Distributing dividends to shareholders is one of the most significant decisions a Malaysian company can make. However, this process is not simply about sharing profits—it involves strict legal requirements, procedural compliance, and important tax considerations. Understanding these rules is essential for directors, shareholders, and business owners alike.
This comprehensive guide explains the legal framework governing dividend distribution in Malaysia under the Companies Act 2016, the critical solvency test, proper procedures, and the tax implications you need to know.
What is a Dividend?
A dividend is a distribution of a company's profits to its shareholders. In Malaysia, dividends represent a return on investment for shareholders and are typically paid in cash, though they may also be distributed as additional shares (bonus shares) or other assets.
Unlike salaries or director fees, dividends are not considered business expenses. They are distributions made from after-tax profits, which has important implications for both the company and its shareholders.
Legal Framework: Companies Act 2016
The Companies Act 2016 fundamentally changed how Malaysian companies approach dividend distribution. Prior to this legislation, companies could only distribute dividends from accumulated profits. The 2016 Act introduced a more flexible but equally rigorous approach centered on the solvency test.
Section 131: The Solvency Test
Section 131 of the Companies Act 2016 is the cornerstone of dividend distribution law in Malaysia. Under this provision, a company may only make a distribution to shareholders if the company satisfies the solvency test immediately after the distribution is made.
The solvency test under Section 131(2) has two limbs:
1. Cash Flow Test: The company must be able to pay its debts as they become due in the normal course of business. This means the company must have sufficient liquidity to meet its obligations as they fall due.
2. Balance Sheet Test: The value of the company's assets must be greater than the value of its liabilities, including contingent liabilities. This ensures the company remains financially healthy after the distribution.
Both tests must be satisfied for a dividend distribution to be lawful. Directors who authorise a distribution without reasonable grounds for believing the solvency test is met may face personal liability.
Procedure for Declaring Dividends
Malaysian companies must follow proper procedures when declaring and paying dividends. The exact process depends on whether the dividend is an interim dividend or a final dividend.
Interim Dividends
Interim dividends are typically declared by the board of directors during the financial year, before the annual accounts are finalised. The procedure generally involves:
First, the directors must review the company's financial position and cash flow projections. They must have reasonable grounds to believe the solvency test will be satisfied after the distribution.
Second, a board resolution must be passed authorising the dividend. This resolution should specify the amount per share, the total distribution, the record date, and the payment date.
Third, the directors must sign a solvency statement confirming that, in their opinion, the company will satisfy the solvency test immediately after the distribution.
Final Dividends
Final dividends are declared after the end of the financial year based on the audited accounts. While directors recommend the final dividend, shareholders must approve it at the Annual General Meeting. The dividend approved cannot exceed the amount recommended by directors.
Documentation Requirements
Proper documentation is crucial for compliance. Companies should maintain:
Board resolutions authorising the dividend declaration, solvency statements signed by directors, financial records supporting the solvency assessment, and dividend payment vouchers or records showing distributions to shareholders.
Director Liability and Consequences
Directors bear significant responsibility in the dividend distribution process. Under Section 132 of the Companies Act 2016, if a distribution is made when the company does not satisfy the solvency test, directors who voted in favour of the resolution or signed the solvency statement may be personally liable.
Directors may be required to repay the distributed amount to the company. Additionally, shareholders who received the dividend knowing that the solvency test was not satisfied may also be liable to repay the distribution.
To protect themselves, directors should ensure they have current and accurate financial information before approving any distribution. If there is any doubt about the company's solvency, directors should seek professional advice before proceeding.
Tax Implications of Dividends in Malaysia
Malaysia operates a single-tier tax system for dividends, which has been in effect since 1 January 2008. This system has significant implications for both companies and shareholders.
Single-Tier System Explained
Under the single-tier system, corporate tax paid by a company is the final tax. Dividends distributed to shareholders are exempt from further taxation in the hands of the shareholders. This means shareholders receive dividends without any additional tax liability, regardless of their personal tax bracket.
This system replaced the previous imputation system where shareholders received tax credits for corporate tax paid and could claim refunds or pay additional tax depending on their circumstances.
Implications for Shareholders
For individual shareholders who are Malaysian tax residents, single-tier dividends are not subject to income tax. These dividends do not need to be declared in personal tax returns as taxable income.
For corporate shareholders, dividends received from Malaysian companies under the single-tier system are also exempt from tax. This prevents economic double taxation within corporate groups.
Withholding Tax Considerations
Generally, there is no withholding tax on dividends paid to either resident or non-resident shareholders under the single-tier system. However, companies should verify their specific circumstances, particularly when dealing with cross-border distributions or special situations.
Practical Advice for Companies
Based on the legal requirements and common compliance issues, here are practical recommendations for Malaysian companies considering dividend distributions:
Maintain accurate financial records: Directors need current financial information to assess solvency. Ensure your management accounts are up to date and reliable.
Consider future obligations: The solvency test looks at the ability to pay debts as they become due. Factor in upcoming payments, loan repayments, and contingent liabilities when assessing solvency.
Document your decision-making: Keep comprehensive records of board discussions, financial analysis, and the basis for concluding that the solvency test is satisfied.
Seek professional advice when uncertain: If there is any doubt about the company's solvency or the proper procedure, consult with your company secretary, auditors, or legal advisors before proceeding.
Review your constitution: Some company constitutions contain specific provisions about dividend procedures that may impose additional requirements beyond the Companies Act.
Conclusion
Dividend distribution in Malaysia involves careful consideration of legal requirements, proper procedures, and tax implications. The solvency test under Section 131 of the Companies Act 2016 places significant responsibility on directors to ensure the company can meet its obligations after making distributions.
By understanding these requirements and following proper procedures, companies can reward shareholders while maintaining compliance with Malaysian corporate law. When in doubt, professional advice from qualified accountants and lawyers is invaluable in navigating these important decisions.
Disclaimer
This article is intended for general informational and educational purposes only. It does not constitute legal, tax, or financial advice. The information provided may not reflect the most current legal developments and should not be relied upon as a substitute for professional advice tailored to your specific circumstances. For advice regarding your particular situation, please consult a qualified lawyer, accountant, or other appropriate professional.