ATJ Asian Tax Journal

Asian Tax Journal

Print ISSN 1738-3323 Online ISSN 2733-9270

A Study on the Impact of the Establishment of the Dividend Exclusion System for Foreign Income on the Tax Strategies of Overseas Subsidiaries

  • Yong Geun Yoo University of Seoul
  • Won Seok Choi University of Seoul Graduate School of Taxation

Asian Tax Journal Vol. 25 No. 3 (2024), pp. 163-187

Abstract

There has been prior research on countries that have adopted the dividend exclusion system for foreign income, including studies on Japan which implemented the system in 2009. However, there are varied opinions on the effects of the system, and the short－term analysis may not accurately capture its impact due to differences in economic conditions and corporate management environments. This study aims to analyze the effects of the system clearly, conducting empirical analysis on Japanese－invested companies from 2007 to 2022. It expands the analysis to include the relationship between this tax policy and tax treaties, as well as the impact on dividends, interest expenses, and equity ratios. The study validated the substitution relationship through comparative verification of dividends, interest, and royalties subject to limited tax rates under tax treaties, following the tax law amendments. It also conducted multivariate regression analysis and double difference method analysis on the relationship between the tax law amendments and the level and propensity of dividends between Japanese investment companies and domestic counterpart companies. The study found a significant substitution relationship between dividends and interest expenses and observed that both the level and propensity of dividends increased significantly after the tax law amendment. The hypothesis that the shareholding ratio would increase after the amendment was also confirmed to have a significant positive relationship. Considering the limitations of the study, such as the focus on Japanese investment companies that are overseas subsidiaries located in Korea, the limits of control variables, economic conditions, and corporate specificity, the establishment of the dividend exclusion system for foreign income may not be the sole factor increasing dividends and shareholding ratio. However, the significant relationships identified through empirical analysis provide evidence of the benefits expected from the implementation of the system, highlighting the significance of this study.

Keywords

  • Dividend Exclusion for Foreign Income
  • Limited Tax Rate
  • Dividend Level
  • Dividend Propensity
  • shareholding ratio of Overseas Subsidiaries

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