Why is it important to understand dividend regulations?
Dividends are a worthy reward for shareholders after each successful financial year. But if a company distributes dividends in violation of regulations, the consequences can be serious – from loss of investor confidence, cash flow imbalance to legal risks. Therefore, understanding clearly dividend regulations, hold on tight dividend conditions and dividend payment regulations is a prerequisite for businesses to operate transparently, effectively and develop sustainably.
Shareholders are increasingly professional and have higher demands on financial transparency. A clear dividend policy not only demonstrates financial capacity but is also a tool to retain and attract long-term investors.
Understand dividend regulations
What are the dividend regulations?
Dividends is the activity of a business distributing after-tax profits to shareholders, usually according to the percentage of shares they are holding. This is a legitimate right of shareholders and is a sign that the business is operating profitably.
According to the Law on Enterprises of Vietnam, dividends can be paid by:
- Cash: Shareholders receive directly through bank accounts
- Share: Shareholders receive additional shares, increasing ownership without reducing the company's equity
- Other forms: If the company charter allows and is approved by the general meeting of shareholders
It should be noted that not all profitable businesses are entitled to pay dividends. This payment must be based on legal regulations, the actual financial situation and the long-term business strategy of the business. Paying dividends is not only a financial issue, but also demonstrates the transparency, commitment and responsibility of the business to shareholders.
Regulations on dividend distribution according to the Enterprise Law
Paying dividends is a right, but also an obligation to comply with the law. Enterprises cannot arbitrarily make decisions without ensuring specific legal conditions. Below are important provisions clearly stated in the current Enterprise Law:
1. Enterprises can only pay dividends when they have real profits.
Not all revenue recognition can lead to dividends. Businesses can only pay dividends when they have profit after tax, and this profit does not come from the sale of assets, reversal of provisions or non-recurring activities.
This is to protect the financial stability of the business. If dividends are paid without real profits, the business may face a cash flow crisis, affecting core production and business activities.
2. Must complete financial obligations before dividing
Before paying dividends, businesses need to ensure:
- Already pay all taxes, including corporate income tax, VAT (if relevant)…
- Already full provision of reserves, according to the charter or legal regulations (development investment fund, reward fund, welfare fund...)
- Do not have bad debt, unpaid debt
3. Resolutions are passed in accordance with the correct procedure.
Dividend distribution must be submitted by the Board of Directors (or Board of Members for LLCs) and approved by the General Meeting of Shareholders (or owners).
This resolution should be clear on:
- Dividend ratio
- Payment method
- Time of execution
- Based on audited or approved financial statements
If there is no resolution or the resolution is not in accordance with the procedure, the dividend payment will be considered illegal. violate the law, and may be subject to revocation or penalty.
4. No division is allowed if it reduces the charter capital below the minimum level.
After paying dividends, the business still has to ensure that the actual contributed charter capital is not affected. If cash dividends result in a working capital shortage or insufficient capital to maintain operations, it is a sign of poor risk management.
Need to understand clearly the regulations on dividend distribution according to the Enterprise Law
Conditions for dividend payment according to current regulations
Although dividends are a shareholder right, businesses cannot always pay dividends. The Enterprise Law and its guiding documents clearly stipulate the mandatory conditions before businesses can pay dividends. These conditions are intended to protect financial stability and prevent profits from being distributed beyond the actual financial capacity of the business.
1. The enterprise must have after-tax and undistributed profits.
Profits for dividend distribution cannot be derived from borrowed capital or temporary records. Enterprises may only pay dividends when:
- There is actual net profit after deducting taxes and eligible expenses
- This profit has not been used to offset losses or allocated to other funds.
For example: A business has a profit of 50 billion VND, but has an accumulated loss of 20 billion from previous years, it can only receive a maximum of 30 billion VND if it meets the remaining conditions.
2. Ensure that all financial obligations have been fulfilled
Specifically:
- Pay full corporate income tax
- No overdue taxes, social security or fees/charges
- Funds have been set aside in accordance with the law or internal regulations.
The goal is to ensure that businesses do not prioritize shareholder interests before fulfilling their obligations to the State and employees.
3. Have valid resolutions and minutes from competent authorities
Dividends are only considered legal if approved by:
- General meeting of shareholders (for joint stock companies)
- Board of members or owners (for LLCs)
The resolution content needs to agree on the division ratio, implementation time and division source (from retained earnings, or reserve fund, etc.).
4. Does not cause financial imbalance or affect charter capital
After paying dividends, businesses must still maintain:
- Ability to pay debts when due
- Positive or controllable operating cash flow
- Charter capital does not fall below the legal registration level
If this condition is violated, shareholders may be forced to return dividends received, and the company may face legal risks or financial inspection.
Current regulations on actual dividend payments
In reality, dividend payments are not simply a number recorded on financial statements. Each company will have its own strategy based on its business model, financial capacity and shareholder expectations. In particular, flexibility in payment methods and announcement timing can greatly affect stock prices and market sentiment.
1. Popular forms of dividend payment today
- Cash dividend: This is a traditional form, suitable for businesses with stable cash flow. Shareholders receive actual money into their accounts and is often very popular.
- Stock Dividend: The company issues additional shares to distribute to existing shareholders. The advantage is that it does not affect cash flow but can dilute ownership ratio if not managed well.
- Combination of cash and stock: Many large businesses choose this approach to balance between preserving capital and satisfying shareholders.
2. Dividend payment process in business
Paying dividends is more than just transferring money. A professional process typically includes:
- Submit audited financial statements to the Board of Directors/Board of Members
- Develop a proposal for a specific dividend distribution plan (rate, time, form)
- Convene a general meeting of shareholders/members to pass a resolution
- Official disclosure of information to the market (for public companies)
- Make payments on time
3. Impact of dividend decisions on businesses and shareholders
- For business: Reasonable dividend distribution helps maintain investor confidence, keep stock prices stable, and at the same time demonstrate a healthy financial situation. However, if dividends are too high while investment capital needs are large, businesses can easily fall into a state of capital shortage, affecting their competitiveness.
- With shareholders: Dividends are a direct source of income, especially attractive to long-term investors. However, if stock dividends increase the number of shares but the value remains unchanged, investors need to carefully consider the strategy of holding or taking profits.
4. Real-life examples from listed companies
- Vinamilk (VNM): Regular annual cash dividends, attractive rates, creating great trust among individual and institutional investors.
- FPT: Flexible dividend payment in cash and shares. In 2023, FPT will pay cash dividend of VND 2,000/share and bonus shares of VND 15%.
- Some technology startups: No dividends in the initial stage, priority is given to retaining profits for reinvestment and market expansion.
Dividend payment procedures in business
How to optimize dividend strategy for business
A smart dividend policy not only helps businesses strengthen their relationships with shareholders, but is also a strategic financial tool that helps regulate cash flow and communicate corporate value to the market. Below are some optimal ways that businesses can consider:
1. Clearly define dividend distribution goals
Each business has a different development stage, so the dividend target needs to be consistent with the orientation:
- Keeping shareholders loyal?
- Strengthening corporate image before IPO?
- Reduce cash surplus pressure?
Clearly identifying the reason for dividend distribution will help businesses choose the right form (cash or stock) and appropriate rate.
2. Long-term cash flow planning
Dividends should not be distributed based on emotions or expectations. Businesses need to plan cash flow for at least 12 months to ensure that after distributing dividends, there is still enough capital for activities:
- Short-term loan repayment
- Monthly operating costs
- Contingency plans (input cost fluctuations, interest rates, etc.)
3. Combine dividends with financial communications
Each dividend announcement is an opportunity for businesses to increase transparency and connect with shareholders. Take advantage of:
- Press release on business performance
- Livestream of shareholder meeting, dividend Q&A
- Clearly disclose dividend plans from the beginning of the year
This clarity helps strengthen market confidence and boost stock value.
4. Apply financial software for accurate management
Using accounting/ERP software helps:
- Track quarterly profit after tax
- Warning when dividend payment affects working capital
- Generate automatic reports for shareholder meetings
In short, dividend distribution is not simply profit distribution. It reflects the financial thinking, management capacity and long-term development strategy of the enterprise. A systematic dividend policy will help the enterprise:
- Increase trust with shareholders and the market
- Maintain healthy cash flow
- Strengthening professional financial brand image
However, distributing dividends incorrectly can be counterproductive – leaving the business short of capital, trapped in a debt spiral, or under pressure from shareholders. So think carefully and make decisions based on data and a long-term vision.
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Frequently Asked Questions (FAQ)
Can a loss-making company pay dividends?
No. Enterprises must make profits to be eligible for dividends according to regulations.
How long is the dividend payment period after the resolution?
Usually within 6 months from the date the shareholders' meeting passes the resolution.
Are dividends taxable?
Yes. Cash dividends are subject to personal income tax 5%.
Can LLCs pay dividends?
Yes, but the form is to divide profits among capital contributors, not called dividends.
Should dividends be paid in cash or stock?
Depending on the strategy. Cash dividends create liquidity for shareholders, stock dividends help businesses retain money for long-term development.
