Is dividend income received from resident and/or non-resident companies exempt from tax? If not how is it taxed?
Tax (2nd Edition)
The general rule is that the dividend is subject to 5% WHT irrespective of the tax residence of the taxpayer. However, this can be reduced to lower rates and even eliminated under certain conditions.
Dividends paid by Australian tax resident companies
Under Australia’s dividend imputation system, an Australian tax resident company which pays a dividend may attach franking credits to those dividends. Conceptually, franking credits represent the tax that would have been paid by a company on an amount of taxable profits equivalent to the amount of profits from which the dividend has been declared.
Dividend income received by an Australian tax resident from an Australian tax resident company will be subject to income tax, but the recipient will ordinarily be entitled to apply, as a credit or offset against tax payable, any franking credits which have been attached to that dividend.
As a general rule, dividend income paid by an Australian tax resident company which is received by a non-resident will be subject to dividend withholding tax. The rate of withholding, subject to any applicable double tax agreement, is 30%. However, there are two main exceptions which may apply:
- If the dividend is fully franked (i.e. franked with the maximum number of franking credits permitted), the dividend will not be subject to any further withholding tax. A dividend which is only partially franked will be partially exempt from withholding tax (i.e. to the extent franked); and
- If the dividend is declared to be a distribution of “conduit foreign income” (broadly, foreign income which is not subject to Australian tax), then the dividend will not be subject to withholding tax.
Note that non-resident recipients of franked dividends are not entitled to a credit for the franking credits which they receive, although there is an exception to this rule for dividends received by Australian permanent establishments of foreign resident companies and individuals.
Dividends paid by non-resident companies
Generally, as Australian tax residents are taxable on their worldwide income, dividends received from non-resident companies will be subject to Australian income tax. However, such dividends may be exempt from income tax if the Australian resident recipient is a company and it holds, directly or indirectly, a participation interest of at least 10% in the non-resident company which declared the dividend. Further, if the Australian resident recipient has paid foreign tax on the dividends, then the recipient may be entitled to an Australian foreign income tax offset.
In theory, dividends received are taxed at the standard CIT rate.
However, the FTC provides for a participation-exemption regime. Dividends received by a qualifying parent-company may be CIT exempted if the parent company has owned at least 5% of the French company for at least 2 years. In that case, only 5% of the amounts of dividends distributed remain taxable to CIT, leading to an effective taxation of 1.72% of dividends distributed (i.e. 34.43% x 5% = 1.72%).
Dividend income received by a Belgian company is in principle subject to a corporate tax at a normal rate. The Belgian participation exemption regime allows for a deduction of 95% of the received dividend amount, which results in an effective rate of 1,7%. The latter rate may be further reduced as the remaining taxable 5% may be offset with other tax deductions.
The following conditions must be met in order to benefit from the participation exemption regime:
a) The shareholding company must hold a participation of at least 10% in the share capital of the distributing company or the said participation must have an acquisition value of at least 2,500,000 EUR;
b) The shareholding company must hold (or commit to hold) the shares in the distributing company for an interrupted period of at least one year;
c) The distributing company must be subject to Belgian corporate tax, or to a similar foreign corporate tax regime.
If the tax base is insufficient in order to allow the deduction of 95% of the dividend, the excess may be carried forward to subsequent assessment years.
Dividends that are paid by a Belgian company or through a Belgian intermediary are in principle subject to a 30% withholding tax. Belgian domestic law provides for reduced rates under certain conditions. Provided that certain conditions are met, a company may credit the withholding tax against the corporate income tax that is due.
The withholding tax can altogether be avoided if the distributing company is a Belgian resident company in which the shareholding company holds (or commits to hold) a participation of at least 10% for an uninterrupted period of at least one year.
Dividends are subject to 5% withholding tax when distributed to non-residents (except for EU/EEA entities). The withholding tax rate may be reduced under an applicable tax treaty.
Dividends distributed to EU and EEA resident entities are exempt, in compliance with the Parent-Subsidiary Directive.
Corporations are often permitted to deduct dividends received from other U.S. corporations. A 70 percent dividend received deduction is allowed for corporate recipients that own less than 20 percent of the stock of the dividend-paying corporation. An 80 percent deduction is allowed to corporate recipients owning 20 percent or more of the stock of the dividend-paying corporation. A 100 percent deduction is allowed for dividends received from a domestic corporation in the same affiliated group. An affiliated group is generally a group of corporations eligible to file consolidated returns. See 19 above.
In certain circumstances, a dividend received deduction is available for dividends paid by a foreign corporation. To be eligible, the foreign corporation must not be a passive foreign investment company, must be subject to U.S. tax (i.e. it must have a U.S. trade or business), and at least 10 percent of the vote and value must be owned by the recipient corporation. The deduction is only allowed with respect to the U.S. source portion of the dividend.
Canadian resident individuals are subject to income tax on the receipt of dividends. The tax rate depends on whether the dividend is received from a Canadian or foreign corporation and, in the case of dividends from Canadian corporations, whether the dividend is an “eligible dividend” or not. Dividends from foreign corporations are treated as regular income and subject to the highest marginal rate of tax. Foreign tax credits should be available for any foreign withholding taxes paid on the dividend.
Dividends from taxable Canadian corporations are subject to a lower rate of tax to account for the Canadian corporate level tax that was already paid on the income generating the dividend. Taxable Canadian corporations can designate their dividends to be “eligible dividends” to the extent that they have earned income that is subject to the general corporate tax rate. “Non-eligible dividends” relate to income that has been subject to a corporate tax rate that is lower than the general rate (such as income that can benefit from the small business deduction). Eligible dividends are subject to a lower tax rate at the shareholder level than non-eligible dividends to reflect the higher general rate of tax paid at the corporate level.
Taxable Canadian corporations are able to deduct dividends received from other Canadian corporations. However, a private corporation is subject to a refundable tax (known as Part IV tax) at a rate of 38 1/3% on such dividends unless it owns shares representing more than 10% of the votes and value of the dividend payor. Part IV tax is refunded at a rate 38 1/3% on dividends paid out to shareholders. In addition, dividends paid on preferred shares issued by Canadian corporations may be subject to special rules that deny the inter-corporate dividend deduction or impose a special tax.
Taxable Canadian corporations are subject to Canadian income tax from dividends paid by non-resident corporations unless the non-resident qualifies as a “foreign affiliate”. A non-resident corporation will qualify as a “foreign affiliate” if the Canadian corporation has an equity percentage of at least 1% and together with all related persons has an equity percentage of at least 10%. Dividends received from a foreign affiliate will be free of Canadian tax if it is paid out of the foreign affiliate’s “exempt surplus”, which is generally income earned from carrying on a business in a country with which Canada has a tax treaty or tax information exchange agreement. Income that does not qualify as “exempt surplus” is generally treated as “taxable surplus”. Taxable surplus dividends paid by a foreign affiliate to a Canadian corporation are subject to Canadian tax; however a deduction is available to account for foreign taxes paid by the foreign affiliate and any withholding taxes on the dividend. Lastly, certain capital gains realized by a foreign affiliate are treated as “hybrid surplus”. Fifty percent of dividends paid out of “hybrid surplus” are included in the Canadian corporation’s income, as Canada only taxes 50% of capital gains. As with “taxable surplus” dividends, a deduction is available to account for foreign taxes paid on the capital gain creating the “hybrid surplus”.
In Ukraine dividend income received from resident and/or non-resident companies is taxed.
If an individual receives dividends, such income is subject to taxation at the personal income tax at rate 5% or 9%, plus the military contribution rate of 1.5%.
If such dividends are paid by a resident company, the company shall act as a tax agent, and shall hold and pay the taxes on behalf of the individual. If such dividends are paid by non-resident company, the individual who receives them shall declare such income and pay all taxes by himself.
Dividends received by a resident company (or a permanent establishment of a non-resident company) from overseas are exempt from income tax and SDC tax. There are no CFC provisions under Cyprus law and the only limitation to this exemption is where both limbs of the following test (Passive Dividend Rules) apply, namely where:
- the investment income is more than 50% of the paying company's activities; and
- the foreign tax burden on the income of the paying company is substantially lower than the Cyprus tax burden.
Dividend income distributed by a domestic entity to an Ecuadorian individual is subject to withholding by the distributing entity at a rate equivalent to the difference between tax owed by the shareholder on the dividend income (grossed up with the tax paid by the entity and attributable to the dividend) as if the dividend were the only taxable income, minus the corporate income tax paid at the entity level.
Dividends distributed to shareholders domiciled in a tax haven jurisdiction are subject to a 10% withholding.
Dividends distributed to domestic entities or to foreign shareholders not domiciled in a tax haven jurisdiction are tax free.
Until 2009 where a UK company received a dividend from a UK company the income was exempt from tax however dividends received from non-resident companies were taxed with credit for any foreign withholding tax and tax on the underlying profits. Following adverse rulings from the ECJ, in 2009 the UK introduced a general exemption system. UK and non-UK source dividends and other distributions received by a UK company or a UK permanent establishment are subject to corporation tax unless the distribution falls within a number of exemptions. The exemptions are drafted broadly such that their overall effect is to exempt all dividends from corporation tax unless they fall within certain anti-avoidance provisions called Targeted Anti-Avoidance Rules (TAARs). TAARS include rules that, for example, prevent the artificial transfer of value out of a company resulting from either an intra-group asset transfer otherwise than at market value or the payment of a dividend out of artificial profits.
There is no charge to tax on the receipt by a Gibraltar company of dividends from any other company, regardless of where incorporated. There is no tax on dividends paid by a Gibraltar company to another, and there is no liability to tax on dividends paid by a Gibraltar company to a person who is not resident in Gibraltar.
At a federal and cantonal level, the participation reduction regime applies, so that the effective tax rate applicable to the dividends received is proportionately reduced as per the ratio of the net dividend income over the total net taxable income, provided that the Swiss company holds at least 10% of the participation or participation rights with a market value of at least CHF 1 million. As a result, such dividend income is usually virtually tax exempt.
The participation exemption applies irrespective of whether the dividends are paid by a resident or a non-resident company.
Dividends paid from one Israeli resident company to another is generally exempt from withholding to the extent dividends are distributed from income that generated or accrued in Israel and was subject to regular corporate income tax rates.
Dividends from an Israeli resident company to a non-Israeli resident company are generally subject to withholding at a rate of 25%, which rate is increased to 30% if at the time of the distribution or at any time during the 12-month period preceding the distribution, the recipient of the dividend is, or was, a “substantial shareholder” (generally, a shareholder that holds 10% or more on one of the means of control of the company paying the dividend). A reduced rate may be applicable under a double tax treaty.
Dividends distributed from a preferred enterprise are generally subject to a reduced 20% withholding rate. In addition, dividends paid from certain qualifying income under the IP Regime will also generally be subject to a reduced 20% withholding rate, which rate is reduced to 4% to the extent the dividends are paid to a non-Israeli company and certain other conditions are met.
Dividends that an Israeli resident company receives from abroad are subject to the standard corporate tax rate (currently 24%), with a possibility to obtain a direct and indirect foreign tax credit with respect to taxes withheld abroad.
Dividend income received from resident companies is 95% exempt from corporate income tax. The same 95% exemption applies to dividend income paid by non-resident companies provided that:
- The paying company is not resident of a tax privileged jurisdiction (i.e., a non-EU/EEA member State with a nominal tax rate lower than 50% of the Italian nominal tax rate); and
- The paying company is not on-distributing profits it received from a controlled company tax resident of a privileged jurisdiction; and
- The payment is fully non-deductible in the country of residence of the paying company. If the payment qualifies for the Parent Subsidiary Directive, the 95% exemption applies to the extent the payment is non-deductible in the country of residence of the paying company.
Under Portuguese domestic tax rules, dividends paid by Portuguese resident companies to non-resident entities are subject to a definitive withholding tax at a rate of 25% (which may be reduced to rates ranging from 5% to 15% under a double tax treaty and provided certain formalities are complied with). As per dividends paid to Portuguese resident companies, they are to be included in the taxable profit assessment and subject to CIT at the general rate of 21%.
Notwithstanding the above, Portuguese Corporate Income Tax Code provides a participation exemption regime which has a wider scope than the mere compliance of the EU Parent-Subsidiary Directive provisions, according to which the withholding tax can be eliminated provided that the following conditions are met:
(i) The beneficiary of the income is resident in Portugal or in:
a. Another EU country;
b. An EEA country bound to administrative co-operation similar to that applicable between EU countries; or
c. A country with which Portugal has concluded a DTT providing administrative co-operation similar to those applicable between EU countries;
(ii) The beneficiary of the income:
a. Holds at least 10% of the share capital or voting rights of the distributing company;
b. Holds the participation continuously for 12 months prior to the distribution of the dividends (or, if held for a lesser period, is kept until the period of 24 12 months is completed); and
c. Is subject to and not exempt from any of the CITs referred to in the EU Parent Subsidiary Directive, or a tax of a similar nature with a rate not lower than 60% of the Portuguese CIT rate.
(iii) The distributing entity is not a resident in a blacklisted jurisdiction.
It is important to refer that the participation exemption regime is not applicable if there is an arrangement or a series of arrangements which, having been put into place for the main purpose or one of the main purposes of obtaining a tax advantage that defeats the object or purpose of eliminating the double taxation of dividends, are not genuine having regard to all relevant facts and circumstances.
Dividend income paid by a Kenyan company is subject to withholding tax at the rate of 5% if paid to a resident person or 10% if paid to a non-resident person in the absence of a double taxation agreement. However, dividend income paid to a resident company holding 12.5% or more of the share capital of the paying company is not subject to withholding tax in Kenya.
Foreign dividends are not subject to tax in Kenya.
Dividend income obtained by corporations from resident companies is, as a rule, subject to a standard taxation of 19% tax. However, this income is exempt in cases where the income is obtained by a company that owns at least 10% of the shares in the paying company directly and constantly for at least two years.
Dividend income obtained by corporations from non-resident companies is, in principle, taxed at the 19% rate. However, dividend is exempt from Polish tax if it was obtained by a Polish company from a company resident in another EU or EEA country in which the Polish shareholder holds at least 10% for two years.
Dividend income derived by Polish individuals from resident or non-resident companies is subject to the 19% tax.
Dividend income derived by a Japanese corporation from another Japanese corporation is, in whole or in part, excluded from the taxable income (i.e., effectively dividend received deduction) of the receiving Japanese corporation, as outlined below:
(i) if the receiving Japanese corporation owns 100% of the shares of the paying Japanese corporation throughout the calculation period for the relevant dividend (generally meaning the fiscal year to which such dividend pertains to), 100% of the dividend is excluded from the taxable income.
(ii) if the receiving Japanese corporation owns more than one-third (1/3) but less than 100% of the shares of the paying Japanese corporation throughout the calculation period for the relevant dividend, 100% of the dividend is excluded from the taxable income but interest expenses pertaining to the acquisition of the underlying shares is added back to the taxable income.
(iii) if the receiving Japanese corporation owns more than 5% but less than one-third (1/3) of the shares of the paying Japanese corporation, 50% of the dividend is excluded from the taxable income.
(iv) if the receiving Japanese corporation owns 5% or less of the shares of the paying Japanese corporation, 20% of the dividend is excluded from the taxable income.
As to dividend income derived by a Japanese corporation from its foreign subsidiary, dividend to be received from such foreign subsidiary will be exempt from Japanese corporate taxation with respect to 95% of the amount of such dividends. Such qualifying foreign subsidiary in general means a foreign corporation 25% or more of whose total issued shares or voting rights are owned by the Japanese corporation for the period of at least six months up to when the dividends become payable. The shareholding percentage can be modified (in most cases reduced, say to 10%) by the indirect foreign tax provision of the applicable tax treaty. This means that Japan has effectively adopted a territorial-based taxation regime so long as foreign income is derived in the form of dividends from foreign subsidiaries.
In the Netherlands the participation exemption entails that, dividends and capital gains derived by a Dutch company from a qualifying shareholding are exempt from Dutch corporate income tax. The participation exemption applies if the Dutch company (i) holds a shareholding of at least 5% of the nominal paid-up capital in a company which capital is divided into shares and (ii) the participation is not held as a mere passive investment (the "motive test"). If the motive test is not passed, the participation exemption may still be applicable if (a) the company in which the participation is held is subject to a "realistic levy of at least 10%" according to Dutch tax standards (the "subject-to-tax test") or/and (b) the assets of the company in which the participation is held do not consist directly or indirectly for more than 50% of so-called "low-taxed free passive assets" (the "asset-test").
Dividends paid by Mexican tax resident legal entities are not subject to further taxation when they are paid out of the after-tax earnings and profits account, since such income would have already been subject to taxation. If that is not the case, the entity paying dividends would be required to pay corporate tax on such untaxed profits at the moment of the distribution.
Regardless of the abovementioned corporate tax, dividends paid to foreign tax residents, whether individuals or legal entities, as well as to Mexican resident individuals, would be subject to an additional 10 per cent withholding tax. Profits distributed by a foreign resident’s permanent establishment set up within national territory to its parent company could be deemed as dividend income and as such, the 10 per cent withholding tax could also be triggered.
Nonetheless, it should be noted that relief in the form of reduced withholding rates could be provided by double taxation agreements (in so far as certain requirements are met).
Norway has a fairly generous exempt method. Income from shares is as a main rule exempt, provided it is not from a low tax country. However, since accompanying costs are deductible, 3 % of dividends must be taken to income. This does not apply for dividends within a tax group. Also distributions and gain from partnerships are on certain conditions comprised.
Dividend payments from companies resident in the EEA to corporate shareholders are treated similar to dividends from a domestic company, provided that the paying company has sufficient substance. There is no minimum level of holding or holding period.
Dividend payments and gains from a company resident outside the EEA area will be comprised by the method if the corporate shareholder holds 10% or more of the share capital and the voting rights of the foreign company for a period of at least two years. Dividends are tax exempt from day one, provided that the criteria are met at a later time.
The exemption does not apply to dividends from low tax jurisdictions outside the EEA.
Dividends are not exempt from taxation if the dividend payment is tax deductible for the paying company, regardless of where the company is resident.
95% of the dividend income received by corporations is effectively exempt from corporate income tax since 5% of the dividend received is treated as non-deductible business expense. This tax exemption generally only applies in case the corporate shareholder owns 10% or more of the shares of the respective corporation.
The tax exemption is not applicable if the shareholder receiving the dividends is a financial institution, insurance company or pension fund. In addition, the tax exemption is not available in case the dividends have been deducted as business expense at the level of the distributing corporation.
The dividend tax exemption generally also applies for trade tax purposes if the shareholder receiving the dividend holds at least 15% of the shares in the distributing corporation from the beginning of the fiscal year and the distributing corporation derives its income essentially from certain active business operations.