Dividends in Hong Kong: A Comprehensive Guide for Companies

Hong Kong is not just one of the world’s largest financial centers. It is a place where companies gain access to unique opportunities thanks to favorable tax conditions and a stable legal system. One of the key tasks for any company operating in Hong Kong is the proper organization of the dividend distribution process. 

Paying dividends is a way to reward shareholders for their investments, which is crucial for maintaining their interest in the company’s activities. Regular and transparent dividend payments help strengthen the corporate image, increase investor loyalty, and serve as an important factor in attracting new investments. 

Dividend Distribution by a Company in Hong Kong 

The process of dividend distribution in Hong Kong is governed by the Companies Ordinance (Cap. 622), which sets clear rules for profit distribution among shareholders. According to these regulations, dividends can only be paid from distributable profits, which implies a positive financial outcome. 

Compliance with legal norms is critically important for any company, as violations can lead to legal consequences, including fines and potential claims from shareholders. 

The legal framework also ensures transparency and predictability regarding dividend payments, which enhances trust among shareholders and investors. Dividends of a company registered in Hong Kong can be paid under certain conditions and procedures, ensuring the transparency and legality of the process. 

Key conditions for dividend payments: 

• From the company’s net profits: Dividends can only be paid from net profits remaining after all taxes and mandatory payments. This ensures that the company maintains financial stability and fulfills its obligations to the state and creditors. 
• Frequency of payments: Dividends can be paid after the end of the financial year or during the year as interim dividends. This allows the company to manage its financial flows flexibly and meet shareholder expectations. 
• Decision to pay: The payment of dividends is based on a decision by the company’s director or Board of Directors, as well as with the consent of the shareholders. This ensures the involvement of all interested parties in making key financial decisions. 

Features of Dividend Payments in Hong Kong 

• Documentation: All decisions regarding dividend payments must be documented. This includes minutes of Board of Directors meetings and shareholder meetings, as well as financial statements confirming sufficient profits. 
• Accumulated Retained Earnings: Dividends may include accumulated retained earnings from several financial periods. This allows the company to use previously earned funds to meet current shareholder needs. 
• Proportional Distribution: Dividends are distributed among shareholders in proportion to their shareholdings in the company. This ensures fairness and equality in profit distribution. 
• Method of Payment: Payments are made to the personal bank accounts of shareholders. This ensures that each shareholder receives their share of the profits directly and in full. 

Thus, the process of dividend payments in Hong Kong is carefully regulated and requires adherence to all established norms and procedures, which helps maintain trust between the company and its shareholders. 

Documents Required for Dividend Payments 

Interim Dividend Payment Before the End of the Financial Year: 

• Interim Management Report: A document confirming the amount of retained earnings for the period in which the dividend payment is planned. 
• Decision of the Board of Directors and General Meeting of Shareholders: Required to confirm consent for interim payments. 
• At the end of the financial year, the following documents must be provided. 

Payments at the End of the Financial Year: 

• Audited Financial Statements: Confirms the company’s financial results for the year and serves as the basis for the decision to pay dividends. 
• Profit Declaration: Submitted to the tax authority (Inland Revenue Department), it reflects the company’s tax obligations. 
• Tax Assessment: A document issued by the Inland Revenue Department confirming tax obligations or exemption from profit tax. 
• Decision of the Board of Directors and General Meeting of Shareholders: Official confirmation of consent to pay dividends, adopted at the respective meetings. 

These documents ensure the transparency and legality of the dividend payment process, as well as compliance with tax and corporate requirements. 

Types of Dividends in Hong Kong 

In Hong Kong, companies can use various forms of dividend payments. Each type has its own characteristics, and the choice of method depends on the company’s strategic goals and the preferences of its shareholders. 

Cash Dividends 

Cash dividends are the most popular type of payments to shareholders. Their amount is determined based on the company’s profits and distributed proportionally to shareholders’ shares. Regular cash dividends indicate the company’s financial stability and its ability to consistently generate profits. For shareholders, such payments are a significant source of income and a confirmation of the effectiveness of their investments. For the company, regular payments strengthen shareholder trust and contribute to maintaining long-term partnerships. 

Advantages of Cash Dividends 

• Immediate Reward: Shareholders receive income that they can use at their discretion, making investments more attractive. 
• Simplicity and Transparency: The procedure for determining and processing payments is simple and clear, which facilitates the process for all participants. 
• Flexibility of Payments: The ability to distribute dividends from profits formed on a specific date without restrictions on the number of payments during the financial year allows the company to adapt to changing conditions. 

Stock Dividends 

Stock dividends involve the distribution of additional shares to shareholders, which increases their stake in the company or enhances the value of existing shares. Instead of receiving cash payments, shareholders receive an increase in their shareholding, which can contribute to the growth of their investment’s value. 

This approach allows the company to preserve its liquid assets, which is particularly important during periods when they are needed for strategic growth and expansion. At the same time, shareholders gain additional value through the increase in their assets, strengthening their interests and motivation for long-term cooperation with the company. 

Stock dividends are especially beneficial when a company aims to maintain capital growth and preserve cash for other strategic objectives. 

Mechanism for Distributing Stock Dividends 

The process of distributing stock dividends consists of several important steps that ensure transparency and compliance with legal requirements. 

1. Analysis of Annual Financial Results: Based on audited financial statements and tax assessments from the tax authority, the company evaluates its financial performance and capacity to distribute dividends. 
2. Board of Directors’ Decision: The board decides on the distribution of stock dividends, considering the company’s current financial position and strategic plans. 
3. Shareholder Notification: Shareholders receive official notification about the upcoming stock distribution, allowing them to prepare for changes in their investment portfolio. 
4. Shareholder Meeting: If necessary, a shareholder meeting is organized to discuss and approve the decision to distribute stock dividends. 
5. Decision on Issuing Shares: The company decides to issue new shares or increase the value of existing ones to facilitate the dividend distribution. 
6. Legal Formalities: Legal procedures are conducted for each shareholder, including updating the shareholder register, issuing share certificates, notifying the Hong Kong Companies Registry, and completing other necessary procedures. 

These steps ensure the effective and legal distribution of stock dividends, strengthening shareholder trust and supporting the company’s financial stability. 

Asset Dividends (Property Dividends) 

The distribution of dividends in the form of assets involves a process where a company allocates tangible assets among its shareholders. These assets can include real estate, securities, or equipment. This approach is used when a company wishes to transfer part of its assets to shareholders without the need to sell them on the open market. 

This type of dividend allows a company to dispose of excess or unused assets that may be illiquid for its current operations. It is particularly relevant when assets do not provide the expected benefits or require significant maintenance costs. 

To distribute asset dividends, a company must have confirmed profits that cover the value of the asset being transferred. The asset valuation must be conducted accurately and transparently to ensure fair distribution among shareholders. 

Examples of assets that can be distributed as dividends: 

• Real Estate: Office buildings, warehouses. Useful for transferring unused property. 
• Securities: Shares of other companies, bonds. Optimal for managing excess assets. 
• Physical Objects: Equipment, vehicles. Applicable during asset reorganization. 

Dividend Payment Procedure 

The procedure for dividend payments in Hong Kong involves several key steps: 

1. Decision by the Board of Directors 
   • The board analyzes the company’s financial condition and decides on the amount and form of dividend payments. This step requires careful consideration, as the decision must be based on the company’s actual capabilities and all financial risks. 
2. Holding a General Meeting of Shareholders 
   • The board’s decision must be approved by shareholders at a general meeting. This is an important step, as shareholders can express their opinions and approve or reject the proposed terms. 
3. Determining the Record Date and Payment Date 
   • After approval at the meeting, the record date (cut-off date) is set to determine which shareholders are entitled to receive dividends, along with the actual payment date. 
4. Notifying Shareholders 
   • All shareholders must be promptly informed of the decision, including the payment date and the amount of dividends they can expect. 
5. Dividend Payment 
   • On the designated payment day, the company transfers funds or assets, depending on the type of dividends. 

Following a clearly defined dividend payment procedure helps avoid misunderstandings and conflicts with shareholders. It also ensures compliance with all legal requirements, minimizing risks for the company and maintaining its reputation. 

Tax Aspects of Dividend Payments in Hong Kong 

Withholding Tax on Dividend Payments 

One of the significant advantages of doing business in Hong Kong is the absence of withholding tax on dividends. This makes Hong Kong one of the most attractive jurisdictions for profit distribution among shareholders, allowing them to receive income in full without additional tax deductions. 

The absence of withholding tax on dividends increases the net income of shareholders, making investments in Hong Kong companies more attractive. For businesses, this means increased interest from investors and the ability to manage financial resources more flexibly. 

Comparison of Withholding Tax Rates on Dividends with Other Countries 

• Hong Kong: 0% 
• Australia: 30% 
• Canada: 25% 
• Chile: 35% 
• Costa Rica: 30% 
• Finland: 30% 
• France: 25% 
• Ireland: 21% 
• Israel: 25% 
• Kazakhstan: 15% 
• Luxembourg: 15% 
• Mexico: 10% 
• Montenegro: 15% 
• Panama: 10% 
• Philippines: 25% 
• Poland: 19% 
• Portugal: 25% 
• Romania: 8% 
• Serbia: 20% 
• Slovakia: 35% 
• Slovenia: 15% 
• Spain: 19% 
• South Korea: 22% 
• Switzerland: 35% 
• Sri Lanka: 15% 
• Thailand: 10% 
• Turkey: 10% 
• Vietnam: 0% 
• UAE: 0% 
• Cyprus: 0% 
• Bahrain: 0% 
• Qatar: 0% 
• Estonia: 0% 
• Ecuador: 10% 
• Greece: 5% 
• Czech Republic: 35% 
• Japan: 20.42% 
• USA: 30% 
• Morocco: 12.50% 

Tax Obligations for Individuals Receiving Dividends 

When shareholders receive dividends in their personal accounts, they must consider personal tax obligations based on the country where they are tax residents. Under their country’s tax laws, residents must declare foreign income and pay the applicable personal income tax rate. 

When a shareholder receives dividend payments in their personal account, it’s important to clarify the following: 

1. Tax Residency 
   • Determine which country you are a tax resident of to understand where you need to declare income. 
2. Tax Rates 
   • Find out the personal income tax rate applicable in your country. 
3. Declaration Procedure 
   • Familiarize yourself with the procedure for declaring foreign income in your country. 
4. Filing Deadlines and Tax Payments 
   • Ensure you know the deadlines for filing tax returns and paying taxes to avoid penalties. 
5. Consultation with Tax Specialists 
   • Consider consulting with tax experts for professional assistance and optimization of tax obligations. 

It’s worth noting that the issue of double taxation may arise only if tax authorities from multiple countries claim your income as an individual. This can occur when you are a citizen of one country but temporarily reside in another. 

In such cases, it’s important to: 

1. Confirm Tax Status 
   • Carefully confirm your tax status in each country to avoid misunderstandings. 
2. Double Taxation Avoidance Agreements 
   • Apply the provisions of double taxation avoidance agreements, if they exist between countries, to minimize tax burden. 
3. Documentation and Evidence 
   • Collect and maintain all necessary documents and evidence proving your tax residency (its loss and acquisition) and the right to apply agreements. 

Accounting for Dividends 

The process of accounting for dividends in Hong Kong requires specific documentation at each stage. On the date dividends are declared, an entry is made in the accounting journal to record the company’s liability to shareholders. On the payment date, a second entry is made to settle these liabilities and reflect the outflow of cash or transfer of assets. 

Proper accounting for dividends ensures transparency and accuracy in the company’s financial reporting, which not only helps avoid issues with tax authorities but also strengthens shareholder trust, as they can rely on timely and accurate payments. 

Example Entry: 

• Date of Dividend Declaration: Debit “Retained Earnings” account, Credit “Dividends Payable” account. 
• Date of Actual Payment: Debit “Dividends Payable” account, Credit “Cash” account. 

Marketing Aspect of Dividend Payments 

Regular and transparent dividend payments are an important strategic tool for strengthening a company’s reputation. They demonstrate to shareholders and the market the financial stability of the business and confirm its willingness to share profits with investors. 

Strengthening the company’s reputation through regular dividend payments helps attract new investors and retain current ones, contributing to an increase in the company’s stock value and its overall market stability. 

In a competitive market, attracting new investors is a key factor for business growth. Regular dividend payments make the company’s shares more attractive, especially for investors focused on receiving stable income. 

Attracting new investors through dividend payments also helps the company increase its market capitalization and gain access to more resources for development. In turn, the practical application of payments strengthens trust in the company from current shareholders, who see their investments working to increase business value. 

It is important to approach dividend payments wisely, considering both legal requirements and the strategic goals of the business. Regular and transparent payments are the foundation for sustainable growth and strengthening the company’s position in international markets.