Dividend withholding tax: the 4 most important things to take into account

Dividend withholding tax: the 4 most important things to take into account

What is dividend withholding tax?

When companies distribute profits to their shareholders this is called a dividend. Dividend withholding tax is a tax that is levied on the payment of dividends. It is called a withholding tax because the tax is an immediate withholding on dividends at the moment the income (the dividend) is paid, as opposed to other taxes that are levied by means of (self)assessment when the income is received.

Who is liable for dividend withholding tax?

The company that distributes the dividends is liable to withhold the tax from the amount distributed and remits it to its revenue authority. While the company is the “withholding agent”, it is not the taxpayer. The shareholder that receives the dividend is the taxpayer, as his net dividends are reduced as a result of the tax. As most (public) companies do not know who their shareholders are, and the withholding liability is a laborious and complex process, they ordinarily outsource the obligation to a third party like a custody bank (also referred to as the “custodian”).

How much tax do I pay on dividends?

Dividend withholding tax is levied over the gross amount of the dividend distribution, meaning that shareholders are unable to deduct expenses related to acquiring and holding the shares and collecting the dividend income. The dividend withholding tax rate varies per country and may range from 5% up to 35%, or higher.

Do you pay tax twice on dividends?

Dividend withholding tax can be levied in domestic situations as well as cross border situations. In cross border situations, the country of residence of the shareholder is commonly referred to as the “residence country” and the country of residence of the withholding agent is commonly referred to as the “source country”, as it is the country where the income originates. In domestic situations, the dividend withholding tax is often an advance levy to the (final) income tax: the shareholder will normally be taxed again on the dividend income through his income tax return but will be granted a credit for dividend withholding tax already paid. In cross border situations, the dividend withholding tax is normally a final tax from the perspective of the source country, since it generally has no tax jurisdiction in the residence country.

When levied in cross border situations, dividends can be, and in practice often are, taxed twice. This is commonly referred to as double taxation. This is because the revenue authority in the residence country of the (beneficial) owner of the dividend will subject the dividend to its income tax. This income tax comes on top of the withholding tax remitted to the revenue authority of the source country. The residence country and source country each apply their own tax in their tax jurisdiction, initially without taking into account the other country’s tax. The source country taxes the payment of the dividend. The residence country taxes the receipt of the (same) dividend.

Can double taxation on dividends be avoided?

Dividend withholding tax may be wholly or partially credited against income tax or refunded in the residence country, and/or the rate may be reduced in the source country. This is commonly known as double tax relief. Double tax relief may be arranged “unilaterally” (i.e. based on the tax laws of either or both of the two states involved) or “bilaterally” (based on tax treaties for the avoidance of double taxation, concluded between the two states involved). However, in spite of double tax relief available, there is a wide variety of reasons why in practice double taxation is often not or only partially resolved. These are often complex situations which require withholding tax expert advice.

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