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If your company has shareholders, you might be considering paying them dividends. In this guide, we’ll explain what dividends are, how they work, the different types of dividends, and how they’re taxed.
What Are Dividends?
Let’s start with the basics: What are dividends? Dividends are the portion of profits that a company shares with its shareholders according to the dividend declaration rules in Singapore. Dividends are a reward to shareholders for investing in the company and having faith in the company to deliver long-term success.
There are four types of dividends that a company can pay its shareholders:
- Cash dividends
The most common type of dividend is the cash dividend that companies pay in cash directly into the brokerage account of shareholders.
- Stock dividends
Sometimes companies pay investors in the form of additional stocks.
- Preferred dividends
Some shareholders own preferred stocks instead of common stocks. Companies generally pay dividends on preferred stock every quarter. However, dividends on these stocks tend to be fixed, while dividend payouts on common stock can change with every payout.
- Special dividends
Companies pay special dividends outside of their regular policy. They share these dividends from the excess cash-in-hand.
- Dividend reinvestment programs (DRIPs)
Stockholders have the option to reinvest their dividends back into the company's stock through DRIPs, sometimes at a discount.
Dividends are only payable out of profits. If your company made a loss, it’s illegal to distribute dividends. If the government finds that your company paid a dividend when there were no profits available, the directors who authorised the payment can be liable for both criminal and civil liabilities. If found guilty, they could face up to 12 months’ jail time and/or a fine of up to S$5,000.
Are Dividends Taxable?
Not all dividends are taxable. In this regard, there are two categories you need to be concerned about: taxable and non-taxable dividends. Taxable dividends include the following:
- Foreign dividends that were received by individuals through a partnership in Singapore
- Dividends that are paid by co-operatives
- Dividends from Real Estate Investment Trusts (REITs) that were received by individuals through a partnership in Singapore or from the carrying on of a trade, business, or profession in REITs
The following is a list of non-taxable dividends:
- Dividends paid to shareholders by a Singapore resident company (except in the case of co-operatives) under the one-tier corporate tax system (more on that later)
- If a resident receives foreign dividends through a partnership in Singapore, the dividends may be exempt from Singapore tax. Income distribution from REITs, except those received by individuals through a partnership in Singapore or from the carrying on of a trade, business, or profession in REITs (see previous section)
- Dividends from share buybacks through Special Trading Counters (STC), dividends from private resident companies and Singaporean dividends from unit trusts
Examples of tax payable on foreign-sourced dividend received in Singapore includes (For the purpose of the ‘subject to tax’ condition):
- The dividend tax, this is income tax levied on the dividend by the foreign country/ territory of source
- The underlying tax, this is income tax paid or payable by the dividend paying company on the income out of which the dividend is paid
To substantiate that the underlying tax has been paid on the income out of which the foreign-sourced dividend is paid, one of the following documents must be submitted:
- Audited accounts of the foreign dividend paying company
- A certification from the bank (through which the taxpayer invested into the foreign dividend paying company)
- A confirmation letter from the foreign dividend paying company that foreign tax has been paid on the income out of which dividends are paid
If you are unable to secure any proof that tax has been paid on the income of the foreign dividend paying company, the ‘subject to tax’ condition will not be considered met.
How Do I Declare Dividends for My Company?
Usually, the company’s directors will suggest a particular amount of money per share to be paid as dividends. Next, the shareholders will vote on this rate in the Annual General Meeting (AGM). If they approve it, these dividends are referred to as final dividends.
Directors can also pay interim dividends to shareholders if they can be supported by the company’s profits. These payments are usually made before both the company’s AGM and the release of its final financial statements. Accordingly, interim dividend payments are accompanied by interim financial statements.
When declaring dividends, you are also required to prepare the following documents:
- The dividend register
- The approval of the shareholders
- The resolution that authorised the payment of the dividends
- The minutes of the meeting in which the company’s directors decided to issue dividends
Once you declare a final dividend and the shareholders approve it, it becomes a debt owed by the company to its shareholders. This debt is immediately payable unless stated otherwise in the declaration. Such a declaration is irrevocable and cannot be cancelled, nor can the dividend be reduced.
It’s important to note that only a final dividend creates a debt. However, even though an interim dividend doesn’t create such a debt, it’s strategically and commercially wise to honour the declaration of an interim dividend in order to keep your shareholders happy.
Lastly, dividends paid out by Singapore resident companies are not an expense for tax purposes. This is because all dividends originate from the company’s profits, which have already been taxed at the corporate level. In Singapore, the corporate tax rate is a flat 17%. To avoid a scenario of double taxation, companies are not taxed again when paying dividends to their shareholders while the dividends are tax-exempt for the shareholders that receive them.
Do All Shareholders Receive Dividends?
First of all, shareholders can never force a company to pay them dividends. It is, therefore, theoretically possible for a company to exist indefinitely without ever paying out dividends to shareholders (although this will probably not make them very happy).
The only exception is with shareholders who own preferred stock. As mentioned earlier, preferred stock is more like a bond instead of a stock because companies usually pay dividends on this type of stock quarterly.
That said, the amount of dividend paid out for preferred stock tends to be fixed, while dividends on common stock change depending on what shareholders approve during the AGM.
When in Doubt, Reach Out!
While we’ve discussed what dividends are, the different types of dividends, how they work in Singapore, how they’re taxed, and the process of declaring them, many corporations still struggle with two key questions: when should we pay our shareholders dividends and how much should we pay them?
These questions are outside the scope of this guide because the answers are different for each corporation. However, Sprout can help guide you and your company in the right direction with the help of our professional accounting services. Our chartered accountants can effectively manage your financial statements with ease and accuracy. Any questions? Contact us with your queries, we’ll respond within 24 hours.