Newsletter
TIMING TO WAIVE DIVIDEND RIGHTS
In a ruling dated 2 February 2005, the Ministry of Finance stated that if a shareholder gives up his right to a cash dividend or stock dividend before the ex-dividend day, he will not be liable for income tax. This resolves the long-standing issue of unreasonable taxation of stock dividend issue by companies whose slimes are traded be-low their par value. Prior to the above ruling, whenever a listed company issued stock divi-dend, all shareholders were assessed for income tax on the par value of the shares, so that even if the shares' market value was as low as NT$3, tax still had to be paid based on their par value of NT$10.
According to the MOF ruling, if a shareholder relinquishes the right to a distribution of cash dividend or stock dividend before the record date for such a distribution, the dividend concerned remains part of the company's retained earnings. The shareholder has not received any stock dividend, so the question of assessment for in-come tax does not arise. However, if a share-holder does not relinquish the right to a dividend until after the record date for the distribution, the dividend received by the shareholder is subject to income tax in accordance with the provisions of the Income Tax Act.
Thus when a shareholder that holds shares whose market price has fallen below par value learns of any forthcoming stock dividend, he can calculate both the tax burden arising from the distribution, and the value of the shares to be distributed, to determine which is more advantageous, and on that basis decide whether to waive the right to the dividend. But it should be especially noted that since the interpretation names the record date for the distribution of dividend as the tax point, a waiver should be made prior to the record date to avoid income tax exposure.