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Reduction of Share Capital Singapore

Reduction of Share Capital Singapore | Bestar
Reduction of Share Capital Singapore | Bestar

Reduction of Share Capital Singapore

Reasons for Reduction:

Companies might choose to reduce share capital for various reasons, such as:

  • Returning excess capital to shareholders: If the company has more capital than it needs, it can return some to shareholders through a capital reduction.

  • Cancelling forfeited shares: Shares that haven't been fully paid for by shareholders can be cancelled and the capital reduced accordingly.

  • Simplifying capital structure: A complex capital structure can be cumbersome to manage. Reduction can help streamline it.

Reducing a company's share capital in Singapore involves lessening the total amount of money the company has raised through the issuance of shares. There are two main ways to achieve this:

With Court Approval

This method is necessary if creditors may be negatively affected by the reduction. Here's the general process:

  1. Pass a special resolution approved by shareholders at a general meeting.

  2. Apply to the court for approval of the reduction.

  3. If approved, file the court order and a notice with the Accounting and Corporate Regulatory Authority (ACRA) within 90 days.

Requirements for Reduction with Shareholders' Approval (Faster Method):

This method is faster but requires specific conditions:

  • Special Resolution: Pass a special resolution approved by shareholders. This requires a 75% majority vote of shareholders present and voting at a general meeting.

  • Solvency Statement: The board of directors needs to declare the company's solvency (ability to pay debts) unless exempted under Section 78D of the Companies Act. The board must make a solvency statement declaring the company can repay its debts within the next 12 months (may not be required in all cases). This typically applies to private companies that haven't changed their share capital in the past year and haven't suffered losses exceeding half their paid-up capital.

  • Publicity Requirements: Comply with publicity requirements to inform creditors.

    • Notice must be published in the Gazette (official government publication) outlining the proposed reduction.

    • Creditors must be notified by advertisement in a local newspaper.

  • Creditor Objection Period: Creditors have 6 weeks from the special resolution date to object to ACRA.

  • File a notice with ACRA after a 6-week period for creditor objections.

Additional Considerations:

  • Impact on financial ratios: Reduction can affect financial ratios used by lenders or investors to assess the company's health.

Tax Consequences of the Reduction

The good news is that generally, a share capital reduction in Singapore doesn't have direct tax implications for shareholders under Singapore's one-tier corporate tax system. Here's a breakdown:

  • Distributions from Share Capital:

    • When the reduction comes from the company's contributed share capital (money shareholders paid for shares), it's considered a return of capital, not a dividend.

    • This means shareholders wouldn't pay income tax on the amount received.

    • However, the cost base of their remaining shares is reduced by the amount of capital returned.

  • Distributions from Other Reserves:

    • If the reduction uses funds from other company reserves (e.g., retained earnings), the tax treatment becomes more complex.

    • In some cases, it might be considered a deemed dividend, but under the one-tier system, dividends from resident companies are generally tax-exempt for shareholders.

Seeking Professional Advice:

While the tax implications seem favorable, it's always recommended to consult with a qualified tax professional for your specific situation. Here's why:

  • Complexity of Reduction:  The source of funds used for the reduction (share capital vs. other reserves) can impact tax treatment.

  • Specific Circumstances:  Your company's unique financial situation and shareholder residency might require a more nuanced tax analysis.

Here are some helpful resources for further information:

How Bestar can Help

Bestar can be valuable asset in navigating a share capital reduction in Singapore. Here's a breakdown of how each can assist you:

  • Legal Expertise: We possess in-depth knowledge of the Companies Act and relevant legal procedures for share capital reduction.

  • Compliance Guidance: We can ensure your reduction process adheres to all legal requirements, including drafting appropriate resolutions and meeting publicity obligations.

  • Creditor Objections: If creditors object to the reduction, our partnered lawyer can represent your company in court and protect your interests.

  • Structuring the Reduction: We can advise on the most suitable method for your situation (court-approved or shareholder approval) considering factors like creditor involvement and complexity.

  • Financial Analysis: We can assess your company's financial health and determine if it's solvent enough to proceed with the reduction.

  • Tax Implications: We can analyze the potential tax consequences for the company and shareholders based on the source of funds used for the reduction (share capital vs. reserves).

  • Preparing Documentation: We can assist in preparing the solvency statement (if required) and any other necessary financial documentation.

Bestar can ensure a smooth and compliant process that minimizes potential risks and tax burdens.


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