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Concept
Dividend tax
Summary
A dividend tax is a tax imposed by a jurisdiction on dividends paid by a corporation to its shareholders (stockholders). The primary tax liability is that of the shareholder, though a tax obligation may also be imposed on the corporation in the form of a withholding tax. In some cases the withholding tax may be the extent of the tax liability in relation to the dividend. A dividend tax is in addition to any tax imposed directly on the corporation on its profits. Some jurisdictions do not tax dividends.
To avoid a dividend tax being levied, a corporation may distribute surplus funds to shareholders by way of a share buy-back. These, however, are normally treated as capital gains, but may offer tax benefits when the tax rate on capital gains is lower than the tax rate on dividends. Another potential strategy is for a corporation not to distribute surplus funds to shareholders, who benefit from an increase in the value of their shareholding. These may also be subject to capital gain rules. Some private companies may transfer funds to controlling shareholders by way of loans, whether interest-bearing or not, instead of by way of a formal dividend, but many jurisdictions have rules that tax the practice as a dividend for tax purposes, called a “deemed dividend”.
In the beginning of income tax history, dividends paid to shareholders were exempt from taxation, as such tax was considered a form or double taxation on money earned by companies and subject to corporate tax.
Currently, in most jurisdictions, dividends from corporations are treated as a type of income and taxed accordingly at the individual level. Many jurisdictions have adopted special treatment of dividends, imposing a separate rate on dividends to wage income or capital gains.
Here is a brief history of dividend taxation:
17th century: The first dividend taxes were imposed in the 17th century in the Netherlands and England.
19th century: Dividend taxes became more common in the 19th century, as more countries adopted income taxes.
Official source
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