Dividend repatriation refers to the return of earnings from foreign subsidiaries to their parent companies back in the home country. Earnings returned home from abroad are subject to income taxes by the home country government even though they are already after-tax income in the foreign hosting country. But sometimes companies have to carry out dividend repatriation to raise funds for certain home investments. To avoid double taxation on direct dividend repatriation, companies may move foreign earnings back home indirectly through other means.
Hosting Country Operations
The dividend repatriation process starts with the evaluation of the foreign subsidiary's operations in the hosting county. If there are enough earnings from hosting country operations and no restrictions on after-tax income by the foreign government, management must consider how to best use the available funds. Companies can either reinvest their earnings right back into their foreign operations or bring earnings home for domestic investments.
Home Country Investments
By setting up foreign subsidiaries, companies often can benefit from low costs of local labor and raw materials, as well as lower tax rates offered by the hosting country government. However, investment returns from foreign operations also may be relatively low. When deciding on dividend repatriation, companies often take into account the potential relative returns of their foreign subsidiaries and the parent back home. If returns on home country investments are superior to those from hosting country operations, companies may consider to repatriate some of their foreign earnings.
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Home Country Taxation
An important aspect in the dividend repatriation process is the home country taxation, which subjects repatriated dividends to double taxation. In most cases, tax rates enacted by home countries are higher than those offered by foreign countries that often seek to attract investment through low-tax incentives. Higher taxes on repatriated dividends can dampen profitable home investments. Whenever home countries offer temporary tax breaks to qualified dividend repatriation to attract foreign investments back, it can become a major factor in the dividend repatriation process.
Dividend Repatriation Alternatives
Sometimes dividend repatriation may be achieved indirectly through alternative ways to avoid high taxes levied by the home country government. Companies may order their foreign subsidiaries to make passive investments in financial securities in the amount of the earnings intended to be repatriated back home, and then borrow against the passive assets held by the foreign subsidiaries and invest the borrowed funds in home country investments that offer better returns. As a result, foreign earnings are indirectly used at home without the burden of taxes on dividend repatriation.