Definition of Dividend Payments
Dividend payments are important to all companies and their shareholders. For the company, the proper and timely issuance of dividend payments serves as evidence that the company is being run in the correct and proper manner. For shareholders, dividend payments are a much-anticipated financial boost received from the shares they hold.
The word “dividend” is derived from the Latin word “dividendum” which means “things to be divided”.
A dividend is a payment made by a company to its shareholders. It is a form of circulation of the company’s earnings. When a company earns a profit or has a surplus, then the company will be in a position to re-invest the profit or surplus in certain business matters. This re-investment is referred to as retained earnings. From this profit, the company pays a percentage of the profit as a dividend to the shareholders. The share of the profit to the shareholders might be in cash which is usually to be deposited into a bank account or, if the company has a re-investment plan, the amount can be paid through additional shares shares or share re-purchase. After receiving the dividends, the shareholders typically must pay income taxes. The company normally does not receive any income tax subtraction for the dividend expenses.
A dividend is to be paid a predetermined amount per share, with the shareholders receiving a dividend in proportion to their shareholding. Dividends might be able to serve as a source of steady income for and increase the morale of shareholders.
In a joint stock company, the payment of dividends is not an expense, but is the distribution of after-tax earnings among the shareholders. The retained profits and earnings are usually displayed in the section of shareholders’ equity on the corporation’s balance sheet in the same section as its issued share capital. In public companies, the dividends are usually paid on a fixed schedule, but companies have the right to pay the dividends at any moment. Sometimes, these impromptu dividend payments are referred to as special dividends so that it may become easier to distinguish between scheduled dividends and special dividends.
Criteria to Receive Dividends in Indonesia
The allocation of the dividends in a limited liability company is specified in Law No. 40 of 2007 regarding Limited Liability Company (Company Law). According to the Company Law, all net profits after any subtractions are put to one side and assets shall be delivered to the shareholders as dividends until and unless determined otherwise in the GMS (“General Meeting of Shareholders”). The reserve is a definite amount from earnings as determined during the General Meeting of Shareholders.
Dividends may only be delivered if the company has a positive bank balance of earnings. A positive balance of earnings means that the company’s net profits in the current fiscal year have covered the company’s accumulated losses from preceding fiscal years.
The company is to put to one side the net profit during each fiscal year as a reserve until and unless the reserve reaches at least 20% of the total subscribed and paid up investment.
The dividends which are not distributed after five years are to be placed in a separate reserve. The process for the circulation of dividends which have been located in the unique reserve will be stated in the General Meeting of Shareholders (GMS). If the dividends which have been placed in the separate reserve are not circulated within 10 years, all of these dividends are to be turned over to the company. These uncirculated dividends will be recorded as some of the company’s other forms of income.
For the allotment of provisional dividends, also known as short-term dividends, which are paid before the annual income of the company, the allotment is determined during the General Meeting of Shareholders (GMS). It may be performed before the company’s ongoing fiscal year ends as long as it is allowed according to the company’s articles of association.
Dividend income which is received by a local taxpayer from a limited liability company, which is generally referred to as a Perseroan Terbatas or PT, is chargeable as normal income for the taxpayer who is being paid the dividend. However, if the dividend beneficiary is a PT with a minimum shareholding of 25% in the company paying the dividend and the dividend is paid out of retained earnings, it is not required to pay the commensurate amount of corporate income tax.
How a Person May Increase the Amount of Money Received from Dividend Payments
The amount of money received from dividend payments can be increased by searching for the companies which are likely to increase their dividend payments in each year. Those who hold shares in such companies will benefit accordingly, allowing the shareholder to receive ever-increasing amounts of money. For most companies, with the growing of sales and profits, dividend amounts to be paid also grow accordingly.
A person who earns a dividend payment outside of a retirement bank account can proceed to reinvest these dividends. The increase in money from dividend payments depends upon the shares of high-quality dividend stocks one owns. The more shares one owns, the more money one can make from the dividends. Those who hold lucrative shares for years or even decades might be able to earn a substantial amount of money each year purely from dividend payments.
Of course, it takes much careful financial planning to make significant amounts of money from dividend payments. However, this is not the only form of financial planning that exists. For any of your financial planning requirements, you can contact us at Paul Hype Page & Co. Our financial specialists will work with you, your company, or both so as to formulate a financial plan which will provide the best results possible for everyone involved.
Relationship Between Dividends and Taxation in Indonesia
In Indonesia, there are different tax rates on dividends. These different tax rates depend on the tax resident status of the person who is receiving the dividends.
- Residents: Dividends received by residents are subject to a withholding tax rate of 15%. This rate matches the withholding tax rate imposed on residents for royalties and interest.
- Non-residents: All dividends which are received by non-residents have a withholding tax rate of 20% imposed on them. This rate is the same withholding tax rate which is imposed on all relevant payments made to non-residents. However, non-residents who are tax residents of certain countries may utilize the provisions found in certain tax treaties to reduce the rate at which these dividends are to be taxed.