Dividend Distribution in a LLC (d.o.o.) in FBiH: When, How, and with What Tax Obligations?

When Are the Conditions Met for Payout of Profit?

Company money is not the owner's personal money. For profit payout to even be considered, statutory and accounting prerequisites must be fulfilled, which your accounting team must precisely determine:

1. Completed and Approved Annual Financial Statement: Payment is made based on official annual financial statements (balance sheet and income statement) showing net profit earned after calculating corporate income tax.

2. Coverage of Prior-Year Losses: If the company has accumulated losses from previous financial years, current-year profit must legally be used first to cover those losses.

3. Formation of Statutory and Charter Reserves: In accordance with the Law on Companies and the company's founding act, the company is required to set aside the prescribed portion into reserves before making a decision on distributing the remaining profit.

4. Maintenance of Liquidity: The payout must not jeopardize regular business operations or the settlement of liabilities toward employees, suppliers, banks, or the state.

Advance Profit Payout During the Year: Why Accountants Don't Recommend It

Payout of profit advances during the current business year carries high financial and tax risks. If a company pays an advance based on interim results and incurs losses or unexpected expenses by year-end, the paid amount loses its classification as a dividend. The Tax Administration may reclassify such a payout as other taxable income, assessing applicable social security contributions and taxes. Therefore, every experienced accountant advises paying out only after the calendar year ends and official final financial statements are approved.

Tax Treatment of Profit Payout in the Federation of BiH

When analyzing tax liabilities, it is important to distinguish the status of the owner to whom profit is being paid:

• Corporate Income Tax: The company first pays corporate income tax at the corporate level at a rate of 10% on the taxable base established in the tax balance sheet.

• Payout to Natural Persons (Residents and Non-Residents): Under current Personal Income Tax regulations in the Federation of BiH, dividends and profit shares paid to natural persons are not subject to personal income tax or social security contributions. Non-resident natural persons do not pay withholding tax in FBiH; instead, they settle their tax obligations in their country of tax residence.

• Payout to Non-Resident Legal Entities (Foreign Companies): When dividends are paid to a foreign legal entity, the domestic company is legally required to withhold and pay withholding tax at a 5% rate, unless a lower rate or exemption applies under an applicable Double Taxation Avoidance Agreement (DTAA), subject to holding proper documentation and a tax residence certificate.

Formal Legal and Accounting Requirements for Profit Payout

Profit payout must be flawlessly documented legally and accounting-wise:

• Decision on Profit Distribution: The general assembly (or sole owner in a single-member d.o.o.) passes a formal decision approving the annual financial statements and distributing net profit.

• Payout Exclusively via Bank Account: Profit payout to natural persons is made exclusively from the company's transaction account to the owner's private account. Cash payouts are strictly prohibited.

• Bookkeeping Entries: Accounting records the transfer from retained earnings to liabilities owed to founders, then closes the liability based on bank statement proof.

Most Common Errors Made by Entrepreneurs

1. Withdrawing money prior to settling tax liabilities and without insight into financial status.

2. Transferring funds from the account without a supporting assembly or founder decision.

3. Transferring funds to a private account during the year as a "loan to founder" intended to be offset later against profit, which constitutes a tax offense without proper agreements and interest charges.

4. Neglecting to cover prior-year losses.

Reliable Accounting and Safe Business Operations

Proper tax planning and legal profit payouts require ongoing coordination among management, legal counsel, and the accounting team. Through our "All Under One Roof" concept, licensed accountants and the experienced bookkeeping team at Poslovnost d.o.o. are at your disposal to verify balance sheets, draft decisions, and safely implement profit payouts without tax uncertainty.