In this article we will discuss about imputation system of taxation in various countries.

The imputation system taxes a company and then grants a partial or full dividend credit to the shareholders against the corporate tax paid by the company. The shareholders claim the imputed credits and either offset them against their own tax liability or receive a refund.

This credit is subject to the payment of the dividend out of fully taxed income. If it is paid out of untaxed or partly taxed income, the distributing company is obliged to pay an equalization tax. The additional tax ensures that the imputed dividend credits granted to the shareholders are fully franked by the corporate tax payment.

Unlike the classical system, the imputation system treats the corporate tax as an advance payment of the personal tax due from shareholders when the corporate income is distributed to them. These systems vary widely and lead to several tax issues.


For example, they create timing issues and encourage tax arbitrage, and the tax preferences given to encourage investors are often washed out in computing the imputation credits. Moreover, their administration and tax compliance is complex.

Most countries with an imputation system confine it to domestic dividends only. The imputation credit is seldom granted to foreign shareholders except under a tax treaty. The foreign shareholder remains subjected to economic double taxation, as under the classical system.

This discriminatory tax treatment leads to a bias towards domestic shareholders and domestic investment. According to the European Court of Justice, the imputation system violates the principle of free movement of capital within the European Union.

Many countries (largely EU Member States) have shifted to other forms of shareholder dividend relief in recent years after the ECJ decision. However, several countries still use the imputation system on domestic dividends.


As of mid-2007, they included:

i. Full credit: Australia, Chile, Guernsey, Jersey, Gibraltar, Malaysia, Malta, Mexico, New Zealand, Taiwan.

ii. Partial credit: Canada, Spain, United Kingdom.

The current trend in imputation countries is not to levy dividend withholding tax at source on direct investments (Examples: Australia, Mexico, and United Kingdom).


Country Examples:


Australia operates a full imputation system. The dividends received by resident shareholders carry imputed credits if a resident company pays them out of fully taxed income. They are “franked” by its own corporate tax payments, and by the franked dividends that the company receives from other resident companies.


The company maintains a “franking account,” which is credited with the corporate taxes paid by the company (i.e. franking payments) and debited with the franked dividend distributions. The company pays a “franking deficit tax” at the end of the year if it distributes franked dividends in excess of the franking credits. This equalization tax payment is creditable against future corporate tax liabilities.

Franking deficits are discouraged through a 30% penalty tax if they exceed 10% of the franking credits earned during the year. A franking surplus or credit may be carried forward indefinitely for offset against future dividend payments.

If a company has franking credits it must frank any dividends paid unless the credits are less than 10% of the dividend. The company may also pay unfranked dividends (i.e. without imputed credits) when distributing income that has not been taxed or not fully taxed in Australia due to tax incentives or foreign tax credits.

The dividends received by a resident corporate shareholder from another resident company are effectively tax-free through a tax offset equal to the tax paid on the dividend income. In the case of franked dividends, the underlying imputed credit is given to resident non­-corporate (i.e. individual) shareholders when they ultimately receive the dividend.


They can use them to offset against their own tax liability, and claim a refund for any excess credits. The unfranked dividends carry no imputed credits and are fully taxed in their hands. Thus, the imputation system recaptures the corporate tax preferences at the resident individual shareholder level. Dividends paid within tax consolidated groups are not subject to imputation rules.

Qualifying non-portfolio (10% or more voting interest) dividends from foreign subsidiaries are tax-exempt under the participation exemption rules. Portfolio dividends are taxable with a foreign tax credit for withholding tax.

Participation expenses on tax-exempt income are not deductible. Fully tax-exempt dividends are not eligible for foreign tax credit. Liquidation distributions in excess of the return of capital are treated as dividends and eligible for the participation exemption.

Nonresident shareholders do not receive a refund of the imputed credits or receive a dividend rebate, but no withholding tax is imposed on the dividends paid to them out of franked income. Australia levies a final withholding tax at 30% (or treaty rate) on unfranked dividends. There are special rules for conduit foreign income to allow the tax-free distribution of income from foreign investments to foreign shareholders.



Under the Malaysian imputation system, the shareholders receive an imputed tax credit on the dividends paid by the company out of its taxed income. For resident shareholders (corporate or individuals), the imputation credit can be applied towards their own tax liability and any excess after offset with other taxable income is refunded.

For nonresident shareholders, it satisfies their Malaysian tax liability on the domestic-source dividend income.

To ensure that the shareholders do not receive imputed credits for taxes not paid at the corporate level, detailed records are maintained in a separate account (“section 108 account”) by the company. The account is credited with the actual corporate tax payable (not paid) that is available to “frank” the future dividend payments.


The company grosses up the dividends on distribution by the tax due and debits the amount to this account. The amount of tax considered as deducted equals the imputed tax credit granted to the shareholders on the dividends.

If the dividends are “franked” by the corporate tax payable, the company retains the tax deducted. If there is a debit balance on the “section 108 account”, the resident company pays an equalization tax to meet the deficit. The equalization tax funds the imputed dividend credits in excess of the corporation tax payable.

The equalization tax also recaptures the tax preferences on the dividends paid out of exempt capital gains or real property gains. Similarly, temporary preferences due to timing differences are also recaptured. The equalization tax cannot be used as set-off against its future corporate income tax liabilities.

Malaysia follows a special tax regime (“exempt account”) to “pass through” the tax preferences on dividends paid out of domestic profits that are tax-exempt or concessionally taxed on the company.

The exempt foreign source income is also credited to this account when a resident company receives it in Malaysia. The distributions from the account are not subject to the payment of equalization tax and do not carry imputed credits. They also remain tax-exempt when distributed to the shareholders.



Under the Maltese imputation system, the domestic dividends carry a full imputation credit and are, therefore, treated as fully taxed when distributed to the shareholders. Resident shareholders may also set off any excess credit against their other income or claim a refund up to the Maltese tax paid by the distributing company.

To ensure that the dividends are paid out of fully taxed income allocated to the Foreign Income Account or Maltese Taxed Account, an amount equal to the actual Malta tax payable on the underlying profits must be paid to the Malta Inland Revenue in advance.

A resident or nonresident shareholder of a company incorporated or resident in Malta after 2006 (from 2011 for pre-2007 companies) is entitled to a refund of underlying tax paid by the company on dividend income.

In most cases, the refund is six-sevenths (6/7ths) of the tax suffered by the company on the profits allocated to its Foreign Income Account or Malta Taxed Account. No refunds are given for profits distributed from the Immovable Property Account or the Final Tax Account.

A full refund is given when the dividend is paid out of income received by the company from a “participating holding”. A participating holding is defined as a holding of 10% or more of the equity shares of an overseas company whose capital is wholly or partly divided into shares.

If the Maltese corporate shareholder owns less than 10% of the equity shares in the overseas company, its shareholding is still eligible as a participating holding provided it satisfies any one of the following conditions:

i. The Maltese corporate shareholder is entitled, at its option, to purchase or has the right of refusal on a disposal of the balance of the equity shares of the overseas company; or

ii. The Maltese corporate shareholder is entitled to be represented on the board of the overseas company in which it has an equity shareholding; or

iii. The value of the equity shareholding exceeds Lm 500,000 (EUR 1.2 million approx.) and the investment is held for at least 183 days; or

iv. The equity shares are held in the overseas company for the business of the Maltese company and not as trading stock for trade (e.g. a strategic stake in a business with which it has a large contract). An advance ruling can be obtained from the tax authorities to determine whether the condition has been met.

“Participating holding” status is subject to anti-abuse provisions which do not apply if the foreign body of persons is either:

(i) Resident or incorporated in a country or territory which forms part of the European Union; or,

(ii) Is subject to any foreign tax at a rate which is more than 15%; or,

(iii) Has less than 50% of its income consisting of passive interest or royalties.

Otherwise, the following additional conditions must be met for the “participating holding” status:

(a) The equity holding by the company resident in Malta in the foreign body of persons must not be a portfolio investment (a foreign body of persons, who derive more than 50% of its income from portfolio investments, is deemed to be a portfolio investment), and

(b) The foreign body of persons must be subject to foreign tax at a rate of not less than 5%.

Income received by a Maltese company from its participating holding is allocated to its Foreign Income Account for tax purposes. However, when profits derived by a Maltese company from its participating holding are subsequently distributed, there will be a full repayment of the Malta tax suffered on the income or gain as opposed to the six-sevenths repayment in normal circumstances.


The Mexican imputation system ensures that the imputed tax credit is only granted on distributions made out of taxed profits (inflation-adjusted). A “CUFIN” account (cuenta de utilidad fiscal neta) is credited at the end of each year with the “net fiscal profit” for the year and dividends received from other resident companies, and debited with the dividends distributed by the company.

The net fiscal profit is taxable income less corporate tax and any non-deductible expenses. An equalization tax is imposed on any excess payment grossed-up at the prevailing corporate rate, if the dividend distribution exceeds the balance in the CUFIN account.

The equalization tax payments may be credited against the corporate income tax in the following three years. The permanent establishments of nonresident companies are also subject to the equalization tax on their remittances to head office.

The dividends received by shareholders are tax-exempt if they are paid out of taxed income and the distributing company has sufficient balance in its CUFIN account. Moreover, a resident individual (but not corporate) shareholder can, by election, claim a credit for the imputed tax and the withholding tax and obtain a refund for any excess credits. This refund is not given to nonresidents.

New Zealand:

New Zealand follows the full imputation system. Corporate taxes paid are credited to a company’s imputation credit account. The company may pay dividends with the attached imputation credits, up to the amount available in this account (subject to the maximum discussed below), to resident shareholders. The shareholder (corporate or individual) claims a credit for the imputation credits against his own tax liability.

Any excess imputation credits are not refunded but may be grossed-up and carried forward for set-off against future taxable income (for corporate shareholders), or the imputation credits themselves may be carried forward to be credited against future income tax liabilities (for individual shareholders). Nonresident shareholders are not eligible to claim a credit against their New Zealand tax liability for the imputation credits attached to dividends they receive.

The maximum ratio at which imputation credits may be attached to dividends is 33/67 (33% corporate rate), i.e. 49.25% of the dividend declared. A company can also, subject to conditions, attach a lower or nil credit in case of dividend payments out of income that has not been subject to full tax (e.g. exempt or foreign income).

If the imputation credits attached to dividends exceeds the actual corporate taxes paid by the company, the company effectively pays “further income tax” to fund the imputation credits. The company is liable to pay 10% penalty tax on any shortfall in the imputation credit account at the year-end and a further income tax equal to the amount. The “further income tax” can be used to offset future corporate taxes.

Foreign dividends received by resident companies are tax-exempt. However, they are subject to a foreign dividend withholding payment (“FDWP”) at the corporate tax rate on the gross dividends received. This payment is reduced by any foreign withholding tax paid.

Indirect tax credit is also given for the foreign company’s underlying tax if the resident company owns at least 10% equity or voting control over the appointment of directors of the foreign company.

For foreign companies resident in grey list countries (e.g. Australia, Canada, Germany, Japan, Norway, United Kingdom, United States and Spain), provided certain criteria are satisfied, the creditable underlying foreign tax is deemed to be equal to the dividend withholding payment, and no FDWP is payable.

In other cases, the underlying credit is calculated on the actual foreign tax paid by the distributing company. Underlying tax credits are also given for tax paid by lower-tier foreign subsidiaries. However, these credits are subject to an overall limit of the FDWP.

Unlike imputation credits, the FDWP is effectively an advance tax due from the shareholders on the foreign sourced income. The FDWP credit may be added to the imputation credit when paid as dividend of the foreign income to resident shareholders.

Alternatively, the company may apply the FDWP credit to reduce the withholding tax when the dividend is paid to the shareholders (resident or nonresident). Nonresident shareholders may apply to have the FDWP refunded.

The dividends paid to resident shareholders (individuals or companies) are liable to a 33% resident withholding tax (“RWT”). This amount is reduced by the imputation credit and the FDWP credit attached to the dividends.

The RWT ensures that the dividends are taxed at source. The dividend received by the shareholder is grossed up by the imputation tax credit, FDWP credit, and RWT for computing his tax liability. Any payments in excess of the RWT are refunded. Domestic inter-company dividends are taxable.

The dividends paid to nonresidents are similarly liable to a nonresident withholding tax (“NRWT”) at the 30% rate. To the extent the dividend is fully imputed (i.e., paid out of fully taxed income), the NRWT is reduced to a 15% rate.

Under a complex system known as Foreign Investor Tax Credit (“FITC”), the company distributes a supplementary dividend to the nonresident shareholders equal to the 15% withholding tax. This supplementary dividend is funded by an income tax credit allowed to the paying company.

The net effect is that the nonresident receives a dividend, net of the 15% withholding tax, and the maximum New Zealand tax on the earnings paid out by dividend is the underlying corporate tax paid by the company.

Conduit Tax Relief (CTR):

New Zealand also provides a regime to relieve conduit tax. Conduit tax occurs where a nonresident invests in companies outside New Zealand through an intermediary company in New Zealand. The CFC and FIF rules attribute to New Zealand shareholders currently the income earned by the nonresident controlled company.

In a conduit company, it results in New Zealand effectively taxing nonresident shareholders for non-New Zealand sourced income. The CTR regime relieves nonresident shareholders from tax imposed on the non-New Zealand sourced income.

It does not apply to investments in grey list countries, since no income is attributed. The conduit relief is subject to NRWT at the 15% rate when repatriated to nonresident shareholders.

The CTR regime grants relief from tax in two ways:

(a) By providing a rebate from tax on attributed foreign income (net of tax credits and offsets for FDWP previously paid) under the CFC regime or calculated under the accounting profits or branch equivalent methods for the FIF regime, or

(b) By providing relief from FDWP (net of any loss offsets) to the extent of nonresident shareholding. For both relief methods, nonresident shareholding is usually based on the shares directly held by them in the New Zealand Company.


Taiwan introduced its imputation system in 1998. Resident companies pay business income tax at progressive rates and a 10% surtax on the retained profits of the previous year. Inter-corporate domestic dividends are tax-exempt.

Resident individual shareholders are entitled to claim a dividend imputation credit for the corporate tax and the additional surtax paid by the distributing company when they receive domestic dividends. Excess credits are refunded to them.

When earnings are distributed as dividends, the corporation computes the imputation credit available to the individual shareholders. The allowable credit is determined by an imputation credit account (ICA).

It is calculated by multiplying the dividend received by the ratio of total corporate tax paid to the accumulated retained earnings since 1998. Thus, the ICA limits credits to the amount of corporate tax and surtax paid by the company in Taiwan.

Nonresident companies and individuals are only entitled to a tax credit of 10% on the franked dividends that were subject to the surtax or retained earnings tax. They are not entitled to the imputation credit.

United Kingdom:

The United Kingdom has a partial imputation system. Until April 1999, the United Kingdom followed an advance corporation (ACT) regime. To ensure that the dividends with imputed tax credits were paid out of the taxed income, an advance corporation tax (“ACT”) was levied equal to the basic tax rate (20% rate) payable by the shareholder.

The company paid this tax to the Revenue when making distributions, but was allowed to offset the amount against its own tax liability or “mainstream tax”, subject to a basic tax rate limitation.

Resident individual shareholders could use the tax credit for offset against their own tax liability. Inter-company domestic dividends were tax-exempt. The ACT suffered on the dividend receipts could be used for offset against the ACT on the dividends paid to shareholders and any excess carried forward for future offset.

Nonresidents were not entitled to the imputed credit on dividend payments, except under certain tax treaties. In April 1999, the ACT system was replaced by quarterly instalment payments of tax for large corporations.

Currently, the imputed credit for resident individuals is 1/9 (10% of the gross dividend), non-refundable, and, under a shareholder relief system the dividend income is taxed in their hands at a preferential tax rate. Inter-company dividends are exempt.

Foreign dividends are entitled to credit relief for the withholding tax and for underlying tax paid overseas, if they qualify. To qualify, the UK corporate shareholder must hold at least 10% voting control in its subsidiaries at each level. There is no withholding tax on dividend distributions.


Different tax systems impact cross-border transactions differently. For example, the economic double taxation under the classical system encourages profit accumulation and the use of fiscally transparent entities, such as branches or partnerships. It also leads to more use of debt than equity to extract the profits as interest, and not as dividends.

Under the imputation system, the effective corporate tax rates tend to be higher since the corporate profits are not subject to economic double taxation when distributed to shareholders.

However, as the imputed tax credit is generally limited to domestic shareholders, it operates as a classical system for foreign shareholders. Moreover, the imputation system suffers from the additional equalization tax payments required to fund the imputed credit on the dividend payments.

Several countries have shifted from the imputation system to shareholder relief under a modified classical system, particularly as it discriminates against cross-border investments.