Understanding the tax implications of share dividends

This has now been legislated and is effective for the 2008 calendar year.

The Bt500,000 tax allowance is applicable (once only) to the aggregate of investments in RMFs, provident funds, government pension funds and welfare funds under the Law on Private Schools, subject to conditions.

Another Bt500,000 tax allowance has also been granted to investments in a long-term equity fund, subject to conditions.

Let's get back to the topic of the tax implications of share dividends, also known as scrip dividends or bonus issues. Share dividends are distributions of profits by a company to its shareholders in the form of additional shares instead of cash. The additional shares are issued in proportion to the shares already owned, for example a listed company has just declared a cash dividend of 15 satang a share, together with a share dividend of one newly issued share for every 10 existing ones. For a public limited company, the advantage of a share dividend, as opposed to the traditional cash dividend, is that it preserves cash flow, while at the same time providing a return on investment to shareholders.

In terms of taxation, the law treats share dividends the same as cash dividends. Therefore, a distributing company is generally required to withhold 10 per cent of the value of share dividends issued for tax purposes. The value of the bonus shares has been suggested by the revenue authority to be calculated by dividing the amount of retained earnings transferred to share capital of the distributing company by the number of bonus shares issued.

When companies issue scrip dividends they normally simultaneously issue a cash dividend out of which the withholding tax on the scrip dividend is paid. This is why the net amount received from such dividend is generally less than it would be in the normal case.

Individuals receiving scrip or cash dividends may elect to treat the 10-per-cent withholding tax paid as a final tax - in which case no further tax is payable on the dividend income - or may treat the gross dividend received as normal taxable income and take a tax credit for the withholding tax previously paid.

Obviously, for individuals whose marginal tax rate exceeds 10 per cent, the final-tax election is very attractive.

Robert Porter is a partner at KPMG Phoomchai Tax.