What dividend means
A dividend is the company sharing its profit with the people who own it.
The money belongs to the company until the moment it is properly declared. That is the part shareholders in small Nigerian companies most often misunderstand. Owning forty percent of a profitable company does not entitle you to draw forty percent of the money in its account. It entitles you to forty percent of whatever the company decides to distribute.
Dividends are paid out of profits, either the profit of the current year or accumulated profit from earlier years. A company with no distributable profit cannot lawfully pay one, however much cash is sitting in the bank, because that cash may be somebody else's money in the form of unpaid suppliers, loans or tax.
How it is used
The mechanics follow a set order.
The directors look at the accounts and recommend a figure. The shareholders approve it at a general meeting, and it is then declared. Once declared, it becomes a debt owed by the company to the shareholders, and it is paid according to shareholding.
Interim dividends work slightly differently. Directors can declare them during the year without waiting for a general meeting, on the strength of profits already made.
In practice most young Nigerian companies distribute nothing for years. Profit goes back into the business, and the founders take salaries instead. That is a legitimate choice, but it should be a decided choice recorded in the minutes, not something that simply happens because nobody raised it.
Key features
- Paid only out of profits, current or accumulated
- Recommended by directors and approved by shareholders in general meeting
- Becomes a debt owed by the company once declared
- Distributed in proportion to shareholding unless a class of shares says otherwise
- Withholding tax is deducted at source before payment
- Interim dividends can be declared by directors during the year
How this works in Nigeria
Withholding tax is deducted from dividends at source, and for dividends that deduction is treated as the final tax on that income in the hands of the shareholder. The company deducts, remits, and issues the shareholder a credit note.
CAMA 2020 also confirmed that a company may not pay dividends out of capital. Directors who authorise a distribution the company cannot support out of profit expose themselves personally, which is why the accounts and the resolution matter rather than being paperwork after the fact.
Unclaimed dividends are a long running problem in the Nigerian capital market, where shares changed hands, addresses changed and payments were never collected. For a private company the equivalent problem is smaller but real: a shareholder who has moved abroad and cannot be reached still has to be paid, and the entitlement does not disappear.
Dividend vs salary vs director's loan
Three ways money leaves a Nigerian company and reaches the people running it, taxed and treated differently.
A salary is paid for work done. It is a business expense, it reduces the company's taxable profit, and PAYE is deducted on it. It is payable whether or not the company made a profit.
A dividend is paid for ownership. It comes out of profit after tax, so it does not reduce the company's tax bill, and withholding tax is deducted from it. No profit means no dividend.
A director's loan is neither. It is money the company lends to a director, and it has to be repaid. Treating it as an alternative to declaring a dividend is how founders end up with an awkward balance sheet and a question from an auditor.
Owner managers in Nigeria typically take a salary and consider a dividend when there is genuine distributable profit.
Limits and risks
A shareholder cannot force a dividend. That is the hardest limitation for minority shareholders in Nigerian private companies, where a majority can simply keep voting to retain profits while paying themselves generous salaries.
CAMA does provide relief where the conduct amounts to unfair prejudice against a minority, and courts can intervene. But the remedy is litigation, which is slow, and the better answer is a shareholders agreement written before the money starts arriving, fixing a distribution policy in advance.
Dividends are also last in line. Creditors, tax and employees are paid first. A company can be busy and profitable on paper and still have nothing lawfully distributable once its obligations are met.
Worth knowing
Put a dividend policy in the shareholders agreement while everybody is still friendly. Something as simple as a stated percentage of profit after tax to be distributed each year, subject to agreed working capital, prevents the most common falling out between founders.
Questions people ask
What is a dividend?
It is a share of a company's profit paid out to its shareholders, in proportion to how many shares they hold. It is declared by the company and can only be paid out of profits.
Can a company pay dividends if it made a loss?
Not out of that year's profit, because there is none. It may still distribute accumulated profit from earlier years, but it cannot pay a dividend out of capital.
How are dividends taxed in Nigeria?
Withholding tax is deducted at source before payment, and for dividends that deduction is treated as the final tax on the income in the shareholder's hands. The company remits it and issues a credit note.
Can I force my company to pay a dividend?
Not directly. Distribution is decided by the directors and approved by shareholders. Where a majority uses that power to unfairly prejudice a minority, CAMA provides remedies, but the practical answer is a shareholders agreement setting a distribution policy in advance.
What is an interim dividend?
A dividend declared by the directors during the financial year, on the strength of profits already earned, without waiting for the general meeting that approves the final dividend.
What is the difference between a dividend and a salary?
A salary is paid for work, is a deductible business expense and attracts PAYE. A dividend is paid for ownership, comes out of profit after tax, and attracts withholding tax. A company with no profit can still owe salaries but cannot declare a dividend.