1. Introduction
In Malaysia, a Sdn. Bhd. (Sendirian Berhad) company may distribute part of its profits to its shareholders in the form of dividends. Dividend declaration is an important aspect of corporate governance, as it reflects the company’s profitability and management’s decision to reward its investors/shareholders. However, the dividend distribution must comply with the requirements of the Companies Act 2016 and the Company’s Constitution.
2. What is a Dividend?
A dividend is a portion of a company’s profits that is distributed to its shareholders as a reward for investing in the company.
It can be in the form of:
It can be in the form of:
- Cash Dividend – payment made in cash to shareholders.
- Share Dividend – Issuance of additional shares of the Company instead of cash.
- Any form of dividend or reward that the company deems appropriate and beneficial to both the company and its shareholders
Cash dividends are the most common form of dividend declared by Sdn. Bhd. companies.
3. Conditions and Criteria for Dividend Declaration
A Sdn. Bhd. needs to meet the following requirements before declaring a dividend:
- Solvency Test – The company must remain solvent after the distribution. This means the company is able to pay its debts as and when they fall due within 12 months after the dividend is paid.
- Cash Flow Statement – The company’s directors or accountants have to ensure that a cash flow statement is prepared to confirm the company’s ability to remain solvent for the next 12 months.
- Profits Availability – Dividends can only be paid out of profits available for distribution (i.e. retained earnings) and not from share capital.
4. Why Do Companies Declare Dividends?
Declaring dividends serves several purposes:
- Rewarding Shareholders – Demonstrates appreciation for investors’ support and provides them with a tangible return on investment.
- Enhancing Company Reputation – A consistent dividend policy reflects good financial health.
- Building Investor Confidence – Regular dividend payments attract investors and signal that the company is stable and well-managed.
5. Steps to Declare a Dividend in a Sdn. Bhd.:
-
Conduct a Solvency Test
Ensure the company is solvent — meaning it can pay all its debts within 12 months after the dividend is paid by conducting the Solvency Test and Cash Flow Statement.
- Inform the Company Secretary
Notify the secretary to prepare the necessary documents, such as the board resolution, dividend voucher for directors’ approval.
-
Approve and Declare the Dividend
The board of directors must approve the dividend amount and declaration date through a resolution.
- Issue Dividend to Shareholders
Pay the dividend to shareholders on the specific date stated in the resolution, and issue dividend vouchers as proof of payment.
7. Conclusion
Declaring dividends in a Sdn. Bhd. is a strategic decision that reflects the balance between rewarding shareholders and maintaining the company’s financial stability. Compliance with the Companies Act 2016, accurate financial reporting, and ensuring solvency are crucial to make the dividend declaration valid and legally compliant.
Important Note
A 2% tax imposed by the Malaysian government on annual dividend income exceeding RM100,000 received by individual shareholders, effective from the Year of Assessment 2025 (beginning 1 January 2025).
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