Dividends are parts of a company’s overall profits that are paid to the company’s shareholders in either cash or kind, such as company shares. This may be seen as a reward or token of gratitude for the shareholders’ investment to the business and their ownership of the company’s shares.
What Counts as Company Profits
The Companies Act of Singapore states that dividends must be paid out of the company’s profits, with this being subject to certain conditions and definitions in order to be considered as such:
- The company’s profits does not include the profits of any other group that the company may be a part of
- When deciding on the amount or rate to be given to shareholders as dividends, the amount of capital each shareholder has paid to the company does not matter. It also doesn’t matter that a company’s total assets are less than the contribution of its shareholders. The only factor that needs to be considered is that the company has a net inflow of income.
- Capital depreciation is not considered a part of profits unless these are being used to mitigate company losses. On the other hand, capital appreciation is a part of profits unless explicitly prohibited by the company’s constitution
- A company is not limited to paying dividends out of the profits earned in the year. The profits from previous years may also be taken into account when paying dividends
- A company may revise its constitution to control and restrict which profits can be considered when paying dividends
How Dividends are Determined
The amount of dividends per share given to shareholders is ultimately determined by the company’s board of directors, who have the power to declare a dividend and propose the dividend rate, but the company’s CEO may influence this decision. It’s worth noting that the schedule of dividend distribution varies from business to business.
Generally, the dividend rate must be proportional to the company’s financial performance and share price at the time. After determining the rate, the company is expected to pass a company resolution to formalize the board of directors’ decision, but the type of resolution will depend on the dividend type. Aside from the resolution, the following accounting documents also need to be prepared:
- Dividend register
- Approval of shareholders
- Minutes of the meeting that the dividends were decided
Types of Dividends
Interim dividends can be declared by the company’s board any time between the company’s two annual general meetings and before the company’s annual profit or less is finalized. These dividends can be paid from the profits of the accounting year, when the dividend has yet to be announced, or from the retained earnings in the profit and loss accounts.
Final dividends are announced after the company’s presentation and reporting of the fiscal year’s financial statement during the annual general meeting. In this situation, the financial and profitability position need to be determined.
Dividends are considered to be exempt from taxation should they satisfy any of the following:
- Dividends are paid to shareholders by a Singapore resident company (excluding co-operatives) in fulfillment of the one-tier corporate tax system
- Dividends come from foreign origins and are received by resident individuals in Singapore. An individual resident in Singapore receiving foreign-sourced dividends from a partnership in Singapore may qualify this individual for tax exemption should some conditions be met
- Dividends come from a Real Estate Investment Trust, except when these were derived from a partnership in Singapore or from carrying out a trade, business or profession in Real Estate Investment Trusts
On the other hand, dividends are considered taxable when they fall under any of the following:
- Dividends were paid by co-operatives
- Dividends come from foreign origins and were derived by individuals through a Singaporean partnership
- Dividends were derived from a partnership in Singapore, or from carrying out a trade, business or profession in Real Estate Investment Trusts
Reporting Dividends in Taxes
Dividends are only treated as income during the year that they are declared payable to the company’s shareholders. Shareholders must declare their taxable dividends on their Income Tax Return as ‘Other Income’, unless the company indicates that they will provide the dividend information to the Inland Revenue Authority of Singapore.
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