Dividend vs Director's Fee vs Director's Bonuses

[skylark_khur]

I'm running a start-up here and it just cross 1-year. I find the members of this forum very knowledgeable about running business and thus, would like to ask about the most cost-efficient (in term of taxation) and legal way to pay myself and my other partners.

After some research, I believe that the most cost-efficient way is to pay ourselves by issuing dividend (as we are Exempted Private Company and the first 100k profit are exempted for corporate tax).

I know that in general, dividend must be paid according to share. But, our problem is we have 2 full-time co-founders and 1 sleeping co-founder. The sleeping co-founder is agreeable not to take pay at the moment. The question is can we just issue dividend to only 2 shareholders and have the 3rd one signed some sort of resolution? Like dividend waiver? I can't find the information in Singapore Companies Act.

If this is not possible, should I payout as Director's Fees or Director's Bonuses and what are the differences?

[Strong Eagle]

I'm running a start-up here and it just cross 1-year. I find the members of this forum very knowledgeable about running business and thus, would like to ask about the most cost-efficient (in term of taxation) and legal way to pay myself and my other partners.

After some research, I believe that the most cost-efficient way is to pay ourselves by issuing dividend (as we are Exempted Private Company and the first 100k profit are exempted for corporate tax).

I know that in general, dividend must be paid according to share. But, our problem is we have 2 full-time co-founders and 1 sleeping co-founder. The sleeping co-founder is agreeable not to take pay at the moment. The question is can we just issue dividend to only 2 shareholders and have the 3rd one signed some sort of resolution? Like dividend waiver? I can't find the information in Singapore Companies Act.

No. All shareholders of the same class of stock must be paid dividends in proportion to their stock ownership. You could issue different classes of stock, however.

If this is not possible, should I payout as Director's Fees or Director's Bonuses and what are the differences?

There is no difference between director's bonus and director's fees. Both are taxable for personal income tax purposes, and both are not subject to CPF.

If you are Singaporean, you can do pretty much what you want, tax wise. If you are a foreigner, you really ought to rethink your plans to pay no tax. Yes, it can be done. But the gahmen knows how this works... when it's time to renew your EP or apply for PR, what you paid in taxes will be one of the criteria as to whether you get renewed or not.

[skylark_khur]

Hi Strong Eagle, thanks for your reply.

No worry on the PR renewal as I do pay some tax for my other personal income.

Could different shareholder cash out the dividend at different timing? Like 5 months apart?

One of our shareholder cash out his pay on Nov, we are thinking if it is still possible to treat this as dividend by having the other shareholders cash out the same amount? Or is it already too late?

Pardon my inexperience on this.

[Strong Eagle]

Regarding dividends - They must be paid out of profits and/or retained earnings from prior year. You cannot use paid up capital amounts to pay dividends.

Payment of dividends to shareholders must be declared in a director's resolution, passed at an AGM or EGM. The resolution must state the date of payment, and the per share dividend amount to be paid out.

You cannot pay different shareholders at different times. A dividend declaration applies to all shareholders. Dividends must be reported on your corporate tax return at the date of declaration, not when they are actually paid to the shareholders.

So, for example, You declare a dividend payment due to be paid on Dec 15, 2011 but you don't actually pay it until Jan 15, 2012. Your P&L and balance sheet for 2011 must reflect a dividend expense item and a liability entry of dividends that must be paid. When you pay in 2012, you reduce cash and zero out your dividend liability item.

You can see that it is up to you when dividends are actually paid compared to when they are declared. However, I don't know if IRAS will question why all shareholders were not paid at the same time... unless your memorandum of incorporation specifically sets some terms, all shareholders must be treated equally. Your financial statements that you must file will reflect this unequal treatment.

Thus, if one of your shareholders received dividend payments in Nov, 2011, then

a) You must have held an AGM or EGM before the actual date of payment.
b) A director's resolution with the dividend per share and date to be paid must be passed at that meeting.
c) Your year end books for 2011 would reflect and expense item for all dividends paid to all shareholders
d) Your cash account would be reduced by the amounts paid to the one shareholder in November.
e) You would have a liability item of dividends owed to the other shareholders.

Filing date for the previous year is Nov 30 of the year following, so your 2011 return is not due until Nov 30, 2012. You thus have time to create the necessary call for an AGM or EGM, plus the resolutions, etc to make the dividend payment legal and official.

As for PR status and income - all I can tell you is that I am aware of a fellow that used the tax breaks and dividends to avoid paying any tax for either his company or for himself. His PR did not get renewed. the government may rightly question how it is you are working for the company but do not draw a salary. It is certainly a reasonable question, and it is clear that the entire point is personal tax avoidance. You don't pay tax, what value are you as a PR?