If you run a business in Singapore you have probably thought about paying yourself dividends. The process can be a little confusing, so we’ve put together a step-by-step guide on how to pay yourself and other shareholders corporate dividends. There are also some important rules that you need to follow when paying dividends in Singapore. If you breach these rules, you can incur serious legal liability and even imprisonment.
- When can I pay dividends?
- What types of dividends are there?
- How do I declare dividends?
- What are the implications of declaring a dividend?
- Important facts about declaring dividends
- How are dividends taxed in Singapore?
- Do dividends create a corporate tax shield?
When can I pay dividends?
You can only pay dividends if your company makes a profit.
You cannot pay dividends if your company has made a loss. Doing so is a crime, which can create both criminal and civil liabilities!
Criminal liability for illegal dividend payments:
Under Section 403(2) of the Companies Act, the illegal payment of dividends is punishable by up to 1 year in prison, and/or a fine of up to $5,000.
Civil liability for illegal dividend payments:
On top of criminal punishments, directors who approve dividend payouts when there are no profits can also be liable to their company’s creditors for any debts owed. Directors can be held personally liable for these debts, meaning that creditors can claim the directors’ personal assets (e.g. house, car, bank savings, etc.) to repay money that’s owed.
Also, shareholders can also sue directors who approve illegal dividend payments. These lawsuits can allege breach of fiduciary duty or negligence. If the director(s) being sued lose their case, their personal assets can be claimed by shareholders to repay damages that are awarded by the Courts.
These riminal and civil liabilities can follow directors even after directors leave their positions. Unless you want to pay huge sums of money from your own pocket, don’t declare dividends illegally!
What types of dividends are there?
The two types of dividends in Singapore.
These are dividends declared during the company’s AGM, after the company’s financial statements have been shared, and annual profits have been confirmed for the year. Once a final dividend has been declared, it cannot be canceled or modified in any way.
These are dividends declared before a company’s AGM is held, which also means that animal financial statements have not been confirmed for the year. Interim dividends can be declared any time between two AGMs.
How do I declare dividends?
Step 1: Have the board of directors declare a dividend payment
The Board of Directors should declare that dividends should be paid in this particular year, and state exactly how much in dividends should be paid.
Step 2: Pass an ordinary resolution to approve the dividend payment
Prepared a written resolution stating how much dividends are to be paid out. Organise a shareholders meeting at least 14 days in advance. If you receive at least 95% shareholder approval you may hold the meeting at a date earlier than 14 days in advance.
At the meeting, put the resolution to pay dividends to a vote. Since this is an ordinary resolution, you must receive at least 50% of all shareholders’ votes. If you receive at least 50% of the votes the ordinary resolution has passed. You may now proceed to pay out the declared dividends.
Step 3: Prepare the dividend voucher, and pay the dividend
A definite voucher is basically a dividend receipt. It helps shareholders and the company keep documentary evidence that dividends were paid and received. Dividend vouchers should state:
- Name of shareholder receiving dividend
- Address of shareholder receiving dividend paragraph name of company issuing dividend
- Address of company issuing giving you paragraph date of dividend paid
- Never shares held by shareholder receiving do you paragraph dividend payment cash a
- Total dividend paid
- Signature of official company officer usually a bold director
Send the dividend voucher to each shareholder who is receiving a dividend when you make the payment.
What are the implications of declaring a dividend?
The implications differ, depending on whether you’re declaring a final dividend, or interim dividend.
Declaring a final dividend creates a legal obligation to pay shareholders. A final dividend is a debt. Therefore, if you’ve declared a final dividend, you cannot simply renege on your declaration. You also cannot reduce the final declared dividend.
Only final dividends create a legal debt. Interim dividends do not create debts so interim dividend can be Revolt canceled all modified without the same degree of legal entanglement. of course changing declared and trim dividends can leave shareholders quite upset so it is best to stick to declared interim dividend amounts.
Additional facts about declaring dividends:
Shareholders and their right to receive dividends:
Shareholders do not have the right to demand dividends. Unless the company’s Constitution allows shareholders to demand dividends (which would be a very strange exception), shareholders cannot force a company to pay them dividends. For instance if a shareholder has a 10% ownership stake, that shareholder cannot simply demand 10% of the company’s profits simply because he owns a portion of the company. The Board must first declare dividends, and then a majority of shareholders must agree to pay out dividends, as outlined in the steps above.
Availability of profits:
Profits only need to be available on the date that the dividends were declared. Profits do not need to be available at the time that dividends are paid.
Dividends and liquidation:
If the company is insolvent and is being liquidated, dividends cannot be paid. Paying out dividends would prejudice the rights of debt holders while favoring Equity holders.
How are dividends taxed in Singapore?
Dividends are generally exempt from tax in Singapore. This makes running a business in Singapore particularly attractive.
Do dividends create a corporate tax shield?
No. Dividends are paid out of net income after tax. Dividends are not an expense line item, so they do not reduce your Earnings Before Interest and Taxes (EBIT). Therefore, dividends do not reduce your corporate tax burden.
Remember to protect your business and directors:
It is vital that you protect your company from the myriad of business risks that exist. A business lawsuit could cost you hundreds of thousands to millions of dollars. A fire at your business premises could wipe out hundreds of thousands of dollars in investment. A slip and fall by a customer while in your business premises could result in expensive personal injury claims. You should also protect your company directors and officers – any lawsuit targeting them would immediately expose their personal assets (a real nightmare scenario!)
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