In December 2008, the prime minster announced that effective the first day of January 2009 tax on dividends paid to all locally (i.e. non-stock exchange registered)-owned companies would be reduced to a nil rate of tax. This would bring them in line with listed companies.

At that time it was not clear if locally-owned companies would include a foreign subsidiary of a local company, and whether it would include foreign companies with local resident shareholders. The effect, however, was to allow for tax-free dividends from local companies to resident shareholders only. This measure, although announced to take effect on January 1, 2009 was never legislated.

2009/2010 Budget Presentation

The Ministry of Finance and the Public Service announced on Thursday, April 23, 2009 that effective July 1, 2009 all non-resident shareholders of listed companies in Jamaica will be subject to tax on dividends at 33 1/3 per cent. This announcement would have suggested that non-resident shareholders of listed companies will be subject to taxation at 33 1/3 per cent. This, however, was cleared up at the post-budget press briefing that it is corporations that will be taxed at 33 1/3 per cent while individuals will be subject to withholding tax at 25 per cent.

Given the above state of affairs, the effect of the finance minister's announcement is that non-resident shareholders of listed companies will continue to enjoy tax-fee dividends status up to June 30, 2009.

Now, come July 1, 2009 what then are the implications and the impact of this proposed new measure for shareholders, in particular those of companies listed on the Jamaica Stock Exchange?

Withholding Tax

Dividends and distributions paid to shareholders continue to suffer tax at source by virtue of section 38 of the Income Tax Act (the Act). This means that when the law was amended to make tax on listed companies' dividend applicable at nil rate, then no tax would have been applicable even when the payment is made to a non-resident. This is so because 'dividends' does not suffer withholding tax under section 40 of the Act, when payment is made by a resident person to a non-resident. What the proposed measure would entail is that the existing law will be amended to make non-resident taxpayers of listed companies suffer a positive rate of tax.

Double-taxation treaties

It should be noted that the lower rate stated in a double-tax treaty which Jamaica enters into with other jurisdictions would take precedence over the higher rates of 33 1/3 per cent and 25 per cent. We will examine these in a moment, but wish first to examine the philosophy behind the Government's position which is summarised as follows:

(i) "Local companies are granted exempt status in respect of tax on dividends paid to them and paid to shareholders" is now clarified to be applicable for dividends paid by companies that are resident in Jamaica to shareholders who are also Jamaican residents.

(ii) That the relevant double taxation treaty rates for dividends will be applicable for non-residents who reside in countries with which Jamaica has double taxation treaties.

(iii) In respect of non-resident shareholders where the non-resident resides in a country with which Jamaica has no double-taxation treaty, the tax rate of 25 per cent for individuals and 33 1/3 for corporations will apply.

The philosophy behind the tax on non-resident shareholders

Countries enter into double-tax treaty arrangements with the main intention being the elimination of double taxation on income of its citizens. If the government's aim is to relieve its citizenry from double taxation it ,therefore, ought not to be benefiting the government of the particular territory in which the taxpayer resides but only the taxpayer.

Where, in the case of dividends, Jamaica has given up the tax, but where the income will still be subject to tax in the contracting state in which the non-resident shareholder resides, this is benefiting the government of that other contracting state and not its residents. Under the circumstances, the Government of Jamaica, is of necessity, imposing tax on the dividends paid to non-residents with its attendant implications.

Double-Tax Treaty Implications:

Jamaica negotiated double-tax treaty contracts with various territories. They are general in nature and establish common principles of law. They are a direct source of obligation for the parties. The binding force comes from the consent of both governments, not from the subject matter or form of the treaty.

Therefore, the rates applicable in those treaties for tax on dividends would have superseded the rates stated in the act.

These rates are:

Canada 22.5%

Israel 15%

CARICOM 0%

Norway 15%

China 5%

Spain 5-10%

Denmark 10%

United Kingdom 22.5%

France 10%

United States 10% (substantial holdings)

15% (other holdings)

Germany 10%

Sweden 10%

Switzerland 10%

Effects on non-residents

(a) Non-resident taxpayers of one of the above treaty countries and of Commonwealth countries, will be able to receive a tax credit for the tax suffered in Jamaica, thus eliminating the effect of double taxation.

(b) In addition, most treaties have what is called a nondiscrimination clause. This clause prevents nationals of the other States from being discriminated against because they are non-nationals of the taxing state. In essence, what it does, say for a shareholder who resides in Canada - because taxation is based on the principle of residence - is allow for the circumstances where that shareholder, because he is here for six months or more and would have established residency here in Jamaica in that particular tax year, would be able to receive the dividend tax-free just as all other resident taxpayers.

The above was prepared for the Jamaica Stock Exchange by a leading firm of tax auditors.