UK Dividend from Subsidiary

[JameS-UK]

Hi

Please could someone in the UK help me with this ?

If a subsidiary makes a net profit can it's parent company pay out a dividend ? - and if so would the parent invoice the subsidiary for the funds and show the invoice as a debt/asset and also therefore suffer an equity reduction on the balance sheet ?

Both are small Ltd companies.

Many thanks
James

 

[Truemanbrown]

I am assuming that both companies are UK resident and that you would like to pay a dividend from the subsidiary to the parent company first. In the example below the dividend from the subsidiary will be £100,000.

The first transaction is the dividend from the subsidiary to the parent.

The subsidiary will need to hold a Director's Meeting to formally approve the payment of the dividend. Please ensure that this is minuted. You will find out more about the procedure about paying dividends here.

When the payment is made, you will also need to give the parent company a dividend voucher.

The transactions should be recorded in the books of the subsidiary as follows: -

Dr Dividend £100,000
Cr Bank Account £100,000

The transactions should be recorded in the books of the parent as follows: -

Dr Bank Account £100,000
Cr Income from Subsidiary Undertakings £100,000 (This is a P & L Account item)

Please note that although this transaction will increase the profit of the parent, the dividend itself is NOT taxable under the Corporation Tax regime.

The second transaction is the dividend from the parent company to the shareholders.

The procedure is the same as the dividend from the subsidiary to the parent. So, the parent holds a director's meeting to approve the payment of the dividend and it must be minuted. A dividend voucher should then be given to all shareholders of the parent.

 

[JameS-UK]

Thank you for your time on this. Yes both are UK based. Is the balance sheet of the parent unaffected after the pay-out?

James

 

[Truemanbrown]

The Balance Sheet will show for the dividend payable from the subsidiary to the parent: -

1. An extra amount of cash (if dividend paid).
2. On the other side, you will see an increase in the P & L Account reserves due to the dividend.

Assuming the parent pays exactly the same amount as the first distribution above, the net result in the Balance Sheet will show no change to the Balance Sheet.