Dividend Payments Guide for Singapore Business Owners
Have you just started a new business? Are you wondering whether you can pay dividends to your shareholders?
Here is a comprehensive guide to paying dividends, covering all aspects from whether you can pay dividends, to how to go about doing so.
Can You Pay Dividends?
Dividends are only payable out of profits. Hence, you should only declare dividends when you are sure that your company has profits which you can pay dividends from.
What constitutes profits?
- This refers to the profits of the company, and not the profits of any group that the company is a part of.
- It does not matter whether the total assets of the company are less than the original capital contribution of the shareholders. As long as there is a net inflow of income, the paid-up capital (i.e. the capital subscribed by the company’s shareholders) does not have to be maintained in order for dividends to be paid.
- Capital appreciation is part of profits, even if there are no revenue profits. Hence, unless prohibited by the company’s constitution, dividends may be paid out of capital gains realised on the sale of capital assets. However, this only applies when the capital of the company is intact. Thus, only the increase in value of the capital may be used for dividend payment.
- Profits do not include capital depreciation, unless they are being used to offset such losses.
- Profits can include past-year profits that have been carried forward. Hence, dividends need not be paid out from profits earned in the same year. However, if such retained profits have been expended so as to become unavailable for distribution, such as to replace previously lost capital or make up for asset depreciation, dividends cannot be declared from them.
- The company’s constitution might restrict what profits may or may not be paid out as a dividend.
Apart from considering whether you have enough profits to declare dividends, there are also other factors which ought to be noted:
- Shareholders have no unconditional right to receive dividends unless otherwise specified in the constitution. A shareholder cannot compel a company to declare dividends.
- However, the consistent refusal of the majority shareholders to declare dividends when profits are available may amount to unfairness to minority shareholders which justifies relief. This is especially if the majority is being remunerated in some other way.
- Profits need only be available on the date of declaration of dividends, not at the time the dividends are paid.
- Dividends may not be declared after the company has gone into liquidation.
How Do You Declare Dividends?
Now that you have decided you can declare dividends, how should you go about it?
Generally, directors will recommend a particular rate to be paid as dividends, which will be voted on and approved by shareholders in the company’s Annual General Meeting (AGM). Such dividends are referred to as final dividends. If the company has adopted the Model Constitution prescribed under the Companies Act without modification, the amount of dividends declared cannot exceed the amount recommended by the directors.
Nevertheless, directors may pay interim dividends as appears to be justified by the company’s profits. These dividend payments are typically made before a company’s AGM and the release of its final financial statements, and usually accompany the company’s interim financial statements.
What Happens When You Declare Dividends?
Once a final dividend has been validly declared, it is a debt owed by the company to its shareholders. This debt is immediately payable unless the declaration states that the dividend will be payable at a later date. Such a declaration cannot be revoked or cancelled, nor can the dividend be reduced.
Notably, only a final dividend creates a debt. An interim dividend does not create a debt. That said, it may be commercially prudent for companies to honour their interim dividend declarations to keep their shareholders happy.
Moreover, dividends are not an expense for tax purposes. Singapore adopts a one-tier taxation system, whereby dividends are not subject to tax from the receiver’s perspective. The funds from which dividends are paid, namely the company’s profits, have already been subjected to corporate tax. Companies are hence not taxed again when paying dividends.
What Happens If You Paid Dividends When There are No Profits Available?
Consequences for directors
If a dividend is paid when there are no profits available, directors who had permitted such a payment may incur both criminal and civil liabilities.
Every director who wilfully paid or permitted the payment is guilty of a criminal offence under section 403(2) of the Companies Act and shall be liable on conviction to a fine of up to $5,000 or up to 12 months’ jail. The director would also be liable to the company’s creditors for the amount of debts owed to them to the extent that the dividends paid exceeded the available profit.
To be found guilty, the director must have known, at the time that the dividends were declared, of circumstances that show there had been insufficient profits to properly declare dividends.
Consequences for shareholders
Generally, there is no liability for shareholders who have received wrongful payment. However, shareholders who receive dividends knowing that there are no profits which the dividends could have been paid from will likely be liable to refund those dividends.
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