Technical Committee on Business Taxation
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1996-05

The Integration of Corporate and Personal Taxes in Europe: The Role of Minimum Taxes on Dividend Payments

Michael P. Devereux

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Abstract

This paper examines minimum taxes on dividends which form of the imputation systems in France, Germany, Italy and the United Kingdom. The aim of these imputation systems is to at least partial integrate corporate and personal taxes which arise on income generated in the corporate sector. Under such systems, part of the corporate tax is imputed to the shareholder -- that is also treated as being part of the shareholders' tax liability. Hence the shareholder receives a tax credit to set against the personal income tax due on the receipt of a dividend.

However, certain forms of corporate income are not taxed -- or are taxed at a rate lower than the full corporation tax rate. In this case, when the income is distributed, the tax credit received by the shareholder may not be matched by tax paid at the corporate level. This problem is overcome
in a number of ways. For some types of corporate income, France, Germany and Italy charge an explicit minimum tax -- known usually as an equalization tax (the précompte in France). However, other forms of income can be paid to shareholders without liability to the minimum tax; in these cases the shareholder generally does not receive the tax credit. The United Kingdom does not have an explicit tax, but its imputation system has much the same effect.

The paper describes the imputation systems in each country in some detail, paying particular attention to the minimum tax. The impact of the imputation systems tends to vary across both the source of the income, whether fully taxed or not fully taxed; whether domestic or foreign source income -- and across the identity of the shareholder -- depending on the tax rate and whether he or she is a resident or non-resident. An Appendix gives a simplified summary of the impact of the imputation systems in the four countries, showing how the net income of a number of different types of shareholders would vary depending on the original source of the income.

The paper also briefly addresses a number of economic issues: it examines the likely impact of the minimum tax on the investment and financing decisions of companies, and outlines how the impact of the imputation system depends on the minimum tax. Finally, it also briefly raises the issue of alternative forms of taxation of corporate source income.

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