How does corporate tax affect dividend payout?
June 27, 2022 | 40,00 EUR | answered by Ulrike Voigt
Dear tax consultant,
My name is Erwin Hentschel and I am the managing director of a medium-sized company. In the past, we have regularly distributed dividends to our shareholders to involve them in our profits. However, I am now concerned about how corporate tax affects these dividend payments. We have always paid corporate tax properly so far, but I wonder if and to what extent dividends are affected by it.
Our company has been consistently profitable in recent years, allowing us to pay attractive dividends to our shareholders. However, I am questioning whether corporate tax reduces or even prevents these payments. I want to ensure that we can continue to pay our shareholders appropriate dividends without facing tax problems.
Could you please explain to me how corporate tax specifically affects dividend distribution? Are there ways to optimize the tax burden and still maintain dividends at an attractive level? What tax aspects should I consider when planning future dividend distributions?
Thank you in advance for your help and advice.
Sincerely,
Erwin Hentschel
Dear Mr. Hentschel,
Thank you for your inquiry regarding the impact of corporate tax on dividend payments in your medium-sized company. I understand your concern that corporate tax could affect dividend payments, and I would be happy to explain in detail how corporate tax affects dividend distributions and what options are available to optimize the tax burden.
Corporate tax is a tax levied on profits of corporations. So, if your company generates profits and distributes them as dividends to the shareholders, you must first pay corporate tax on them. The amount of corporate tax depends on the company's profit and the applicable tax rate.
Therefore, corporate tax is deducted before the distribution of dividends. This means that the dividends are already net for the shareholders and they do not have to pay any further tax on them. However, corporate tax naturally reduces the available profit that can be used for dividend payments.
To optimize the tax burden and maintain dividend distributions at an attractive level, there are various options available. One option is to reduce the tax burden through effective profit planning. Various tax planning strategies can be used to optimize profit and minimize corporate tax.
Furthermore, when planning future dividend distributions, you should also consider other tax aspects, such as tax reserve formation, tax loss carryforwards, or the tax treatment of distributions to foreign shareholders.
It is advisable to seek advice from an experienced tax advisor to identify individual tax optimization possibilities for your company and minimize tax risks.
I hope this information has been helpful to you and I am available for any further questions.
Yours sincerely,
Ulrike Voigt
