In a world where tax rules and laws are complex and confusing, it can be difficult to navigate the landscape of dividends and dividend tax. For that reason, we are writing this post to give you clarity on what dividends and dividend tax consist of.

We will, among other things, explain what a dividend is, who it is for, and the difference between ordinary and extraordinary dividends.

If you are already familiar with some of these topics, you can jump around the article by clicking on the headings on the left side of your screen or at the top if you are reading from your phone.

What is a dividend?

It is always good to start by getting the basics in place. Therefore, we will start by defining the concept of a "dividend."

A dividend is simply an annual distribution of a company's profit to one or more owners and any shareholders. The annual dividend must be decided at the company's general meeting and then distributed to the owners and shareholders proportionally according to their ownership shares.

So, the person who owns 25% of the company receives 25% of the total dividend, and so on.

The proportional distribution of the dividend actually comes from the dividend's other, Latin name, "dividende," which you may also encounter from time to time. "Dividende" stems from the Latin "dividendius," meaning "that which should be divided."

Who is a dividend for?

We have mentioned that the recipients of the dividend are owners and shareholders, but we haven't mentioned that dividends are only for limited liability companies.

Sole proprietorships cannot pay out dividends because the owner's assets and the sole proprietorship's assets are the same.

However, that is not the case when it comes to companies.

Public limited companies (A/S) and private limited companies (ApS) can all distribute dividends to their owners.  

Ordinary or extraordinary dividend?

There are two different ways to distribute a dividend. The first way is called an ordinary dividend. Distributing an ordinary dividend is the most common way to pay out dividends.

This is primarily because the ordinary dividend is decided and paid out in connection with the company's general meeting, where the annual report is also approved. It is therefore a natural time to do so, because we know the actual profit at this point.

There are 3 conditions for the distribution of an ordinary dividend:

1. Ordinary dividends can only be paid out of the profit shown in the approved annual report
2. May only be distributed if it is not detrimental to the company or its creditors
3. Ordinary dividends must be approved by the management and passed by a majority at the company's general meeting

Extraordinary dividends differ in that they are distributed at a time other than the company's general meeting. It is therefore a way to distribute company capital during a financial year.

To distribute an extraordinary dividend, the company must meet 5 conditions:

1. The company must have approved and filed its first annual report with the Danish Business Authority
2. Can be paid out based on the previous year's financial statements, or if profit or free reserves have been earned during the financial year
3. Payment of extraordinary dividends must be based on a balance sheet or an interim balance sheet, which must be attached to the decision. It can be a good idea to get help from an accountant for this part
4. May only be distributed if it is not detrimental to the company or its creditors
5. Extraordinary dividends must be approved by the management, e.g., in connection with an extraordinary general meeting, but authorization for this type of dividend can also be granted at the annual general meeting

How do you get a handle on dividends?

Even though dividends might sound quite simple on paper, it can sometimes be harder to get a real handle on them in practice, because first and foremost, a profit must be calculated and a dividend must be booked.

At Reportability, you can create your own annual report without being a top-tier accounting expert. You simply transfer your bookkeeping from your accounting system to Reportability, and our tool then begins calculating your figures.

Once that is done, it will tell you how much you can distribute, and it will book it completely automatically for you, so you don't have to do it yourself. It takes no more than 30 minutes for you to get through our tool, and when you are finished, you have a completed annual report, a calculated and booked dividend, and a guide on how to report it to the tax authorities.

The tool also automatically sends your annual report to the Danish Business Authority when you are ready.

If you need help along the way, you can always write to our accounting experts in the chat.

This way, you avoid all the hassle.

Dividends from an ApS

The procedure for distributing dividends from an ApS is simple.

As we mentioned above, the decision regarding dividends must be made at the annual general meeting. In connection with the decision to approve the annual accounts, the management also decides whether or not dividends should be paid out.

Subsequently, the actual distribution of dividends can take place from the company to the individuals who are to receive them.

Dividend tax

Like all other income, dividends are subject to tax, and you can read more about this in the post about dividend tax.

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