Taxation of dividends and capital gains: A comparison across countries

By Kumarmanglam Vijay

In the present times, most corporations are looking at taking advantage of globalization and setting up entities across the world. Most countries want to attract foreign capital flows and offer attractive tax regimes to non-resident investors.

This has resulted in an increase in cross-border investments by multinationals. Typically, this creates two additional income streams for the investing entity: (i) ‘capital gains’ when the income stems from the sale of shares/ investments; and (ii) ‘dividends’ which is a periodical return on investment paid by the investee company. Lower tax incidence and ease of compliance enable a jurisdiction to attract investments. We have discussed below the Indian regime and how it stacks against a select few countries.

In India, gains derived from the transfer of shares held as capital assets are subject to capital gains tax depending on whether the gains are regarded as long-term capital gains (“LTCG”) or short-term capital gains (“STCG”).

LTCG tax @10% is triggered upon the transfer of listed shares held for more than 12 months and on the transfer of unlisted shares held for more than 24 months before their sale. STCG tax @15% is triggered upon the transfer of unlisted shares held for 12 months or less. STCG derived by non-residents on the sale of unlisted shares held for 24 months or less at normal rates as applicable to them. Surcharge and cess is also applicable.

Non-residents receiving dividend income from Indian companies are generally subject to tax in India at the rate of 20% (plus applicable surcharge and cess). It is also important to note that the Indian tax implications would also be subject to the beneficial provisions of the double taxation avoidance agreements entered into between India and the country of residence of such non-resident.

We have discussed some global tax regimes to provide an overview of the taxability of capital gains and dividend income.

United States (US)

Generally, US-sourced capital gains derived by non-residents may be completely exempt from US taxation if they are not (i) effectively connected with the conduct of a US trade or business, (ii) gains from the sale of US real property interests, or fixed, determinable, annual, or periodical income. Dividend income that is ‘non-effectively connected income’ (i.e. not connected to the operation of business) is generally taxed at a flat 30% rate on the gross income unless a tax treaty specifies a lower rate.

United Kingdom (UK)

Subject to certain exceptions, no tax is levied on a gain on the sale of shares in a UK subsidiary by a foreign non-resident parent company. Dividends paid by UK companies are not subject to tax withholding and are exempt from corporation tax except where the anti-avoidance rules become applicable.

Singapore

Singapore does not levy tax on capital gains income. Foreign-sourced dividends are also not subject to tax in Singapore.

Japan

Capital gains earned by companies are taxed at the same rate as the rates applicable to their ordinary income, i.e. approx. 31%. Much like in India, capital loss can be offset against capital gains. Certain types of corporate reorganizations do not result in capital gains as per the local laws. Dividend income is generally subject to tax in Japan @20% withholding tax.

Brazil

Non-residents are subject to withholding tax on capital gains arising from the sale or transfer of Brazilian assets and the rate of such taxes ranges from 15% to 22.5%. Currently, Brazil does not levy any tax on dividend income.

Conclusion

Governments tend to take a macroeconomic and strategic view of the competitive landscape to attract foreign capital and change tax laws to either attract or direct cross-border investments to the country. Therefore, tax laws keep evolving to align with the economic policy of the jurisdiction and that leads to the complexity. Investors should seek proper advice not only on the expected returns but also look at tax-adjusted returns and ease of compliance while deciding on investment avenues and destinations.

(Author is Partner, JSA Advocates and Solicitors; Disclaimer: The above information is based on publicly available data and is not meant to be legal advice.)