Taxation of Dividends

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–          From the shareholders perspective, it is after-tax dividends that are of interest. The dividend substitute – capital gains, are also potentially liable for taxation.

–          Of the two it is usually dividends that are taxed more heavily.

–          In countries where dividends are net of company taxes, and the dividends paid are taxed at the shareholder level, dividend payment is expensive.

–          In such a system, there is a strong tax incentive against the payment of dividends for companies seeking to please their shareholders.

–          Some countries have imputation systems which impute an amount of company taxes to shareholders based upon the dividends that companies pay, and then give shareholders a credit on their taxes for that amount.

–          This only balances the double payment effect if personal income tax liabilities of shareholders = the tax credit.

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