Can Shareholders Receive Dividends as Shares of Another Company?

Question from Iryna, Can Shareholders Receive Dividends as Shares of Another Company?

Answer from AI:

When a company decides to distribute profits to its shareholders, it typically does so in the form of cash dividends. However, there are instances where dividends can be paid in other forms, such as property or, in some cases, shares of another company. This practice is not standard and can be complex due to the legal and tax implications involved.

Legal Considerations for Dividends in the Form of Shares

In the UK, the Companies Act 2006 governs the distribution of dividends. The Act does not explicitly prohibit the distribution of dividends in the form of shares of another company, but there are several considerations that a company must take into account:

• Articles of Association: The company’s Articles of Association may specify the forms in which dividends can be paid. If the Articles allow for dividends to be paid in forms other than cash, this may include shares of another company.
• Solvency Test: Under the Companies Act 2006, a company can only pay dividends out of profits available for the purpose. The directors must ensure that the company will remain solvent after the distribution.
• Valuation: The value of the shares being distributed must be assessed to ensure that the dividend reflects the appropriate amount of distributable profits.
• Tax Implications: There may be tax consequences for both the distributing company and the receiving shareholders. The tax treatment of dividends in the form of shares can be different from cash dividends.

Tax Implications

The tax treatment of receiving shares as dividends can be complex. Shareholders may be subject to Capital Gains Tax if they dispose of the shares in the future. The base cost for the calculation of any gain will be the market value of the shares at the time they were distributed as dividends. It is essential to consult with a tax professional to understand the specific tax implications.

Practical Steps for Paying Dividends in Shares

If a company decides to pay dividends in the form of shares of another company, it should take the following steps:

1. Review the Articles of Association to ensure that non-cash dividends are permitted.
2. Conduct a solvency test to confirm that the company has sufficient distributable profits.
3. Obtain a valuation of the shares of the other company to be distributed.
4. Hold a board meeting to declare the dividend and document the decision.
5. Communicate with shareholders about the nature of the dividend and any choices they may have.
6. Ensure compliance with tax reporting and withholding requirements.

Seeking Professional Advice

Given the complexities involved in distributing dividends in the form of shares of another company, it is advisable for companies to seek legal and tax advice before proceeding. A legal professional can help ensure compliance with the Companies Act 2006 and other relevant regulations, while a tax advisor can assist with understanding and managing the tax implications for both the company and its shareholders.

For more information on the Companies Act 2006 and its provisions on dividends, you can visit Legislation.gov.uk.

Note: This information is intended to provide a general overview and should not be construed as legal advice. Each situation is unique, and laws and regulations are subject to change. It is important to consult with a legal professional for personalized advice tailored to your specific circumstances.