28 Aug 2023

SHOULD DIVIDENDS PAID TO AN INDIVIDUAL FOUNDER BE TAXED AT SOURCE?

Let's say that the founder of the resident "A" LLC, which keeps records of income and expenses, is not registered for VAT purposes, and whose volume of operations is up to 200,000 manats in any month (months) of a consecutive 12-month period, pays 10,000 dividends to the VAT-registered LLC "B" and According to Article 106.10 of the Tax Code, the dividend is not taxed at the source of payment. Later, "B" LLC pays dividends to the individual who is the founder from that income. At this time, do the provisions of Article 122.2, line 2 of the Tax Code apply to the dividend paid to an individual? More specifically, should a dividend paid to an individual be taxed at source?

The State Tax Service informed that according to Article 106.10 of the Tax Code, a resident enterprise that keeps records of income and expenses in accordance with this Code, is not registered for VAT purposes, and whose volume of operations is up to 200,000 manats in any month (months) of a consecutive 12-month period. Dividend incomes of legal entities with founder (shareholder) or shareholders are exempt from tax.
Thus, to a natural and legal person who is a founder (shareholder) of a resident limited liability company, which keeps records of income and expenses in the manner determined by the Tax Code, is not registered for VAT purposes, and the volume of transactions of which is up to 200,000 manats in any month (months) of a consecutive 12-month period. Dividend paid is not taxed at the source of payment.
At the same time, according to the provisions of Article 122.2 of the Tax Code, if the legal entities that are the actual owners of the dividend are taxed in accordance with Article 122.1 of this Code, the income of the legal entities receiving the dividend shall not be taxed again.
Based on the aforementioned, in the above-mentioned case in the application, when a VAT-registered resident enterprise that receives tax-exempt dividend income at the source of payment re-distributes that dividend to an individual who is its founder in the form of a dividend in accordance with Article 122.1 of the Tax Code at the source of payment at a rate of 10 percent tax is calculated and paid to the state budget.

Basis: Articles 106 and 122 of the Tax Code.