What taxes must be paid on dividends?

Dividends are one of the most favoured words of the managers, as it refers to the profits made by the shareholders of a company in respect of their share in the company. Taxes are withheld for the paid dividends. Dividends are usually paid in cash.

The important matter about dividends

The more dividends a company pays, the more successful it can be potentially considered, therefore such information is often heard in the public space, when reporting on a company’s success. Dividends are not paid automatically. They are approved by the company management. The company may also choose not to pay dividends at all, when investing in the development of the company.

The new order

Following the tax reform, the payment of taxes on dividends changed, encouraging companies to invest in development. The new corporate income tax (CIT) procedure stipulates that CIT must be paid only from the part of the profit that is paid to the participants (shareholders), and also only one of the taxes must be paid from this amount – CIT or personal income tax (PIT).

“The new” and “the old” dividends

Also, regarding the adoption of the new law, it is important what type of dividends are paid. “The old” dividends are considered to be those that are paid out of the profit generated in the period up to 2018 and which have already been subject to the CIT rate of 15%. In turn, “the new” are considered those that are paid out of the company’s profit generated in the period from 01.01.2018 and therefore income taxes have not yet been applied to them. When paying “the old” dividends (from the profit that was previously subject to 15% CIT), the PIT in the amount of 10% must be withheld, if the recipient is a natural person. When paying “the new” dividends, a company must pay 20 or 25% of their amount to the state budget (depending on the calculation made). A natural person no longer has to pay any additional taxes on “the new” dividends received. Therefore, the actual profit of the company can be withdrawn by the participants by paying 20% CIT. For example, if a company has “the new” share of profit of EUR 10 000, which it is willing to pay in dividends, EUR 8 000 of it can be paid in dividends (80%), but EUR 2 000 (20%) must be paid to the state budget in the form of CIT.

It is important to know that the new dividends must not be paid out, while the old ones have still been accrued. Other conditions must be taken into account, if dividends are paid to shareholders of foreign companies. 

Notes

According to the law, the date on which dividends have been calculated is considered to be the date of payment of the income of dividends.

When paying dividends a number of conditions must be taken into account, the law has to be applied and taxes have to be paid. We strongly recommend that you consult with experts on these issues, who will advise on the most appropriate and correct solution in the particular case.