Underlying tax is defined as the tax on the profits out of which a dividend is paid.

Underlying tax is defined as the tax on the profits out of which a dividend is paid.

• A. The tax on the profits out of which a dividend is paid.
• B. The tax on the shareholder's dividend.
• C. The tax on foreign profits after tax
• D. The tax on the company's total income.

Answer: (A)

Underlying tax refers to the tax paid by the company on the profits that are used to pay dividends. It’s the corporation tax on distributable profits, not the shareholder’s personal tax on the dividend, nor taxes on foreign profits or the company’s total income. In other words, it’s the tax the company has already paid on the profits from which the dividend is drawn, which is why that option correctly defines underlying tax.

Underlying tax refers to the tax paid by the company on the profits that are used to pay dividends. It’s the corporation tax on distributable profits, not the shareholder’s personal tax on the dividend, nor taxes on foreign profits or the company’s total income. In other words, it’s the tax the company has already paid on the profits from which the dividend is drawn, which is why that option correctly defines underlying tax.