Listed companies reward their shareholders by paying out a portion of their profits. Though cash dividends are the most common form of shareholder remuneration, there are several possible options available in Hong Kong which are the most common: distribution of dividends; capital reduction and share buybacks.
The primary purpose of dividend distribution is to provide a return on investment (ROI) to the shareholders. This makes it a fundamental part of the company’s strategy and objective, thereby creating a healthy relationship between the company, its shareholders, and the investors. As a result, dividends are considered an essential part of the financial life of the company.
A company may pay profits to its shareholders through distribution of dividends. According to its articles of association, a Hong Kong enterprise may declare final dividends by ordinary resolutions provided that such dividends shall not exceed the amount recommended by the directors, and board resolutions would be sufficient for approving interim dividends in cash.
The HK company must have sufficient profits available for distribution to declare any dividends (whether interim or final). In general, distribution of dividends should apply to all of the shareholders in the same class, and the amount of dividends to be received by shareholders of the same class would be pro-rata to their shareholding.
Another option is capital reduction. This could take many forms, one of which is repaying any paid-up share capital in excess of the company’s needs for its optimal operation and growth.
The law in HK allows companies to take advantage of the court-free procedures for reducing capital to return excess capital to shareholders. To execute this option, the firm needs to undergo certain procedures according to the Companies Ordinance, which usually take around 6 to 8 weeks.
It is not necessary to have sufficient distributable profits, however the company must satisfy the prescribed solvency test, and the directors of the company are required to make a solvency statement to confirm that there will be no grounds on which the company could be found to be unable to pay its debts immediately after the capital reduction and (assuming that the company is not intended to commence winding up within 12 months after the reduction) the company will be able to pay its debts as they become due during the period of 12 months immediately following the date of the capital reduction.
The directors responsible for the solvency statement must have reasonable grounds for the opinion they express, otherwise it will be considered an offence, punishable with fines or imprisonment. In order to make an accurate statement, directors must analyze the company’s state of affairs (updated financial statements) and take into account all the liabilities (including contingent and prospective liabilities).
In the buyback option, a HK company may purchase its own shares in accordance with the provisions under the Companies Ordinance, and the relevant shareholders can receive the amount of the purchase price accordingly, as long as its articles of association do not prohibit nor restrict a buyback.
This option is more flexible than the other two, in terms of the source and amount of payment, as a HK company may pay a buyback of its own shares out of its distributable profits; out of the proceeds of a fresh issue of shares made for the purpose of a buyback; or out of capital in accordance with the Companies Ordinance.
A HK company can agree with any shareholder on a price to buy all or part of the shares under a previously approved contract, as long as there is at least 1 member holding any share(s) other than redeemable shares after the buyback and other conditions under the Companies Ordinance.
If the payment of a share buyback is made by the company out of its capital, the directors are required to present a solvency statement (as in the case of capital reduction), in addition to other requirements under the Companies Ordinance.
In Hong Kong, a listed company can engage in share buybacks in four ways:
On-market share buyback: Share buyback through the facilities of The HK Stock Exchange
Exempt share buyback: Limited types of share buybacks, including an employee share buyback
Share buyback by general offer: A share buyback by way of an offer to all shareholders
Off-market share buyback: Share buyback that does not fall into any of the above categories,
most typically, buybacks from specific shareholders without going through the facilities of the
HK Stock Exchange.
Subject to the adjudication of the Stamp Office, stamp duty may be payable on the transfer documents for any share buyback. There are tax implications that companies considering this option should take into consideration.
When it comes to dividend tax treatment in Hong Kong, there is no such tax levied on dividends paid to the shareholders. Shareholders are not required to pay tax on capital gains in HK. Therefore, it is a tax-free payment, which makes it especially beneficial to the shareholders.
From the accounting perspective, the dividend payment in a HK company is paid out of the surplus, which is the profit earned by the company, and thereby, should not be reported in the income statement as a cost of the period. However, the journal entry is recorded in two instances, on the date the dividend is declared and on the date that the dividend is paid.
Companies based in HK should report the details of dividends to the auditor during the annual audit process.
To learn more about our services in China, contact our Head of Business Advisory - Ms. Kristina Koehler-Coluccia at kristina@woodburnglobal.com. DISCLAIMER: All information in this article is verified to the best of our ability and is assumed to be correct at time of release; however, Woodburn Accountants & Advisors does not accept responsibility for any losses arising from reliance on the information provided within. The information provided is for general guidance and does not replace specialized advice.