Wednesday, March 9, 2011

Tax on Corporate Dividends

In a corporate world, dividends is not a new topic. As a matter of fact, it is one of the major consideration for an investor to purchase shares of stock of a company. It represents the share in the net earnings distribution of a stockholders who own shares of stocks of a company. It could be in the form of cash, property, company's own shares or stock dividends and liquidating dividends upon liquidation and dissolution. It is basically sourced from the unrestricted or free retained earnings of the company made available through an action of the Board of Directors.

Taxability of cash and/or property dividends would normally depend on the classification of the company and the recipient stockholders. Company for determining tax on dividends may be classified as either a domestic corporation or as a foreign corporation. Stockholders may be classified as either an individual or a corporation, and the latter may further be classified as a domestic corporation, resident foreign, and non-resident foreign corporation. Determining the classification would depend on the state where the same is organized or constituted and existing. Domestic corporations are those organized and existing under the laws of the Philippines. Those organized and existing under the laws other than the Philippines are referred to as foreign corporation. Foreign corporations doing business in the Philippines are normally classified as resident foreign corporation, otherwise, the same shall be referred to as a non-resident foreign corporation.

Dividends distributed by a DOMESTIC corporation to the following stockholders are taxed as follows:

* Individuals, whether Pinoy or not, is subject to 10%;
* Domestic corporations - exempt;
* Resident foreign corporation - EXEMPT from income tax; and
* Non-resident foreign corporation - 15% subject to the rule on tax-sparing credit and/or Tax Treaty rules

On the other hand, dividends distributed by a FOREIGN corporation to the following stockholders are taxes as follows:

* Pinoy individuals residing in Philippines is subject to 5-32% normal income tax;
* Pinoy individuals not a resident of the Philippines is EXEMPT from income tax;
* Domestic corporations subject to 30% corporate income tax;
* Resident foreign corporation is EXEMPT from income tax; and
* Non-resident foreign corporation is EXEMPT from income tax.

Stock dividends are, as a rule EXEMPT from income tax as there is no flow of wealth to the stockholder before and after the stock dividend. The increase in the number of shares as a result of the stock dividend is not necessary income until after such shares are actually sold. However, if such stock dividend distribution would constitute as an income distribution (e.g. increase in the equity percentage of a stockholder), then, the same shall be taxed in the same manner above.

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eunice87286 said...

re: dividends distributed by a FOREIGN corporation
If I'm a pinoy individual residing in Philippines and I received a dividend from a foreign corporation:
1. Am I liable for the income tax whether the foreign corporation is a resident or non-resident foreign
2. If the dividend I received is already taxed from source, meaning the foreign corporation is required to withheld tax on dividend. Am I still liable to pay tax in the Philippines or am I exempt already?
Thank you.

philtaxation said...

Hi Eunice. As a resident citizen, my view is yes to both of your questions and the tax paid abroad on such income would be deductible as tax credit. If you are a non-resident citizen, then, the dividend income from a non-resident foreign corporation is not taxable.

Joel said...

RE: Dividends from Domestic Corporation
- For the stockholders who receives their dividends from a domestic corporation, are they required to still file for their individual ITRs or form 2316? Can they file exemptions for those forms?
- Would there be an exemption if the amount of the dividend is too small? How much is amount that can be considered as taxable?

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