How does a company pay dividends in Singapore

We hear so much of this term dividends but we seldom discuss the rules and implications associated with it. As most will know, it is basically profit (or part of it) distributed to the owner(s) of a company at the end of or during a company’s financial year.

What are the types of dividends?

There are mainly 2 types: final dividends and interim dividends.

Final dividends are announced during the Annual General Meeting (AGM) after the company’s financial statements are reported and final profits for the year confirmed. It cannot be cancelled once declared.

Interim dividends, as the name suggests, are announced any time between 2 AGMs. It can take place before the annual profit or loss and the final financial statements are confirmed. It can be paid out of retained earnings or current year profits.

How to declare dividends?

You need to prepare the following documents in preparation for dividend declaration:

  1. Dividend vouchers
  2. Dividend register
  3. Resolution for dividend payment
  4. Shareholders’ approval with signatory
  5. Warrants to shareholders
  6. Minutes of the meeting specifying the location, date and time of the meeting, and details on the declared dividends

For final dividends, the dividend amount and payment form, i.e. cash, shares, options or other properties) is suggested by the directors during the AGM. The proposal will be voted and finalised by the shareholders’ approval. The dividend can then be paid any time after this declaration date.

For interim dividends, the process is similar. The only difference is the decision on the paid dividends can be made by the board of directors alone, as long as the company’s profits justify for it.

Do note there is no limit for dividends as long it does not exceed the final net profit of the company to date.

How is it distributed?

The company’s board of directors will announce in detail of the dividends that will be paid in the form of a dividend declaration. It is important to note that dividends should be given only when the company has made profits.

This is specified in Section 403 in the Companies Act, that no Singapore dividend shall be paid to shareholders of any company except out of profits. Some of the common questions we received from our clients are:

  1. Can dividends be paid out of profits of a larger holding group of companies of which the dividend-receiving company is a member of?

Answer: No, the dividends payable must be profits of its own company.

  1. Is it necessary to maintain paid-up capital before declaring dividends?

Answer: No, the dividends payable must be profits of its own company.

  • Is capital appreciation or gains considered as the company’s profits?

Answer: Yes, as long as the company’s constitution allows such dividend payment.

  1. Can current profits include profits that have been carried forward from previous years?

Answer: Yes, dividends can be issued from retained earnings even if there is no current-year profit

 

In the same section, it is also stated that any violation could lead to a fine of up to S$5,000 or imprisonment up to 12 months for the director or chief executive officer. They are also liable to the company’s creditors to the extent to which the dividends paid have exceeded the profits. If you are a shareholder who received dividends that are wrongfully distributed, talk to us today so we can advise you better.

What is the tax treatment of dividends in Singapore?

Generally, shareholders who received dividends will not be taxed on that dividend income as long it is paid by a Singapore resident company. This is due to Singapore’s one-tier taxation system, where the company’s profits have already been subjected to corporate tax.

To be precise, non-taxable dividends include:

  • Dividends paid by a resident company on or after 1 Jan 2008
  • Foreign sourced dividends received by resident individuals on or after 1 Jan 2004
  • Income distribution from Real Estate Investment Trusts (REITs)

Dividends that are taxable include:

  • Dividends paid by co-operatives
  • Foreign sourced dividends received in Singapore by resident individuals through a partnership in Singapore. In some cases, tax is exempted if certain conditions are met. Talk to us to find out more.
  • Income distribution from REITs derived by individuals through a partnership in Singapore.

What is the accounting treatment?

Upon the declaration of the dividends, dividend payable is credited under a liability account. It is owing to shareholders until full settlement. Once the dividends if fully paid, the dividend payable account is debited by its full amount, together with a credit in the company’s cash account by the same amount.

If you have further questions on the company’s dividend declaration and its implications, feel free to contact us for a non-obligatory discussion.

 

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