DIVIDEND TAX in EUROPE
and the smart corporate tax system in Malta with Full Imputation
Look at OECD data to go deeper on the issue
Some countries, MALTA is one of the most interesting have integrated their taxation of corporate and dividend income to eliminate double taxation. In most countries, though, dividend taxes add another layer of taxation on corporate income.
Imagine a business earns a profit of $100. This profit is subject to a corporate income tax of 22.5 percent (the average of the European countries covered), resulting in corporate income taxes of $22.50 and after-tax profits of $77.50. The business decides to distribute these after-tax profits as dividends to its shareholders. These shareholders then need to pay an average of 23.5 percent in dividend taxes, a tax bill of $18.21. The total tax bill on a $100 profit then amounts to $40.71, which is an integrated tax rate of 40.71 percent. As this example shows, when analyzing corporate income taxation, it is important to look at dividend taxes in the context of other layers of taxation.
CORPORATE TAX SYSTEM in MALTA, Europe – ITALIAN & ENGLISH
Al fine di individuare un corretto modo per applicare la corporate tax, suggerisco di dare un’occhiata al sistema fiscale maltese riferito alle società per un motivo principale che ho riassunto in pochissime parole:
Il sistema chiamato FULL IMPUTATION, in cui i dividendi distribuiti su profitti tassati, incorporano un credito di imposta per parte dell’imposta pagata dalla società, attuando di fatto un modello quasi simile alle società “passthrough” statunitensi anziché al modello delle società C – Vedi immagine
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CORPORATE TAX SYSTEM MALTA,
lowering the real Corporate Tax to 5% from the nominal one of 35%, the smart and fair solutions of Full Imputation System, where dividends distributed out of taxed profits, are carrying an imputation credit of the tax paid by the company, having de-facto a quasi-similar model to the US passthrough firms instead of C corporations model
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Europe and global bad practices and regulation incentivizing CORPORATE DEBT instead of EQUITY, MALTA has instead a fair NID policy
IN MALTA is different having a model to avoid the bias of “advantageous debt financing model”. Malta has introduced for the fiscal year 2018 a NID model or notional interest deduction, giving a tax neutrality to the equity financing and debt financing
NID is calculated as the risk-free rate referred to the current yield to maturity on Malta government stocks with a remaining term of approximately 20 years, plus a 5% premium
Thin-Cap Rules in Europe
High-tax countries create an incentive for companies to finance investments with debt because interest payments are tax-deductible, which is usually not the case for equity costs.
This encourages global businesses to lend money internally from entities in low-tax countries to entities in high-tax countries. Tax savings in high-tax countries can exceed the increased tax paid in low-tax countries, decreasing worldwide tax liability.
To discourage such international debt shifting, many countries have implemented so-called thin-capitalization rules (thin-cap rules), which limit the amount of interest a multinational business can deduct for tax purposes. The two most common types used in practice are “safe harbor rules” and “earnings stripping rules.” Safe harbor rules restrict the amount of debt for which interest is tax-deductible by defining a debt-to-equity ratio. Interest paid on debt exceeding this set ratio is not tax-deductible. Earnings stripping rules limit the tax-deductible share of debt interest to pretax earnings.
thin-cap rules, thin-capitalization rules, debt-to-equity ratio, safe-harbor rules, debt shifting
More than half of the European countries covered have interest-to-pretax-earning limits in place. Most commonly, the limit is set at 30 percent of EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization). For instance, a parent company takes a $100 loan from its subsidiary requiring interest payments of $5. EBITDA are $10, so only $3 (30 percent of $10) of the $5 in interest paid are tax-deductible.
Some of the countries have debt-to-equity ratios in place. For instance, Turkey’s debt-to-equity ratio is 3:1. Let’s say a Turkish business takes a $100 loan from its foreign subsidiary. Its current equity amounts to $10, resulting in a debt-to-equity ratio of 10:1. The annual interest on the loan is 5 percent, or $5. Because the business’ debt-to-equity ratio is twice the limit, only half of the interest, or $2.5 of the $5, is tax-deductible.
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