The concept of dividend in international tax law

Abstract

'Dividend' in its economic sense is the return on an equity investment in a corporation. Dividend distribution is a transaction in which corporate profits are distributed to the shareholders of the corporation. When two or more legal systems are involved, the classifications of corporate distributions have become a major problem for taxing authorities. This study defines this basic form of transaction both from a company law perspective and a tax law perspective including their corollaries. This definition however is not necessarily the same for different states. Therefore in a cross-border situation classification conflicts may and do emerge with the result of creating international double taxation or international non-taxation. The concept of dividend is analyzed from a domestic and international point of view. From a domestic perspective, the legislation of the United States, the United Kingdom, Germany and Malta is referred to for the purpose of this study. On the other hand from an international perspective, the conventions and directives of EC Law and the Model Conventions of the OECD, the United States and the United Nations were all taken into consideration. This transaction is, however, only one of the forms in which corporate profits may legally be distributed to the owners of a corporation. Dividend equivalent transactions are also relevant for this study. Tax avoidance is sometimes very possible when a dividend transaction is classified as any other item of income for tax purposes. Various dividend equivalent transactions are included in this thesis. International tax law recognizes various legal systems. The interaction of these legal systems is necessary to figure out why classification conflicts occur and if there is a solution provided by these legal systems. This study does not only analyze the interaction of the different legal system but seeks to provide ways of how classification conflicts are solved. Finally, it is important to note that a universal definition of dividend is not possible. However, when two legal systems classify a dividend differently, it is important to try to mitigate or eliminate the effects of international double taxation or international non-taxation.