Ordinary General Shareholders’ Meeting
Obligation of Corporations to Hold Them Annually
Dear clients and friends,
We believe it is in your interest to inform you that in April, the deadline set by the General Law of Commercial Companies (LGSM) is met for shareholders of every Corporation to hold an Ordinary General Assembly. For this reason, we find it appropriate to make the following information available to you:
WHAT IS AN ORDINARY GENERAL ASSEMBLY?
The Assembly is the meeting of shareholders at the company’s registered office, for which they must be previously summoned and in which they will deliberate and decide on certain matters of the company.
An Ordinary General Assembly is one that, according to the LGSM, must be held at least once a year[1], within the 4 months following the end of the fiscal year, so that shareholders are informed of the report presented by the administrator(s) including the company’s financial statements for analysis, discussion, and approval.
WHY IS IT IMPORTANT TO HOLD AN ORDINARY GENERAL ASSEMBLY?
The importance of holding this assembly lies in the fact that once shareholders are aware of the financial situation of the company, they can determine the destination of the results obtained, whether they are profits or losses for the year.
If the financial statements show that the company had profits in the fiscal year, shareholders have the right to receive dividends from the company in proportion to their contributions. To distribute dividends among shareholders, the LGSM ESTABLISHES that the ordinary general assembly must approve the financial statements that show the profits. Any distribution of profits made in contravention of this, will not produce any legal effect and both the company and its creditors can demand that the shareholders who received the profits as well as the administrators who distributed them, reimburse such profits to the company.
WHY IS IT FISCALLY IMPORTANT TO HOLD AN ORDINARY GENERAL ASSEMBLY?
It is possible that the tax authority, using its verification powers, checks the compliance with the tax obligations of the taxpayer (company), among them the operations related to the distribution of dividends to the company’s shareholders.
In the event of a review of this type, it will be necessary to present the documentation that accredits compliance with the legal requirements, that is, it will be necessary to present the minutes of the ordinary general assembly in which the company’s financial statements showing profits and the fiscal receipt indicating the amount of distributed dividends and the withheld tax[2] are approved.
Furthermore, the law determines the retention periods for the taxpayer’s accounting documentation in case of a review, establishing that in the case of records issued or received by companies when distributing dividends or profits, they must be kept for as long as the company exists. [3]
Also, it is important to remember that for the documentation presented before the tax authority to have full probative efficacy, it must meet the requirement of “certain date” that is, not only the minutes of the assembly are enough, but it must have been notarized or certified by a public notary, so that the authority can verify that it was carried out at the time stated by the law.
WHAT CAN BE THE FISCAL CONSEQUENCE, IN CASE OF NOT COMPLYING WITH THE LEGAL REQUIREMENTS?
If money was delivered to shareholders without complying with the requirements demanded by law and the tax authority conducts a review, there is a possibility that it determines there was an irregular distribution of dividends or “fictitious dividends” since the tax legislation treats any disbursement that benefits shareholders as a dividend, even if it concerns interest or loans.
The legal consequence for the company in case the tax authority determines fictitious dividends, will be that it must pay at that moment with its updates and surcharges, the tax that should have been calculated, withheld, and paid at the time of the dividend distribution, since the company is the entity obligated to pay the tax on the dividends it distributes, considering an additional rate of 10% if the dividend was paid to a natural person.
The above implies that if the money delivered to shareholders actually corresponds to a dividend distribution, but the legal requirements were not met, the tax that the tax authority determines at the time of the review will have to be paid according to the rates corresponding to the payment of dividends, however, if the money delivered to shareholders is not for dividends, but rather corresponds to a loan or the payment of interests, when considered as a dividend higher tax rates than its legal nature will be applicable.
CAN I HOLD THE ASSEMBLY BY REMOTE MEANS?
As of the reform to the LGSM on October 20, 2023, it is possible to hold shareholder assemblies using electronic, optical, or any other technology, just as if they were in-person assemblies, provided that the company’s bylaws have been amended to include the possibility of holding assemblies by remote means.
For the above, we are at your service to assist you in the preparation and drafting of the necessary documents to comply with the obligation of every corporation to hold an Ordinary General Assembly of shareholders, as well as our firm could carry out a corporate audit in order to determine the status of the company/companies in relation to their obligations in this area.
AS ALWAYS, WE REMAIN AT YOUR SERVICE TO DISCUSS ANY ISSUE RELATED TO THIS INFORMATION
[1] General Law of Commercial Companies, Article 181.
[2] Income Tax Law, Articles 140 and 164,
[3] Federal Fiscal Code, Article 30″
