An anomaly exists in the Irish tax system which makes taking dividends from British-based investments slightly more attractive than from Irish companies. This became obvious when two Family Money readers contacted us regarding various aspects of dividend-withholding tax. Ms W e-mailed us asking about the position regarding personal income tax where dividends in a British company are received in the form of shares in lieu of dividend. In her opinion, this income is not real income until the shares are sold. She asks: "Is there a difference in tax treatment if the company is Irish? How is the figure under tax credit treated as shown on the dividend tax voucher."
When additional share capital of a quoted company is taken instead of cash the distribution is called a "scrip dividend" and is liable to dividend-withholding tax (DWT).
According to the Revenue Commissioners: "In general, dividends paid and other distributions made by Irish-resident companies on or after 6 April, 1999 are liable to a dividend withholding tax at a rate of 24 per cent."
Relevant distributions for personal investors liable to DWT include: normal cash dividends, non-cash dividends, scrip dividends of quoted and non-quoted companies.
In Ms W's case PricewaterhouseCoopers tax partner, Mr Joe Kerrane says the tax credit question is no longer relevant because the UK ceased to attach tax credits for any dividend paid after last April and no credits are available in the Republic, he said.
If the company is an Irish company, the shares are deemed as income equal to the amount of the cash dividend received. "If the investor is taxed on £100 in cash then they're taxed on £100 worth of shares as a tax equivalent. The disadvantage for an investor is with cash you have the money to pay the tax, where if you have shares you must find cash from elsewhere or sell the share. There is a cash flow disadvantage on taking a scrip," he said.
One difference has emerged between investment in Irish and British resident companies. Dividend-withholding tax rules for scrip dividends say that if the cash dividend was going to be £100 (€127) a company is not allowed to give a scrip for the net amount, says Mr Kerrane.
"If cash is £100 the tax on the £100 is 24 per cent or £24 so the net of the dividend withholding tax equivalent is £76. An Irish company may not offer the shareholder scrips to a greater value than £76. If you took the dividend in cash you get £76 because the £24 withholding tax is taken out and the scrip is still a £76 equivalent," he said.
The UK does not have withholding tax so a scrip from the UK could have gained a share to the value of £100. The tax applies only to dividends paid by Irish-resident companies. You get a credit in the Republic for dividend withholding, says Mr Kerrane. Scrips from British-based companies may be available to Irish investors at the gross amount where Irish-resident companies are required to deduct DWT and issue the net amount. However, Irish residents liable to income tax may claim the DWT against liability. If this amount exceeds the liability the excess will be refunded.
If resident in the Republic but not liable to income tax, a claim may be made for a refund of the DWT deducted. Unfortunately, this may take as long as 18 months from the receipt of the scrip.
Family Money reader Mr O'Frang to point out some interesting items in the new dividends-withholding tax information leaflet which the Government introduced earlier this year. In particular, he was concerned about the new requirement for investors to provide a letter from the Revenue Commissioners in their country of residence confirming that tax is being deducted at source.
He feels this will be a negative factor to people who want to invest in Irish shares.
It seems that Revenue requires proof of a person's tax residence in another country. Revenue's dividend-withholding tax information leaflet says some individuals non-resident in the Republic but living in an EU member state or in a state with which the Republic has a double taxation agreement are exempt from DWT.
However, the exemption is only available if a declaration is made to the company on a Revenue-authorised form by the individual or through a qualifying intermediary or authorised withholding agent. "If you are a qualifying non-resident person, other than a company, your declaration form must be certified by the tax authority of the country in which you are resident for tax purposes," says Revenue.
Revenue says DWT will not apply in the case of distributions made in the period from April 6th 1999 to April 5th 2000 to a recipient (whether or not beneficially entitled to the distribution) who is one of the following: a person whose share register address is in a relevant territory or an intermediary whose address is not in a relevant territory which before making the distribution has notified the company that it is to receive the distribution on behalf of a person (whether an individual, company or unincorporated body) whose address in the records of the intermediary is in a relevant territory. Some companies also qualify for the one-year exemption.
