What is Distributable profits?

Distributable profits refer to the portion of a company’s profits that can be legally distributed to shareholders in the form of dividends. These profits are determined after accounting for the company’s financial obligations, such as taxes, operational expenses, and retained earnings, and ensuring compliance with legal and regulatory requirements. In Switzerland, the concept of distributable profits is governed by the Swiss Code of Obligations and is crucial for businesses when determining how much profit can be returned to shareholders.

Key Features of Distributable Profits

Calculation of Profits: Distributable profits are typically derived from a company’s net income, which is calculated after subtracting operating expenses, taxes, and any necessary provisions for future liabilities. However, not all of a company’s net income is necessarily distributable, as certain amounts may need to be retained for reinvestment or to meet legal requirements.
Retained Earnings: Companies often retain part of their profits to reinvest in business operations, pay down debt, or build reserves. The remaining profits, after retaining sufficient funds, can be classified as distributable profits.
Legal and Regulatory Considerations: In Switzerland, the company must comply with the legal framework for profit distribution. The Swiss Code of Obligations mandates that a company must set aside certain reserves before profits can be distributed to shareholders. This includes legal reserves, which are a percentage of the profits that must be retained within the company.
Dividends: Distributable profits are primarily used for the payment of dividends to shareholders. The decision on the amount to be distributed is made by the company’s board of directors and approved by the shareholders at the annual general meeting (AGM).

Legal Framework for Distributable Profits in Switzerland

Under the Swiss Code of Obligations, the company must adhere to specific rules when it comes to the distribution of profits:

Reserve Requirements: A portion of the profits must be allocated to legal reserves before any profits can be distributed. These reserves ensure the financial stability of the company and protect creditors’ interests. Companies are required to retain 5% of their annual profits until legal reserves reach a specified threshold.
Limitations on Distributions: If the company’s equity (total assets minus liabilities) is below the required legal minimum or if the company faces financial difficulties, it may be prohibited from distributing profits. This ensures that the company remains solvent and that shareholders do not receive dividends that would jeopardize the company’s financial health.
Board and Shareholder Approval: Once the distributable profits are determined, the decision to distribute them to shareholders as dividends must be approved by the shareholders during the AGM. The board of directors will propose the amount of dividends to be paid, based on the available distributable profits.

Importance of Distributable Profits

Shareholder Returns: Distributable profits are a key way for companies to return value to their shareholders, either through regular dividend payments or special one-time distributions. For shareholders, these dividends provide a direct financial benefit from their investment in the company.
Corporate Financial Health: The level of distributable profits can serve as an indicator of a company’s financial health and profitability. It reflects the company’s ability to generate profits while maintaining sufficient reserves for growth, debt repayment, and other obligations.
Legal and Tax Compliance: Adhering to the legal requirements for the distribution of profits ensures compliance with local regulations, preventing legal issues or disputes over dividend payments. Properly managing distributable profits also helps avoid penalties for failing to retain the required reserves or distribute profits correctly.

In Switzerland, understanding and managing distributable profits is vital for businesses looking to balance returning value to shareholders with ensuring long-term financial stability and compliance with legal obligations.