How to pay out dividends?

[juicywatermelon]

I’m a non-resident director of a pte ltd in Singapore (I’m French, the other partner is Singaporean). I’m not on any EP.

I’m planning to pay myself for the first time from our company account. After reading some of the posts here I come to the conclusion that the best way tax-wise is to pay myself dividends. I’m the only shareholder. This way the company doesn’t have to pay any taxes - as opposed to 20% tax for director’s fee and 15% for income.

What is the procedure for paying out dividends? I know that we first need to pass the directors’ resolution. Then what?

Do I have to declare the dividends paid out in our accounts? I know that dividends are paid from the profit after corporate tax has been paid, which means after we have filed our accounts for the current FY. So do I declare the dividends in the next FY or not at all?

Also can dividends be paid out only if we have made profit for the FY? If for example we made profit last FY, this year we just broke even, can I pay out dividends from the cash assets brought over from last FY?

Thanks in advance for your help.

[Strong Eagle]

You have several misconceptions.

First, there is no special tax on directors fees, unless you are referring to your taxes in France. In Singapore, directors fees are treated exactly the same as other forms of earned income for tax purposes, although they are excluded for the purposes of CPF calculations.

Second, directors fees are a deductible expense. So, if you have a profit of 50K before directors fees, pay out 50K in directors fees, then corporate profit is zero and there is not corporate tax due.

If you take the same as dividends, then dividends are paid from retained earnings. So now you must pay corporate tax on $50K... although generous allowances in the first three years might make this zeros.

You must declare dividends by a directors resolution. Not much else. I believe you can pay dividends so long as the cash is available and does not impact your ability to service accounts payable.

[juicywatermelon]

I’m referring to the 20% withholding tax on directors fees:
http://www.iras.gov.sg/irasHome/page04.aspx?id=6250
If I take out $50K as directors fees, the comp would have to pay $10k withholding tax.

Yes I do realise that the directors fees are deductible. But my comp is a new start up and we’re not paying any corp tax at the moment. In the first year we had a profit of $40k (no tax), second year no profit, now I’d like to take out the $40k and I think the best way is by dividends.

Even after the 3 years tax exemption period, I find it’s more viable to pay out dividends.
Let’s say for example in the 4th year we have a profit of 100k.

- If I pay the whole $100k out as directors fees, I can deduct it as expense and we’d have zero corp profit = zero tax. But we’d have to pay 20% withholding tax (=$20k).

- If I opt to pay corp tax on the $100k, it would be
From IRAS website:
Partial exemption
First $ 10,000 @ 75% = $ 7,500
Next $290,000 @ 50% = $145,000

($ 10,000 - $ 7,500) + ($ 90,000 - $ 45,000) = $47,500 * 17% = $8,075
Which is less than the $20k withholding tax. And then I can pay out the dividends tax free.

After I declare by directors resolution, do i have to lodge it with ACRA ?

If this FY we have $40k assets in the balance sheet and I pay out $40k dividends, do I just declare zero assets in next FY’s balance sheet?

[Strong Eagle]

Thanks for the update on foreign directors withholding.

As far as the balance sheet is concerned, the assets need to be cash. You cannot use a loan to pay dividends.

Opening balance sheet

Cash - $40,000
Equip - $20,000
Total Assets - $60,000

Liab - $20,000
Retained Earnings - $40,000
Total Liab & Net Worth - $60,000

Dividend payment

Credit Cash - $40,000
Debit Dividend Expense - $40,000

Closing balance sheet

Cash - $0
Equip - $20,000
Total Assets - $20,000

Liab - $20,000
Open Retained Earnings - $40,000
Profit / Loss -$40,000
Close Retained Earnings - $0
Total Liab & Net Worth - $20,000

If you are American, dividends are taxable and not subject to earned income exclusion.

You should be aware that the Singapore government is well aware of the moves made for tax avoidance purposes. They have seen them all. If you/others have passes that will need to be renewed, you should consider your tax strategy in the context of what could be perceived as a 'fair share'.

Even though I could have paid zero tax in some years, I have opted to always pay some corporate tax. Don't know if they are tied to together... and my requests for EP's are nearly automatically approved, I enjoy the tax credit relief to keep people employed, and I think my PR will be just fine next year when I renew.

OTOH, I am aware of a fellow who consistently worked his books to pay little or no corporate and personal tax. When his PR came up for renewal, it wasn't renewed. Connection?

[juicywatermelon]

Thanks a lot for the info on the balance sheet.

It's understandable that the Singapore government won't renew the passes for foreigners who don't pay tax. After all they only want to keep those who contribute to the economy I don't live in Singapore so I don't have this problem... at least for now...!