Distributions can leak tax through withholding and mismatched rules. The fix is routing, timing, and eligibility—supported by substance.
Where leakage happens. Cross-border dividends meet withholding tax (WHT) at the paying company, corporate income tax in the holding jurisdiction, and personal tax on receipt. Poor routing can stack these layers.
Treaties and exemptions. Many hubs offer participation exemptions or reduced WHT under treaties, subject to beneficial ownership and LOB conditions. Shell entities lose relief; documented holding periods and real control help.
Timing & ordering. Align distributions with the fiscal year, capital maintenance rules, and bankable narratives (e.g., retained earnings vs. return of capital). Where feasible, upstream through entities that qualify for domestic exemptions before hitting treaties.
Currency & cash logistics. Lock FX early; dividend blocks can be large. Ensure board approvals, solvency tests, and escrow arrangements are in place.
Alternatives to cash. Consider share buy-backs, capital reductions, or loan repayments (only where facts support). Each carries different tax outcomes.
Mistakes. “Backdating” resolutions; using conduit companies with no control; distributing while ignoring thin-cap or debt covenants.
Case snapshot. An Asian OpCo pays a dividend to a mid-shore HoldCo with a participation exemption; the HoldCo then pays the family trust in a treaty partner country. Substantive directors and documented investment policy secure treaty relief.
FAQ
- Is the highest-treaty-score country always best? No; tests like LOB and substance can nullify wins.
- Can I recharacterize dividends later? Rarely. Plan before the resolution date.
Editor’s Note: The winning dividend is boring: predictable, documented, and bankable.
Tags: Dividends, WHT, Holding Company, Treaties