Is dividend income received from resident and/or non-resident companies exempt from tax? If not how is it taxed?
Tax (3rd edition)
The participation reduction regime applies at the federal and cantonal level, meaning 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. To qualify for the participation reduction, the Swiss company must hold at least 10% of the participation or participation rights with a market value of at least CHF one 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 non-resident company.
Yes. Under US tax law, corporations are generally allowed a deduction for dividends received from other taxable US corporations. The deductible amount is calculated as a percentage of the dividends received, depending on the level of ownership that the corporate shareholder has in the US corporation paying the dividend. Currently, the dividends received deduction is 50 percent of the dividend if the recipient owns less than 20 percent (by vote and value) of the stock of the payor corporation (resulting in an effective tax rate of 10.5 percent), 65 percent if the recipient owns at least 20 percent but less than 80 percent of the stock of the payor corporation (resulting in an effective tax rate of 7.35 percent), and 100 percent if the recipient owns 80 percent or more of the stock of the payor corporation.
Furthermore, dividends corporations receive from non-US corporations are not generally eligible for the dividends received deduction. However, if a corporation owns at least 10 percent (by vote and value) of the stock of a foreign corporation paying the dividend, the US corporation is generally entitled to a deduction for the untaxed US source portion of the dividends. And, as enacted as part of the TCJA to transition the US to a hybrid territorial tax system, certain domestic corporations that own at least 10 percent (by vote or value) of a foreign corporation are entitled to deduct 100 percent of the untaxed foreign-source portion of dividends received by the foreign corporation, provided the US corporate shareholder has met certain holding period requirements.
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”.
Dividend income of domestic companies is tax exempt.
Dividend income from foreign corporations is exempt from corporate income tax under the international participation privilege if the (i) foreign company is comparable to a domestic company or is an EU company listed in the EU Parent-Subsidiary Directive, (ii) minimum holding period of 1 year has elapsed, (iii) shares in the foreign company constitute at least 10% of the nominal capital and (iv) the foreign company does not mainly derive low taxed passive income.
Dividend income from portfolio participations (participation below 10%) in foreign companies is exempt from corporate income tax as well if the (i) foreign company is comparable to a domestic company and is resident in a country with which Austria has agreed on a comprehensive exchange of information or is an EU company listed in the EU Parent-Subsidiary Directive and (ii) does not fall under the scope of the international participation privilege (and in case of particiaption above 5% is not low-taxed).
Individuals are subject to a flat-rate tax of 27.5% on dividend income.
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%) or 1.4% (i.e. 28% x 5%).
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.
Dividends received from resident companies are not subject to taxation in Brazil.
As to the distribution of dividends from foreign affiliate companies, provided that some conditions are met, dividends will only be subject to taxation in Brazil when they are effectively distributed. On the other hand, in view of the CFC legislation, profits from foreign controlled companies should be considered deemed distributed to the Brazilian controlling company by December 31 of each calendar year.
Foreign tax credit is allowed according to Brazilian tax legislation.
Please note that taxation on profits and dividends may be avoided in Brazil, depending on the existence of a favorable tax treaty between Brazil and the jurisdiction in which the Brazilian subsidiary is located.
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.
Dividends received by Irish resident companies from other Irish resident companies are exempt from tax.
Dividends received by Irish resident companies from non-resident companies are taxed as follows: (i) 0% - portfolio holdings (>5%); (ii) 12.5% - dividends from trading subsidiaries (in EU/DTA country or where listed company within group); (iii) 25% - dividends from other subsidiaries.
Tax payable on dividends is reduced by applicable credits. There is an extensive credit regime including provisions for credit for foreign underlying and withholding taxes (including multiple lower tier subsidiaries). Furthermore tax credits may be pooled within separate 12.5% and 25% buckets and excess tax credits may be carried forward.
Finally there is an effective dividend participation exemption on dividends received from subsidiaries in an EU Member State. An Irish company in receipt of a dividend from a company in an EU Member State, which is not fully sheltered by actual tax credits, is entitled to a deemed credit to ensure an effective Irish tax rate of 0% on dividends received from EU subsidiaries.
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 23%), with a possibility to obtain a direct and indirect foreign tax credit with respect to taxes withheld abroad.
In 2008, Malaysia moved away from the imputation system and adopted the single-tier tax system, which took effect from year of assessment 2008.
Thus, pursuant to paragraphs 12A and 12B of Schedule 6 of the ITA, the following are exempt from tax in the hands of shareholders:
(a) dividend paid, credited or distributed to any member by a co-operative society; and
(b) dividend paid, credited or distributed to any person where the company paying such dividend is not entitled to deduct tax under the Act and any deductions in relation to such dividend shall be disregarded for the purpose of ascertaining the chargeable income of the person.
Between 1.1.2008 to 31.12.2013, companies with tax credit balances could still pay dividend under the imputation system and shareholders receiving such dividends are entitled to set-off against their payable taxes.
Generally speaking, dividends paid by Mexican companies or non-resident companies to Mexican individuals are taxed as ordinary income at the applicable progressive rate.
Dividends received by Mexican resident corporations from another Mexican resident corporation are not taxable. However, dividends received by a Mexican-resident corporation from a foreign resident corporation, are taxable at a 30% income tax rate, as ordinary income, although the taxes paid abroad could be credited against taxes due in Mexico.
In addition, please note that dividend payments made by Mexican companies to individuals or foreign residents (individuals or corporations) are subject to tax at a 10% withholding rate.
Pursuant to the participation exemption the basis for taxation of dividends is 3 % of the dividends received, which are subject to 23 % corporate income tax. Such dividends are thus subject to an effective tax rate of 0,69 %. Losses are not deductible. However, if the receiving company owns more than 90 % om the distributing company, the dividend is fully tax exempt.
Dividends on shares from companies resident in Norway are subject to the participation exemption method irrespective of participation and holding period. The same applies for dividends from shares in companies resident in the EEA, with the exception of companies established in low-tax jurisdictions. Companies in low-tax jurisdictions within the EEA must be genuinely established there and conduct genuine business within the stare of residency (substantial business test).
Dividends on shares in companies' resident outside the EEA, but in low-tax jurisdictions, are also tax exempt provided that the shareholder has held at least 10% of the shares and capital for a period of two years. Dividends on shares in low-tax jurisdictions outside the EEA are not tax exempt and losses on such shares will be deductible.
Norwegian branches of foreign companies are covered by the participation exemption method irrespective of the state of residency of the foreign company.
All companies who have a Notice of Operations, an Operations Code to operate in the Colon Free Zone (CFZ) or which operate in a petroleum free zone or any other duty free or special zone, or generate taxable incomes in the Republic of Panama will be subject to the payment of these taxes, according to the following rules:
Companies who have a Notice of Operations, or generate taxable incomes in the Republic of Panama.
- 10% - Profits from Panamanian source.
- 5% - Profits from foreign source or from exports, and from exempt income from paragraphs f and I of article 708 of the Tax Code.
Companies registered in special tax regimes, such as Colon Free Zone, Panama Pacific Regime, Petroleum Free Zone, are oblige to pay dividend tax at the rate of 5% without the consideration of the source of the income to be distribute.
When an individual distributes dividends or participation quotas it should first use up the income from Panamanian source, or local or internal operations, before distributing dividends or participation quotas from income coming from foreign operations or exports and from local income exempt from the Income Tax, as foreseen in the Tax Code, accordingly.
Subsequent distribution of dividends is not subject to dividend tax as long as the tax has been paid at the source
The distribution of dividends or participation quotas to those companies that do not require a Notice of Operations or do not generate taxable income in Panama is excluded from the concept of local income.
Dividends received by domestic corporations and resident foreign corporations from another domestic corporation are exempt from income tax. Dividends received by a domestic corporation from foreign corporations are subject to the 30% regular corporate tax.
Non-resident foreign corporations are subject to a 30% tax on dividends received from domestic corporations, which may be reduced to 15% subject to compliance with the requirements for tax sparing credit.
As a general rule, dividends received by resident companies are subject to a 21% CIT rate, whereas dividends paid to non-resident companies are subject to withholding tax at a 25% rate or a reduced rate (between 5% and 15%) foreseen under the terms of the applicable Double Tax Treaty.
Portugal has transposed the EU Parent-Subsidiary Directive provisions which result in a withholding tax exemption under the conditions set forth therein, and established more recently a participation exemption regime.
Under this regime, dividends are exempt whenever the Portuguese company is not tax transparent and holds a minimum of 10% of the capital or voting rights of its subsidiary, for a minimum period of 1 year. The participated company cannot be resident in a black-listed jurisdiction and must be subject and not exempted from CIT or, if EU resident, from a tax mentioned under article 2 of Directive 2011/96/UE or, if resident outside the EU, from a tax similar to the CIT, provided additionally that the rate applicable under such CIT is not lower than 60% of the Portuguese CIT rate.
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.
If the paying company is resident in a tax privileged jurisdiction, a 50% exemption may apply if such company carries out an effective trade in their State of residence.
All dividends received from a resident subsidiary are exempt from corporate tax in order to prevent double taxation. However, dividends received from non-resident subsidiaries are exempt only under certain conditions: the subsidiary should be either a joint stock or a limited liability company, the parent company should hold at least 10% of the shares of the subsidiary for at least one year, the income in question should have been taxed in the foreign country at a rate of at least 15% (20% for finance and insurance companies) and the dividend should have been transferred to Turkey before filing the corporate tax return.
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.
The participation exemption is a full exemption from Dutch corporate income tax (CIT) and applies to dividends and capital gains derived by a Dutch taxpayer from a qualifying participation. The participation exemption in practice is fairly straightforward and should normally apply to (groups of) operational companies.
In summary, the participation exemption is applicable to an interest in a subsidiary if the following conditions are satisfied:
- company in which the interest is held (i.e. the subsidiary) has a capital divided into shares;
- The Dutch shareholder, or an entity related to it, owns at least 5% of the nominal paid-up share capital of the subsidiary; and
- The subsidiary is not a portfolio investment (based on meeting the “Motive Test”) or is considered a qualifying portfolio investment (based on meeting the "Asset Test" or the "Subject-to-Tax Test"). Please note that only one of these tests has to be met.
If the participation exemption would not apply, the dividends are included in the tax base of the taxpayer for CIT purposes.
As part of the implementation of the European Anti-Tax Avoidance Directive, the Dutch government published its proposals for the introduction of a CFC regime in the Netherlands as of 1 January 2019. The CFC regime may deny the application of the Dutch participation exemption in certain situations (reference is made to question 12). Furthermore, payments that are by nature tax deductible at the level of the distributing entity are excluded from application of the Dutch participation exemption at shareholder’s level.
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.
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 one 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.
Where a dividend, or part of a dividend, is the distribution of profits that were not assessable to tax in Gibraltar in the hands of the company that originally generated the income, then the dividend, or relevant part of the dividend is not taxable in the hands of an ordinarily resident individual receiving the dividend.
There is also no withholding tax on dividends paid, however, where a company declares a dividend, a return of dividends is required. Listed companies are exempted from this requirement.
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.