Tax Risks of Long-Term Non-Distribution of Dividends by Companies

This article analyzes the tax risks associated with long-term non-distribution of dividends for both domestic and foreign companies, covering both domestic and international tax implications.

I. Domestic Tax Risks for Domestic Companies That Do Not Distribute Dividends

On July 5, 2023, the Tax Bureau of Haicheng City, Anshan, Liaoning Province, issued a notice to local taxpayers, warning that long-term non-distribution of retained earnings by companies can bring more harm than good. Let’s explore how the tax authorities assess the pros and cons of undistributed profits and identify the associated tax risks.

1. Benefits of Not Distributing Dividends

• Maintaining cash flow: Retaining earnings helps enhance the company’s ability to withstand risks.
• Reducing financial pressure: Undistributed profits provide more funds for future development.

2. Drawbacks of Not Distributing Dividends

• Hindering business expansion and development: Retained earnings could fail to meet the company’s growth needs (this contradicts the second point in the "benefits" section, raising questions about the underlying logic).
• Reducing shareholder returns: This could lower shareholder confidence. If the company faces operational difficulties or significant risks in the future, retained earnings may be prioritized for debt repayment, restructuring, or liquidation, potentially harming shareholder interests.
• Potential negative impact on investors: Long-term non-distribution may deter investor confidence.
• Tax evasion risks: If retained earnings are accessed through improper methods (e.g., off-the-books withdrawals), this could lead to tax evasion or expose the company to tax risks.
• Increased tax burden on equity transfers: Retained earnings increase the value of equity, which could result in higher tax liabilities during equity transfers.

The tax bureau concluded that shareholders should weigh the pros and cons of retaining earnings and distribute undistributed profits promptly in accordance with tax regulations to mitigate tax risks and potential issues.