If you are a business owner, distributing dividends is important subject for you to consider. You may have questions such as: what taxes do I have to pay upon distributing dividends? When it is the most appropriate time to pay dividends? What is the difference between paying dividends and paying the invested capital?
This article provides useful information on what factors should you consider before you decide on distributing dividends.
What taxes do I have to pay upon distributing dividends?
In accordance with Georgian tax legislation, upon dividend distribution, company must pay income tax and dividend tax. Income tax rate is 15%, while dividend tax rate is 5%. For instance, if company decides to distribute 1,000 GEL dividend, the company’s owner will receive net proceeds of 807.5 GEL (1,000*85%*95%), while the remaining 192.5 GEL will be paid to Georgian Revenue Services.
When is it the most appropriate time to pay dividends?
Often, company owners make mistake by assuming that they can pay dividends and then reinvest it in the company if the latter needs the money. At a first glance, this might seem a valid approach, however, in this case, the company has to pay the above discussed taxes upon distributing dividends, which means that if the owner distributed 1,000 GEL dividend and therefore paid 192.5 GEL as taxes, in case company needs the money, the owner will only be able to invest back 807.5 GEL, since the paid taxes will not be returned. As a result, the company will have smaller amount of funds available to fund its projects. Therefore, distributing dividends is only appropriate when a company does not have such short-term plans and projects that would require reinvestment of the issued dividends in the near future. Otherwise, the company will have smaller funds available upon reinvesting the paid dividends.
What is the difference between paying dividends and paying the invested capital?
Often, company owners make mistake by assuming that the company will be taxed upon any distribution to shareholders. However, whether tax applies or not depends on the substance of distribution – dividend distribution is different from invested capital distribution. The distinction between these two types of distributions is crucial – upon invested capital distribution, a company does not pay income and dividend taxes. For instance, if a company’s owner decides to distribute 1,000 GEL from the invested capital, unlike dividend distribution, the company will not have to pay 192.5 GEL as taxes and 1,000 GEL will be fully paid to the owner, without any tax deductions.
To better understand the distinction between invested capital and dividend, we analyze each of them below.
Dividend – represents distribution of company’s profits. Company has earned profit as a result of its operations. These profits are usually accumulated over years. Dividend represents distribution of these accumulated profits. When company distributes profits, it must pay profit and dividend taxes as discussed above.
Invested capital – represents equity invested by the owners. Unlike accumulated profits, invested capital represents funds invested in a company by its owners upon the company’s establishment or after the establishment. When company distributes invested equity, it does not pay neither profit nor dividend tax.