This chapter deals with disposals of shares. Due to the derivative nature of shares, the tax on corporate income when derived can be duplicated when gains on the disposal of shares are taxed (economic double taxation). The stripping effect of dividends can remove the duplication. These themes inform various options for the taxation of share gains. A major issue here is how taxation of gains on the disposal of shares relates to the taxation of dividends (Chapter 2). There may be similar treatment, but this is not always possible depending on the type of dividend relief adopted. Other methods of integration are possible. Share disposals may cause a change of ownership of a corporation with consequences at the corporate level, particularly on a corporation’s tax attributes such as losses. Many countries restrict the use of corporate carry forward losses on a change of ownership. Defining a sufficient change highlights the artificiality of corporations. Other tax attributes are considered, including the tax value of assets, unrealised losses and the carry forward of credits. The chapter concludes with a comparison of the tax consequences on the sale of a corporate business either directly or indirectly through the sale of shares.

This chapter deals with taxation when a corporation distributes income. It presumes all events occur within a particular country and that the capital structure of the corporation does not change. Dividends as payments with respect to corporate rights are discussed. Corporate financing in the forms of debt and equity are explored with a consideration of hybrid instruments and thin capitalisation. The discussion proceeds to consider the fundamental features of dividends and hidden profit distributions, which have tax consequences at both the corporate and shareholder levels. The dual nature of corporate income is identified, which involves dividends constituting taxable income. With the taxation of corporate income when derived, the result is economic double taxation, the classical system. Arguments in support of and against this double taxation are considered before the discussion turns to consider the options for relieving the double taxation (dividend relief). Dividend relief options at the corporate level and the shareholder level are explored with a consideration and categorisation of recent international practice. Systems behave differently when faced with expenses in deriving dividends, preference income and dividend streaming. Finally, the manner in which a corporate tax system allocates profits as retained or distributed is considered.

In Chapter 5, the treatment of portfolio investment was examined. For inbound dividends, the general principle is that shareholders (corporate or non-corporate) receiving foreign-sourced dividends should be treated the same way as shareholders receiving domestic dividends if they are in an objectively comparable situation, unless different treatment is justified. If the country of residence of the shareholder (the home State) chooses to provide reliefs for domestic dividends, then it must provide the same reliefs at least for EU-sourced dividends. The fact that economic double taxation is suffered because another State has imposed corporation tax on the underlying profits generating the dividends is not a relevant consideration. It has been found that a home State is not obliged to give to shareholders a credit for foreign withholding taxes, irrespective of whether it gives such credit for domestic withholding taxes. Recent cases were reviewed, some of which explored the equivalence of the credit and exemption methods in this context. Case law on the taxation of outbound dividends was very similar but with some subtle differences. This chapter also examined the payment of interest.

Considers tax treaty limitations on residence country taxing rights, including the obligation to provide foreign tax relief and methods of relief for double taxation, especially the exemption method and credit method. The treaty obligation is compared to the limited approach under EU Law. The separate legal identity of corporations causes two problems for foreign tax relief. First, economic double taxation of corporate income results if the tax charge cascades on distributions up a chain of corporations. Methods of underlying foreign tax relief or indirect foreign tax relief are considered. Second, controlled foreign corporations may be used as a dividend trap or method of avoiding tax. Rules to address these are discussed. The second heading considers methods of calculating foreign income and the impact on foreign tax relief. Here there are few rules in tax treaties but burgeoning EU case law. Allocating expenses between foreign and domestic activities is critical when calculating the volume of exempt foreign income or, under the foreign tax credit method, the limitation on credit. Expenses may produce losses. The treatment of foreign losses on domestic income and domestic losses on foreign income are considered. Finally, cross-border intragroup losses under various systems of group relief are considered.