4.3.2.1 Introduction cross-border dividend taxation

The return on equity is generally not deductible. Without rules to avoid double taxation1 this leads to economic double taxation. In situations involving groups of companies, the economic double taxation follows from the combination of corporate tax at the level of the payer and corporate tax at the level of the recipient. The more legal entities in the structure, the more corporate tax due.2 From an economic point of view, the amount of income tax on dividend payments should not depend on the number of legal intermediaries.3 Additionally, dividend payments are generally subject to withholding tax. This additional layer of taxes leads to both juridical and a second variant of economic double taxation. The juridical double taxation is formed by corporate income tax at the level of the recipient of the dividend, as well as the dividend tax withheld from the recipient of the dividend. Second, there is a variant of economic double taxation due to the combination of corporate income tax at the level of the payer and the dividend tax withheld from the recipient of the dividend.

The national tax treatment of dividends generally stimulates debt financing rather than equity financing. Interest payments are in principle deductible, which means the aforementioned double taxation is partially resolved (solely juridical double taxation remains).4 Given this difference in tax treatment, companies that are part of a multinational group will generally favour debt financing over equity financing. To mitigate this difference in treatment, most national tax systems provide for partial or full elimination of economic double taxation with respect to equity remuneration.5