A dividend tax is imposed on the dividend payments earned by the stockholders of a company. The dividend tax is also defined by someone as the tax imposed on the corporate dividends. Dividends refer to the payments made to the shareholders by the company and dividend tax is the income tax imposed on that dividend earnings.
The dividends are generally paid out to the shareholders by the companies while sometimes are retained by the company for reinvestment with the consent of the investors.
This is a common practice that a company shares its corporate profits amongst the shareholders of the company.
Tax Approaches on Dividend
The dividend tax is a matter of controversy as one group of economists thinks it should sustain while others think that it should be abolished.
In some countries where the dividends are considered as the ordinary income, are taxed accordingly while dividend income may also be referred to as the interest income or collected rents in some other jurisdictions.
Some economists think that dividend tax leads to double taxation as the shareholders as the part owners of the company are already paying the corporation tax on the profits that the company earns. The cash dividends are the payments that are paid out in the form of checks and are taxable to the shareholders in that financial year.
The re-investment of dividends may be a way to escape the dividend taxation. There are some companies, which offer dividend reinvestment plans allowing the shareholders to use the dividends earned to reinvest in the small amounts of stock. In order to facilitate re-investment the companies offer re-investment plans without any commission and sometimes even at slightly discounted rate.
The shareholder in some cases may not require paying taxes for the re-invested dividends. However, in some cases they may have to pay the taxes for the re-investment.