Dividend Withholding Tax: 4 key considerations

A dividend withholding tax is a tax that is levied on the payment of dividends, that is to say, the distribution of profits among company shareholders.?

It is called a withholding tax because the tax is an immediate withholding on dividends when the income (the dividend) is paid, as opposed to other taxes levied by means of (self)assessment when the income is received.

1. Who is liable for dividend withholding tax?

The company that distributes the dividends is liable to withhold the tax from the amount distributed and remit it to its revenue authority. However, 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”).

2. How much tax do I pay on dividends?

Dividend withholding tax is levied over the gross amount of the dividend distribution, meaning that shareholders cannot 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.

3. 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 shareholder's country of residence 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. The dividend withholding tax is usually a final tax from the perspective of the source country since it generally has no tax jurisdiction in the residence country.

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.?

4. The risk of double taxation

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, which is added 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 dividend payment, while 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, 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, despite double tax relief available, there are a wide variety of reasons why, in practice, double taxation is often not or only partially resolved.

These are often complex situations that require withholding tax expert advice, and Taxology is here to assist you. Contact us today to find out how we can help you tackle these challenges effectively!