Now that your company has made a good profit, you are thinking about how to distribute the same to your shareholders.
Before we go any further, let’s make a special announcement: Tianlong Services provides matchless online accounting services in Singapore and beyond! Just so you know.
Now that you know, this article will delve into all the nitty-gritty things you need to be acquainted with when it comes to dividends in Singapore.
What Does the Law Say About Dividends?
The main legislation that regulates how companies conduct their day-to-day operations in Singapore is the Companies Act (“CA”).
The Companies Act provides that any amounts recommended by the directors should be paid by way of dividends and the payment of a dividend must be made out of profits.
The Companies Act is silent with respect to the other aspects of dividends, such as naming the dividends.
In practice, companies name dividends as “Special Dividend’; “Interim Dividend”, “Final Dividend”, etc. Profit may be held in reserve in order to strengthen the company’s financial position or it may be distributed among the shareholders. This distribution usually takes the form of a dividend, which is a share of the profits whether at a fixed rate or otherwise, allocated to the shareholders of the company.
It is also important to note that the payment of dividends and the entitlement to dividends are also largely governed by the constitution of your company.
Entitlement to Dividends
Let’s be crystal clear here.
Any company incorporated in Singapore that has shareholders MUST, without any deviation or unscrupulous tricks, pay dividends to its shareholders! There is no way around it.
When you pay shareholders their respective dividends by the book, you are actually compensating them for the shares that they already own in your company.
Through experience, it is evident that most shareholders in Singapore look forward to receiving their quarterly dividends even more than their monthly salary.
The general entitlement to dividends depends upon the company’s constitution, which normally provides that dividends are declared and paid up consistent with the amount that was paid on each share.
The prima facie rule is that the court distances itself from any internal affairs of companies pertaining to the division of profits among shareholders. This is because any intervention by the courts could bring about questionable internal management issues that only the shareholders can address in their own capacity.
As a company owner or shareholder, you need to acknowledge that when you make any decisions internally, the court will have very minimal or no jurisdiction to control or evaluate it. This means that, for instance, the courts cannot say whether your company provided fair or workable dividends to its shareholders, or the reserve fund was appropriately necessary.
Such questions may arise but it is upon your shareholders to make a concrete decision about them in keeping with any directions or restrictions outlines in the constitution of your company.
However, once a dividend has been declared by a company, such dividend then becomes a debt owed by the company to the shareholders. Such debt should be paid immediately unless the declaration of the dividend specified a different payment date.
The declaration of dividend may or cannot be subsequently cancelled, revoked, or amended to reduce the dividend.
Forms of Dividend Payments
There are a number of forms of dividends that companies use to pay shareholders. It is also important to note that most dividends are usually expressed as percentages.
Dividends may be paid anytime, so long as legal conditions are met for their distribution, in cash or in other forms. For example, shares which are fully paid up may be issued to shareholders.
Although most constitutions allow a distribution in specie, note that in the absence of an express authority in the constitution, a company must pay dividends in cash. Without the authority of its constitution, a company may not, for example, pay dividends by distribution of shares or debentures in another company.
The method of payment of dividends, which is contained in the constitution, may vary from 1 company to another. Normally, the constitution provides that the directors may recommend a particular rate of dividend. At a general meeting, the company will then declare the dividend, subject to the amount recommended by the directors.
Companies can distribute a final dividend and/or an interim dividend.
A final dividend refers to the amount that your company declares and is paid up to the shareholders as dividend after you have determined your full-year revenues as reflected in the financial statements.
Many companies usually declare and issue this form of revenue by announcing it in their annual general meeting (AGM). In most cases, this form of dividend is paid to shareholders on a quarterly basis, but you can choose to pay it semi-annually or annually as well.
It is also needful to note that in contrast to an interim dividend, a final dividend is voted on and approved during the AGM as soon as the board of directors declare the earnings for that financial year.
An interim dividend refers to the amount that your company declares and is paid up to shareholders as dividends even before you have determined your full-year revenues. It can also be described as a dividend paid out in between the previous AGM and the next AGM, however, it cannot be effected by distribution in specie. In most cases, this form of dividends is paid to shareholders quarterly or semi-annually.
The constitution may provide the directors with power to pay an interim dividend — that is, one which is paid between the annual general meetings (AGMs). There are many ways in which the interim dividend is different from the final dividend: These include
- It does not generate any kind of debt owed by the company to the shareholders;
- It may be revoked by the directors any time before payment;
- It is provisional; and
- It anticipates the profits to be disclosed in the final accounts.
Listed companies in Singapore have to make an announcement when they recommend or declare a dividend.
In case there is a variation in either the interim or final dividend of a listed company when compared with the figures of the interim or final dividend for the matching period of the preceding financial year, it is important for the directors of your company to give reasons as to why there was a variation when they made the declaration.
Directors may rescind their decision to pay an interim dividend after it has been resolved but before it is actually paid, if they conclude that there are no profits and that it is not prudent to pay an interim dividend.
Payment of Dividend from Profit
As per section 403 of the Companies Act, a company can only declare its dividends if profit is available. The Companies Act provides that profits used to purchase, or proceeds that come from the sale of treasury shares cannot be used to pay dividends to company shareholders.
However, it is legally allowed to use proceeds that your company receives for the disposal of the treasury shares and have been applied towards the profits of the company are payable as dividends.
The Companies Act otherwise provides no guidelines on when a profit is available or not, and accordingly, the question as to what are profits has often been referred to the courts. The courts have developed several principles that govern or regulate dividend payments to shareholders in Singapore:
- The profits to be used for paying the dividends must only come from the company declaring the dividends. Even if the company is managed as part of a group of companies, the status of each company in the group must be considered as separate legal entities for the purposes of paying dividends.
- The company may go ahead and pay the dividends even if the existing total assets are not more than the original capital that the shareholders subscribed. Note, that the company’s income must still exceed its outgoings.
- It is not a must for a company to pay out dividends from profits earned in the current financial year. Except if your company constitution provides otherwise, you may carry forward the dividends or even reserve them.
- There is no requirement that the revenue profits of the company need be applied to accumulated losses or depreciation of assets before such revenue profits are distributed as dividends.
- A company may use its profits to write off an asset or as a replacement of lost capital in previous financial years. But if the profits are okay, you may use the proceeds to pay dividends in subsequent years.
- A company may use surplus funds originating from the revaluation of assets to distribute dividends.
- Even if a company lacks revenue profits, it may use capital profits to pay dividends. Note that there must be an increase your company’s capital in the first place.
A company’s constitution may be used to dictate the type of profit for paying out shareholders’ dividends.
Conclusion - Dividends
This article has provided you with key information that will help you understand the distribution of dividends in a Singapore company.
Need professional guidance? No worries! Feel free to contact our experts at Tianlong Services to learn more about dividends.