Is dividend income received from resident and/or non-resident companies exempt from tax? If not how is it taxed?
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.
According to articles 40 paragraph 1 and 64 paragraph 1 a of Law 4172 / 2013, any dividends distributed during the year 2016, are taxable and subject to withholding tax at 10%.
However, according to the provisions of article 112 paragraph 7 of Law N.4387/2016, the tax rate on dividends was increased from 10% to 15%, starting from 01.01.2017, in order to impose the same rate on income from the same category (i.e. income from capital). Similarly, with the provisions of par. 8 of the above article 112, article 64 paragraph 1 of Law 4172/2013 is amended, so that the rate of withholding tax on dividends to be set at 15% instead of 10% as applied previously. Therefore, any dividends to be distributed during the next fiscal year, i.e. 2017 and thereafter, will be subject to withholding tax of 15%.
More specifically, we distinguish the following cases, regarding the taxation of dividends for legal entities:
A. Taxation of domestic-sourced dividends acquired by domestic legal entities, with profit purpose or otherwise, and foreign legal entities with a permanent establishment in Greece:
According to Circular (“POL”) No. 1042 / 26.01.2015 of the Ministry of Finance, income from dividends acquired by domestic legal persons or legal entities, for profit purpose or otherwise, as well as by foreign legal entities with an establishment in Greece, is subject to withholding tax, which does not exhaust the tax liability, but this income is taxed as income from business under the provisions of Article 47 § 2 of Law 4172/2013, and the tax withheld is offset against the income tax, with the application of provisions of article 64 paragraph 4 of Law 4172/2013. If this income has been already taxed abroad, this tax is offset against the income tax of the legal entity or of the permanent establishment under Article 9 of Law 4172/2013 ( "foreign tax credit").
B. Taxation of nationally-sourced dividends acquired by Legal Persons or Legal Entities that do not have their tax domicile in Greece and do not maintain a permanent establishment in Greece :
Legal persons or legal entities that do not have their tax domicile in Greece and do not maintain a permanent establishment in Greece, are subject to tax in this territory, subject to the provisions of Article 63 of Law 4172/2013 ( "exemption for certain intercompany payments') . Specifically, a rate of 10% of withholding tax is performed, which (withholding) exhausts the tax liability in accordance with article 36 paragraph 2 and article 64 paragraph 3 of Law 4172/2013.
For the countries where double taxation treaties are concluded, taxations is made in line with these treaties, otherwise, Turkey has right to levy tax for foreign dividend income.
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.
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 that has already been subject to taxation. If that is not the case, the entity paying dividends would be required to pay tax on the distribution of untaxed profits.
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.
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.
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:
- 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.
- 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.
- if the receiving Japanese corporation owns more than 5% but one-third (1/3) or less of the shares of the paying Japanese corporation, 50% of the dividend is excluded from the taxable income.
- 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.
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 17 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.
Dividends are not taxed in Hong Kong.
As a general rule, dividend income received from resident and non resident companies are exempt from taxation in Spain provided that a participation of, at least, 5% (or with an acquisition cost of 20 million Euros) has been uninterruptedly held during the year prior to the distribution of the dividend (such period can be completed afterwards). Some additional requirements as to the level of taxation of the participated entity are necessary in the case of dividends from non Spanish entities.
For corporate entities dividends received from domestic and non domestic subsidiaries are tax exempt, provided that the subsidiary is not a passive company located in a low tax jurisdiction.
Yes, dividend income received by a domestic or foreign corporation is generally exempt from corporate income tax. However, 5% of the dividend income is deemed to be a non-deductible business expense, thereby effectively reducing the 100% exemption to a 95% exemption. Exceptions from the participation exemption apply in the following situations:
- For dividends received from portfolio shareholdings (less than 10% participation);
- In the event the distributed amounts reduced the tax basis of the distributing entity (e.g., if they are deducted as business expense for tax purposes at the level of the distributing entity); and
- In certain situations for banks, other financial institutions, insurance companies and pension funds as shareholders.
The taxable 5% of the dividend income is taxed at the ordinary corporate income tax rate of 15% plus solidarity surcharge.
For corporate taxpayers the 95% exemption for dividend income generally also applies for trade tax purposes subject to the additional requirements that:
- the shareholder receiving the dividend holds a participation of at least 15% in the distributing entities from the beginning of the fiscal year in which the distributions are made; and
- the distributing entities generate their gross income exclusively or almost exclusively from certain qualifying active business activities.
For distributions made by companies that have their statutory seat and place of effective management in the EU the participation threshold is principally reduced to 10% and the activity requirement for dividend income should not apply.
As a general rule, shareholders are liable to tax on the dividend they receive but participation exemption relief applies to certain dividends distributed to resident corporate shareholders. Dividends paid by a Belgian company or through a Belgian intermediary will be subject to a withholding tax. For individual shareholders this withholding tax forms the final tax, while it forms an advance payments for corporate shareholders (which is normally credited against the corporate income tax).
A. Corporate tax
Resident companies may deduct from their profits 95% of the amount of the dividends that they receive provided that the following conditions are met:
- a minimum shareholding of 10% or EUR 2.500.000 is required (by way of reminder, this threshold does not apply for the exemption of capital gains realised on shares) at the time of the attribution or payment of the dividends (the so-called ‘participation condition’). This participation threshold does usually not apply to income received by investment companies.
- The shares have been held or will be held by the company for an uninterrupted period of at least one year (‘permanency condition’).
- The distributing company is subject to Belgian corporate income tax or a similar tax regime abroad (‘taxation requirement’). This condition is very technical and requires a careful assessment.
In the case of a lack or insufficiency of taxable profit, the remaining participation exemption can be carried forward to the next taxable periods.
B. Withholding tax
In many events, no withholding tax is due on dividends paid by a subsidiary to its parent company.
Among those exemptions, dividends allocated by a subsidiary to its parent company are exempted from withholding tax to the extent that the parent company is located in a Member State of the European Union or in a State with which Belgium has concluded a double taxation agreement.
To benefit from this exemption, the parent company must maintain or have maintained, during an uninterrupted period of at least one year, a minimum 10% share in the subsidiary’s capital. As a result of the CJEU’s Tate&Lyle (C-384/11) ruling, when the parent company is not resident of Belgium and is placed in the same conditions except that the share it holds in the capital of its subsidiary is lower than 10% but higher than 2,500,000.00 EUR, the applicable rate of the withholding tax is reduced to 1.7%.
Italian tax legislation provides that dividends arising in favour of an Italian company or branch from its shareholding in another Italian or foreign company are in principle exempt from tax as to 95% of their amount, resulting in only 5% of the amount of any such dividend being subject to IRES.
In principle, dividends paid to non-Italian shareholders are subject to a withholding tax at a 26% rate, reduced by the applicable double taxation treaty, if any.
However, dividend payments from an Italian subsidiary made to an EU holding company are not subject to Italian withholding tax, provided that the EU Parent-Subsidiary Directive conditions are met (including anti-abuse provisions).
Italian withholding tax also applies to dividends distributed to EU holding companies which do not meet the EU Parent-Subsidiary Directive requirements. In such a case, withholding tax is levied at 1.2% on dividends distributed to EU or EAA white-list holding companies.
Since the introduction of the single tier dividend regime in the year of assessment 2008, dividend income is no longer taxable in Malaysia.
Dividends received by an Irish company from another Irish company are exempt from Irish tax.
Foreign dividends received by Irish companies are taxed at 25%, however they can be taxed at the lower 12.5% rate where the dividends are paid out of the trading profits of a company which is resident for tax purposes in an EU Member State or a country with which Ireland has a double tax treaty. Full credit is given for underlying tax on the profits out of which the dividend was paid and also for any withholding taxes. Where dividends do not carry sufficient tax credit, and they are paid by an EU resident company out of EU taxed profits, “additional credit” can be claimed eliminating Irish tax on the dividend in compliance with the CJEU decision in the FII case.
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%).
Australian residents are taxed on their worldwide income. They will therefore be taxed on any receipt of a dividend regardless of the residency of the company in question (although some limited exceptions apply).
Despite the above, it should be noted that Australia operates an imputation system of dividend taxation. This means that Australian residents utilise credits (franking credits) for the company tax (currently 30%) paid by an Australian resident company. The following example illustrates the operation of this principle. If an Australian resident individual has a marginal tax rate of 49% and receives a fully franked dividend, the tax levied on the distribution received is 19% (49% less 30%).
Non-residents that receive a dividend distribution from an Australian resident company will be taxed on that income unless an exception applies (eg under a double tax agreement or where tax has been withheld under the dividend withholding tax provisions). However, they are not entitled to use franking credits to offset any taxation.
Yes, at 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 Mio. As a result, such dividend income is usually virtually tax exempt.
The participation exemption applies irrespective whether dividend income is paid by a resident or a non-resident company.