21.01.2019

As of 1 January 2019, a lower tax rate of 14%, or 14/86 of the net amount of dividends, applies to dividends paid on a regular basis under Subsection 4(5) and Section 50of the Income Tax Act. Thus, a resident company can be subject to a lower tax rate of 14/86 and a standard rate of 20/80 for the taxation of dividends.

On the basis of Section 501 of the Income Tax Act, for the calculation of the average taxed profit for the previous three calendar years, the year 2018 shall be deemed to be the first year to be taken into account.

The rate provided for in Subsection 4(5) shall be applied: 

  1. In 2019, on one-third of the profits distributed in 2018 from which a resident company has paid income tax;
  2. In 2020, on one third of the profits distributed in 2018 and 2019 from which a resident company has paid income tax.

In the fourth year, the resident company can apply upon the payment of dividends a lower tax rate of 14/86 in the amount of the average taxed payment of dividends and equity of the previous three years (Subsection 4(5) and Section 501 of the Income Tax Act).

In the case of payment of a tax with a lower tax rate to a natural person, the withholding tax is additionally 7% (§ 41 (7²) of the Income Tax Act). Income tax is deducted from the dividend payment made to both resident and non-resident natural persons.

Transnational tax treaties may exempt the payment of dividends of non-resident natural persons from withholding the income tax (United Arab Emirates, Bahrain, Georgia, Jersey, Cyprus, Isle of Man and Mexico are countries in case of which the residency certificate exempts from withholding income tax) or reduce the tax rate to 5% upon the withholding of income tax (Bulgaria and Macedonia are countries whose residency certificate reduces the tax rate to 5% upon withholding income tax).

A company shall declare received dividends taxed at a lower rate as income class 723.1 under code 7210 of section II of Annex 7 to the tax return TSD. If the company redistributes the dividends taxed at a lower tax rate from the dividends received, they must be declared under code 7311.

Similarly to the standard-rate dividend, the exemption method can be applied provided that the company receiving and redistributing the dividend had a shareholding of at least 10% in the dividend payer. The difference between paying a standard-rate dividend is that if a lower-taxed dividend is subsequently redistributed to a natural person, the withholding income tax rate is 7%.

Example from explanatory letter:

Table  1

  

New system

Old system

Stable

Variable

Stable

Variable

Year 1

Distributable profit

1000

0

1000

0

Income tax liability

200

0

200

0

Year 2

Distributable profit

1000

2000

1000

2000

Income tax liability

180

400

200

400

Year 3

Distributable profit

1000

0

1000

0

Income tax liability

160

0

200

0

Year 4

Distributable profit

1000

2000

1000

2000

Income tax liability

140

360

200

400

TOTAL

Distributable profit

4000

4000

4000

4000

Income tax liability

680

760

800

800