A VAT registered person may earn dividend income by holding shares in a company.
The payment of a dividend by a company is a distribution of its profits to its shareholders. The holder of a share is, however, not entitled to a dividend until the company has declared a dividend. Similarly, dividend income received by merely holding shares in a company does not constitute consideration for a supply.
A dividend income accrues to the shareholder by merely holding shares in a company. If the company makes profits, and declares profits, the shareholder receives a dividend. The shareholder does not make any supply in order to be eligible for a payment of dividend. In other words, a dividend is generally a passive income.
As the shareholder does not make a supply to receive the dividend, the dividend income cannot be treated as consideration for a supply. Accordingly, dividend income is outside the scope of VAT, and is therefore, not required to be reported on the VAT return.
While dividend income is generally outside the scope of VAT, any amount charged as a “management fee” would be subject to VAT. For example, management fees charged by a holding company to its subsidiaries would be subject to VAT.
Dividend income is therefore, outside the scope of VAT, and there is no requirement to report them in the VAT return.
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