Question

What factors affect the tax treatment of corporate distribution?

Answer 1

Distribution by corporates to shareholders is normally taxable event and is taxed under different rates depending on different circumstances. The distribution by corporates to shareholders can be in the form of dividend or buyback mainly. The factors that affect the tax treatment are

· Holding period: The holding period is one very important concept which determines whether the gain is long-term gain or short-term gain. Different types of gains are treated differently.

· Types of Income: It also depends as to whether the income is in the form of capital gain or dividend gain, normally dividend is taxed as ordinary income so dividend is normally taxed at higher rates.

· Income slab: The tax rate is also applicable on the category of income in which the owner is applicable depending on what level of income he has. Normally in most countries as the income level increase the tax rate applicable increases.

· Type of gain: Here the type of gain means that the gain is received from the sale of securities or salvage value gain. Salvage value gain is when the company is winding up its operation, under certain circumstances the tax treatment can be different and can be used to set off losses.