Tax may affect choice of extra remuneration or dividends

IN his BT article titled "The risks of having minority controlling shareholders in firms" published on Dec 28, 2017, my colleague Mak Yuen Teen argued that controlling shareholders will often prefer to receive extra remuneration as opposed to dividends.

Assuming a payout of S$10 million, a 30 per cent controlling stake and a top personal income tax (PIT) bracket of 22 per cent, the shareholders will receive only S$3 million if they opted for dividends, being 30 per cent of S$10 million tax-free dividends.

This pales in comparison to the S$7.8 million net of 22 per cent tax which they would otherwise receive had they opted for extra remuneration for the same amount of S$10 million.