A dividend is a share of a company's profits distributed to its shareholders, usually in cash and often paid quarterly or annually. Companies pay dividends out of profits that have already been subject to corporate tax, which is why dividends sit at the centre of debates about double taxation: the same underlying profit is taxed once at company level and again in the owner's hands.
How the shareholder is taxed depends on the country. The United States taxes qualified dividends at preferential rates of 0%, 15% or 20%. The United Kingdom offers a small tax-free dividend allowance and then charges 8.75%, 33.75% or 39.35% by band. Italy applies a flat 26% rate on most dividends, France uses a 30% flat levy known as the PFU, and Germany charges a 25% withholding plus a solidarity surcharge.
Suppose a UK company owner draws 20,000 in dividends. After a 500 allowance, a basic-rate shareholder would pay 8.75% on the remaining 19,500, about 1,706, far less than the same sum taken as salary. This makes the mix of salary and dividends a key planning choice for owner-managers.
Cross-border dividends may also face withholding tax at source. To model different structures, explore the compare taxes by country calculator.