Definition for : Dividend tax credit
The advantage of Debt financing is the deductibility of Interest Expenses against the Income tax borne by the company. However, Income tax on Investors significantly decreases this benefit. As they are non-Deductible, dividends are taxed once by corporate Income tax and again by the personal Income tax on the shareholder (in most European countries). To avoid this Double taxation, some countries have instituted an offsetting mechanism called the dividend tax credit. This is intended to neutralise the effect of corporate Income tax at the level of the investor.
(See Chapter 38 Share issues of the Vernimmen)
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