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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

**Changes in Top Dividend Tax Rates**
Country	2017 Tax Rates	2018 Tax Rates	2019 Tax Rates
Source: OECD, “Tax Policy Reforms 2019,” Sept. 5, 2019, https://www.oecd.org/tax/tax-policy-reforms-26173433.htm; OECD.Stat, “Table II.4. Overall statutory tax rates on dividend income,” 2019, https://stats.oecd.org/index.aspx?DataSetCode=TABLE_II4.
France	44.0 percent	34.0 percent	34.0 percent
Iceland	20.0 percent	22.0 percent	22.0 percent
Latvia	10.0 percent	0.0 percent	0.0 percent
Norway	29.8 percent	30.6 percent	31.7 percent

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 earning 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

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

www.maltaway.com no borders international advisory partners your hub for a re-location for business Assets and people

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

https://www.maltaway.com/corporate-tax-malta-vs-usa-full-imputation-system-and-notional-interest-deduction-nid/

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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