Paying Dividends from a Hong Kong Company: Distributable Profits, Approval and Bookkeeping
For a profitable Hong Kong company with a few shareholders, a dividend is the normal way to take profits out. It's simple to do, but it has one firm rule, a little paperwork, and two entries in the books. Here's how it works for a private company.
The rule: only out of distributable profits
Under section 297 of the Companies Ordinance, a company may only make a distribution out of profits available for distribution. They are its accumulated, realised profits, less what has already been paid out or capitalised, minus its accumulated realised losses.
- Accumulated: profits from earlier years count, and so do losses. A company that lost money in the past has to earn it back before it can pay a dividend.
- Realised: section 291 says it's a question of generally accepted accounting principles. An unrealised gain, such as an increase in the value of an investment that hasn't been sold, doesn't count.
- Not cash: the test is about profits, not the bank balance. A company can have plenty of profits and no cash to pay them, or cash and no profits.
| Item | Amount |
|---|---|
| Realised profits brought forward from earlier years | 600,000 |
| Add: realised profit for the latest year | 250,000 |
| Less: dividends already paid out of those profits | (200,000) |
| Profits available for distribution | 650,000 |
| Not included: an unrealised gain on revaluing an investment | 120,000 |
Listed companies also have to pass a net-assets test (section 298); for a private company, the profits test is the one that matters.
Which accounts justify the amount
The amount is judged by reference to the company's financial statements (section 302):
- Normally the last annual accounts, audited and laid before the members or sent to them (section 304).
- Interim accounts if the last annual accounts don't show enough profit, for example when profits have been made since the year end. For a private company they need to be enough to make a reasonable judgement of the figures (section 305). Up-to-date management accounts are the usual starting point (see monthly management accounts).
- Initial accounts for a new company that hasn't yet had its first annual accounts (section 306).
Every distribution already made by reference to the same accounts is added in (section 303), so two dividends can't each use the same profits.
Who approves it: interim and final dividends
Most private companies use, or are based on, the model articles. Under article 73:
- A final dividend is declared by the members at a general meeting, and can't be more than the directors recommend.
- An interim dividend can be paid by the directors, if it appears to them to be justified by the company's profits.
- It's paid by reference to each member's shareholding on the date of the resolution or decision, unless the resolution or share terms say otherwise.
Record the decision in board minutes or a members' resolution, with the amount per share, the date it's based on, and the accounts relied on. Check your own articles: they can differ from the model.
Paying it
- By bank transfer or cheque to each shareholder (article 74).
- In assets instead of cash only by ordinary resolution on the directors' recommendation (article 77).
- A shareholder can waive their dividend, but only by deed (article 78).
- Unclaimed dividends stay owing for 12 years, after which the shareholder loses the right to them (article 76).
The bookkeeping
| When | Entry |
|---|---|
| Members approve the dividend | Dr Retained earnings 300,000 Cr Dividends payable 300,000 |
| Paid to the shareholders | Dr Dividends payable 300,000 Cr Bank 300,000 |
A dividend is not an expense. It doesn't go through the income statement; it comes out of retained earnings in equity. Book it once it's no longer at the directors' discretion: a final dividend when the members approve it, an interim dividend usually when it's paid.
If a shareholder who is also a director leaves the dividend in the company, the amount owed to them can be credited to the director's current account and drawn later. Money taken out without a dividend or salary is a different thing: it's owed back to the company.
Tax
- For the company, a dividend isn't deductible: it's paid out of profits that have already been taxed (see profits tax rates).
- For a company receiving a dividend from a company that pays Hong Kong profits tax, section 26(a) of the Inland Revenue Ordinance keeps it out of the recipient's assessable profits.
- Shareholders who live or are taxed elsewhere should check how their own country treats the dividend.
If a dividend is paid unlawfully
If a dividend is paid without enough distributable profits, a shareholder who knew, or had reasonable grounds to believe, that it broke the rules has to repay it (section 301). For a small company whose shareholders are also its directors, that's almost always the case. If you're not sure the profits are there, check the figures first, and take advice.
How Certanta helps
- Current figures: books closed every month, so retained earnings and the latest profit are always up to date in your portal (see the month-end close).
- Ask before you declare. "What are retained earnings at 30 September?" is a question for the AI assistant in your portal.
- Booked properly: the declaration and the payment, to each shareholder or to the director's current account, signed off by your bookkeeper.
- Year-end accounts ready for the auditor, so the annual accounts that justify next year's dividend aren't delayed (see audit-ready books).
Frequently asked questions
Can a Hong Kong company pay a dividend if it made a loss this year?
Possibly. The test under section 297 of the Companies Ordinance is accumulated realised profits less accumulated realised losses, not the current year alone. A company with enough realised profits from earlier years can still pay a dividend; one with accumulated losses cannot.
What are distributable profits in Hong Kong?
A company's accumulated, realised profits, so far as not previously distributed or capitalised, less its accumulated, realised losses, so far as not previously written off in a reduction or reorganisation of capital (Companies Ordinance, section 297). Unrealised gains do not count.
Who approves a dividend?
Under the model articles for private companies, a final dividend is declared by the members at a general meeting and cannot exceed the amount the directors recommend; the directors can pay interim dividends that appear to them to be justified by the company's profits. Check your own articles.
Can a dividend be based on management accounts?
If the last annual accounts do not show enough distributable profits, the amount can be justified by interim accounts. For a private company these must be enough to make a reasonable judgement of the relevant figures (section 305).
Is a dividend an expense of the company?
No. It is a distribution of profits to shareholders, taken from retained earnings in equity. It does not go through the income statement and is not deductible for profits tax.
What happens if a dividend is paid without enough profits?
A shareholder who knew, or had reasonable grounds to believe, that the distribution was made in breach of the rules is liable to repay it to the company (Companies Ordinance, section 301).
Know your retained earnings before you declare
With books kept current every month, your balance sheet and retained earnings are always up to date in your portal, and the dividend is booked when you declare and pay it.
Open the demo See pricingThis article summarises the Companies Ordinance (Cap. 622), the model articles for private companies (Cap. 622H) and the Inland Revenue Ordinance (Cap. 112) as published on e-Legislation on 29 October 2026. It is general information, not legal, tax or accounting advice. Your own articles of association may differ from the model articles; check them, and take advice before paying a dividend you are unsure about.