Corporate finance (dividends/interest) (4)

Question 1

Interest

Answer 1

Income for lender from money that is offered to the borrower

Interest should be paid even if there is no profit

Must be paid

Fixed rate

Question 2

Dividends

Answer 2

Income offered to the shareholders of a company

Can only be paid when there are profits for the company

Can be optional - company decides when to pay

Depends on companys plan to calculate

Question 3

Tax treatment of debt vs equity

Answer 3

Debt (interest payments)

For borrower: Tax deductible –> not taxed

For lender: taxed

Equity (dividend payments)

For company: not tax deductible

For shareholder: exempt (usually)

Question 4

Resident state

Answer 4

where you are a tax resident, and pays tax to the state

Question 5

Source state

Answer 5

Where you are not a tax resident but generate income from the states territory, and pays tax to the state

Question 6

Withholding tax (WHT)
Scenario: Company X (NL) invests in subsidiary (GE)

Answer 6

Source state can tax the interest/dividend payment from the payer

It is administratively easier
GE wants to tax Company A, but A is in NL

It is easier to tax the income in GE (its subsidiary)

So, GE just taxes the payer of the income in its territory

Question 7

Article 10 OECD Model Tax Convention (Dividends; how to allocate taxing rights under OECD)

Answer 7

Dividends paid by a company which is a resident of Source State to
a resident of Resident State may be taxed in Resident State.
* Source State can also tax the same dividends with limitations.
* Dividends may also be taxed in Source State, but if the beneficial
owner of the dividends is a resident of Resident State, the tax so
charged shall not exceed:

a) 5% of the gross amount of the dividends if the beneficial owner is
a company which holds directly at least 25% of the capital of the
company paying the dividends through a 365 day period;
* b) 15% of the gross amount of the dividends in all other cases.

Question 8

Interest (How to allocate under taxing rights) OECD article 11

Answer 8

Interest arising in Source State and paid to a resident of Resident
State may be taxed in Resident State.
* Source State can also tax the same interest with limitations.
* Interest may also be taxed in Source State, but if the beneficial
owner of the interest is a resident of Resident State, the tax so
charged shall not exceed 10% of the gross amount of the interest.
* The competent authorities of the two states shall by mutual
agreement settle the mode of application of this limitation.