Unlike dividend payments made on ordinary shares, whether the dividend payments made on preference shares are equity distribution or finance cost depends on the characterization of the preference shares as a debt or equity instrument.
For this, we need to determine whether it is debt or equity based on its legal form, and not its accounting treatment.
Consequently, dividends paid/ payable on preference shares are not tax deductible where the legal form or the characterization of the preference shares is an equity instrument. This is notwithstanding that the dividends are recorded as finance costs in the company’s profit and loss account.
Hence, tax adjustments need to be made to add back to the net profit before tax when computing the corporate income tax.
To know more, get in touch with a company secretary in Singapore!
