of capital, a disposal or a dividend depends on the facts of the case, such as the timing of the investment and the recipient. The tax treatment should not be assumed in advance but assessed separately before the distribution. The taxation of dividends and other distributions also depends on the recipient and the form of distribution.

What is an unlawful distribution of funds?

A distribution of funds is unlawful, for example, where:

it is made in a form not permitted by law or without a business justification,
the amount distributed exceeds the limits permitted by law, or
it is made even though it was known or should have been known that the company was insolvent or would become insolvent as a result.

A shareholder may be required to return funds received unlawfully under the conditions laid down by law. In addition, board members and the managing director may be liable for damages if an unlawful distribution has caused loss to the company or its creditors. The distribution rules are therefore an essential part of creditor protection.

How does the auditor examine distributions?

In an audit, the auditor examines the financial statements on which the distributable funds are calculated. As part of the audit, the auditor may assess, among other things:

whether the distribution proposal corresponds to the adopted financial statements and distributable funds,
whether the distribution decision has been properly made and documented,
whether material changes after the balance sheet date have been taken into account, and
whether the accounts include transactions that may constitute disguised distributions.

Findings may affect the auditor's report. Read more about what an auditor examines.

Checklist before a distribution

Have the latest financial statements been adopted and, where required, audited?
How much unrestricted equity is distributable after statutory deductions and those required by the articles of association?
Have there been material changes since the balance sheet date?
Will cash and financing cover future payments after the distribution?
What is the appropriate form of distribution, and has the tax treatment been clarified?
Have the board's proposal and the general meeting's decision been documented?

If the distribution is part of an ownership arrangement, such as a shareholder's exit or a corporate transaction, the value of the company and its shares and the financing should also be assessed as a whole.

Let's discuss your distribution

Are you considering a dividend, a return from the SVOP reserve or a distribution as part of an ownership arrangement? JTT can help with questions relating to audit, financial analysis and corporate transactions. Contact us.