A dividend is a distribution of a company's profits to its shareholders, usually in proportion to the shares they hold. For owner-managed companies, dividends are often paid alongside a salary as part of how the owners extract value from the business. Because dividends move money out of the company, Irish law sets clear rules about when they can be paid, and Revenue imposes a withholding tax regime on most payments.
Profits Available for Distribution
Under the Companies Act 2014, a company can only pay a dividend out of profits available for distribution. These are broadly the company's accumulated realised profits, less its accumulated realised losses, that have not already been distributed or capitalised. A company cannot pay a dividend simply because it has cash in the bank, and it cannot pay one out of share capital. Whether profits are available is determined by reference to the company's relevant financial statements.
Interim and Final Dividends
- Interim dividends
are paid during the financial year. They are generally declared by the directors where the constitution allows it and where they are satisfied the company's profits justify the payment.
- Final dividends
are declared by the members in general meeting, or by written resolution, usually after the financial statements for the year have been approved. Members cannot declare a final dividend higher than the amount recommended by the directors.
Both types of dividend should be properly documented in board minutes or members' resolutions, and each shareholder normally receives a dividend voucher showing the gross amount, the tax withheld and the net payment.
Unlawful Distributions
A dividend paid without sufficient distributable profits is an unlawful distribution. A shareholder who knew, or had reasonable grounds to believe, that the payment was unlawful is liable to repay it to the company. Directors who authorise an unlawful distribution may also face personal liability, and the issue frequently comes to light when a company later becomes insolvent and a liquidator reviews past payments.
Dividend Withholding Tax
Irish resident companies must generally deduct Dividend Withholding Tax (DWT) at a rate of 25% from dividends paid to shareholders. The company pays the DWT over to Revenue and files a DWT return through the Revenue Online Service (ROS) by the 14th day of the month following the month in which the dividend is paid. For example, DWT on a dividend paid in June is due by 14 July.
Exemptions From DWT
Certain shareholders, known as excluded persons, can receive dividends without DWT being deducted, provided the correct declaration has been given to the company before payment. These include:
- Irish resident companies, which typically provide a Form V3 declaration.
- Individuals resident in another EU or EEA member state, or in a country with which Ireland has a double taxation treaty, using Form V2A.
- Non-resident companies meeting the relevant conditions, using Form V2B.
- Certain pension schemes, charities and other qualifying bodies.
Exemption is never automatic. Without a valid declaration on file, the company must withhold DWT at 25%, and non-resident declarations must be renewed periodically.
How Irish Resident Individuals Are Taxed
For an Irish resident individual, the gross dividend is treated as income and is liable to income tax at their marginal rate, together with USC and PRSI. The DWT already deducted is credited against the final liability, and the dividend must be declared on the individual's tax return. Because of this, the choice between taking a salary, a dividend or retaining profits in the company has significant tax consequences for owner-managers.
Dividends and the Close Company Surcharge
Dividends can also affect a company's own tax position. Close companies that retain investment or rental income without distributing it within 18 months of the year end can face a surcharge of 20% on that income. Paying a dividend within the time limit can reduce or eliminate this surcharge, which is one of the reasons dividend planning is usually considered alongside the company's corporation tax position.
For further guidance and support with declaring dividends and meeting DWT obligations, contact Setup Your Company at info@setupyourcompany.ie or call us on 01 628 3177.
