What rate applies when my company pays a dividend to its foreign parent?
The domestic withholding rate applies unless a treaty reduces it, and treaties commonly set the reduced rate on a scale that depends on how much of the paying company the parent holds. A parent with a substantial direct shareholding is often entitled to a lower rate than a portfolio holder. Beyond the shareholding test, the parent has to be a resident of the treaty country and to satisfy the treaty's limitation-on-benefits or principal-purpose test. Each of those questions is answered before the dividend is paid, because that is what makes the reduced rate available at payment rather than by refund.
Does the treaty rate depend on how much of the company we own?
In most treaties, yes. The reduced rate on dividends is typically graded, with a lower rate where the parent holds at least a specified interest in the payer and a higher one for smaller holdings. Both the threshold and the way the interest is measured, whether direct or indirect, by capital or by voting power, are set by the particular treaty, so the test has to be read in the treaty that applies rather than assumed from another one you have seen. Check the holding as at the date that treaty specifies, and keep the share register evidence with the dividend paperwork.
What is a principal-purpose test and why does it affect dividends?
It is an anti-abuse rule. Broadly, a treaty benefit can be denied where obtaining that benefit was one of the principal purposes of an arrangement, unless granting it would accord with the object and purpose of the treaty. Limitation-on-benefits provisions do similar work through mechanical qualifying tests instead. For dividends this matters because a holding company in a treaty country sitting between the operating company and its ultimate owners can look as though it was placed there for the rate. The answer to that is the commercial reason for the structure, documented at the time rather than afterwards.
Can we claim the treaty rate at payment or reclaim it later?
Both routes exist, and the difference between them is cash and effort. Where the documentation establishing the parent's residence, its holding and its entitlement is in hand before the dividend is paid, the reduced rate can generally be applied at payment. Where it is not, the domestic rate is withheld and the parent claims the difference back afterwards, which means a refund process in a country where it does not otherwise file, and a wait. That is why the documentation belongs in the dividend timetable, alongside the resolution, rather than in the year-end reporting.
What paperwork do we need before declaring a dividend to our parent?
At minimum, evidence that the parent is resident in the treaty country, evidence of its shareholding at the relevant date, and something recording why the parent satisfies the treaty's entitlement tests. The board resolution and the payment date should follow that evidence rather than come before it. Where the group has more than one layer, note who actually receives the income and whether the recipient is the person the treaty looks at. Assemble this before the declaration, because a reduced rate applied on an assumption is an exposure that sits with the paying company, not with the parent.
Our parent is in a country with no treaty, what applies?
Then there is no reduced rate to claim and the domestic withholding rate applies to the dividend in full. The useful questions become different ones: whether the parent's own country gives relief for the tax withheld, whether profits need to leave as a dividend at all or whether commercially genuine arrangements already in place do that work, and whether the timing of distributions can be planned around the group's position. What does not work is inserting an intermediate company for the sake of a rate, which is precisely the arrangement the anti-abuse tests were written to catch.
What happens if I have not filed for several years?
Missed years are handled as one package, not one at a time, because the route chosen for the first year determines the relief available for the rest. Each country has a disclosure or relief programme with its own conditions, and entering the right one — before the authority contacts you — is usually what keeps penalties down. Filing quietly outside a programme forfeits that protection. See catching up on missed returns.
What is cross-border tax?
Cross-border tax is what applies when income, assets or people touch more than one tax system at once — someone living in one country and earning in another, a company selling or hiring abroad, a family holding property in a second country. The work is rarely one country's rules applied harder; it is reconciling two sets of rules and claiming the relief that stops the same income being taxed twice at full rates. See what we do.
