What is a Gross Dividend?
A gross dividend is the total amount distributed by a company to its shareholders before any taxes or other deductions are applied. Unlike the net dividend, which is the actual amount received by shareholders after taxes have been deducted, the gross dividend represents the full distribution announced by the company. This figure is crucial for calculating the total income for shareholders before tax liabilities are considered.
Detailed Explanation
Businesses often distribute their profits to shareholders in the form of dividends. When a company declares a dividend, it specifies the gross dividend amount, which is the amount before any applicable taxes. The tax deducted at the source, also known as withholding tax, varies depending on the country and tax regulations.
For instance, if a company declares a gross dividend of $100 per share, and a withholding tax of 15% applies, the shareholder will receive a net dividend of $85 per share, with $15 per share remitted to the tax authorities.
Examples
Example 1: Domestic Shareholder
- Suppose a company declares a gross dividend of $2.00 per share.
- Withholding tax rate: 10%
- Net dividend received by shareholders: $2.00 - ($2.00 * 10%) = $1.80 per share.
Example 2: Foreign Shareholder
- Suppose a foreign company declares a gross dividend of €3.00 per share.
- Withholding tax rate: 20%
- Net dividend received by shareholders: €3.00 - (€3.00 * 20%) = €2.40 per share.
Frequently Asked Questions (FAQs)
1. Why is it important to know the gross dividend amount?
Knowing the gross dividend amount is crucial for understanding the total distribution a company makes before any tax liabilities. It helps investors assess the company’s profitability and the financial benefit of holding its shares.
2. How does gross dividend differ from net dividend?
The gross dividend is the total amount declared by a company before taxes, while the net dividend is the amount received by shareholders after deducting taxes at the source.
3. Do all shareholders receive the same gross dividend?
Yes, all shareholders are entitled to the same gross dividend per share. However, the net amount they receive may vary based on their tax situation and the applicable withholding tax rate.
4. Is the gross dividend subject to double taxation?
Depending on the jurisdiction and the tax treaties in place, gross dividends might be subject to double taxation - once at the corporate level and again at the shareholder level. Some tax systems offer relief or credits to mitigate this issue.
5. How do investors calculate their tax liability on gross dividends?
Investors must refer to their country’s tax code or consult with a tax advisor to determine their tax liability on gross dividends. The rate typically depends on the investor’s tax bracket and local tax laws.
- Net Dividend: The amount of dividend received by the shareholder after deducting the withholding tax from the gross dividend.
- Tax Credit: A reduction in the tax liability that may be offered by tax authorities to offset part of the withholding tax paid on gross dividends.
- Dividend Yield: A financial ratio that shows how much a company pays out in dividends each year relative to its stock price.
- Advance Corporation Tax (ACT): A form of corporation tax paid by companies on their dividend distributions, typically allowing shareholders to claim tax credits on the gross dividend.
Suggested Online Resources
- Investopedia - Dividend
- Yahoo Finance - What is a Dividend?
- The Motley Fool - How Dividends Work
Suggested Books for Further Studies
- “The Intelligent Investor” by Benjamin Graham
- “Dividends Still Don’t Lie: The Truth About Investing in Blue Chip Stocks and Winning in the Stock Market” by Kelley Wright
- “Investment Valuation: Tools and Techniques for Determining the Value of Any Asset” by Aswath Damodaran
Accounting Basics: Gross Dividend Fundamentals Quiz
### What does gross dividend refer to?
- [x] The total amount of dividend declared by a company before tax deductions.
- [ ] The amount received by shareholders after tax deductions.
- [ ] The dividend amount companies pay after expenses.
- [ ] The net profit of a company divided by the number of shares.
> **Explanation:** The gross dividend is the total amount declared by a company before any taxes or deductions are applied.
### What distinguishes gross dividend from net dividend?
- [ ] Gross dividend is declared annually while net dividend is quarterly.
- [x] Gross dividend is before tax deductions, while net dividend is after.
- [ ] Net dividend is always higher than gross dividend.
- [ ] Gross dividend includes capital gains, whereas net dividend does not.
> **Explanation:** Gross dividend is the amount before tax deductions, whereas net dividend is the amount received by shareholders after these deductions.
### If a company declares a gross dividend of $5.00 and the withholding tax is 20%, what is the net dividend?
- [x] $4.00
- [ ] $5.00
- [ ] $3.00
- [ ] $6.00
> **Explanation:** The net dividend would be $5.00 - ($5.00 * 20%) = $4.00 per share.
### Who typically determines the withholding tax rate on dividends?
- [ ] The company's board of directors
- [x] The tax authorities of the governing jurisdiction
- [ ] The shareholders
- [ ] The company's CFO
> **Explanation:** The withholding tax rate on dividends is typically determined by the tax authorities of the governing jurisdiction.
### Why might a shareholder receive a tax credit on gross dividends?
- [ ] To mirror stock price increases.
- [x] To offset double taxation on corporate earnings.
- [ ] To increase company liquidity.
- [ ] To reflect the company's gross revenue.
> **Explanation:** Tax credits on gross dividends are often provided to offset the double taxation on corporate earnings — once at the corporate level and again at the shareholder level.
### How can international investors avoid double taxation on dividends?
- [x] By taking advantage of tax treaties between their country and the company's country.
- [ ] By investing only in domestic companies.
- [ ] By receiving dividends in foreign currency.
- [ ] By registering as tax-exempt entities.
> **Explanation:** International investors can avoid double taxation on dividends through tax treaties between their home country and the company's country, which often provide tax credits or exemptions.
### What is the purpose of the gross dividend figure for financial analysis?
- [x] To assess the total profitability distributed to shareholders.
- [ ] To analyze the company's quarterly growth.
- [ ] To determine the company's cash reserves.
- [ ] To compute the company's total market capitalization.
> **Explanation:** The gross dividend figure helps assess the total profitability a company distributes to its shareholders before any taxes or deductions.
### Which of the following is true about gross dividend payouts?
- [ ] They are always equal to the net income of a company.
- [ ] They adjust for inflation automatically.
- [x] They are declared before any taxes are deducted.
- [ ] They cannot be altered once declared.
> **Explanation:** Gross dividends are declared before any taxes are deducted, giving a clear picture of the total distribution before shareholder liabilities.
### How does a high gross dividend impact investor perception?
- [ ] It decreases investor confidence.
- [x] It may increase investor confidence due to perceived profitability.
- [ ] It indicates a cut in company expenses.
- [ ] It suggests low corporate taxation.
> **Explanation:** A high gross dividend can increase investor confidence as it indicates that the company is profitable enough to distribute substantial earnings to its shareholders.
### In dividend terminology, what generally accompanies the announcement of a gross dividend?
- [ ] Tax assessment notices
- [ ] Share dilution plans
- [ ] Buy-back announcements
- [x] Information about the applicable withholding tax
> **Explanation:** Information about the applicable withholding tax generally accompanies the announcement of a gross dividend to provide shareholders with clarity on their net dividend amount.
Thank you for embarking on this journey through our comprehensive accounting lexicon and tackling our challenging sample exam quiz questions. Keep striving for excellence in your financial knowledge!
