Dividends are distributed to the shareholders as a reward for their investment. It has to be paid out of the company’s net profit and can be in the form of cash, stocks, or any other mode. As per Section 403 (2) of the Companies Act, if a dividend is paid when there are no profits, the director(s) or the chief executive officer(s) who wilfully paid or permitted to pay the dividends is guilty of a criminal offence.
Types of Dividends
There are two types of dividends:
- Final Dividend – It is declared during the AGM and needs to be approved by the shareholders. The dividends are decided based on the actual annual profit after the financial statements are reported. Once declared, final dividends cannot be cancelled or reduced.
- Interim Dividend – It is declared by the board of directors based on the interim profit of the company, which is before the AGM and the annual financial statements are released. While the company doesn’t need to honour this payment, it is wise for them to do so to maintain their reputation in the market and keep their investors happy.
A company is not bound to pay dividends to its shareholders and can use the profits for reinvestments or to mitigate any cash shortage. It is mandatory for a dividend declaration before the dividends are paid.
Dividends are non-taxable in Singapore as it follows a one-tier taxation system. As the company has already paid corporate taxes on the profit earned, the shareholders do not need to pay income tax on the same.