What are Dividends?
Dividends are the distribution of profits by a company to its shareholders. At the end of the financial year, the company’s board will assess the financial status of the company and decides if the company has performed well financially, and distribute payouts to the shareholders as final dividends. If the assessment is done during the financial year, it will be known as interim dividends.
It is important for the company’s director to determine whether to pay their shareholders dividends or keep the money to further invest in the company. Dividend is only payable out of the company’s profits, so the company will need to consider carefully how to use this sum. Shareholders are not entitled to dividends, and they cannot compel the company to pay dividends to them.
Where did the funds for Dividends come from?
Dividends are paid through the company’s profit or reserves; hence if the company has not been making money since the start of the operation, there are no dividends to be paid out. Dividends can be paid as stock shares, but most companies will provide cash dividends to their shareholders.
They are only distributed after the company has taken into account all their losses and any costs, so it will be the remaining sum from the company revenue. Think of it as a form of bonus payout for shareholders who have invested in your company. Dividends are not taxed due to Singapore’s one-tax system.
If there are no profits available to pay for dividends and the director still permitted dividend payout, they will be liable for legal consequences under the general law and company policy.
How many Dividends to distribute to Shareholders?
Dividends are also paid to shareholders according to the shares held by each of the shareholders. For example, Company A has made a profit of S$100,000 after tax in 2019 assuming that there is no loss or profit from previous years, the amount of dividend that the company is able to payout will be S$100,000. Also, assuming there are two shareholders in the same company whereby Shareholder A holds 60% of the shares and Shareholder B holds 40% of shares. Shareholder A will have a payout of S$60,000 while Shareholder B will get a payout of S$40,000 in dividends.
For both interim and final dividends, you will require a directors’ resolution in order to issue the dividends. The Corporate Secretary of the company will be responsible for issuing such resolution after approvals from all shareholders at the end of the financial year (Final) or during the year based on the estimates of the Company’s financial (Interim). The director can determine the dividend rate, and shareholders can vote on and approve the dividends rate.
Taxation on Dividends
As mentioned before, Singapore practices one-tier tax system, hence dividends will not be taxed during the declaration of Shareholder’s personal income tax filing. This is because dividends are profit after paying corporate taxes; hence it will not be taxed again on a personal level.
If your company need any advice on Dividend payout, any support regarding company registration in Singapore or payroll outsourcing, contact us for a free consultation.