What is a Return of Capital?
A Return of Capital is a Corporate Actions Event whereby the initial capital paid by the shareholders is paid back to those shareholders. A Captial Return differs from a Cash Dividend in the sense that a Return of Capital is paid by decreasing a company's equity, whereas a Cash Dividend is paid from the Company's profits.
When a company pays back part of all of the invested money to the investor hereby decreasing the total value of the investment.
A transfer of wealth back to the investor by the company. When the company pays a Capital Return, it will decrease its outstanding capital accordingly.
Why do shareholders like Return of Capital Events?
As opposed to a cash dividend, neighter the compony nor the investor needs to pay tax on a return of capital.
Process of a Capital Return
1 Company to decide for a Return of Capital (often advised by managent consultants, accountants and industry experts)
2 Company to appoint a Paying Agent
3 Company to officially announce and publish the details of the event
4 Paying agent to distribute the information among all industry participants
5 Paying agent to pay the money on the payment date
Key Dates, Ratios and numbers in a Return of Capital Event
Exdate, Record date, Payment Date, Cash amount per share
Tax Consequences of a Capital Return
There are no tax consequences
Example of a Return of Capital
On May 28, 2009, the shareholders of Nobelcorp approved a return of capital to shareholders through a reduction in par value in an aggregate amount equal to 0.25 CHF per share, which was paid in four installments as follows:
Under current Swiss tax law, distributions to shareholders in the form of a reduction in par value are exempt from Swiss withholding tax. However, the company urged shareholders to consult Noble’s Proxy Statements relating to its Change of Incorporation, its 2009 General Meeting of Shareholders and its 2010 General Meeting of Shareholderseach as filed with the U.S. Securities and Exchange Commission. Investors were also urged to consult their tax advisor for more information.
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