Returning excess cash to shareholders of Singapore companies


Financier Worldwide Magazine

July 2013 Issue

July 2013 Issue

With the rise in cash reserves of many companies worldwide, activist shareholders have increasingly put public pressure on the management of such companies to either actively fund growth, which can be tricky in the current economic climate, or in the alternative, to return excess cash to shareholders. The choice to return excess cash to shareholders can be a popular one andmay enhance shareholder value, as evidenced by Apple’s decision in May to issue US$17bn worth of bonds in the US bond markets to fund a share buyback program and dividend payment. This article illustrates some of the ways by which Singapore companies considering a return of cash to its shareholders may do so under the current Singapore Companies Act. 

When a Singapore company is considering a return of excess cash to its shareholders, it may choose to do so by way of a dividend distribution, share buyback or capital reduction exercise under the Singapore Companies Act. The company should consider various factors, including the source of its excess cash (whether it is excess share capital or cash generated from profits), the tax impact on the company and its shareholders, as well as timing issues, in identifying the optimal manner of effecting such a return. A company with a substantial foreign shareholder base may also need to consider the foreign tax implications of the payout in the hands of its foreign shareholders. 

Distribution of dividends. Companies may return cash to their shareholders via an outright distribution of dividends and this can be implemented by way of board or shareholder resolutions, or both. However, a company can only declare and pay final dividends from distributable profits and not share capital. In determining whether the company has sufficient distributable profits, it can look at both its current year as well as past years’ profits. In terms of current year profits, a company is not required to apply its current year profits to offset any accumulated losses from past years and may distribute such profits as dividends. Any past years’ profit reserves may also be distributed, including reserves created from the revaluation of assets, provided that the revaluation is not subject to short-term fluctuations and has been verified by professional valuers independently. 

As for tax implications, all Singapore-resident companies are under a one-tier corporate tax system. As such, the tax on corporate profits is final and dividends received by the shareholder from the Singapore-resident company will be tax exempt, regardless of whether the shareholder is a company or an individual and whether or not the shareholder is a Singapore tax resident. 

Share buyback. There are four methods of share buyback by listed and unlisted companies under the Singapore Companies Act. Perhaps the most commonly used method is the ‘on-market’ purchase by a listed company that alsoallows the company to increase its earnings per share.Share buybacks are fairly uncommon for unlisted companies as there is a 10 percent statutory limitation on the number of shares that may be bought back in aggregate. 

A share buyback may be the most suitable method for returning cash to the shareholders of a company if the company either does not have sufficient distributable profits to pay a dividend, or a capital reduction is not desirable because its directors are unwilling to provide solvency statements and a court approval of the capital reduction is not an option. A company may buy back its shares out of its share capital or profits as long as its directors are of the view that the company will remain solvent after the buyback. 

In respect of an ‘on-market’ share buyback by a Singapore-resident company, the tax treatment to the shareholders is generally independent of the tax treatment to the company. The proceeds received by the shareholders from such ‘on-market’ share buybacks would generally be regarded as disposal proceeds for tax purposes similar to any other disposal of securities. Accordingly, whether or not any gains derived by a shareholder from the ‘on-market’ share buybacks are taxable would depend on whether the shareholder is treated as having held the shares for long-term investment holding purposes (where the gains should be capital in nature and not taxable in Singapore) or for trading purposes (where the gains should be revenue in nature and taxable). 

Capital reduction. A company may opt to return cash to its shareholders by way of capital reduction if it does not have distributable profits and some companies may even take on additional debt to fund the cash distribution. A company may, however, also opt for capital reduction even if it has distributable profits if it wishes to improve its capital structure or leave distributable reserves intact to maintain a sustainable dividend policy post-capital reduction. Unlike a share buyback, which any shareholder may choose not to accept, a capital reduction will, once passed by the requisite 75 percent shareholder majority, be binding on all shareholders and ensure a more definitive outcome for companies which are doing so primarily to improve their capital structure. Capital reductions are also not subject to the 10 percent statutory limit applicable to share buybacks.

There should not be any concern that the capital reduction would result in odd lots of shares held by shareholders as capital reductions do not necessarily have to involve the reduction in the number of shares, and a cash distribution may be effected by reducing an equivalent dollar amount from a company’s share capital.

A company may effect a capital reduction by obtaining the requisite shareholder approval, followed either by the approval of the High Court or a ‘court-free’ process which requires each director of the company to make a solvency statement. In practice, directors may be reluctant to provide solvency statements as they are required to vouch for the company’s ability to pay off its debts for a period of 12 months following the capital reduction exercise. If a director provides an erroneous solvency statement without reasonable grounds, he may be subject to criminal liability that includes financial penalties and/or imprisonment. As such, most companies in Singapore still prefer the ‘court approval’ route.  

As for the tax implication for the shareholder, if a capital reduction is made out of a company’s contributed share capital, the shareholders are treated as having simply received a return of capital and the cost of their investment in the remaining shares would accordingly be reduced by the amount of capital returned.Where the capital reduction is not made out of the company’s contributed share capital, the payment made to its shareholders is deemed a dividend and, accordingly, tax exempt for the shareholder on the basis that the company is tax resident in Singapore and under the one-tier system. 

Looking forward

The Steering Committee for Review of the Companies Act has proposed changes to the Companies Act, including the regime in respect of share buybacks and capital reductions. Among the changes currently being considered is the adoption of a uniform solvency test for all transactions in the capital maintenance regime. In addition, directors will be allowed to make solvency statements in writing instead of formal statutory declarations, making the ‘court-free’ capital reduction process more attractive. While the proposed changes are unlikely to result in companies rushing to return excess cash to their respective shareholders, they will go a long way towards facilitating the process.


Richard Young, Sunit Chhabra and Chiam Tao Koon are partners at Allen & Gledhill LLP. Mr Young can be contacted on +65 6890 7635 or by Mr Chhabra can be contacted on +65 6890 7735 or by email: Mr Chiam can be contacted on +65 6890 7617 or by email: 

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Richard Young, Sunit Chhabra and Chiam Tao Koon

Allen & Gledhill LLP

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