Dual Income Tax & Dividend Taxation: A Comprehensive Guide

Dual Income Tax System

This system levies a proportional tax rate on all net income (capital, wage, and pension income less deductions) combined with progressive tax rates on gross labor and pension income.

Implemented in Denmark, Finland, Norway, and Sweden, the dual income tax (DIT) system was introduced for reasons of economic efficiency, net-wealth tax, and a broader tax base.

Key features:

• Capital incomes are taxed at a lower rate.
• Acts as a hybrid model between income and consumption concepts (interest-adjusted income tax).
• All income and profit are divided into capital income (proportional/flat rate) and labor income (progressive rate).
• Features the lowest personal income tax (PIT) percentage on labor income.

Dividend Taxation

Corporate tax systems have varying relationships and integration levels between corporate income tax (CIT) and PIT on dividends paid to shareholders.

Classical System (No Integration)

This system leads to economic double taxation, as the corporation is considered separate from its shareholders. Both CIT and PIT are applied.

Full Integration (Conduit System)

This system eliminates economic double taxation. The corporation is not a separate entity; it acts as a channel for shareholders to receive corporate income. Only PIT is applied.

Corporate-Level Systems

• Dividend-Deduction System: Distributed profits (dividends) are deducted from the taxable profit.
• Split Rate: Distributed profits are taxed at a lower rate than retained profits.

Note: These systems are no longer in effect.

Shareholder-Level Reliefs

• Imputation System (Full or Partial): Similar to full integration but applies only to distributed profits. Dividends are taxed at the marginal PIT rate, with CIT on distributed profits treated as a withholding tax.
• Schedular Treatments: These disregard CIT and offer preferential treatment for dividends compared to other personal income forms.

Schedular Treatment Methods

1. Tax Credit: Deducted from PIT on dividends; the credit amount isn't directly linked to the CIT paid.
2. Separate (Lower) Tax Rate on Dividends: Often a final withholding tax at a relatively low rate.
3. Dividend Exemption: Dividends are fully or partially exempt from PIT.

Property Tax

Property taxes are classified as follows:

1. Recurrent taxes on immovable property
2. Recurrent taxes on net wealth
3. Estate, inheritance, and gift taxes
4. Taxes on financial and capital transactions
5. Other non-recurrent taxes on property
6. Other recurrent taxes on property

Social Security Contributions

These contributions finance various aspects of the welfare state, including health, pensions, unemployment, and disability benefits. The welfare state's main functions are redistribution (including poverty alleviation), insurance against social risks, and income smoothing/reallocation.