Tax treatment of dividends and shares in profit
Tax Alert, July 2014
Decision of the Constitution Court on retroactive taxation of dividends
The Constitution Court has issued a decision that abolishes the retroactive taxation of dividends and shares in profit (published in the National Gazette no 83/2014). The effect of the decision is that sections 6 and 8 of the Personal Income Tax Act Amendments of October 2013 (National Gazette 125/13) have been abolished.
A brief history of dividend taxation is as follows:
Taxation of dividends was introduced with the Personal Income Tax Act Amendments in February 2012 (National Gazette 22/2012). Under these amendments, dividends became subject to income tax at the 12% from 1 March 2012. Section 16 (3) of Amendments stated that all dividends and shares in profit are subject to tax, if they are paid from the date the Amendments came into force (1 March 2012), except dividends and shares in profit realized until 31 December 2000.
Since this provision prescribed retroactive dividend taxation, a petition was filed at the Constitution Court to ascertain whether this provision was constitutional.
The Constitution Court issued the Decision and the Resolution on invalidation of section 16 (3) on 18 September 2013. In October 2013, new Amendments to the Personal Income Tax Act (National Gazette 125/13) were published. With the new amendments, the response to the Constitution Court's decision was as follows:
Section 6 prescribed that taxation of dividends and share in profit should be made on a treasury basis (when they are paid).
Section 8 formulated the provision on retroactive taxation of dividends so that dividends and shares in profit paid after 1 March 2012 are subject to tax, if the decision on payment of the dividends or shares in profit was made after 1 March 2012, regardless of when the actual profit was realized.
Upon these changes another appeal was filed at the Constitution Court to ascertain whether the changed provisions are in line with the Constitution.
The Constitution Court issued a decision on 18 June 2014 under which the new sections 6 and 8 are to be abolished. This Decision thus fully abolishes the retroactive dividend taxation.