Question

A parent holding company sells shares in its subsidiary such that the parent now owns only 65% of the subsidiary and, thus, the tax returns of the parent and its subsidiary can't be consolidated. The parent receives annual dividends from the subsidiary of $2,500,000. If the parent's marginal tax rate is 34% and if the exclusion on intercompany dividends is 70%, what is the effective tax rate on the intercompany dividends, and how much net dividends are received?

Answer 1

Answer:

10.2%

Explanation:

Total annual dividends $2,500,000

the actual dividends received deduction is 80%, but since the question states that it is 70%, we must subtract 70% of $2,500,000 = $750,000

the company will be taxed only on $750,000 of dividends that it received:

total taxes paid = $750,000 x 34% = $255,000

effective tax rate = total taxes paid / total dividends received = $255,000 / $2,500,000 = 10.2%