Practical tips on the annual financial statements - Part 2 Overview of the variants of profit appropriation and loss offsetting

Since the introduction of the new company law on 1 January 2023, the rules for the appropriation of profit and the offsetting of losses have been adjusted. These changes to the appropriation of profit are only minimal:

  • No 2nd allocation to the statutory retained earnings reserve necessary
  • Always accumulate statutory retained earnings up to 50% (exception: holding companies)

There are more extensive changes to the offsetting of losses, which, depending on the composition of equity (statutory and voluntary reserves), must be proposed by the Board of Directors and approved by the General Meeting.

The following article shows the current legal situation and explains the effects depending on the constellation of equity in the event of a loss.

With the introduction of the new company law, the provisions on reserves were redefined.

  • 671 OR - legal capital reserve
    • Contributions and subsidies from shareholders.
    • Proceeds realised from the issue of shares in excess of the nominal value and issue costs.
    • Capital gains
  • 672 OR - Statutory retained earnings

If there is a balance sheet profit, 5% of the annual profit must be allocated to the statutory revenue reserve. This reserve must be formed until 50% of the share capital is reached (the legal capital reserve is added to the retained earnings). Holding companies must accumulate the reserve up to 20% of the share capital (including the legal capital reserve).

If there is a loss, this must be offset in the following order in accordance with Art. 674 CO:

  1. with the profit carried forward
  2. with the voluntary retained earnings
  3. with the statutory retained earnings
  4. with the statutory capital reserve

In other words, if a loss has been generated and the retained earnings are not sufficient for offsetting, must any existing voluntary retained earnings can be offset against the accumulated loss. The Board of Directors does not have to propose this offsetting to the Annual General Meeting, as it is mandatory.

The situation is different for the statutory profit and capital reserve. Here, the Annual General Meeting can decide whether these should be carried forward or offset. As there is a right of choice in this case, the Board of Directors must propose a variant to the Annual General Meeting. The annual financial statements are supplemented accordingly with a proposal on the appropriation of earnings. If the annual financial statements are audited by an auditor, the proposal on the offsetting of losses is also part of the audit.

Conclusion:

Since the new company law came into force, not only has the appropriation of profits been slightly adjusted (elimination of the 2nd allocation / "superdividend"), but the offsetting of losses has also been reorganised. It must be checked in each case whether the offsetting requires an application. When applying for a dividend, it must also be checked whether sufficient liquidity is available to maintain the company's operations even after the profit distribution.