When considering an investment, taxes are a big part of the planning process. There are different types of taxes that apply depending on the investment. In this article, we will focus on the taxes that apply to investing in a company, be it as a share/stockholder and what taxes apply when investing in Real Estate.
If you are considering investing in a company, it will vary whether the company is listed in the stock market or not. Stock market companies are easier to access, as they are publicly traded, which is normally the preferred option, however, you can also decide to invest in private companies, purchasing a certain amount of shares. The distinction is important, as private companies have different obligations from publicly listed companies, which will also affect how they perform and impact their strategic decisions.
Before we go into the taxes that apply to the investor, it is important to understand how companies are taxed. A company is taxed at the rate of the country the company has been incorporated in, on its revenues minus its costs and interest and amortization. In other words, companies pay taxes on their EBT (Earnings Before Taxes).
This is relevant, because certain companies will look to maximize their EBT, while other companies, especially private companies, might look to focus more on other parameters.
As an investor, you can obtain a return on your investment in two different ways, when you invest in a company. You can either profit from the sale of the owned shares, which would be taxed under the Capital Gains Tax, or you can obtain a return in the form of Dividends. Often dividends are taxed together with Capital Gains, but many countries also have specific taxes solely for dividends (i.e. Belgium: Capital Gains tax = 10% flat rate, Dividends tax = 30% / 15%). Dividends and returns on the sale are not mutually exclusive, as you can benefit from the dividends while you hold the shares and still benefit from the profit in the sale price.
When talking about Capital Gains or Dividend taxes, the tax that will be levied on your income will be the tax defined by the country where you are currently considered a fiscal resident. But certain countries might also apply a withholding tax (WHT) in the source country (meaning, country where the income is generated), which can generate a scenario where double taxation is applied. There are mechanisms to avoid this double taxation, but the impact can still affect the profitability of the investment. Always make sure there is a tax treaty between the countries you invest in and where you are fiscally resident if you want to avoid unpleasant surprises.
Taxation on Capital Gains:
As mentioned before, capital gains arise when you sell a share you purchased for a higher price. Usually, you can deduct the associated costs related to the purchase of the share:
Selling Price – Purchase Price – Associated Costs = Profit (Taxable Gain)
The profit is the amount that will be taxed. The rate will depend on several factors. First, it will depend on whether we are talking about a corporation or an individual. In both cases, the key factor will be determined by the country of residence. For example,
| Corporations | Individuals | |
|---|---|---|
| United Arab Emirates | Corporate Tax (9% or 0%) | No tax |
| Spain | Corporate Tax (25% or 23%) | By bracket (19% to 30%) |
| Portugal | Corporate Tax | 12,5% up to 48% (Residents will be taxed only on half the income) |
| Singapore | No tax | No tax |
| United Kingdom | Corporate Tax (25%) | 18% or 24%, certain assets might see different rates |
IMPORTANT: This taxation will often be affected by the holding period of the shares. Short-term (held for less than 1 year) will normally be taxed together with normal income, while long-term (held for 1+ year/s) will be taxed under capital gains as seen above.
Many countries will allow offsetting the capital losses (selling below the purchase price) to the capital gains. This means that if in the same year/period you purchase and sell more than once, and/or the shares sold had different purchase prices, everything will be calculated together, and the taxable income will be based on the total profit/loss generated.
Finally, it is critical to understand that most countries only tax the gains when they are realized, meaning the shares are effectively sold. The ownership is not taxed; thus, a share can experience increases and decreases in its value, but taxes will only be paid once they are sold. However, certain countries can tax the unrealized gains via certain mechanisms such as exit taxes or wealth taxes.
Taxation on Dividends
Many countries will tax dividends together with capital gains, while other countries decide to provide dividends with their own tax bracket. Dividends are obtained when a company decides to pay the shareholders all or part of the net profit. The quantity obtained will depend on the number and types of shares and the company itself. With dividends, there are no costs to discount, therefore the total amount of dividends obtained are taxed.
Dividends received by corporations will always fall under corporate tax.
| Corporations | Individuals | |
|---|---|---|
| United Arab Emirates | Corporate Tax (9% or 0%) | No tax |
| Spain | Corporate Tax (25% or 23%) | By bracket (19% to 30%) |
| Portugal | Corporate Tax (20%) | Flat Rate of 28%. Possible exemption or reduced rate for special cases. |
| Singapore | Corporate Tax (17%) | No tax |
| United Kingdom | Corporate Tax (25%) | By bracket (8,75 % to 33,75%; special cases up to 39,35%) |
Withholding Taxes
A withholding tax is applied in certain cases. The WHT will depend on the type of income (i.e. royalties, dividends, invoices, etc.) and whether the countries involved (country of residence of payer and country of residence of receiver) have a Tax Treaty in place or not. Usually, the taxes range from 10% up to 30%, however certain countries have higher (usually up to 35%; Greenland has the highest WHT at 44%). The purpose of this tax is to ensure that taxes are actually paid, regardless of the country’s different laws.
This tax is automatically deducted by the payer and paid to their corresponding tax authorities. The receiver can then ask for a refund (if applicable) to the origin country (always a complicated endeavor) or can use other mechanisms in its own country of residence to compensate for this WHT according to their national laws.
WHT Example:
Example 1.- Corporation in the US pays a 50.000€ dividend to a resident in UAE. Since there is no Tax Treaty in place, the WHT applicable is 30%.
50.000€ – 30% WHT = 50.000€ – 15.000€ = 35.000€ net payment
Since UAE has no taxes on dividends, the receiver will not be able to get any refund from the USA, as they will ask for proof of payment of taxes, and since the UAE also has no income tax, this 30% WHT is going to have to be counted as a loss.
Example 2.- Corporation in the US pays a 50.000€ dividend to a resident in Spain. Since there is a Tax Treaty in place, the WHT applicable is 15% as per the treaty.
50.0000€ – 15% WHT = 50.000€ – 7.500€ = 42.500€ net payment
The Spanish resident will then have to pay taxes on these dividends on their global Capital Gains. The 7.500€ WHT at the USA will, according to article 24 of their treaty be deducted from the total taxes to be paid in Spain.
Taxation on Real Estate
Finally, taxes on real estate are a little bit different due to the immobility of real estate. The gains from real estate will always be taxed on the country where the real estate is located. Depending on whether the beneficiary is Resident or Non-resident, different tax rates will apply. Taxes for Non-residents are to be considered similar or identical to the WHT seen above.
These taxes apply both to the profit of selling the estate (capital gains) and the taxes of exploitation through renting or any other means (income). Certain countries (i.e. Spain) will attribute an income value, even if it’s not actually exploited, in case the estate is not the primary residence of the owner.
Additional taxes can also apply to the ownership of estate like wealth tax or property tax.