Company Dividend in Ireland: A Beginner’s Guide

When a company earns money, it may use the profits in several ways. It might reinvest them in the business, purchase equipment, employ additional staff, repay debts or keep the money available for future expenses. It may also decide to distribute some of its profits to its shareholders. This type of payment is called a dividend.

What is a company dividend?

A dividend is a payment made by a company to its shareholders from profits that are legally available for distribution. Shareholders are the people or organisations that own shares in the company.

A dividend is different from a salary. A salary is paid to an employee or director in return for work performed. A dividend is paid because the recipient owns shares in the company. Someone may be both a director and a shareholder, but these roles should still be treated separately.

Dividends are also different from ordinary business expenses. A dividend is a distribution of profit and is not normally deductible when the company calculates its taxable trading profits.

Can every company pay a dividend?

No. A company cannot pay a dividend simply because it has money in its bank account.

Under Irish company law, a company must have sufficient profits available for distribution before it can pay a dividend. In simple terms, this usually means looking at the company’s accumulated profits and losses. If previous losses have used up the company’s profits, it may not be legally permitted to pay a dividend—even if there is cash in the bank.

For example, imagine that a company has €30,000 in its bank account. However, €20,000 came from a bank loan, and the company has accumulated losses of €10,000. Although the company has cash available, it has no profits available for distribution. It therefore cannot pay a dividend simply because there is money in its bank account.

Before approving a dividend, the directors should review the company’s financial statements or reliable, up-to-date management accounts. They should also consider upcoming costs, taxes, loan repayments and other financial commitments. Paying a dividend should not leave the company unable to pay its debts.

How does a company pay a dividend?

The process will generally include the following steps:

1. The directors review the company’s financial position.
2. They confirm that sufficient profits are available for distribution.
3. The company checks its constitution and the rights attached to its shares.
4. The appropriate dividend is approved by the directors or shareholders.
5. The decision is recorded in written minutes or resolutions.
6. Dividend vouchers are prepared for the shareholders.
7. Dividend Withholding Tax is deducted where required.
8. The remaining amount is paid to each shareholder.
9. The company files the necessary tax return and pays the tax withheld to Revenue.

The exact approval process can depend on whether the payment is an interim or final dividend and on the company’s constitution.

How are Irish dividends taxed?

An Irish resident company will generally deduct Dividend Withholding Tax (DWT) from a dividend before paying the shareholder. The current standard DWT rate is 25%, although exemptions may apply in certain circumstances.

DWT is normally a payment towards the shareholder’s tax liability rather than the final amount of tax due.

An Irish-resident individual is generally taxed on the gross dividend, meaning the amount before DWT was deducted. Income Tax, Universal Social Charge and Pay Related Social Insurance may apply, depending on the person’s income and circumstances. The shareholder can normally claim credit for the DWT already deducted.

A simple dividend example

Suppose an Irish company decides to pay a gross dividend of €4,000 to one of its shareholders.

The calculation would generally look like this:

• Gross dividend: €4,000
• DWT at 25%: €1,000
• Net amount paid to the shareholder: €3,000

The shareholder receives €3,000, but the amount reported as dividend income is generally the full €4,000. The €1,000 deducted by the company may be credited against the shareholder’s final tax bill.

The shareholder could still have additional tax to pay if their total liability on the dividend is greater than €1,000. Alternatively, their particular circumstances may produce a different result.

Common dividend mistakes

Some of the most common mistakes include:

• Assuming that cash in the bank is the same as distributable profit
• Paying shareholders before formally approving the dividend
• Failing to prepare board minutes and dividend vouchers
• Forgetting to deduct or report DWT
• Treating a director’s personal withdrawal as a dividend after the event
• Paying different amounts on identical shares without checking the shareholders’ rights
• Assuming that the 25% DWT deduction is always the shareholder’s final tax

An incorrectly declared company dividend may have to be repaid and could create legal, accounting and tax problems for both the company and its directors.

The key point

Dividends can be an effective way for a profitable Irish company to distribute money to its shareholders. However, they must be supported by sufficient distributable profits, properly approved, documented and reported for tax purposes.

Before paying a dividend, directors should ask three important questions:

1. Does the company have profits legally available for distribution?
2. Can the company afford the payment after considering its other obligations?
3. Have all company-law and tax procedures been followed?

Professional accounting or legal advice should be obtained if the company’s financial position, share structure or tax treatment is unclear.

This article provides general information only and does not constitute legal, accounting or tax advice. Tax rates and requirements may change, and advice should be obtained based on the company’s and shareholder’s particular circumstances. Please contact us for more details.