If a business is profitable and has excess equity available, a dividend is a percentage of its earnings that is given to its shareholders. Resolved at the company’s general meeting, the dividend distribution is based on shareholding and is equitable.
Shareholders gather at the annual general meeting to approve the financial results and decide whether to pay out dividends. Dividends are paid to shareholders based on the amount of shares they own, so there is fairness in the distribution of ownership.
Anyone, including individuals and other corporate entities, can own shares and receive dividends. However, when a parent company or subsidiary owns over 90% of the issuing company, they might opt for a group contribution as an alternative financial strategy. This approach is essentially tax-free and can be a smarter move in such scenarios.
Types of dividends
Dividends are categorised into three predominant types:
Ordinary dividends: As part of the fiscal review, the general meeting may confer a portion of the company’s profit to be allocated for dividend distribution. Following their proposal in the annual accounts, these sums are reserved in the financial records pending the general meeting’s endorsement and the eventual dispersal.
Additional dividend: These dividends are derived from the profits of preceding years that remain undistributed.
Extraordinary dividends: In instances where the company has realised profits within the current financial year and elects to distribute dividends ahead of the subsequent year’s general meeting.
Taxation on dividends
Profits that are earmarked for dividends are subject to the standard corporate tax rate of 25-30 percent. Shareholders themselves are also liable for personal taxation on any dividends received.
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