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What Is a Dividend Exclusion?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 18 September 2014
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A dividend exclusion is a type of tax break that makes it possible for a company to utilize a portion of the dividends received from investments as a tax deduction. This type of arrangement typically involves specific provisions that must be met in order for a portion of the dividends received to be eligible for exclusion. When this type of benefit is provided, the ability to exclude dividends from taxable income can allow a business to retain more of its income for use in either increasing general financial stability or to enhance the company operation in some manner.

The concept of a dividend exclusion has been common for many decades, with different nations imposing a range of qualifications that companies must meet in order to claim this type of exclusion. In the United States and a number of other nations, the company must be classed as a domestic business operation in order to be eligible for this type of tax break. In addition, only dividends issued by other domestic companies may be considered for the exclusion. This means that if the company issuing the dividends is not considered domestic, those earnings cannot be excluded and will be considered taxable income even if the receiving company is domestic.

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Revenue agencies in different nations set the qualifications that must be met in order to claim a dividend exclusion, as well as setting limitations on how much of an exclusion may be claimed. Those limitations may have to do with the overall annual income of the business operation, allowing the business to claim up to a maximum amount of exclusion based on a comparison of that total income and the amount of the dividend in question. In other nations, a company may be able to claim the entire dividend as an exclusion, regardless of the amount.

In some nations, individuals who meet the criteria set by revenue agencies may also claim some form of dividend exclusion. Other nations reserve this particular type of tax break for corporations only and do not extend it to individuals, unless they are incorporated or otherwise recognized as a legal business entity. Since tax exclusions in general are subject to change from one tax year to the next, consulting with a tax professional to review current tax regulations will make it easier to determine if the individual or business entity is entitled to some form of dividend exclusion.

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