Dividends – Operation, Types And Taxation

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In this article we go into the concept of stock dividend. We will see what share dividends are, when and why they are distributed and in what quantity.

When we talk about share dividends, we are considering a portion of the profit decided by a particular company. This “slice” of money is distributed to its shareholders at the end of each accounting period as a reward for the capital invested previously.

How Much Of The Profit Is Distributed?

The amount and timing of the distribution of this profit is decided by the so-called ordinary shareholders’ meeting, after approving the financial statements. During the year, a company may decide a certain amount to be allocated to the distribution of dividends, always taking care to keep a sufficient amount of money to be reinvested, or to be used in other ways. A company in crisis, however, will not be forced to distribute a dividend. In fact, in the event of losses or debts accumulated previously, the shareholders’ meeting may decide not to “return” part of the money to the shareholders at any given time, or rather “reward”.

Usually dividends are issued in the form of cash. But there is the possibility that they may also be distributed in the form of shares. In the case of recently issued securities, the distribution can take the form of a free capital increase.

The Detachment Of The Dividend

The shareholders who own the share when the share detaches the coupon, mature the right to collect their dividend.

On the coupon detachment day, the share price is lowered by an amount equal to the dividend. In fact, the price of each share also includes profits. The share prices are of the Tel Quel type.

When the dividend is paid out, the indices are also adjusted. The payment and detachment dates of the dividend are always regulated by the Italian Stock Exchange calendar.

The moment of the detachment of the dividend represents an important moment also for the trading because just in those days there are interesting movements for those who trade upwards or downwards. Find out more information about trading with CFDs.

When a shareholder chooses to sell his shares before the payment date, i.e. in the period from the detachment date to the payment date, he would still retain his right to receive the dividend. Only on the day of payment will the shareholder receive the amount equivalent to his detached dividend. Obviously, the shareholders’ meeting has the power to decide the date on which the dividend will be paid out. Usually this date is set three working days after the detachment date.

Dividends On Preferred Shares

Those who own preference shares will be able to have their dividends increased compared to ordinary shareholders, while those who own savings shares will be sure to receive this bonus.

Ordinary And Extraordinary Dividends

There are two types of dividend, if we are talking about ordinary dividends, we are referring to that part deriving from corporate profits. The alternative is the so-called extraordinary dividend, i.e. the shareholders’ meeting decides to pay a part of the company’s cash reserves, and not a part of the profits for the period in question. This extraordinary dividend can be obtained from the sale of parts of the company, or for example previous deposits held specifically for situations of necessity.

How Dividends Are Taxed

Extraordinary dividends, e.g. from adjustment interest, cannot be taxed. Ordinary dividends, on the other hand, are divided into two categories, i.e. qualified and non-qualified participations. In the qualified case, 40% of dividends received are subject to the marginal tax rate, while the remaining 60% of dividends are exempt from this type of tax. In the second case, on the other hand, the portion received from shareholders is taxed in its entirety with a final withholding tax of 12.5%. Likewise, each dividend of foreign origin is subject to a 12.5% withholding tax.

There is a black list of companies resident in States that have a privileged tax regime, in case the dividends come from such companies, the tax will be applied on the total of the sum of the profits and all the others received. This is unless the recipient can prove that their holding was not acquired in order to move their income to a country with reduced taxation.

There are also differences for the taxation of dividends from companies. These depend on the type of company itself, for example there will be different taxation depending on whether it is a corporation or a partnership. In the first case, they will not be eligible for a tax credit, but for a 95% exemption. Dividends received will be 5% of the total taxable income. It should be remembered, however, that if the company paying the dividend is located in a tax haven, this exemption will be recognized as valid only when the Inland Revenue establishes that the income received has been taxed in a country with ordinary taxation.

In the case of partnerships, on the other hand, dividends may contribute 40% of their total value to the formation of the company’s income, regardless of whether they are qualified participations or not.

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