How Dividend Declaration & Payments Work in Singapore

How Dividend Declaration & Payments Work in Singapore

Dividends are profits distributed by a company to its shareholders as a return paid on their investment in the company. In Singapore, a company can make dividend payments only if it makes profits. In addition, dividend payments have to be recommended by directors, voted on, and approved by shareholders of a company. But, before dividends can be approved, the company must first make a dividend declaration.

This article provides an overview of how companies in Singapore can declare and pay their dividends.

Singapore Dividend Declaration

The declaration of dividends is an event where the directors of a company announce in detail that dividends will be paid to its shareholders. It is important to note that companies should declare dividends only when they are sure they have profits to pay their shareholders. 

Section 403 in the Companies Act states that any company shall pay no dividend to its shareholders unless they make profits. Furthermore, there are some key points to consider when determining whether dividends can be paid to shareholders:

  • The profits which you will distribute to your company’s shareholders must be derived from the company. Therefore, you must exclude gains from the larger holding group of which your company is a member.
  • It does not matter whether the company’s total assets are less than its shareholders’ initial capital contributions.  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 for dividends to be paid.
  • Capital appreciation is part of profits, even if there are no revenue gains. Therefore, unless prohibited by the company’s constitution, dividends may be paid out of capital gains obtained from the sale of capital assets. However, this only applies if the company’s capital is still intact. Thus, only the increase in the value of capital can be used for dividend payments.
  • Profits may not include capital depreciation unless they are being used to offset such losses.
  • Profits may include profits from the previous year (retained earnings).
  • The company constitution may limit what profits the company may or may not pay as dividends.
  • Shareholders have no unconditional right to receive dividends unless otherwise provided for in the constitution. In addition, they cannot force the company to declare dividends.
  • Profits only need to be available on the dividend declaration date, not when the company pays dividends.
  • Dividends may not be declared after the company is liquidated.
  • Any director or chief executive officer who pays dividends when the company has no profits will have to pay a fine of up to $5,000 or imprisonment for up to 12 months.

 

Types of Dividends in Singapore

There are two main types of dividends a company can pay to its shareholders:

 

Interim Dividend

Interim dividends are distributions to shareholders that a company has declared and paid before determining its full-year earnings (between two annual general meetings). Typically, companies pay interim dividends out of their retained earnings in the profits and loss accounts or the profits of their accounting year.

Final Dividend

Final dividends refer to dividends declared by the company’s directors during an annual general meeting after the company issues its full-year financial statements. In this case, the financial position and profitability position needs to be ascertained.

You may also want to read this related article:

A Guide to Preparing a Company Constitution in Singapore

 

How Dividend Declaration & Payments Work 

Now that you are sure that you will declare and pay dividends. Here are some steps to do these deeds. 

 

Declaring Dividends

First, you will need to prepare the required documents for declaring dividends, such as:

  • Dividend vouchers;
  • Dividend register;
  • Resolution to pay dividends;
  • Shareholders’ approval;
  • Warrants to shareholders;
  • Board meeting minutes (including date, location, who is present, amount of dividends to be paid per share, and the fact that a decision has been made).

 

In general, the board of directors will recommend a specific rate to be paid as final dividends. Then, the company’s shareholders will need to vote on the rate and approve it in the annual general meeting (AGM). Note that the amount of declared dividends cannot exceed the amount stated in the company’s constitution.

As for interim dividends, the decision on dividends to be paid can be taken by the board of directors as long as the company’s profits justify it. These dividends usually accompany the company’s interim financial statements.

 

Paying Dividends

Once the final dividend is legally declared, it is the company’s debt to its shareholders. This debt is payable immediately unless the declaration states that dividends will be paid at a later date. Such a statement cannot be revoked or canceled, nor can the dividend be reduced.

In particular, only final dividends create debt. Interim dividends do not create debt. Having said that, it may be commercially wise for companies to honor their interim dividend declarations to satisfy their shareholders.

There is no dividend limit per se. However, you need to pay attention to how much profit your company gets. In other words, you can distribute all remaining profits after paying taxes and settling losses. Even so, keep in mind that if your company declares and pays dividends without making any profit, your directors could be found guilty of a criminal offense.

Dividend calculation in Singapore

In Singapore, there are a few common steps involved in calculating dividends:

  • Decide how many shares you hold;
  • Determine dividends paid per share (DPS); and
  • Multiply the DPS by the number of shares.

Furthermore, here is what you need to do if you want to calculate the dividend yield:

  • Determine the price of the stock you are analyzing;
  • Then, determine the DPS of the stock
  • Next, divide the DPS by the stock price;
  • Lastly, use the dividend yield to compare investment opportunities.

How often should a company pay dividends?

Most companies pay dividends four times each year quarterly. However, some companies pay dividends twice a year, once a year, or even monthly.

Simply put, there are no set rules regarding how often a company should pay dividends. But, on the other hand, companies have the freedom to set their own policies regarding dividend payments.

 

Dividend Tax Treatment in Singapore

Now you may be wondering whether dividend income is taxable. Overall, shareholders will not be taxed on dividends paid by Singapore resident companies. This is because Singapore adopts a one-tier taxation system, whereby dividends are not subject to tax from the receiver’s perspective.  However, there are some exceptions that dividends are still taxable.

On the one hand, non-taxable dividends include:

  • Dividends Singapore resident companies paid on or after 1 January 2008  under the one-tier corporate tax system except for cooperatives;
  • Foreign dividends resident individuals received on or after 1 Jan 2004. However, if they receive foreign-sourced dividends through a partnership in Singapore, these dividends may be exempt from Singapore tax under certain conditions; and
  • Income distribution from Real Estate Investment Trusts (REITs).

On the other hand, the following dividends are subject to income tax:

  • Dividends paid by co-operatives;
  • Foreign-sourced dividends individuals pay through a partnership in Singapore; and
  • Income distribution from REITs derived by individuals through a partnership in Singapore or from the carrying on a trade, business, or profession in REITs.

For additional information, click here.

 

Dividend Reflection in Singapore’s Company Account

The declaration of dividends leads to the creation of a liability account called a dividend payable account. This means that the company has debt to its shareholders. The value of this liability account depends on the value of the dividends declared and settled by the directors and shareholders.

Once dividends are paid to shareholders, the dividend payable account is written off, and the company’s cash account is credited for the same amount.

 

Conclusion

From all the explanations above, it can be concluded that companies can only pay dividends if they make profits. In addition, before you can pay dividends, you must make a declaration first. If you insist on distributing dividends when the company has no profits, each director of your company will be subject to a penalty according to the Companies Act.

If you have any further questions about dividend payments in Singapore, feel free to contact our experts!

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