Taxation of Dividends
– 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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