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Good news: resident withholding tax compliance issues relating to dividends are now resolved for companies

Tax Alert - June 2017

By Emma Marr and April Wong

Effective from 1 April 2017, companies can save on compliance and administration when distributing dividends to corporate shareholders. The Taxation (Annual Rates for 2016-17, Closely Held Companies, and Remedial Matters) Act 2017 (Act) has simplified the resident withholding tax (RWT) rules relating to dividends by allowing companies to opt out of paying RWT on a fully imputed dividend paid to a corporate shareholder regardless of whether they are a group company or not.

Generally, a person who makes a payment of resident passive income comprising a dividend must withhold RWT from the dividend at a RWT rate of 33%, less any imputation credits.

Companies that distribute a fully imputed dividend are obliged to pay 5% of RWT (the difference between 33% and the current corporate tax rate of 28%) to Inland Revenue by the 20th of the month following the dividend distribution, which has historically resulted in an initial over-taxation of the dividends and additional compliance for corporates. The paying company had to account for the additional RWT to Inland Revenue, and the recipient company sought a refund from Inland Revenue when RWT could not be utilised to lower their income tax liability. Further, if a company wished to pay dividends to its corporate shareholders at year-end to clear its current accounts, it may not have had sufficient financial information to determine the level of the dividend.

To address the compliance burden faced by corporates in complying with the RWT regime, the Act allows a company to opt out of withholding RWT on a fully imputed dividend paid to another company. We commend Inland Revenue for making this rule optional, as some companies (particularly those that are widely held) would in fact incur greater compliance costs from an outright requirement not to withhold RWT on fully imputed dividends. In this particular scenario, the company would have had to establish which shareholders are corporates and those that are not, and differentiate between these two groups within their systems. We suggest contacting your Deloitte adviser to find out whether opting into these new rules could save you compliance time and costs.

 

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