“Are there any reasons why a company should not pay dividends on shares held in its off-shore employee ownership trust? Do any companies currently do this? At the moment the trust waives dividend payments on shares it holds, but we would like to review this arrangement.”
We dont pay dividends to the trusts. The shares the trusts own are unallocated to plan members (i.e. they just hedge a general exposure) thus they would have nobody to onward pay dividends to. We have no plans to revisit.
The EBT waives the dividend (except for a nominal amount) for the reasons given in previous comments. On a practical level, having (twice) had to “close out” an EBT following a company takeover, it’s helpful (but not essential) to keep it simple and not have cash in the EBT if it can be avoided
In my experience our EBTs have waived the right to dividends for the tax reason you outlined. The only exception to this was in of the operation of a particular deferred bonus plan that effectively purchased shares with the bonus amounts deferred (a mandatory and voluntary element) which were then eligible for dividends, on the participant’s behalf, throughout the 3 year performance period. The EBT paid these on to the participants.
It is very uncommon for a trust deed not to have a dividend waiver included. We have been advised that without the waiver it is very difficult to argue that the company should not pay the dividend as the trust would find it difficult to refuse money it could have for the benefit of the beneficiaries.
Our understanding is that the main reason for not wanting to pay dividends to a trust is that it is very tax inefficient for example a Trust is required to pay 50% tax to HMRC if it receives dividend income from a UK company.
Our trustee commented that most of its clients who effectively want to “pay a dividend on the shares” simply either gift or loan the trust an amount that is equivalent to the dividend. In this way the trust receives the same gross amount but as they do not have to pay the 50% tax the net amount received is significantly higher.
Loaning the equivalent amount of money to the trust also avoids getting cash stranded in the EBT, i.e. the company could recall the loan.
Our EBT waives dividends on shares it holds other than a nominal amount. Can’t see any reason why dividends could not be paid, however, the issue already highlighted re. distribution of cash reserves is worth considering – why end up with a load of cash stranded in the EBT?
Essentially, it’s just a company paying money to itself; short of a nominal amount (we pay 0.01p per share). We have also been advised that the Trust may have issues holding large amounts of cash on our behalf unless there is an arrangement for this to be distributed to the future owners of the shares (who could be the Company if the shares do not end up being used to satisfy awards, so the cash flow would be pointless).
Having said this, we pay dividends on a proportion of shares held by the Trust, but only those which have been purchased by employees with their bonus as part of our Deferred Bonus Plan. The Trust holds the shares and dividend for the employees in a nominee capacity and the dividend cash is earmarked to purchase further shares as part of the award, when the award vests. The amount of dividend income is then notified to the individuals on an annual basis by the Company (not the Trust due to disguised rem issues) and must be declared on individuals’ personal tax return as income in that tax year.
We do pay dividends on shares held in the EBT but have only done so after discussions with the lawyers on the terms of the EBT at flotation. In our case LTIP holder is also entitled to the votes.
Talking to our registrars we are slightly unusual