Tax on dividends: who withholds it and how is it calculated?

The two most common mistakes with dividends are paying the founder the full amount and remembering the tax later, or applying one rate to every recipient. The Tax Code, however, distinguishes recipients: legal entity or individual, resident or non-resident, receiving on a share or on an LLC stake. Below we give the exact article and part for each case, then calculate on one hypothetical JSC example.

Which payment is a dividend?

Article 41, part one, of the Tax Code lists four types of income as dividends: 1. Any income received by a shareholder (participant) when a legal entity's profit (including in the form of interest on preference shares) is distributed on shares (stakes). 2. Payments in cash or in kind to a shareholder (participant) on liquidation in the part exceeding his stake in the charter fund. 3. Payment to an expelled or withdrawing participant of the actual value of part of his stake in the manner set out in Article 41. 4. The value of additional shares (increase in the face value of a stake) received by a shareholder when the charter fund is increased out of the legal entity's own capital (property).

Under part two of the article, this income is treated as dividends if it is paid in proportion to the shareholders' stakes in the charter fund.

Who withholds the tax?

The company paying the dividend. Article 343, part one: dividends paid by a legal entity to a tax resident of Uzbekistan are taxed at source in the manner of Article 345, and the recipient excludes this income when determining its tax base. Article 345, part one, calls such a payer a tax agent, and part two requires the tax to be determined separately for each taxpayer and for each payment.

Tax on dividends paid to non-residents is also withheld by the payer: Article 351, part one, item 1 includes dividends received from legal entities of Uzbekistan among a non-resident's income taxed at the tax agent.

For the payer itself a dividend is not an expense: Article 317, item 24 lists dividends accrued by the taxpayer among non-deductible expenses.

Rates: who pays how much?

Article 483, part 27, word for word: income of resident and non-resident individuals "in the form of dividends on shares is exempt from personal income tax", and for dividends on shares of non-resident legal entities "a corporate profit tax rate of 5 percent applies". The relief concerns "shares": it does not extend to dividends of an LLC participant on a stake, where the basic rule in the second column of the table applies.

There are two more cases for non-residents. Under Article 357, if the non-resident actually has the right to the income, the tax agent applies the exemption or reduced rate provided by an international treaty of Uzbekistan and Article 6 of the Code. Article 354, part three, allows the tax withheld from a non-resident to be reduced by tax previously paid on dividends that the paying company received from other legal entities of Uzbekistan, if the following conditions are met: - the non-resident holds at least 25% of the paying company's charter fund; - this stake has been held continuously for at least 365 calendar days before the dividend payment date; - the tax paid on the dividends received has not previously been taken into account in determining the non-resident's tax; - the tax agent has obtained documents confirming that tax was paid on dividends received from other legal entities.

Reporting and payment deadline

• Reporting: the tax agent files with the tax authority where it is registered no later than the 20th day of the month following the month in which the dividends were accrued (Article 345, part 5).
• Payment: the tax is paid to the budget no later than the dividend payment date (Article 345, part 6).
• Certificate: at the recipient's request, the tax agent issues a certificate in the prescribed form on the income and tax withheld (Article 345, part 7).
• Liability: if the tax is not withheld, the tax agent must pay the unwithheld amount and the penalty interest to the budget (Article 346).
• For payments to a non-resident the deadlines differ: the report is filed no later than the 20th day of the month following the month in which the dividends were paid (Article 355, part 1), and the tax is paid to the budget no later than the day after the day the income is paid to the non-resident (Article 355, part 2, item 2).

Example: «Shahrixon Avto» JSC distributes dividends

The shareholders decided to distribute 80,000,000 soums of dividends. Shareholders (hypothetical):

If «Shahrixon Avto» were an LLC rather than a JSC and Durbek received a dividend on a stake, under Article 381, part two, 20,000,000 × 5% = 1,000,000 soums would be withheld. A non-resident individual would pay 10% on a stake (Article 382): 20,000,000 × 10% = 2,000,000 soums.

Article 345, part three: dividends received reduce the base

Suppose «Shahrixon Avto» received 10,000,000 soums of dividends from another Uzbek company in the period, and this amount has not previously been taken into account in its tax base. Under Article 345, part three, the total amount of taxable dividends is determined as the dividends distributed minus these dividends received, and each recipient's base is its share of that total: - total taxable amount: 80,000,000 − 10,000,000 = 70,000,000 soums; - «Ipaksoy Tekstil»'s base: 70,000,000 × 40% = 28,000,000 soums; - tax: 28,000,000 × 5% = 1,400,000 soums (instead of 1,600,000).

This part is for tax residents. For payments to non-residents, the separate conditions of Article 354, part three, apply (above).

Journal entries (NAS No. 21)

Under Article 345, part 6, for resident shareholders the last entry must not be later than the payment to them; the 1,400,000 soums withheld from «Bosfor Invest» are transferred under Article 355 no later than the day after the payment. If a non-resident is paid in foreign currency, under Article 354 the tax is calculated in soums at the Central Bank rate on the payment date.

How «Ipaksoy Tekstil», which received the dividend, records this income in its own books is shown in a separate article.

Note: tax rates and reliefs change. Before paying dividends, check the current version of the Tax Code on lex.uz.