Dividend policy is concerned with financial policies regarding paying cash dividend in the present or paying an increased dividend at a later stage. Whether to issue dividends, and what amount, is determined mainly on the basis b asis of the company's unappropriated profit (excess cash) and influenced by the company's long-term earning power. When cash surplus exists and is not needed by the firm, then management is expected to pay out some or all of those surplus earnings in the form of cash dividends or to repurchase the company's stock through a share buyback program.
If there are no NPV positive opportunities, i.e. projects where returns exceed the hurdle rate, and excess cash surplus is not needed, then – then – finance finance theory suggests – suggests – management management should return some or all of the excess cash to shareholders as dividends. This is the gene ral case, however there are exceptions. For example, shareholders of a "growth stock ", expect that the company will, almost by definition, retain most of the excess earnings so as to fund future growth internally. By withholding current dividend payments to shareholders, managers of growth companies are hoping that dividend payments will be increased proportionality higher in the future, to offset the retainment of current earnings and the internal financing of present investment projects. Management must also choose the form the form of the dividend distribution, generally as cash dividends or via a share buyback . Various factors may be taken into consideration: where shareholders must pay tax on dividends, dividends, firms may elect to retain earnings or to perform a stock buyback, in both cases increasing the value of shares outstanding. Alternatively, some companies will pay "dividends" from stock stock rather rather than in cash; see Corporate action. action. Financial theory suggests that the dividend policy should be set based upon the type of company and what management determines is the best use of those dividend resources for the firm to its shareholders. As a general rule, shareholders of growth companies would prefer managers to have a share buyback program, whereas shareholders of value or secondary stocks would prefer the management of these companies comp anies to payout surplus earnings in the form o f cash dividends.
Coming up with a dividend policy is challenging for the directors and financial mana ger a company, because different investors have different views on present cash dividends and future capital gains. gains. Another confusion that pops up is regarding the extent of effect of dividends
on the share price. price. Due to this controversial nature of a dividend policy it is often called the dividend puzzle. puzzle. Various models have been developed to help firms analyse and evaluate the perfect dividend policy. There is no agreement between these schools of thought over the relationship between dividends and the value of o f the share or the wealth of the shareholders in other words. One school consists of people like James E. Walter and Myron J. Gordon (see Gordon model) model), who believe that current cash dividends are less risky than future capital gains. Thus, the y say that investors prefer those firms which pay regular dividends and such dividends affect the market price of the share. Another school linked to Modigliani and Miller holds Miller holds that investors [1] don't really choose between future gains and cash dividends. Relevance of dividend policy[ policy[ edit source] source] Dividends paid by the firms are viewed positively both by the investors and the firms. The firms which do not pay pa y dividends are rated in oppositely by investors thus affecting the share price. The people who support relevance of dividends clearly state that regular dividends reduce uncertainty of the shareholders i.e. the earnings of the firm is discounted at a lower rate, k e thereby increasing the market value. However, Ho wever, its exactly opposite in the case of increased uncertainty due to non-payment of dividends. Two important models supporting dividend relevance are given by Walter and Gordon. source] Walter's model [edit source] Walter's model shows the relevance of dividend p olicy and its bearing on the t he value of the share. source] Assumptions of the Walter model [edit source] 1. Retained earnings are the only source of financing investments in the firm, there is no external finance involved. 2. The cost of capital, k e and the rate of return on investment, r are constant i.e. even if new investments decisions are taken, the risks of the business remains same. 3. The firm's life is endless i.e. there is no closing down. Basically, the firm's decision to give or not give out dividends depends on whether it has enough opportunities to invest the retain earnings i.e. a strong relationship between investment and dividend decisions is considered. Model description [edit source] source]
Dividends paid to the shareholders are reinvested by the shareholder further, to get higher returns. This is referred to as the opportunity cost of the firm or the cost of capital, k e for the firm. Another situation where the firms do not pay out dividends, is when they invest the profits or retained earnings in profitable opportunities to earn returns on such investments. This rate of return r, for the firm must at least be equal to k e. If this happens then the returns of the firm is
on the share price. price. Due to this controversial nature of a dividend policy it is often called the dividend puzzle. puzzle. Various models have been developed to help firms analyse and evaluate the perfect dividend policy. There is no agreement between these schools of thought over the relationship between dividends and the value of o f the share or the wealth of the shareholders in other words. One school consists of people like James E. Walter and Myron J. Gordon (see Gordon model) model), who believe that current cash dividends are less risky than future capital gains. Thus, the y say that investors prefer those firms which pay regular dividends and such dividends affect the market price of the share. Another school linked to Modigliani and Miller holds Miller holds that investors [1] don't really choose between future gains and cash dividends. Relevance of dividend policy[ policy[ edit source] source] Dividends paid by the firms are viewed positively both by the investors and the firms. The firms which do not pay pa y dividends are rated in oppositely by investors thus affecting the share price. The people who support relevance of dividends clearly state that regular dividends reduce uncertainty of the shareholders i.e. the earnings of the firm is discounted at a lower rate, k e thereby increasing the market value. However, Ho wever, its exactly opposite in the case of increased uncertainty due to non-payment of dividends. Two important models supporting dividend relevance are given by Walter and Gordon. source] Walter's model [edit source] Walter's model shows the relevance of dividend p olicy and its bearing on the t he value of the share. source] Assumptions of the Walter model [edit source] 1. Retained earnings are the only source of financing investments in the firm, there is no external finance involved. 2. The cost of capital, k e and the rate of return on investment, r are constant i.e. even if new investments decisions are taken, the risks of the business remains same. 3. The firm's life is endless i.e. there is no closing down. Basically, the firm's decision to give or not give out dividends depends on whether it has enough opportunities to invest the retain earnings i.e. a strong relationship between investment and dividend decisions is considered. Model description [edit source] source]
Dividends paid to the shareholders are reinvested by the shareholder further, to get higher returns. This is referred to as the opportunity cost of the firm or the cost of capital, k e for the firm. Another situation where the firms do not pay out dividends, is when they invest the profits or retained earnings in profitable opportunities to earn returns on such investments. This rate of return r, for the firm must at least be equal to k e. If this happens then the returns of the firm is
equal to the earnings of the shareholders if the dividends were paid. Thus, i t's clear that if r, is more than the cost of capital k e, then the returns from investments is more than returns shareholders receive from further investments. Walter's model says that if rk e then the investment opportunities reap better returns for the firm and thus, the firm should invest the retained earnings. The relationship between r and k are extremely important to determine the dividend policy. It decides whether the firm should have zero payout or 100% payout. In a nutshell :
If r>k e, the firm should have zero payout and make investments.
If r
If r=k e, the firm is indifferent between dividends and investments.
source] Mathematical representation [edit source] Walter has given a mathematical model for the above made statements :
where,
P = Market price of the share
D = Dividend per share
r = Rate of return on the firm's investments
k e = Cost of equity
E = Earnings per share'
The market price of the share consists of the sum total of:
the present value of an infinite stream of dividend s the present value of an infinite stream of returns on investments made from retained earnings.
Therefore, the market value of a share is the result of expected dividends and capital gains according to Walter. source] Criticism[edit source] Although the model provides a simple framework to explain the relationship between the market value of the share and the th e dividend policy, it has some unrealistic u nrealistic assumptions.
1. The assumption of no external financing apart apa rt from retained earnings, for the firm make further investments is not really followed in the real world. 2. The constant r and k e are seldom found in real life, because as and when a firm invests more the business risks change. Gordon's Model [edit source] source]
Main article: Gordon model
Myron J. Gordon Myron J. Gordon has also supported dividend relevance and believes in regular dividends [2] affecting the share price of the firm. firm. source] The Assumptions of the Gordon model [edit source] Gordon's assumptions are similar to the ones given b y Walter. However, there are two additional assumptions proposed by him : 1. The product of retention ratio b and the rate of return r gives us the growth rate of the firm g. 2. The cost of capital k e, is not only constant but greater than the growth rate i.e. k e>g. source] Model description [edit source] Investor's are risk averse and believe that incomes from dividends are certain rather than incomes from future capital gains, therefore they predict future capital gains to be risky propositions. They discount the future capital gains at a higher rate than the firm's earnings thereby, thereb y, evaluating a higher value of the share. sha re. In short, when retention rate increases, the y require a higher discounting rate. Gordon has given a model similar to Walter's where he has given a mathematical formula to determine price of the share. Mathematical representation [edit source] source]
The market prices of the share is calculated as follows:
where,
P = Market price of the share
E = Earnings per share
b = Retention ratio (1 - payout ratio)
r = Rate of return on the firm's investments
k e = Cost of equity
br = Growth rate of the firm (g)
Therefore the model shows a relationship between the payout ratio, rate of return, cost of capital and the market price of the share. source] Conclusions on the Walter and Gordon Model [edit source] Gordon's ideas were similar to Walter's and therefore, the criticisms are also similar. Both of them clearly state the relationship between dividend policies and market value of the firm. source] Capital structure substitution theory & dividends [edit source] [3]
The capital structure substitution theory (CSS) (CSS) describes the relationship between earnings, stock price and capital structure of public companies. The theory is based on one simple hypothesis: company managements manipulate capital structure such that e arnings-per-share (EPS) are maximized. The resulting dynamic debt-equit y target explains why some companies use dividends and others do not. When redistributing cash to shareholders, company managements can typically choose between dividends and share repurchases. repurchases. But as dividends are in most cases taxed higher than capital gains, investors are expected to prefer capital gains. However, the CSS theory shows that for some companies share repurchases lead to a reduction in EPS. These companies typically t ypically prefer dividends over share repurchases. source] Mathematical representation [edit source] From the CSS theory it can be derived that debt-free companies should prefer repurchases whereas companies with a debt-equity ratio larger than
should prefer dividends as a means to distribute cash to shareholders shareholders,, where
D is the company’s total long term debt
is the company’s total equity
is the tax rate on capital gains
is the tax rate on dividends
Low valued, high leverage companies with limited investment opportunities and a high profitability use dividends as the preferred means to distribute cash to shareholders, as is [4] documented by empirical research. Conclusion [edit source]
The CSS theory provides more guidance on dividend policy to company managements than the Walter model and the Gordon model. It also reverses the traditional order of cause and effect b y implying that company valuation ratios drive dividend policy, and not vice-versa. The CSS theory does not have 'invisible' or 'hidden' parameters such as the equity risk premium, the discount rate, the expected growth rate or expected inflation. As a consequence the theory can be tested in an unambiguous way. Irrelevance of dividend policy[edit source]
Franco Modigliani
Merton Miller The Modigliani and Miller school of thought believes that investors do not state any preference between current dividends and capital gains. They say that dividend policy is irrelevant and is not deterministic of the market value. Therefore, the shareholders are indifferent between the two types of dividends. All they want are high returns either in the form of dividends or in the form of re-investment of retained earnings by the firm. There are two conditions discussed in relation to this approach :
decisions regarding financing and investments are made and do not change with respect to the amounts of dividends received. when an investor buys and sells shares without facing any transaction costs and firms issue [5] shares without facing any floatation cost, it is termed as a perfect capital market.
Two important theories discussed relating to the irrelevance approach, the residuals theory and the Modigliani and Miller approach. Residuals theory of dividends [edit source]
One of the assumptions of this theory is that external financing to re-invest is either not available, or that it is too costly to invest in any profitable opportunity. If the firm has good investment opportunity available then, they'll invest the retained earnings and reduce the dividends or give no dividends at all. If no such opportunity exists, the firm will pay out dividends. If a firm has to issue securities to finance an investment, the existence of floatation costs needs a larger amount of securities to be issued. Therefore, the p ay out of dividends depend on whether any profits are left after the financing of proposed investments as floatation costs increases the amount of profits used. Deciding how much dividends to be paid is not the concern here, in fact
the firm has to decide how much profits to be retained and the rest can then be distributed as dividends. This is the theory of Residuals, where dividends are residuals from the profits after [6] serving proposed investments. This residual decision is distributed in three steps:
evaluating the available investment opportunities to determine capital expenditures. evaluating the amount of equity finance that would be needed for the investment, basically having an optimum finance mix. cost of retained earnings
Extension of the theory [edit source]
The dividend policy strongly depends on two things:
investment opportunities available to the company amount of internally retained and generated funds which lead to dividend distribution if all possible investments have been financed.
The dividend policy of such a kind is a passive one, and doesn't influence market price. the dividends also fluctuate every year because of different investment opportunities every year. However, it doesn't really affect the shareholders as they g et compensated in the form of future capital gains. Conclusion [edit source]
The firm paying out dividends is obviously generating incomes for an investor, however even if the firm takes some investment opportunity then the incomes of the investors rise at a later stage due to this profitable investment. Modigliani-Miller theorem [edit source]
Main article: Modigliani – Miller theorem The Modigliani – Miller theorem states that the division of retained earnings between new investment and dividends do not influence the value of the firm. It is the inv estment pattern and [7] consequently the earnings of the firm which a ffect the share price or the value of the firm. Assumptions of the MM theorem [edit source]
The MM approach has taken into consideration the following assumptions: 1. There is a rational behavior by the investors and there exists perfect capital markets. 2. Investors have free information available for them. 3. No time lag and transaction costs exist.
4. Securities can be split into any parts i.e. the y are divisible 5. No taxes and floatation costs. 6. The investment decisions are taken firmly and the profits are therefore known with certainty. The dividend policy does not affect these decisions. Model description [edit source]
The dividend irrelevancy in this model exists because shareholders are indifferent between paying out dividends and investing retained earnings in new opportunities. The firm finances opportunities either through retained earnings or by issuing new shares to raise capital. The amount used up in paying out dividends is replaced by the new capital raised through issuing shares. This will affect the value of the firm in an opposite way. The increase in the value because of the dividends will be offset by the decrease in the value for new capital raising. See also[edit source]
Clientele effect
External links[edit source]
Dividend Policy by Alex Tajirian Corporate Dividend Policy by Henry Servaes (London Business School) and Peter Tufano (Harvard Business School)
References[edit source] 1. ^ Rustagi, Dr.R.P. Financial Management . Taxmann Publications (P.) Ltd. ISBN 97881-7194-786-7. 2. ^ Vinod Kothari. "Dividend Policy". Retrieved 2011-10-14. 3. ^ Timmer, Jan (2011). Understanding the Fed Model, Capital Structure, and then Some. 4. ^ Fama, E.F.; French, K.R. (April 2001). "Disappearing Dividends: Changing Firm Characteristics or Lower Propensity to Pay". Journal of Financial Economics 60: 3 – 43. 5. ^ Dividend Policy, Robert H. Smith School of Business. 6. ^ Sumon S P Lee, Dividend Policy, The Chinese University of Hong Kong. 7. ^ CA Magni, Relevance or irrelevance of retention for dividend policy irrelevance
A dividend is a payment made by a corporation to its shareholders, usually as a distribution of profits.[1] When a corporation earns a profit or surplus, it can either re-invest it in the business (called retained earnings), or it can distribute it to shareholders. A corporation may retain a portion of its earnings and pay the remainder as a dividend. Distribution to shareholders can be in cash (usually a deposit into a bank account) or, if the corporation has a dividend reinvestment plan, the amount can be paid by the issue of further shares or share repurchase.[2][3] A dividend is allocated as a fixed amount per share, with shareholders receiving a dividend in proportion to their shareholding. For the joint stock company, paying dividends is not an expense; rather, it is the division of after tax profits among shareholders. Retained earnings (profits that have not been distributed as dividends) are shown in the shareholder equity section in the company's balance sheet - the same as its issued share capital. Public companies usually pay dividends on a fixed schedule, but may declare a dividend at any time, sometimes called a special dividend to distinguish it from the fixed schedule dividends. Cooperatives, on the other hand, allocate dividends according to members' activity, so their dividends are often considered to be a pre-tax expense. The word "dividend" comes from the Latin word "dividendum " ("thing to be divided").[4] Contents [hide]
1 Forms of payment
2 Reliability of dividends
3 Dividend dates
4 Dividend-reinvestment
5 Dividend taxation
o
5.1 Australia and New Zealand
o
5.2 UK
o
5.3 India
o
5.4 Effect on stock price
o
5.5 Criticism
6 Other corporate entities o
6.1 Cooperatives
o
6.2 Trusts
o
6.3 Mutuals
7 See also
8 References
9 External links
Forms of payment[edit source] Cash dividends are the most common form of payment and are paid out in currency, usually
via electronic funds transfer or a printed paper check. Such dividends are a form of investment income and are usually taxable to the recipient in the year they are paid. This is the most common method of sharing corporate profits with the shareholders of the company. For each share owned, a declared amount of money is distributed. Thus, if a person owns 100 shares and the cash dividend is GBP £0.50 per share, the holder of the stock will be paid G BP £50. Dividends paid are not classified as an expense, but rather a deduction of retained earnings. Dividends paid does not show up on an Income Statement but does appear on the Balance Sheet. Stock or scrip dividends are those paid out in the form of additional stock shares of the
issuing corporation, or another corporation (such as its subsidiary corporation). They are usually issued in proportion to shares owned (for example, for every 100 shares of stock owned, a 5% stock dividend will yield 5 extra shares). Nothing tangible will be gained if the stock is split because the total number of shares increases, lowering the price of each share, without changing the market capitalization, or total value, of the shares held. (See also Stock dilution.) Stock dividend distributions are issues of new shares made to limited partners by a
partnership in the form of additional shares. Nothing is split, these shares increase the market capitalization and total value of the company at the same time reducing the original cost basis per share. Stock dividends are not includable in the gross income of the shareholder for US income tax purposes. Because the shares are issued for proceeds equal to the pre-existing market price of the shares; there is no negative dilution in the amount recoverable.[5][6][7] Property dividends or dividends i n s p e c i e (Latin for "in kind") are those paid out in the form of
assets from the issuing corporation or another corporation, such as a subsidiary corporation. They are relatively rare and most frequently are securities of other companies owned by the issuer, however they can take other forms, such as products and services. Interim dividends are dividend payments made before a company's Annual General Meeting
(AGM) and final financial statements. This declared dividend usually accompanies the company's interim financial statements. Other dividends can be used in structured finance. Financial assets with a known market value
can be distributed as dividends; warrants are sometimes distributed in this way. For large companies with subsidiaries, dividends can take the form of shares in a subsidiary company. A
common technique for "spinning off" a company from its parent is to distribute shares in the new company to the old company's shareholders. The new shares can then be traded independently.
Reliability of dividends[edit source] Two metrics are commonly used to examine a firm's dividend policy. Payout ratio is calculated by dividing the company's dividend by the earnings per share. A
payout ratio greater than 1 means the company is paying out more in dividends for the year than it earned. Dividend cover is calculated by dividing the company's cash flow from operations by the
dividend. This ratio is apparently popular with analysts of income trusts in Canada.[citation needed ] Dividends are payments made by a corporation to its shareholder members. It is the portion of corporate profits paid out to stockholders.
Dividend dates[edit source] Any dividend that is declared must be approved by a company's Board of Directors before it is paid. For public companies, there are four important dates to remember regarding dividends. These are discussed in detail with examples at the Securities and Exchange Commission site [4] Declaration date is the day the Board of Directors announces its intention to pay a dividend.
On this day, a liability is created and the company records that liability on its books; it now owes the money to the stockholders. On the declaration date, the Board will also announce a date of record and a payment date. In-dividend date is the last day, which is one trading day before the ex-dividend date , where
the stock is said to be cum dividend ('with [including] dividend'). In other words, existing holders of the stock and anyone who buys it on this day will receive the dividend, whereas any holders selling the stock lose their right to the dividend. After this date the stock becomes ex dividend . Ex-dividend date (typically 2 trading days before the record date for U.S. securities) is the day
on which all shares bought and sold no longer come attached with the right to be paid the most recently declared dividend. This is an important date for any company that has many stockholders, including those that trade on exchanges, as it makes reconciliation of who is to be paid the dividend easier. Existing holders of the stock will receive the dividend even if they now sell the stock, whereas anyone who now buys the stock will not receive the dividend. It is relatively common for a stock's price to decrease on the ex-dividend date by an amount roughly equal to the dividend paid. This reflects the decrease in the company's assets resulting from the declaration of the dividend. The company does not take any explicit action to adjust its stock price; in an efficient market, buyers and sellers will automatically price this in.
Book closure Date Whenever a company announces a dividend pay-out, it also announces a
date on which the company will ideally temporarily close its books for fresh tra nsfers of stock. Record date Shareholders registered in the stockholders of record on or before the date of record will receive the dividend. Shareholders who are not registered as of this date will not
receive the dividend. Registration in most countries is essentially automatic for shares purchased before the ex-dividend date. Payment date is the day when the dividend cheques will actually be mailed to the shareholders
of a company or credited to brokerage accounts.
Dividend-reinvestment[edit source] Some companies have dividend reinvestment plans, or DRIPs, not to be confused with scrips. DRIPs allow shareholders to use dividends to systematically buy small amounts of stock, usually with no commission and sometimes at a slight discount. In some cases, the shareholder might not need to pay taxes on these re-invested dividends, but in most cases they do.
Dividend taxation[edit source] In many countries, such as the U.S.A. and Canada, income from dividends is taxed, albeit at a lower rate than ordinary income. Though in most cases, the lower tax rate is due to profits being taxed initially as Corporate tax.
Australia and New Zealand[edit source] In Australia and New Zealand, companies also forward franking credits or imputation credits to shareholders along with dividends. These franking credits represent the tax paid by the company upon its pre-tax profits. One dollar of company tax paid generates one franking credit. Companies can forward any proportion of franking up to a maximum amount that is calculated from the prevailing company tax rate: for each dollar of dividend paid, the maximum level of franking is the company tax rate divided by (1 - company tax rate). At the current 30% rate, this works out at 0.30 of a credit per 70 cents of dividend, or 42.857 cents per dollar of dividend. The shareholders who are able to use them offset these credits against their income tax bills at a rate of a dollar per credit, thereby effectively eliminating the double taxation of company profits. This system is called dividend imputation.
UK[edit source] The UK's taxation system operates along similar lines to Australia and New Zealand: when a shareholder receives a dividend, the basic rate of income tax is deemed to already have been paid on that dividend. This ensures that double taxation does not take place, however this creates difficulties for some non-taxpaying entities such as certain trusts, charities and pension funds which are not allowed to reclaim the deemed tax payment and thus are in effect taxed on their income.
India[edit source] In India, companies declaring or distributing dividend, are required to pay a Corporate Dividend Tax in addition to the tax levied on their income. Dividend received is exempt in the hands of the shareholder's, in respect of which Corporate Dividend T ax has been paid by the company.
Effect on stock price [edit source] After a stock goes ex-dividend (i.e.. the financial obligation for the company to pay the dividend to the holder), the stock price should drop. To calculate the amount of the drop, the traditional method is to view the financial effects of the dividend from the perspective of the company. Since the company has paid say £x in dividends per share out of its cash account on the left hand side of the balance sheet, the equity account on the right side should decrease an equivalent amount. This means that a £x dividend should result in a £x drop in the share price. A more accurate method of calculating this price is to look at the share price and dividend from the after-tax perspective of a share holder. The after-tax drop in the share price (or capital gain/loss) should be equivalent to the after-tax dividend. For example, if the tax of capital gains Tcg is 35%, and the tax on dividends Td is 15%, then a £1 dividend is equivalent to £0.85 of after tax money. To get the same financial benefit from a capital loss, the after tax capital loss value should equal £0.85. The pre-tax capital loss would be £0.85/(1-Tcg) = £0.85/(1-35%) = £0.85/65% = £1.30. In this case, a dividend of £1 has led to a larger drop in the share price of £1.30, because the tax rate on capital losses is higher than the dividend tax rate. Finally, security analysis that does not take dividends into account may mute the decline in share price, for example in the case of aPrice –earnings ratio target that does not back out cash; or amplify the decline, for example in the case of Trend following.
Criticism[edit source] Some believe that company profits are best re-invested back into the company: research and development, capital investment, expansion, etc. Proponents of this view (and thus critics of dividends per se) suggest that an eagerness to return profits to shareholders may indicate the management having run out of good ideas for the future of the company. Some studies, however, have demonstrated that companies that pay d ividends have higher earnings growth, suggesting that dividend payments may be evidence of confidence in earnings growth and sufficient profitability to fund future expansion.[8] Taxation of dividends is often used as justification for retaining earnings, or for performing a stock buyback, in which the company buys back stock, thereby increasing the value of the stock left outstanding. When dividends are paid, individual shareholders in many countries suffer from double taxation of those dividends:
1. the company pays income tax to the government when it earns any income, and then 2. when the dividend is paid, the individual shareholder pays income tax on the dividend payment. In many countries, the tax rate on dividend income is lower than for other forms of income to compensate for tax paid at the corporate level. Capital gains should not be confused with dividends. Capital gains assume an increase in a stock's value. Dividend is merely parsing out a share of the profits, and is taxed at the dividend tax rate. If there is an increase of value of stock, and a shareholder chooses to sell the stock, the shareholder will pay a tax on capital gains (often taxed at a lower rate than ordinary income). If a holder of the stock chooses to not participate in the buyback, the price of the holder's shares could rise (as well as it could fall), but the tax on these gains is delayed until the actual sale of the shares. Certain types of specialized investment companies (such as a REIT in the U.S.) allow the shareholder to partially or fully avoid double taxation of dividends. Shareholders in companies that pay little or no cash dividends can reap the benefit of the company's profits when they sell their shareholding, or when a company is wound down and all assets liquidated and distributed amongst shareholders. This, in effect, delegates the dividend policy from the board to the individual shareholder. Payment of a dividend can increase the borrowing requirement, or leverage, of a company.
Other corporate entities[edit source] Cooperatives [edit source] Cooperative businesses may retain their earnings, or distribute part or all of them as dividends to their members. They distribute their dividends in proportion to their members' activity, instead of the value of members' shareholding. Therefore, co-op dividends are often treated as pretax expenses. In other words, local tax or accounting rules may treat a dividend as a form of customer rebate or a staff bonus to be deducted from turnover before profit (tax profit or operating profit) is calculated. Consumers' cooperatives allocate dividends according to their members' trade with the co-op. For example, a credit union will pay a dividend to represent interest on a saver's deposit. A retail co-op store chain may return a percentage of a member's purchases from the co-op, in the form of cash, store credit, or equity. This type of dividend is sometimes known as a patronage dividend or patronage refund, as well as being informally named divi or divvy .[9][10][11] Producer cooperatives, such as worker cooperatives, allocate dividends according to their members' contribution, such as the hours they worked or their salary.[12]
Trusts [edit source]
In real estate investment trusts and royalty trusts, the distributions paid often will be consistently greater than the company earnings. This can be sustainable because the accounting earnings do not recognize any increasing value of real estate holdings and resource reserves. If there is no economic increase in the value of the company's assets then the excess distribution (or dividend) will be a return of capital and the book value of the company will have shrunk by an equal amount. This may result in capital gains which may be taxed differently than dividends representing distribution of earnings.
Mutuals[edit source] The distribution of profits by other forms of mutual organization also varies from that of joint stock companies, though may not take the form of a dividend. In the case of mutual insurance, for example, in the United States, a distribution of profits to holders of participating life policies is called a dividend . These profits are generated by the investment returns of the insurer's general account, in which premiums are invested and from which claims are paid. [13] The participating dividend may be used to decrease premiums, or to increase the cash value of the policy. [14] Some life policies pay nonparticipating dividends. As a contrasting example, in the United Kingdom, the surrender value of a with-profits policy is increased by a bonus, which also serves the purpose of distributing profits. Life insurancedividends and bonuses, while typical of mutual insurance, are also paid by some joint stock insurers. Insurance dividend payments are not restricted to life policies. For example, general insurer State Farm Mutual Automobile Insurance Company can distribute dividends to its vehicle insurance policyholders.[15]
See also[edit source]
Dividend cover
Dividend policy
Dividend tax
Dividend units
Dividend yield
Special dividend
Liquidating dividend
Qualified dividend
P/E ratio
List of companies paying monthly dividends
CSS dividend policy
References[edit source] 1. Jump up^ Sullivan, Arthur ; Steven M. Sheffrin (2003). Economics: Principles in action . Upper Saddle River, New Jersey 07458: Pearson Prentice Hall. p. 273. ISBN 0-13-063085-3. 2. Jump up^ Michael Simkovic, "The Effect of Enhanced Disclosure on Open Market Stock Repurchases", 6 Berkeley Bus. L.J. 96 (2009). 3. Jump up^ Amedeo De Cesari, Susanne Espenlaub, Arif Khurshed and Michael Simkovic, "The Effects of Ownership and Stock Liquidity on the Timing of Repurchase Transactions", 2010 4. Jump up^ "dividend". Online Etymology Dictionary . Douglas Harper. 2001. Retrieved 2006-1109. 5. Jump up^ [1]Public offering Kinder Morgan Management, LLC 6. Jump up^ [2] U.S. Securities and Exchange Commission 7. Jump up^ [3] EDGAR Online, Inc. 8. Jump up^ Robert D. Arnott and Clifford S. Asness (January/February 2003). "Surprise! Higher Dividends equal Higher Earnings Growth". Financial Analysts Journal . Retrieved 2011-01-04. 9. Jump up^ Ace Hardware (March 22, 2001). "Annual Report, Section 1, Business, 10-K405 SEC Filing". 10. Jump up^ "Co-op pays out £19.6m in 'divi'". BBC News via bbc.co.uk. 2007-06-28. Retrieved 2008-05-15. 11. Jump up^ Nikola Balnave and Greg Patmore. "The History Cooperative – Conference Proceedings - ASSLH - Rochdale consumer co-operatives and Australian labour history". 12. Jump up^ Norris, Sue (March 3, 2007). "Cooperatives pay big dividends". The Guardian. Retrieved 2009-06-09. 13. Jump up^ "What Are Dividends?". New York Life. Retrieved 2008-04-29. "In short, the portion of the premium determined not to have been necessary to provide coverage and benefits, to meet expenses, and to maintain the company's financial position, is returned to policyowners in the form of dividends." 14. Jump up^ Hoboken, NJ (2002). "24, Investment-Oriented Life Insurance". In Fabozzi, Frank J. Handbook of Financial Instruments. Wiley. p. 591. ISBN 0-471-22092-2.OCLC 52323583. 15. Jump up^ "State Farm Announces $1.25 Billion Mutual Auto Policyholder Dividend". State Farm. 2007-03-01.
External links[edit source]
Look up d i v i d e n d in Wiktionary, the free dictionary.
Ex-Dividend Dates: When Are You Entitled to Stock and Cash Dividends – U.S. Securities and Exchange Commission
Why Should Companies Pay Dividends?
Dividend Policy from studyfinance.com at the University of Arizona
Common Stock Dividends Ex-Dividend Dates for Common Stock Dividends
The new U.S. dividend tax cut traps from Tennessee CPA Journal, Nov. 2004
UK Dividend Tax Rates
Investment basics: Currency – Indian Rupee (INR) Foreign exchange control – There is a simplified regulatory regime for foreign exchange transactions and liberalized capital account transactions. Current account transactions are fully permitted unless specifically prohibited. The central bank monitors capital account transactions. Full foreign investment is permitted in most industries, while sector-specific caps have been set for foreign investment in certain
industries, such as basic and cellular telecommunications services, banking, insurance and retail trade. Foreign direct investment (FDI) in limited liability partnerships (LLPs) will be allowed with specific approval of the government for LLPs operating in sectors/activities where 100% FDI is otherwise allowed under the “automatic route,” and subject to other specified conditions. FDI up to 100% is permitted in single-brand product retail trading by one nonresident entity under the approval route subject to the fulfilment of certain conditions. Accounting principles/financial statements – Accounting Standards issued by the Institute of Chartered Accountants of India, which are largely based on IAS, apply. Financial statements must be prepared annually. Principal business entities – These are the public/private limited liability company, partnership, limited liability partnership, sole proprietorship, representative and branch of a foreign corporation.
Corporate taxation: Residence – A corporation is resident if it is incorporated in India or wholly managed and controlled in India. Basis – Residents are taxed on worldwide income; nonresidents are taxed only on Indian-source income. Foreign-source income derived by a resident company is subject to corporation tax in the same way as Indian income. A branch of a foreign corporation is taxed as a foreign corporation. Taxable income – Corporation tax is imposed on a company’s profits, which consist of business/trading income, passive income and capital gains. Income resulting from the indirect transfer of assets located in India is included. Normal business expenses, as well as other specified items, may be deducted in computing taxable income. Taxation of dividends – Dividends paid by a domestic company are subject to the Dividend Distribution Tax (DDT) at an effective rate of 16.22%. Dividends subject to DDT are exempt from tax in the hands of the recipient. Dividends received from a foreign
company are subject to corporation tax, but a credit for withholding tax generally is available for foreign tax paid. For financial year 2012-2013, dividends received by an Indian company from specified foreign companies (companies in which the Indian company holds 26% or more of equity shares) is subject to tax at a reduced base rate of 15%. A surcharge and cess also are imposed. Capital gains – The tax treatment depends on whether the gains are long or short term. Gains are long term if the asset is held for more than three years (one year in the case of shares and specified securities). Longterm gains on listed shares and specified securities are exempt if the transaction is subject to the Securities Transaction Tax (STT). Where such gains are not subject to the STT, a 10% tax applies (without benefit of an inflation adjustment). As from financial year 2012-2013, the applicable tax rate on long-term capital gains derived by a nonresident from the sale of unlisted securities is 10%. Gains on other long-term assets are taxed at 20% (with benefit of an
inflation adjustment). Short-term gains on listed shares and specified securities, which are subject to the STT, are taxed at 15%, and gains from other short-term assets are taxed at the normal tax rates. A surcharge and cess also are imposed. Losses – Business losses and capital losses may be carried forward for eight years, with short-term losses offsetting capital gains on both long and short-term assets, and longterm losses offsetting only long-term gains. Other than unabsorbed depreciation (which may be carried forward indefinitely), losses may be carried forward only if the tax return is filed by the due date. Unabsorbed depreciation may be offset against any income whereas business losses may be offset only against business profits. Rate – The rate is 30% for domestic companies and 40% for foreign companies and branches of foreign companies. Taking into account the surtax and cess, the highest effective rate is 32.445% for domestic companies and 42.024% for foreign companies. Surtax – A 5% surcharge applies to domestic
companies (2% for foreign companies) if income exceeds INR 10 million. An additional 3% cess is payable in all cases. Alternative minimum tax – A Minimum Alternate Tax (MAT) is imposed at 18.5% (plus any applicable surcharge and cess) on the adjusted book profits of corporations whose tax liability is less than 18.5% of their book profits. A credit is available for MAT paid against tax payable on normal income; the credit may be carried forward for offset against income tax payable in the following 10 years. A limited liability partnership is liable to an alternative minimum tax (AMT) at 19.06% (i.e.18.5% plus the 3% education cess) of the adjusted total income where the normal income tax payable is less than the AMT payable. The adjusted total income will be the total income before giving effect to the AMT provisions as increased by certain deductions claimed in computing the total income, including the tax holiday claimed by units in a Special Economic Zone (SEZ). The base for computation of AMT for LLPs is thus
different than that for computing AMT in the case of companies. A tax credit will be allowed for the AMT paid against tax payable on normal income. The tax credit may be International tax India Highlights 2013carried forward up to 10 years as in the case of companies. Foreign tax credit – Foreign tax paid may be credited against Indian tax on the same profits, but the credit is limited to the amount of Indian tax payable on the foreign income. Participation exemption – No Holding company regime – No Incentives – A deduction is available (up to 200%) in respect of capital and revenue expenditure on scientific research conducted in-house by specified industries and for payments made to specified organizations for scientific research. As from financial year 2012-2013, a deduction of 150% of expenditure incurred on a notified agricultural extension project or skill development project is available. A deduction is available for capital expenditure (other than expenditure incurred
on the acquisition of land, goodwill or financial instruments) incurred by specified businesses, including for setting up and operating cold chain facilities, warehousing for the storage of agricultural produce and laying and operating cross-country natural gas or crude or petroleum oil pipeline networks for distribution, including storage facilities that are an integral part of such networks, developing and building approved affordable housing projects, the production of fertilizer in India, etc. Undertakings set up in special economic zones are exempt from tax on their export profits subject to compliance with other conditions. Other tax holidays are available based on industry and region. Withholding tax: Dividends – Dividends are not subject to withholding tax. However, the company paying the dividends is subject to DDT at an effective rate of 16.22%. Interest – Interest paid to a nonresident generally is subject to a 20% withholding tax, plus the applicable surcharge and cess. The
rate may be reduced under a tax treaty. Interest paid to a nonresident on an infrastructure debt fund set up in accordance with guidelines to be prescribed by the government is subject to a 5% withholding tax, plus the applicable surcharge and cess. As from 1 July, 2012, interest paid to a nonresident on debt incurred under a loan agreement or by way of the issue of longterm infrastructure bonds by an Indian company in foreign currency is subject to a 5% withholding tax, plus the applicable surcharge and cess, if the loan agreement is approved by the central government and the funds are borrowed between 1 July 2012 and 30 June 2015. If the nonresident does not have a Permanent Account Number (PAN), i.e. a tax registration number, tax must be withheld at the applicable rate or 20%, whichever is higher. Royalties – Royalties paid to a nonresident are subject to a 10% withholding tax, plus the applicable surcharge and cess. The rate may be reduced under a tax treaty. If the nonresident does not have a PAN, tax
must be withheld at the applicable rate or 20%, whichever is higher. Technical service fees – Technical services fees paid to a nonresident are subject to a 10% withholding tax, plus the applicable surcharge and cess. The rate may be reduced under a tax treaty. If the nonresident does not have a PAN, tax must be withheld at the applicable rate or 20%, whichever is higher. Branch remittance tax – No Other taxes on corporations: Capital duty – No Payroll tax – The employer is responsible for withholding tax on salary income. Real property tax – No, but see "Stamp duty," below. Social security – The employer generally contributes 12% of eligible wages per month to the Provident Fund. From the employer’s contribution, 8.33% of the wages (up to INR 6,500) are applied to the pension fund, with the balance paid to the Provident Fund. The employer also must pay a gratuity to workers who have rendered continuous service for at
least five years at the time of retirement, resignation, superannuation, etc., at the rate of 15 days’ wages for every completed year of service (up to a maximum of INR 1 million). Stamp duty – Financial instruments, real property and other specified transactions in India attract stamp duties that are levied under the Indian Stamp Act and the stamp acts of the various states (with rates varying significantly by state). Transfer tax – No Other – A 1% wealth tax applies on the aggregate value exceeding INR 3 million of nonproductive assets such as land; buildings not used as factories; commercial property not used for a business or a profession; offices or residential accommodation for employees earning over INR 500,000 per annum; certain precious metals; and cars, aircraft and yachts. Anti-avoidance rules: Transfer pricing – The transfer pricing regime is influenced by OECD norms, although the penalty provisions in India are
stringent compared to those in other countries. The definition of associated enterprise extends beyond a shareholding or management relationship, as it includes some deeming clauses. The taxpayer is required to maintain certain information and documents and provide a certificate (in a prescribed format) from a practicing chartered accountant that sets out the details of associated enterprises, international transactions, etc., along with the methods used to determine an arm’s length price. The certificate must be submitted by the due date for filing the annual tax return for companies required to submit such a certificate, i.e. 30 November. Where the application of the arm’s length price would reduce the income chargeable to tax in India or increase a loss, no adjustment will be made to the income or loss. If a transfer pricing adjustment is made on a taxpayer that benefits from a tax holiday, the benefit will be denied to the extent of the adjustment. The allowable variation in computing the arm’s length price will be as
notified by the government. (See “Other,” below, for application of the transfer pricing rules for transactions involving jurisdictions that do not effectively exchange information with India and for application of the general anti-avoidance rule). As from financial year 2012-2013, the scope of the transfer pricing provisions is extended to cover “specified domestic transactions” if the aggregate value of the transaction exceeds INR 50 million in a year. Specified domestic transactions include payments to related parties, the inter-unit transfer of goods or services, transactions of profitlinked tax holiday units with other parties and any other transaction that may be notified. The pricing of these transactions must be determined with regard to arm’s length principles using methods prescribed under India’s transfer pricing rules. Advance pricing agreement rules apply as from 1 July 2012. Thin capitalization – No Controlled foreign companies – NoOther – To discourage transactions with persons located in jurisdictions that do not effectively exchange information with India,
the government will designate such jurisdictions, with the effect that transactions with persons situated in those jurisdictions will be subject to the Indian transfer pricing rules and income paid to persons in the designated jurisdiction will be subject to a minimum withholding tax of 30%. A general anti-avoidance rule will apply as from financial year 2013-2014. Under these rules, an arrangement entered into by a taxpayer may be declared as an impermissible avoidance arrangement if its main purpose, or one of the main purposes, is to obtain a tax benefit and other prescribed conditions (e.g. lack of commercial substance, etc.) are satisfied. Disclosure requirements – A nonresident with a liaison office in India is required to prepare on its activities and submit it to the Indian tax officer within 60 days from the end of the financial year. Administration and compliance: Tax year – The tax year is the fiscal year (1 April to 31 March). Consolidated returns – Consolidated
returns are not permitted; each company must file a separate return. Filing requirements – Taxes on income in a fiscal year usually are paid in the next fiscal year (“assessment” year). Companies must submit a final return by 30 September (30 November for companies required to file a certificate on international transactions (see “Transfer pricing,” above)) of the assessment year, stating income, expenses, taxes paid and taxes due for the preceding tax year. Returns for noncorporate taxpayers that are required by law to have their accounts audited also are due on 30 September. All other taxpayers must submit a return by 31 July. Taxpayers claiming tax holidays or carrying forward tax losses must file their returns on or before the due date. Companies must make foru advance payments of their income tax liabilities during the accounting year on: 15 June (15% of total tax payable), 15 September (45% of total tax payable), 15 December (75% of total tax payable) and 15 March (100% of total tax payable).
Penalties – Penalties apply for failure to file a return and certificate of international transactions, failure to comply with withholding tax obligations and concealment of income. Rulings – The Authority for Advance Rulings issues rulings on the tax consequences of transactions or proposed transactions with nonresidents. Rulings are binding on the applicant and the tax authorities for the specific transaction(s). Personal taxation: Basis – A resident of India normally is taxed on worldwide income. A person not ordinarily resident generally does not pay tax on income earned outside India unless it is derived from a business controlled in India, or the income is accrued or first received in India or is deemed to have accrued in India. A nonresident is subject to tax on Indiansource income. Residence – An individual is resident in India if he/she spends at least 182 days in the country in a given year, or 60 days if the individual has spent at least 365 da ys in India in the preceding four years. For an Indian
citizen leaving India for employment or as a member of the crew of an Indian ship, and for an Indian citizen/person of Indian origin working abroad who visits India while on vacation, the threshold is 182 days in the given year instead of 60 days. An individual is “not ordinarily resident” if he/she has not been a resident in nine out of the 10 preceding years or has been in India for less than 730 days during the preceding seven years. Filing status – Each taxpayer must file a return; joint filing is not permitted. Taxable income – Income from employment, including most employment benefits, is fully taxable. Profits derived from the carrying on by an individual of a trade or profession generally are taxed in the same way as profits derived by companies. Capital gains – See "Corporate taxation." Deductions and allowances – Deductions are granted for medical expenses and insurance, retirement annuities, mortgage interest, education loans, etc. Rates – Rates are progressive up to 30%,
plus the applicable cess. The first INR 250,000 is exempt for resident senior citizens (age 60 or over, but under 80), INR 500,000 for very senior citizens (80 and older) and, for nonseniors, the first INR 200,000 is exempt. Other taxes on individuals: Capital duty – No Stamp duty – Financial instruments and transactions in India attract stamp duties that are levied under the Indian Stamp Act and the stamp acts of the various states (with rates varying significantly by state). Capital acquisitions tax – No Real property tax – No Inheritance/estate tax – No Net wealth/net worth tax – A 1% wealth tax applies on the aggregate value exceeding INR 3 million of nonproductive assets such as land; buildings not used as factories; commercial property not used for business or a profession; offices or residential accommodation for employees earning over INR 500,000 per annum; certain precious metals; and cars, aircraft and yachts. Social security – The employee contributes
10%-12% of wages per month to the Provident Fund. Administration and compliance: Tax year – The tax year is the fiscal year (1 April to 31 March). Filing and payment – The employer withholds tax on salary income. All individual taxpayers (except salaried individuals with income not exceeding INR 500,000, subject to fulfilling other conditions) are required to file an individual tax return. Individuals must prepay 100% of the final tax due by the end of the fiscal year either via withholding at source or by making advance payments (with interest payable on underpayments). Returns are due by 31 July of the assessment year. Penalties – Penalties apply for failure to file a return, failure to comply with withholding tax obligations and concealment of income. Value added tax: Taxable transactions – All Indian states impose a “consumption-type destinationbased VAT,” driven by the invoice tax credit method on the sale of most types of movable goods and specified intangible goods (barring a few exempt goods), the list of which varies
from state to state. Sales involving the movement of goods from one state to another are governed by the Central Sales Tax (CST). Rates – The VAT rate has two components: a general rate of 4% to 5% and a residual rate of 12% to 15% that varies from state to state. The CST rate is 2% against the submission of specified forms or the applicable local VAT rate. Registration – The turnover limit for compulsory registration for businesses is INR 500,000, although this may vary by state. State VAT laws also specify monetary amounts of sales and/or purchases required for registration. Filing and payment – VAT returns must be filed and payments made monthly or quarterly, based on the tax liability. Other – A central excise duty is levied on the manufacture of excisable goods in India. The peak rate of central excise duty, including the education cess and the secondary and higher education cess is 12.36%. Service tax is payable at 12.36%, including
the education cess and the secondary and higher education cess on the provision of specified taxable services in India. Source of tax law: Income-tax Act; Annual Finance Acts; Customs Act; Central Excise Act; Finance Act, 1994; State VAT and Central Sales Tax laws Tax treaties: India has comprehensive tax treaties with more than 80 countries. Tax authorities: Income Tax Department, Authority for Advance Rulings International organizations: WTO, ADB (Asian Development Bank), G20, SAARC (South Asian Association for Regional Cooperation)
Taxxxxxxxxxxxxxxxx in germany
The German constitution (Grundgesetz ) lays down the principles governing taxation in the following articles:
The ability-to-pay principle (Art. 3 para. 1 Grundgesetz)
Equality in taxation (Art. 3 para. 1 Grundgesetz).
The lawfulness of taxation (Art. 2 para. 1 and Art. 20 para. 3 Grundgesetz)
The welfare state principle (Art. 20 Grundgesetz)
The right to decide on taxes is subdivided:
The federation has the right on customs. (Art. 105 para. 1 Grundgesetz) The federation and the states decide together on most of the tax law. Forma lly, the states can decide that there is no federal law. In practice, there are federal laws for all taxation issues. (Art. 105 para. 2 Grundgesetz) The states decide on local excise taxes. (Art. 105 para. 2a Grundgesetz) The municipalities and the districts (Kreise) can decide on some minor local taxes like the taxation of dogs (Hundesteuer ).
So even if Germany is a federal state, 95% of all taxes are imposed on a federal level. The income of these taxes is allocated by the federation and the states as following (Art. 106 Grundgesetz):
The federation receives exclusively the revenue of:
Customs
Taxes on alcopops, cars, distilled beverages, coffee, mineral oil products, sparkling wine, electricity, tobacco, and insurance
Supplement on income taxes so-called solidarity surcharge (Solidaritätszuschlag )
The states receive exclusively the revenue of:
Inheritance tax, real property transfer tax
Taxes on beer and gambling
Fire protection tax
The municipalities and/or districts receive exclusively the revenue of:
Real property tax
Taxes on other beverages, dogs, and inns.
Most of the revenue is earned by income tax and VAT. The revenues of these taxes are distributed between the federation and the states by quota. The municipalities receive a part of the income of the states. In addition, there is a compensation between r ich and poor states (Länderfinanzausgleich , Art. 107 para. 2 Grundgesetz).
Structural organisation of fiscal administration[edit] Germany’s fiscal administration is divided into federal tax authorities and state tax authorities.
The local tax offices ( Finanzämter ) belong to the latter. They administer the “shared taxes” for the Federation and the States and process the tax returns. The number of tax offices in Germany totals around 650.
As a result of discussions in 2006 and 2009 between Federation and States (Föderalismusreform ) the Federation will further on also administer some taxes. The competent authority is the Federal Central Tax Office (FCTO) which is also competent authority for certain applications of tax refund from abroad. Since 2009 FCTO also allocates an identification number for tax purposes to every taxable person.
Jurisdiction[edit] There is normally at least one finance court in every state (Berlin and Brandenburg share a court, in Cottbus). Appeal instance is theFederal Finance Court of Germany (Bundesfinanzhof ) in Munich.
Fiscal Code[edit] The common rules and procedures applying to all taxes are contained in the fiscal code ( Abgabenordnung ) as so-called general tax law. The individual tax laws regulate in which case tax is incurred.
Tax identification numbers[edit] From 2009 onward, every German resident receives a personal tax identification number . In the coming years,[when?] businesses will be receiving a business identification number. The competent authority is the "Federal Central Tax Office" (Bundeszentralamt für Steuern ).[1]
Tax revenue[edit]
German Tax Revenue 2007
In 2007, German tax revenue totaled €538.2 billion.[2] Tax revenue is distributed to Germany’s three levels of government: the federation, the states, and the municipalities. All of these are jointly entitled to the most important types of tax (i.e., value-added tax and income tax). For this reason, these takes are also known as “shared
taxes”. Tax revenue is distributed proportionately using a formula pres cribed in the German
constitution.
Income tax for residents[edit] Individuals who are resident in Germany or have their normal place of abode there h ave full income tax liability. All the income earned by these persons both at home and abroad is subject to German tax (principle of world income).
Taxation classes (tax groups, Lohnsteuerklasse aka Steuerklassen) [edit]
class I = single
class II = single parent
class III = married and spouse has no income or lower income
class IV = married and similar income to spouse
class V = opposite of class III, ie this is the class your lower earning spouse has if you have III
class VI= for a second job.
Types of income [edit] For the purposes of charging income tax in Germany, earnings are divided into seven different types of income. A distinction is made between:
Income from agriculture and forestry
Income from business operations
Income from self-employed work
Income from employed work
Income from capital
Income from letting property
Miscellaneous income.
If a taxpayer’s income does not fall into any of these categories, then it is not subject to
income tax. This includes winnings at a game show, for example.
Income tax[edit]
German income tax rate in 2010 as a function of taxable income
The rate of income tax in Germany ranges from 0% to 45%. The German income tax is aprogressive tax, which means that the average tax rate (i.e., the ratio of tax and taxable income) increases monotonically with increasing taxable income. Moreover, the German taxation system warrants that an increase in taxable income never results in a decrease of the net income after taxation. The latter property is due to the fact that the marginal tax rate(i.e., the tax paid on one euro additional taxable income) is always below 100%.
Income tax rate in 2010[edit] No income tax is charged on the basic allowance, which is €8,004 for unmarried persons and €16,008 for jointly assessed married couples. Beyond this threshold, the marginal tax rate increases linearly from 14% to 24% for a taxable income of €13,469 (€26,938 for married couples). In the subse quent interval up to a taxable income of €52,881 (€105,762 for married couples), the marginal tax rate increases linearly from 24% to 42%. The last change of rates occurs at a taxable income of €250,730 (€501,460 for married couples) when the marginal tax rate jumps from 42% to 45%. The course of the marginal tax rate and the resulting average tax rate are depicted in the graph to the right.
Solidarity surcharge[edit] On top of income tax, the so-called solidarity surcharge (Solidaritätszuschlag ) is levied at a rate of 5.5% of the income tax for higher incomes. Up to €972 (€1,944 for married couples) annual income tax, no solidarity surcharge is levied. Above this threshold, the solidarity surcharge rate increases continuously[clarification needed ] until it reaches 5.5% when the annual income tax is €1,340.69 (€2,681.38 for married couples). For example, if €10000 income tax result from a certain annual taxable income, a solidarity surcharge of €550 will be levied on top. As a result, the tax payer owes the
taxation office €10550.
Solidarity surcharge is also imposed on withholding taxes on income e.g. wages tax and capital yields tax.
Withholding taxes [edit] Tax on income from employed work and tax on capital income are both retained by being deducted at source (pay-as-you-earn tax, wages tax, or withholding tax). Here, an amount of tax is retained directly by the employer or by the bank before the earnings are paid out.
Deductions [edit] German income tax law allows a considerable number of taxpayer’s costs to be
deducted from income when computing taxable income. This applies in particular to costs immediately related to earnings. Apart from this, other costs are also deductible, e.g., certain insurance payments, costs incurred by sickness, costs for home help, and maintenance payments. In addition to the possibility of deducting costs, there are also numerous allowances and lump-sum amounts which reduce taxable income, e.g., an allowance for capital earnings currently at €801 (€1,602 for married couples) and a lump sum of €1000 (earnings in 2011 or onwards) is deducted from income from employed work.
Tax allowance for children [edit] Expenditure on child support and on children’s vocational training is taken into account with a special tax allowance, with allowances for costs expended on child supervision, education and training, and with child benefit payments.
Flat rate tax on private income from capital and capital gains ("Abgeltungsteuer") [edit] Since 2009-01-01 Germany levies a flat rate tax on private income from capital and capital gains. The tax rate is 25% plus 5.5% solidarity surcharge. The tax is levied at German sources as capital yields tax. A tax refund is possible if the personal income tax rate is below 25%.
Tax return[edit] The obligation to file an income tax return does not apply to everybody. For example, single assessed tax payers who exclusively earn income subject to withholding tax are exempt from this obligation, because their tax debt is deemed to be at least settled by the withholding tax. Nevertheless, any person having f ull tax liability is allowed to file a tax return, taking into account the tax already withheld at the source and possible deductions. In many cases, this may result in a tax refund.
Married couples can apply for joint assessment to be taxed at a more favourable rate. In this case, they must file the annual tax return as it is possible that the tax paid through withholding tax was not sufficient.
Income tax for non-residents[edit] Individuals who are neither resident of Germany nor have their normal place of abode there are only liable to pay tax in Germany if they earn income there which has a close domestic (German) context. This includes in particular income from real estate in Germany or from a permanent establishment in Germany.
Double taxation agreements [edit] See also: International taxation
Germany has reached tax treaties with about 90 countries to avoid double taxation. These agreements fall under public international law and aim to avoid that one taxpayer is charged similar taxes more than once on the same income for the same period. The basic structure of the double taxation agreements which Germany has signed follows the "Model Tax Convention" drawn up by the OECD.
Business taxes[edit]
German Tax Rate on Corporate Income 1995-2009
As of 1 January 2008, Germany’s corporation tax rate is 15%. Counting both the
solidarity surcharge (5.5% of corporation tax) and trade tax (averaging 14% as of 2008), tax on corporations in Germany is just below 30%.
Corporation tax[edit] Corporation tax is charged first and foremost on corporate enterprises, in particular public and private limited companies, as well as other corporations such as e.g. cooperatives, associations and foundations. Sole proprietorships and partnerships are not subject to corporation tax: profits earned by these set-ups are attributed to their individual partners and then taxed in the context of their personal income tax bills.
Corporations domiciled or managed in Germany are deemed to have full corporation tax liability. This means that their domestic and foreign earnings are all taxable in Germany.
Exemptions [edit] Some corporate enterprises are exempted from corporation tax, e.g. charitable foundations, Church institutions, and sports clubs.
Flat rate tax [edit] The corporation tax charged at corporate level is 15% (flat rate tax). Solidarity surcharge as above income tax / tax rate.
Assessment base [edit]
Ratio of German assets in tax havens to German GDP.
[3]
Havens in countries with tax information
sharing allowing for compliance enforcement h ave been in decline. The "Big 7" shown a re Hong Kong, Ireland, Lebanon, Liberia, Panama, Singapore, and Switzerland.
The assessment base for the corporation tax charged is the revenue which the corporate enterprise has earned during the calendar year. Taxable profits are determined using the result posted in the annual accounts (balance sheet and Income statement) drawn up under the Commercial Code. What is deemed income under tax law sometimes diverges from the way earnings are determined under commercial law, in which case tax law provisions prevail.
Dividends [edit] When dividends are paid to an individual person, capital yield tax at a rate of 25% is charged. Since 1 January 2009, this tax is final for individuals who are residents of Germany. Solidarity surcharge is also imposed on capital yields tax. When dividends are paid to an enterprise with full corporation tax liability, the recipient business is largely exempted from paying tax on these revenues. In its tax assessment, merely 5% of the dividends are added to profits as non-deductible operating expenses. The same applies if a taxable corporate enterprise sells shares in another company. Deducting tax from dividends paid by a subsidiary with full tax liability to a foreign parent domiciled in the EU is waived on certain conditions, e.g., the parent company has to have a direct holding in the subsidiary of at least 15%.
Integrated fiscal units (group taxation) [edit]
Under German tax law, separate companies may be treated as integrated fiscal units for tax purposes (Organschaft). In an integrated fiscal unit, a legally independent company (the controlled company) agrees under a profit and loss pooling agreement to become dependent on another business (the controlling company) in financial, economic and organisational terms. The controlled company undertakes to pay over its entire profits to the controlling company. Another requirement is that the controlling company has to hold the majority of voting rights in the controlled company. In tax terms, recognition of a fiscal unit means that the income of the controlled company is allocated to the controlling company. This provides an opportunity to balance profits and losses within the integrated fiscal unit.
Trade tax[edit] Entrepreneurs engaging in business operations are subject to trade tax (Gewerbesteuer ) as well as income tax/corporation tax. In contrast to the latter, trade tax is charged by the local authorities or municipalities, who are entitled to the entire amount. The rate levied is fixed by each local authority separately within the range of rates prescribed by the central government. As from 1 January 2008, the rate averages 14% of profits subject to trade tax.
Assessment procedure [edit] The business entity has to file the trade tax return with the tax office, like its other tax returns. Taking any allowances into account, the local tax office ( Finanzamt ) calculates the trade earnings and then gives the applicable figure for a trade tax assessment to the local authority collecting the tax. The underlying profit base, as well as the book-tax differences for the local trade tax jurisdictions, may differ from that used for the corporation tax. On the basis of the collecting rate ( Hebesatz ) in force in its area, the local authority calculates the trade tax payable.
Unincorporated enterprises [edit] One-man businesses and members of a partnership may deduct a large portion of trade tax from their personal income tax bill.
Incorporated enterprises [edit] As from 1 January 2008, corporate entities may no longer deduct trade tax from their taxable profits.
Value-added tax[edit] As a matter of principle, all services and products generated in Germany by a business entity are subject to value-added tax (VAT). The German VAT is part of the European Union value added tax system.
Exemptions [edit] Certain goods and services are exempted from value-added tax by law; this applies for German and foreign businesses alike. For example, the following are exempted from German value-added tax:
export deliveries
intra-Community supply of goods
services provided by certain professional groups (e.g. doctors)
financial services (e.g. granting loans)
letting real estate in the long-term
cultural services provided to the public (e.g. by public theatres, museums, zoos, etc.),
value-added by certain institutions providing general education or vocational training
services provided in an honorary or voluntary capacity.
Tax rate[edit] The rate of value-added tax rate generally in force in Germany is 19%. A reduced tax rate of 7% applies e.g. on sales of certain foods, books and magazines, flowers and transports.
Payment of the tax [edit] Within 10 days of the end of each calendar quarter, the business entity has to send the tax office an advance return in which it has to give its own computation of the tax for the preceding calendar quarter. The amount payable is the value-added tax it has invoiced, minus any amounts of deductible input tax. Deductible input tax is the value-added tax which the entrepreneur has been charged by other business entities. The amount thus calculated has to be paid to the tax office by way of an advance. By this is meant that the amount due must be paid in full before the next fiscal quarter. Larger businesses have to file the advance return every month. For entrepreneurs who have only just taken up professional or commercial operations, the monthly reporting period likewise applies during the first calendar year and in the year after that. At the end of the calendar year, the entrepreneur has to file an annual tax return in which it has again calculated the tax.
Small businesses [edit]
Entrepreneurs whose turnover (plus the value-added tax on it) has not exceeded EUR 17,500 in the preceding calendar year and is not expected to exceed EUR 50,000 in the current year (small enterprises), do not need to pay value-added tax. However, these small enterprises are not allowed to deduct the input tax they have been billed.
Real property tax[edit] Municipalities levy a tax on real property (Grundsteuern ). The tax rates vary because they depend on the decision of the local parliament. The tax is payable every quarter.
Real property transfer tax[edit] Transfers of real property are taxable. The vendee and the vendor are common debtors of the tax. In general the vendee has to pay the tax. The tax rate is defined by the individual States. In general the tax rate is 3.5%. Berlin and Hamburg use a tax rate of 4.5%. In NRWthis tax is 5% as of Nov. 2011.
Inheritance and gift tax[edit] Inheritance tax and gift tax are regulated in one law. Taxable is either a transfer by reason of death or a gift amongst livings. There are depreciations e.g. for family houses, families as well and for entrepreneurs (up to 100%). The tax rate is from 7% up to 50%.
Capital gains tax[edit] In Germany there is no special capital gains tax. Only under certain conditions gains from private disposal may be taxed. Since 2009-01-01 Germany levies a final tax (Abgeltungsteuer) that may take effect like a capital g ains tax for resident persons e.g. disposal of shares.
Aviation Tax[edit] Main article: German air passenger taxes
From 2011-01-01 on, all passenger flights departing from Germany will be subject to the aviation tax. The amount of tax to be paid depends on the distance to the final destination. Flights to a destination up to 2,500 km away will incur a tax of €8 per passenger. The amount increases to €25 for distances of up to 6,000 km and €45 for distances beyond this. The distance taken into account is that for the entire journey as booked. For flights involving a transfer or short stopover, this means that the tax only becomes chargeable on the initial departure.
Taxes not levied[edit] There is no net worth tax or payroll tax in Germany. This section requires expansion.(January 2012)
Financial crisis 2009[edit] Existing depreciations e.g. for certain private housekeeping expenses and for small and medium sized enterprises have been enhanced. A declining depreciation for movable assets has been reintroduced for two years (2009-2010). Businesses are allowed to carry back losses and to claim refund of paid corporation / income tax. As a result they get liquidity improvement. From 2010-01-01 on the VAT tax rate concerning hotel accommodation is reduced from 19% to 7%.
See also[edit]
German Taxpayers Federation
Monthly reports of Federal Ministry of Finance (partly English)
References[edit] 1. Jump up^ [1] Website of the German Federal Central Tax Office. 2. Jump up^ Bundesministerium der Finanzen; Monatsbericht des BMF Juli 2008; page 69. 3. Jump up^ Shafik Hebous (2011) "Money at the Docks of Tax Havens: A Guide", CESifo Working Paper Series No. 3587, p. 9
German Constitution (Grundgesetz)
German Fiscal Code (Abgabenordnung)
German Income Tax Law (Einkommensteuergesetz)
German Corporation Tax Law (Koerperschafsteuergesetz)
German Trade Tax Law (Gewerbesteuergesetz)
German Value-Added Tax Law (Umsatzsteuergesetz)
Germany’s Double Taxation Agreements
OECD Model Tax Convention
Federal Ministry of Finance: Information about inheritance and gift tax (German)
Federal Ministry of Finance: Aviation Tax - a new charge for airlines (English)
Federal Ministry of Finance: Germany’s financial, budgetary and fiscal policies
(English)
