Shareholder or Beneficial Owner Under Dividend

In the context of income tax, understanding the concept of a shareholder or a beneficial owner is crucial, especially when it comes to the taxation of dividends. The term “dividend” refers to the portion of a company’s earnings that is distributed to its shareholders, usually in the form of cash payment or additional shares. In India, the tax implications for shareholders and beneficial owners differ, and it is important to have a clear understanding of these distinctions in order to ensure compliance with the law.

Definition of Shareholder and Beneficial Owner

In the Indian context, a shareholder is a person who owns shares in a company. The Companies Act, 2013 defines a shareholder as a person who holds shares in the company and whose name is entered in the register of members of the company. Shareholders have certain rights, such as the right to receive dividends, attend and vote at general meetings, and participate in the distribution of the company’s assets in the event of its winding up.

On the other hand, a beneficial owner is a person who enjoys the benefits of ownership, such as receiving income or dividends, without being the registered owner of the shares. This concept is particularly relevant in the context of beneficial ownership of shares held by foreign institutional investors (FIIs) and foreign portfolio investors (FPIs) in Indian companies.

Taxation of Dividends for Shareholders

When a company declares and distributes dividends to its shareholders, the dividends are subject to income tax in the hands of the shareholders. The Finance Act, 2020 introduced a new tax regime for dividends wherein dividends are taxable in the hands of the shareholders at their applicable tax rates. Previously, dividends were subject to Dividend Distribution Tax (DDT) at the company level.

Under the current regime, dividends are taxed as per the shareholder’s individual income tax slab rates. However, shareholders who receive dividends from Indian companies are entitled to a deduction in respect of the amount of dividend received. The deduction is limited to 20% of the dividend income, and the balance is included in the total income of the shareholder and taxed at the applicable rates.

Taxation of Dividends for Beneficial Owners

The taxation of dividends for beneficial owners is governed by the provisions of the Income Tax Act, 1961. In the case of FII and FPI, the tax liability for dividends is dependent on the provisions of the Double Taxation Avoidance Agreement (DTAA) between India and the country in which the beneficial owner is tax resident. Under the DTAA, the tax rates on dividends may be lower, thereby reducing the tax burden on the beneficial owner.

The concept of beneficial ownership is also relevant in the context of the General Anti Avoidance Rule (GAAR) provisions. If the tax authorities are of the view that the FII or FPI does not have the requisite beneficial ownership over the dividends, they may seek to tax the dividends in India.

Documentation and Compliance Requirements

For both shareholders and beneficial owners, it is important to comply with the documentation requirements to establish their entitlement to the dividends and the applicable tax treatment. Shareholders are required to ensure that their details are correctly reflected in the register of members of the company. In the case of beneficial owners, the relevant documents such as the beneficial owner declaration, tax residency certificate, and other KYC documents must be submitted to establish their entitlement to the beneficial tax rates under the DTAA.

Non-compliance with the documentation and compliance requirements may lead to adverse tax implications, including the denial of tax benefits and the imposition of penalties. Therefore, it is essential for shareholders and beneficial owners to maintain proper records and ensure strict compliance with the regulatory requirements.

Conclusion

In conclusion, the taxation of dividends for shareholders and beneficial owners is governed by specific provisions under the Income Tax Act, 1961. While shareholders are subject to tax on dividends at their applicable tax rates, beneficial owners may be entitled to preferential tax treatment under the DTAA. It is imperative for both shareholders and beneficial owners to understand their rights and obligations, comply with the necessary documentation requirements, and ensure adherence to the applicable tax laws to avoid any adverse consequences. Seeking professional tax advice and guidance can also be beneficial in navigating the complexities of dividend taxation and ensuring compliance with the law.