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Dividend Payments in a Polish sp. z o.o.: Legal Regulations, Conditions, Taxes and Risks

In this material, we present an expert overview of the rules for profit distribution (dividends) in a Polish spółka z ograniczoną odpowiedzialnością (sp. z o.o., the equivalent of a limited liability company). It covers the current provisions of the Kodeks spółek handlowych (KSH), the conditions and procedure for dividend payments (including advance dividends), the tax consequences for shareholders, the risks of unlawful profit distributions, as well as a comparative analysis of dividends with other ways of extracting income from a company.

Legal Basis and Conditions for Profit Distribution (Dividends)

Right to dividends. Shareholders (owners of shares) of a sp. z o.o. have the right to a share in the company’s profit, calculated for the financial year and confirmed by the annual financial statements, if the general meeting of shareholders has adopted a resolution to distribute that profit as dividends. This right is guaranteed by art. 191 KSH and cannot be entirely excluded by the company’s articles of association; however, the articles may provide for preferential dividends for certain shares (for example, entitlement to up to 150% of the usual dividend amount for a preferred share). As a general rule, the dividend is distributed in proportion to the shareholders’ holdings, unless otherwise (e.g. the existence of preferred shares) is explicitly provided in the articles.

Necessary conditions for dividend payment. According to law, dividends can be paid only when a number of formal conditions are met:

Only after compliance with all the above steps does the company acquire the right to pay out dividends to the shareholders. It should be borne in mind that in larger sp. z o.o. companies the annual financial statements are subject to an audit before approval (if in the preceding year the company exceeded at least two of the criteria specified in art. 64 of the Accounting Act – for example, >50 employees, balance sheet > €2.5 million, revenue > €5 million). For small and medium-sized companies an audit is generally not mandatory, but the annual financial statements must still be prepared according to Polish accounting standards and approved on time.

Procedure for adopting the resolution and payment date. The resolution on profit distribution is usually adopted at the ordinary general meeting of shareholders, which by law must take place no later than 6 months after the end of the financial year[5]. Typically, for companies following the calendar year as their financial year, such a meeting is held by June 30 of the following year.

In the resolution, the shareholders may specify the date on which the right to receive the dividend is determined (the so-called dzień dywidendy – the dividend record date) and the date of the actual payment. By default, unless otherwise provided in the articles of association, the right to the dividend is held by those who are shareholders on the day the profit distribution resolution is adopted. The articles may authorize the meeting to set a different record date, but not later than two months from the date of the resolution. The deadline for the dividend payment is determined by the resolution itself; if it is not specified, the dividend must be paid without undue delay after the record date.

It is important to note that before distributing profit as dividends, one must ensure that the company has no uncovered losses from previous years and that its share capital has not been diminished by past losses. If prior losses have partially or entirely eroded the capital, then the profit earned for the year must first be used to replenish the share capital to its original amount (in accordance with art. 189 §2 KSH). Only the profit remaining after covering those losses and any mandatory allocations may be distributed to shareholders as dividends.

Limitations on the Dividend Amount and Calculation of the Maximum Distribution

Polish law imposes a strict limit on the amount of profit available for distribution as dividends – this is to prevent the illegal extraction of capital beyond the profit actually earned. According to art. 192 KSH, the amount designated for distribution among shareholders cannot exceed the net profit of the last financial year, adjusted by several factors:

Thus, the maximum allowable dividend amount is effectively last year’s net profit + distributable reserves from previous years – losses – own shares – mandatory allocations. For example, if the financial year yielded a net profit but the company has uncovered losses or obligations to replenish capital, the amount available for dividends may turn out to be zero or significantly lower than that year’s profit. Exceeding this limit is not permitted – paying dividends above the calculated amount would violate the KSH and is considered an unlawful distribution of profit.

It should be emphasized that paying dividends out of capital (i.e. when there is no sufficient profit) is impossible in a sp. z o.o., except via a special procedure of reducing the share capital. Any distribution of funds to shareholders made in breach of the law or the articles (for example, without profit, without a proper resolution, or in excess of the permitted amount) is regarded as improper and triggers an obligation to return the money to the company, as discussed in detail later (see Risks and Liability section).

Advance Dividends (zaliczka na poczet dywidendy)

Polish law allows the company to pay shareholders advances on dividends – i.e. interim payouts from the expected profit of the current year, before the financial year is completed and the annual result is formally approved. This possibility is provided for sp. z o.o. by arts. 194–195 KSH, however the payment of advance dividends is only possible if strict conditions are met.

Conditions for paying an advance on dividends (zaliczka na dywidendę) for a sp. z o.o. are as follows:

All of the above conditions must be satisfied in aggregate before a decision on an advance dividend is made. The management board of the company, once given such authority by the articles, decides independently on the payment of the advance – however, even if all conditions are met, the board is not obliged to do so, but rather evaluates its advisability (payment of an advance is a right, not an obligation). The decision is usually documented with minutes of a board meeting, indicating the advance amount and the payment date.

Limitations and risks of advance payments. An advance on a dividend is a payout of anticipated profit, so the law safeguards the company in case the expectations are not borne out. If by the end of the financial year it turns out that the company did not earn sufficient profit – for example, it incurred a loss or the profit is less than the advances paid – the shareholders are obliged to return the advance in whole or in part. According to art. 195 §1 KSH, if the year ended in a loss, the entire advance must be returned; if the actual annual profit is smaller than the total advances paid, then the portion of the advance exceeding the shareholder’s share of the yearly profit must be returned. Thus, shareholders bear the risk: an advance is not final income, it is subject to recalculation after the year’s end. In practice this means advance dividends are used cautiously. Small and medium-sized sp. z o.o. companies usually avoid advances due to the complexity of the conditions and the risk of needing to return the funds, preferring to pay dividends after the year is closed. However, for some companies an advance can be useful – for example, to distribute a portion of profit in the middle of the year.

It is important to remember that the failure to meet even one of the conditions (for instance, paying an advance when there was no profit in the previous year, paying above the limit, or without the appropriate provision in the articles) is equivalent to a violation of the law. Such a payment is treated as an unlawful withdrawal of funds and entails consequences analogous to the payment of an illegal regular dividend (obligation of return, management’s liability, etc., see below).

Tax Consequences of Dividend Payments

Double taxation of profit and tax rate. Dividends received by shareholders of a Polish sp. z o.o. are classified as income from capital and are subject to a flat 19% tax. This tax is withheld by the company upon payment (a withholding tax mechanism, WHT) and remitted to the tax authority[20]. For shareholders who are Polish resident individuals, the 19% rate is final (it satisfies their personal income tax obligation, similar to the tax on interest, etc.). Thus, the profit of a sp. z o.o. is effectively taxed twice: first at the company level by corporate income tax (CIT, standardly 19%), and then at the shareholder level upon distribution. The company paying the dividend acts as the tax remitter (withholding agent) and transfers the 19% withheld to the state budget, paying out the net amount to the shareholders.

Note: Since 2019, a reduced CIT rate of 9% has been in effect for small companies in Poland, but only if certain conditions are met (a revenue cap and other criteria). However, this does not affect the taxation of dividends – the withholding tax rate on dividends remains 19%, regardless of the company’s CIT rate.

Dividend tax exemption for companies (EU directive). The law provides an important exception to the taxation of dividends. If the recipient of dividends is another company (a legal entity), under certain conditions the payments can be exempt from withholding tax pursuant to Poland’s implementation of the EU Parent-Subsidiary Directive. According to art. 22(4) of the CIT Act, no tax is withheld on income from shareholdings (dividends) if all of the following conditions are simultaneously met:

If all the above conditions are fulfilled, the Polish sp. z o.o. does not withhold the 19% tax when paying a dividend to such a company. In effect, the dividend becomes untaxed in Poland (though the recipient might have tax obligations in its own country). For example, dividends paid by a Polish subsidiary to its parent company in Germany, where the parent has a ≥10% stake held for more than 2 years, are exempt from withholding tax in Poland.

However, the above exemption is only applicable to recipients from EU/EEA countries. If dividends are paid to a non-resident company from outside the EU/EEA, the exemption under art. 22(4) CIT cannot be used. In such cases, the taxation is governed by the bilateral double taxation treaty (DTT) between Poland and the respective country. As a rule, the Polish company must withhold tax at the base 19% rate, unless the recipient has beforehand provided a certificate of tax residence and requested the application of a reduced rate under the tax treaty (usually treaties set a WHT rate of 5% or 15%, depending on the ownership stake). For foreign shareholders who are individuals, a treaty-reduced withholding rate (often 15%) may likewise apply, or otherwise the standard 19% if no treaty relief is available. It is important to ensure timely delivery to the company of a residence certificate and any other required statements (inne wymagane oświadczenia) to apply such relief. Otherwise, the company by law will withhold the standard 19%, and the foreign recipient would then have to attempt to recover the excess tax via a refund procedure.

Additionally: Polish tax legislation since 2019 has introduced special WHT procedures for large payments – if the amount of income paid to one recipient exceeds 2 million PLN in a year, then even if reliefs apply, formally the tax must be withheld, and only afterward can the company or recipient apply for a refund. To avoid this, in practice a special declaration of due diligence (o dochowaniu należytej staranności) by the payer is submitted or an official opinia o zastosowaniu zwolnienia (opinion from the tax authority on the application of the exemption) is obtained. These procedures are complex and beyond the scope of this overview, but they need to be taken into account when paying bardzo wysokie dywidendy (very high dividends).

Taxation under special regimes. Note that individual shareholders cannot benefit from the EU directive exemption: even if they hold more than 10%, any dividends paid to them are always subject to 19% tax (since the relief is only intended for inter-corporate payments). Moreover, shareholders do not pay social security contributions (ZUS) on dividends received – dividends are not considered remuneration for work, but constitute income from capital. If a sp. z o.o. is using the special “Estonian CIT” regime (a system in which tax is paid upon profit distribution), then upon paying dividends a somewhat different tax situation arises: in addition to the withholding tax, a portion of the previously paid lump-sum tax (ryczałt) by the company can reduce the amount of tax to be withheld. This regime has its own rules which should be studied separately. Here, we have described the standard taxation system.

Risks and Liability in Case of Violating Dividend Payment Rules

Payment of dividends in violation of the established requirements (failing to follow KSH procedures or paying above the allowed amount) is treated by law as an unlawful distribution of profit. This leads to serious consequences for both the shareholders who received such payments and the persons who decided to make the payment.

Obligation to return unlawfully received amounts. Article 198 §1 KSH explicitly provides that a shareholder who, contrary to the law or the provisions of the company’s articles, received any payment from a sp. z o.o. is obliged to return it to the company. “Payment” here is understood not only as an outright dividend, but any amount paid to a shareholder without legal basis (for example, if profit was distributed without a shareholders’ resolution, an advance was paid without meeting the conditions, amounts were paid above the permissible limit, etc.). The return must be made for the full amount of the improperly received sum.

Liability of the management board (company officers). In addition to the receiving shareholder, the members of the company’s governing bodies who were responsible for such a payment also bear liability. Under the same art. 198 §1 KSH, the members of the bodies responsible for the payment are jointly and severally liable with the recipient for the return of the funds to the company. In simple terms, the company has the right to demand the return of the money either from the recipients or from the management board members (directors) who allowed the unlawful distribution, or from both[35]. Joint and several liability means that the company can, at its discretion, require the entire sum back from the recipient, or from the responsible officials, or from them jointly. This motivates the management board to strictly observe the rules when distributing profit.

Additional consequences. The law stipulates that if neither the shareholder nor the culpable board members are able to return the payment (for example, if the shareholder turned out to be insolvent, and as a result of the payout the company’s assets fell below its share capital), then the other shareholders of the company may have to bear subsidiary liability for the shortfall – in proportion to their shareholdings. This rule (art. 198 §2 KSH) is aimed at protecting the company’s creditors: the share capital of a sp. z o.o. must be covered by assets, so ultimately all shareholders are responsible for replenishing the “hole” caused by the unlawful withdrawal of funds. Moreover, neither the shareholders nor the officers can be released from the obligations to return such sums – not by any resolution of the company or agreement (art. 198 §3 KSH). Claims for the return of unlawfully paid dividends are subject to a statute of limitations of 3 years from the date of payment. If it is proven that the recipient was consciously aware of the illegality of the payment (i.e. acted in bad faith), then a claim may be brought against that person even after the 3-year period has elapsed.

Hidden profit distribution. It is not uncommon in private companies to feel tempted to bypass the formal restrictions by channeling a payment to a shareholder under another guise. However, such schemes are fraught with reclassification and sanctions. The Polish tax authorities pay close attention to transactions between a sp. z o.o. and its owners, especially if payments are made outside the dividend procedure. If the company makes payments to a shareholder under the guise, for example, of an inflated remuneration under a contract or a zero-interest loan, this can be viewed as a concealed withdrawal of profit. In 2023, provisions on “ukryta dywidenda” (hidden dividends) in the standard CIT system were planned (and later repealed), but the concept itself remains: essentially, expenses incurred by the company for the benefit of a shareholder that are not justified by genuine business necessity can be disallowed for tax purposes and treated as a profit distribution. Such situations are monitored particularly strictly under the “Estonian” CIT regime, where the concept of ukryte zyski (hidden profits) directly applies. Hidden profit in the context of the lump-sum corporate income tax (Estonian CIT) refers precisely to providing any material benefit to shareholders or their affiliated entities outside of an official dividend[39]. For example, paying an excessively high compensation to a shareholder (not corresponding to the market value of their labor or services), purchasing the shareholder’s personal assets at the company’s expense, or providing them an interest-free loan without a business necessity – all these can be classified as hidden profit distribution with corresponding tax consequences (imposition of a 19% tax, denial of expense deductibility, etc.). Thus, attempts to circumvent dividend restrictions by disguising payouts as company “expenses” are risky.

Aside from tax risks, unlawful payouts can have other negative consequences. If, as a result of an improper profit distribution, the financial condition of the company deteriorated (for example, the company became insolvent), the members of the management board may face liability toward creditors. In extreme cases, a criminal-law evaluation is possible as well (for instance, intentionally causing insolvency by siphoning off funds could be classified as a crime). Generally, however, the main consequence of an illegal dividend payment is civil liability: the obligation to return the amounts and compensate any losses to the company. Therefore, it is crucial for owners of a sp. z o.o. to strictly adhere to the established rules of profit distribution.

Dividends and Alternative Ways of Withdrawing Profit from a sp. z o.o.

A dividend is not the only way in which a shareholder (owner) can derive income from their sp. z o.o. Below are the main alternatives and how they differ from dividends:

Remuneration for work (salary, management board contract). A shareholder of the company can at the same time be in an employment or civil-law relationship with it – for example, being employed as a director, serving on the management board on the basis of a resolution of appointment (uchwała o powołaniu) with remuneration, or performing certain work/services under a contract for specific work or a mandate contract (umowa o dzieło / umowa zlecenie). In such cases, the company pays this person compensation as an employee or contractor, rather than as a shareholder. The advantage is that the amount paid is a business expense for the sp. z o.o. and reduces its taxable profit (in contrast to a dividend, which is paid out from net profit). However, salary or contract remuneration is subject to personal income tax at rates of 12%/32% (or other applicable rates depending on the type of contract) and usually requires the payment of social security contributions (the full ZUS package for employees, or at least health insurance for management board members receiving remuneration under an appointment). Thus, paying a large amount of income to a shareholder as salary results in progressive tax rates and significant contributions, but this approach provides a regular payout (monthly) and allows the company to deduct it as an expense. The choice between a dividend and, for example, a salary often depends on specific calculations: a salary lowers the company’s profit and its CIT, but increases the recipient’s burden with personal income tax and social charges, whereas a dividend is paid from profit that has already been taxed at the company level, yet the dividend itself is subject to a single relatively low flat tax and no contributions.

Civil-law contracts and services (B2B cooperation by the shareholder with the company). Owners of a sp. z o.o. often provide professional services to their company as external contractors – for example, through their own sole proprietorship (jednoosobowa działalność gospodarcza) or under service contracts. In such cases, contracts for remunerated service provision are concluded between the company and the owner acting as an independent entrepreneur, and the company pays the remuneration not as to its shareholder, but as to an outside contractor. These payments are also recorded as expenses of the sp. z o.o. and reduce its profit. The tax consequences for the recipient depend on the tax regime of their activity: this could be a 19% flat tax for a sole proprietor, an 8.5% lump-sum tax (ryczałt) on revenue (for rental income, for example), or the general progressive tax scale. In any case, social security contributions usually apply (within the individual’s business or for the contract). A crucial point is the arm’s-length nature of the remuneration: the rate of payment for the shareholder’s services must correspond to the market price as if similar services were provided by an unrelated contractor. Otherwise, the tax authorities may deem an excessive payment to be a hidden profit distribution. The arm’s-length principle is critically important for transactions between the company and its owner. In general, B2B compensation or one-off service contracts are useful for covering specific work or services provided by the shareholder, but they should not be used to divert profit beyond reasonable limits.

Renting a shareholder’s property to the company. Another way to withdraw funds is when a shareholder provides the use of their personal property to the sp. z o.o. for a fee. For example, an owner might lease to the company an office, warehouse, equipment, or vehicle that they own. The company will pay rent, counting it as an expense, and the shareholder will receive rental income (which can be taxed at a preferential 8.5% rate in the form of a ryczałt lump-sum tax on rental income up to a certain limit). This method is also entirely lawful, provided that the rent rate corresponds to market value. If the company pays the shareholder clearly more than the market rent for similar property, the difference may be regarded as a hidden distribution of profit. With a sensible approach, however, renting allows the shareholder to “monetize” personal assets while simultaneously providing the company with needed resources. It is important to execute a written lease agreement and to comply with all tax formalities (withholding tax at source if the owner is a foreign resident, or the individual owner’s own tax payments in Poland).

Loan to the shareholder from the company. A sp. z o.o. providing funds to its shareholder in the form of a loan is a common way to temporarily take money out of the business. The law does not outright forbid giving loans to shareholders, provided it does not harm the company. However, from the perspective of profit distribution, a loan is not income – the shareholder is obliged to return the funds received per the loan terms. If a loan is granted interest-free or on conspicuously favorable terms, the tax authorities may adjust the conditions to market levels (for example, by assessing the company with a non-operating income equal to the foregone interest). A more serious danger arises when a formal “loan” is not repaid within a reasonable time or is repeatedly extended with no intention of repayment – then regulators may treat it as an effective profit withdrawal masked as a debt. This is especially relevant under the Estonian CIT regime: while there is no direct prohibition on loans there, an unpaid loan to a shareholder after a certain period can fall under the definition of ukryte zyski (hidden profits) subject to taxation. Moreover, if the sp. z o.o. becomes insolvent, large outstanding loans to shareholders can be challenged by creditors or a bankruptcy trustee as transactions harmful to the company’s interests. Therefore, loans should be used sparingly: they are suitable for short-term financing of a shareholder’s personal needs, but should not replace dividends. A prudent practice is to set interest at an arm’s-length rate and to actually have the funds repaid on schedule.

Conclusion: A dividend is the only legitimate way to distribute the net profit earned by the company among the owners in proportion to their shares. The alternative methods (salary, fees, rent, loans, etc.) serve different purposes – compensating a shareholder’s labor, covering their expenses, or providing them use of assets. These alternatives can be part of an overall strategy for returning value to the owner, but each such transaction must have its own justification (work performed, service rendered, asset provided, etc.) and be on market terms. Unlike dividends, the alternative payouts usually reduce the company’s profit (and thus its CIT) and are immediately burdened with tax for the recipient as income from employment or business activity. A dividend, by contrast, is only paid if profit exists and after the company has paid CIT on that profit, but the dividend itself is subject to a relatively low fixed tax and no social contributions. In practice, owners of a sp. z o.o. often combine these approaches: for instance, they set themselves a reasonable remuneration for work (to provide a regular income and reduce the CIT base), and distribute the significant remaining profit once a year as dividends. The key is simply not to abuse the alternative schemes in violation of the law – Polish legal and tax regulations (including transfer pricing and anti-avoidance rules) are designed to prevent turning such payouts into a hidden profit distribution. By maintaining balance and complying with the law, a sp. z o.o. owner can legally and efficiently receive income from the business while minimizing risks.

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Dividend Payments in a Polish sp. z o.o.: Legal Regulations, Conditions, Taxes and Risks