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21 January 2019

Distribution of dividends

Dividends, as a shareholder’s annual profit, are the subject of a strict set of rules defining the limits and possibilities of how and when the payments can be made. In this article, we will introduce you to the topic of distributing and paying dividends to the eligible members of the company.

Definition and legal status

In short, dividends are the payments made by the company to its shareholders from the surplus of the company’s annual revenue. It functions as a return on the capital they invested in the past. The amount of those regular payments depends on the volume of the contribution. Do not confuse dividends with other forms of financial gain for shareholders, such as capital mitigation or compensation after the company is dissolved. As said before, dividends are a part of the company’s revenue, therefore the principles of distribution must yield to the regulations.

Remember that dividends are the subject of tax liability. If the dividend is greater than the risk-free return, the surplus will be taxed as ordinary income. As of now, the withholding tax covers income from dividends at a rate of 25%. Although the tax amount taken from dividends can be recovered after distribution under the rules adopted in 2017. A shareholder may file a refund application within three months of tax collection, regardless of whether he is entitled to it or not. In the case of annual loss – taxation of dividends can be deducted.

Dividends distribution

As stated in the Companies Act, the dividends distribution shall only be made based on the company’s last approved annual accounts or a revised interim sheet. The basis is calculated according to the last, positive annual outcome. In the case of a negative annual outcome, there’s a chance of acquiring the dividends, but the company must have free equity.

Types of dividends

  • Regular dividend – approved by a general meeting at the time of the annual settlements and reports approval period.
  • Exceptional dividend – shared between two general meetings, specified separately in the capital note, as opposed to the regular dividend.
  • Additional dividend – distributed based on the latest approved annual accounts and between two ordinary general meetings, often comes as an addition to ordinary dividends.

Payments

According to Chapter 8 of the Companies Act, one cannot separate the right to dividends from the owner within two years of the capital being granted. The dividends are accumulated and can be acquired by the shareholder only if he stays active within the company during the period of accumulation.

However, the regulations (regarding limited liability companies) state that the total amount of dividends distributed is always limited by an actual due capital of the company. Also, one cannot receive a larger amount than the amount approved by the Management Board.

The dividend taxation is calculated using a shareholder model method. Every shareholder pays the tax proportional to dividends received. The tax is deducted for the year in which the dividend is approved by the management. Currently, the tax rate is 23 percent for the income year 2019.

Any foreign investor who holds shares in a Norwegian company is entitled to receive income as a dividend at the end of the financial year. As of Norwegian shareholders investing in foreign countries, they must complete a special RF-1059 form to submit the tax return.

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