Dividends are profits distributed to shareholders as a paid return for their investment into the company by owning shares. Before dividends get to the hands of the shareholders, there needs to be a dividend declaration from the boards of a business.
Let’s find out how a company can declare dividends and also explore other related aspects (types of dividends, dividend tax treatment and dividend declaration rules in Singapore) in this blog.
Table of Contents
1. What is Dividend Declaration?
The dividend declaration is the event in which the board of directors of a company announces in detail that dividends will be paid to its shareholders. It is important to bear in mind that a company should declare dividends only when making sure that there are profits available at that time.
According to Section 403 in the Companies Act, it is regulated that no Singapore dividend shall be paid to the shareholders of any company except out of profits. In other words, dividends must be payable only out of profits. When it comes to profits from which the dividends will be distributed, there are some points that you should also take note:
- It must be the profits of its own company. Profits from the larger holding group of which the company is a member must be excluded
- It is not necessary to maintain paid-up capital to declare dividends as long as there is a guaranteed flow of net income
- Capital appreciation or capital gains arisen from the sale of capital assets may be a part of profits (as long as your company’s constitution allow such dividend payment), while capital depreciation is not
- Profits can include profits that have been carried forward from the previous year (retained earnings)
It is also stated in the same Section that any director or chief executive officer who pays dividends when the company has no profit will be sentenced to a fine up to $5,000 or imprisonment up to 12 months. They will also hold liability to the creditors to the extent by which the dividends paid have exceeded the profits.
Regarding the shareholders who receive wrongful dividends distribution, they hold no liability other than to refund the received amount.
2. Types of Dividends in Singapore
Dividends are paid to shareholders most commonly by cash, but also can be paid under forms of shares or other properties. In general, there are 2 types of dividends: final dividends and interim dividends.
Final dividends refer to the dividends declared during the Annual General Meeting (AGM) after the financial statements being reported and annual profits being ascertained. Such a declaration cannot be revoked or canceled.
Interim dividends are the dividends announced before ascertainment of annual profit or loss and before the release of final financial statements. The declaration of such dividends can take place any time between two AGMs. It can be paid out of the retained earnings in the profits and loss accounts or out of the profits of the accounting year.
3. How to Declare Dividends in Singapore
Some documents need to be prepared for dividend declaration in Singapore:
- Dividend vouchers
- Dividend register
- Resolution to pay dividends
- Shareholders’ approval
- Warrants to shareholders
- A written record of the meeting noting down the location, date, detail on the declared dividends, etc.
In general, the declaration rules in Singapore are not so complex. For final dividends, directors will suggest a rate for the paid dividends in the Annual General Meeting. The final dividends will then be voted and finalized by approvals from shareholders. After the declaration date, the payment can be made immediately or on a later date if it is stated in the declaration.
As for interim dividends, the decisions on the paid dividends can be made by the board of directors as long as they are justified by the company’s profits. These dividends usually accompany the company’s interim financial statements.
There is no limit for dividends. The company can distribute all of the profits tending to pay dividends after tax and loss matters. However, as stated above, it must not declare dividends more than the profits available.
4. Dividend tax treatment in Singapore
One of the most common related questions is whether the income from dividends is subjected to tax. Overall, shareholders will not be taxed on dividends paid by a Singapore resident company. This is due to the fact that Singapore adopts a one-tier taxation system, in which the profits of that company has already been subjected to the corporate tax. However, there are a few exceptions that dividends are still taxable.
To be more specific, on the one hand, non-taxable dividends include:
- Dividends paid by a resident company on or after 01/01/2008
- Foreign dividends received by resident individuals on or after 01/01/2004
- Income distribution from Real Estate Investment Trusts (REITs)
On the other hand, the exceptions that dividends are taxable are:
- Dividends paid by co-operatives
- Foreign dividends received in Singapore by resident individuals through a partnership in Singapore. Nevertheless, there is tax exemption available for these dividends if certain conditions are met. More details here.
- Income distribution from REITs derived by individuals through a partnership in Singapore.
5. Dividend Reflection in Singapore Company’s Account
The declaration leads to the creation of a liability account called dividend payable account. It means that the company is owning debt to its shareholders. The value of this liability account depends on the value of dividends declared and finalized by the board of directors and the shareholders.
When the dividends are paid to shareholders, the “dividends payable” account is removed and the cash account of the company is credited by a similar amount.
6. Key Takeaways
- Dividends are only payable out of profits
- Before dividends being paid, there must be a dividend declaration
- There are two types of dividends: Interim and Final dividends. Each one has different declaration rules.
- In most cases, dividends are not taxed in Singapore, although there are some very few exceptions.
Should you have any further questions on dividend payment in Singapore, feel free to contact our experts via firstname.lastname@example.org for answers.