Ex-Dividend Pricing, Taxes and Arbitrage
Opportunities: the Case of the Portuguese
Stock Exchange
JORGE FARINHA* and MIGUEL SORO**
Keywords: ex-dividend pricing, arbitrage, taxes, international
financial markets, market efficiency
JEL Classification: G12, G14, G15
*CETE-Centro de Estudos de Economia Industrial, do Trabalho
e da Empresa, Faculdade de Economia, Universidade do Porto,
Rua Roberto Frias, 4200-464 Porto, Portugal. Tel. (351)225571100, Fax (351)-225505050. E-mail: [email protected].
** Banco Espírito Santo S.A., Rua José Falcão, 132 2º, 4050-315
Porto, Portugal. Tel. (351)-938243739, Fax (351)-222063383. Email: [email protected] (corresponding author).
This version: June, 2006
Ex-Dividend Pricing, Taxes and Arbitrage
Opportunities: the Case of the Portuguese
Stock Exchange
JORGE FARINHA and MIGUEL SORO
ABSTRACT
This paper examines the ex-dividend stock price behaviour in the Portuguese Stock Exchange
between 1993 and 2002, a unique period characterized by a richness of different investor tax
statuses and several tax changes. After classifying investors according to their tax profile and
corresponding dividend tax discrimination factors, we find that the pursuit of a short-term
trading strategy around the ex-dividend day does not yield significant abnormal returns after
tax and bid-ask costs. These results are in accordance with the inexistence of arbitrage
opportunities even when extreme tax situations are considered under different dividend yield
scenarios. It is also shown that the observed ex-dividend price reduction is consistent with a
tax explanation and in disagreement with market microstructure arguments. Further tests
indicate that the price change is not significantly different from the expected theoretical
price reduction for a marginal investor which we identified most likely as a long-term
shareholder in high-tax brackets. Finally, our results only provide a weak support for the
clientele hypothesis.
Since Elton and Gruber’s (1970) seminal work, a lot of attention has been
paid to the relationship between taxes and the price behaviour around the
first day when stocks trade without dividend rights (the ex-dividend day).
Even before Miller and Modigliani’s (1961) Dividend Irrelevance Proposition,
Campbell and Beranek (1955) had already reported a 90% drop of the exdividend stock prices, on average, related to the dividend value at exdividend. Their justification for this fact was the existence of an asymmetric
tax treatment of dividends versus capital gains.
This paper provides an additional empirical contribution on the way taxes
influence ex-dividend pricing and on the potential existence of tax-induced
arbitrage opportunities by analyzing the uniqueness of the 1993-2002
Portuguese setting characterized not only by a rich set of different investor
tax profiles but also by a number of major tax changes. In a hypothetical taxfree environment, where all investors behave rationally, one can expect the
ex-dividend price reduction to be equal to the gross amount of the dividend
paid out. However, when taxes are introduced, and specially under the
typical scenario where dividends are more taxed than capital gains, the
investor will cease to be indifferent to the way firm cash-flows are
distributed, and will seek the strategy that will yield the largest after-tax
return. Under those circumstances, one should expect that the ex-dividend
price reduction to be smaller than the amount of the dividend if taxes on cash
payouts are higher than those on capital gains. Although a fair number of
papers have already dwelled on this issue, as is the case with Barclay (1987),
Lasfer (1995) and, more recently, Bell and Jeckinson (2002), Lasfer and
Zenonos (2003), and Elton et al (2003), the contribution of this study is
2
twofold. First of all, there are no empirical studies on the Portuguese Stock
Exchange that have borne in mind the different tax characteristics of its
investors. Similarly to the US and many European countries such as the
United Kingdom, Italy France or Germany, the prevailing Portuguese tax
regime provides a preferential tax treatment of dividends versus capital
gains. This allows us to analyze if the Portuguese tax setting has the same
impact on prices as observed in other markets. Secondly, our paper also
provides a test for the existence of tax-induced arbitrage opportunities for
different classes of investors in the Portuguese Stock Exchange. Following
Elton and Gruber’s (1970) methodology, and taking into account the
Portuguese tax environment, this study also attempts to identify not only if a
tax effect is found on the ex-dividend price behaviour but also whether it is
possible, for any investor tax class, to earn risk-adjusted abnormal returns
from a short-term trading strategy around the ex-dividend day. For this
empirical testing we distinguish all the different investor tax classes that can
be found under the Portuguese tax system and their potential reactions to a
dividend distribution.
Contrary to the predictions of the tax hypothesis, Kalay (1982) suggests that
it is the intensity of trading activity of arbitrageurs that, in the presence of
transactions costs, will force a price reduction smaller than the dividend. A
complementary perspective is that of Boyd and Jagannathan (1994), who, in
addition, consider market specific features to be also of significant relevance
in the explanation of the price behaviour around dividend payments.
The results in this paper challenge earlier findings for the Portuguese market
obtained by Borges (2001). As opposed to Borges (2001), we find that the tax
hypothesis is the major force behind the ex-dividend pricing behaviour. Our
results also reveal, similarly to a number of recent studies, weak evidence
concerning the presence of a clientele effect, as well as the inexistence of any
market peculiarities of the Portuguese Stock Exchange that could help to
explain the price formation around the ex-dividend day. In addition, a
striking result in our study is the conclusion that the ex-dividend price
behaviour in the Portuguese Stock Exchange is consistent with the semistrong efficiency hypothesis where no investors, regardless of their tax
position, can achieve abnormal returns after tax and transaction costs from a
short-term trading strategy around the ex-dividend day that attempts to take
advantage of potential tax-induced arbitrage opportunities.
The remainder of this paper is organized as follows. In Section I we briefly
present a literature review on the main theoretical issues and empirical
studies focusing on the relation between dividends and taxes. Section II
characterizes the evolution of the Portuguese tax system between 1993 and
2001. In Section III we propose our research hypotheses. Section IV describes
the sample and methodology used. Empirical results are presented in Section
V. Finally, Section VI summarizes the major conclusions of the paper.
3
I.
PREVIOUS LITERATURE
The first papers that considered taxes to be an important concern in the
analysis of investors’ behaviour were Farrar and Selwyn (1967) and Brennan
(1970). Assuming an unfavourable tax treatment of dividend versus capital
gains, Brennan (1970) argues that for a given level of risk, the rate of return
required by a stock investor is a positive linear function of the dividend yield1
as follows:
Ri , t − rnr , t = ∂ o + ∂1 ⋅ β i , t + ∂ 2 (DYi , t − rnr , t ) + µi , t
(1)
where
Ri ,t :
Return for stock i in period t;
rnr , t :
Risk-free rate of return in period t;
∂1 :
Impact of Systematic risk factor β i,t on Ri ,t ;
∂2 :
Dividend impact coefficient on Ri ,t ;
β i,t :
Systematic risk factor of stock i in period t;
DYi , t : Dividend yield of stock i, at the end of period t;
µi, t :
Stochastic error term
Equation (1) shows the relationship between before-tax expected return,
systematic risk and dividend yield, from which one expects that, if ∂ 2 is
statistically different from zero, one can conclude that investors will demand
a higher before-tax required return when in presence of higher dividend yield
stocks, so as to compensate larger tax costs. Although some studies have
confirmed a positive correlation between risk-adjusted returns and dividend
yield, there remains quite a degree of controversy about this theoretical
framework. Hess (1982) and Miller and Scholes (1982), among others, argue
that the relationship between returns and yields is too complex to be justified
solely on tax grounds. As an alternative perspective, Black and Scholes
(1974) use the clientele explanation2 introduced by Miller and Modigliani
(1961) to argue in favour of a neutrality hypothesis for dividends which states
that if investors demand higher returns for stocks with higher dividend
yields, companies will lower their dividend payouts so as to reduce their cost
of capital and thus permanently increase their stock price. However, market
dynamics would ensure that in equilibrium the supply and demand for stocks
The dividend yield is the ratio between the gross amount of the dividend and the stock price.
The clientele effect is characterized by the existence of homogenous groups of agents that hold
different classes of assets according to their preferences. Such clienteles can be formed according
not only to investors’ tax statuses but also to their risk-taking profiles. This explanation could
help to understand why dividend policies usually are quite stable in most companies. In fact, if
important and frequent dividend policy changes occurred in a firm, its shareholders would likely
replace their investments in favour of a company which they would see as having a dividend
policy more in line with their tax statuses. However, in a real-life setting, the existence of several
market frictions, such as transaction costs, could translate into an important limitation to the
willingness of those investors to jump from one investment to another.
1
2
4
would be such that no relationship should be expected between returns and
dividend yields.
Within the clientele effect framework, Elton and Gruber (1970) present their
theoretical argument by relating the marginal tax rates (on dividends and
capital gains) and price changes around the ex-dividend day. According to
their hypothesis, Elton and Gruber (1970) anticipate that ex-dividend prices
will be formed in a way so as to ensure that the marginal investor will be
indifferent between any particular market timing to sell stocks3. Assuming
risk-neutral investors and no transaction costs, the equilibrium in such
market is presented as follows4:
Pc − t gc (Pc − Po ) = Pe − t gc (Pe − Po ) + D (1 − td )
(2)
where
Pc : Cum-dividend price;
Pe : Ex-dividend price;
Po : Stock price at acquisition;
td : Dividend tax rate;
t gc : Capital gains tax rate;
D : Gross dividend.
Equation (2) can also be expressed as5:
Pc − Pe 1 − td
=
D
1 − t gc
(3)
Using Re instead of the ratio between the price change and the dividends
(QVP), we find
3 More precisely, the authors consider that an investor holding a stock that is approaching its exdividend day will look for the strategy that will ensure the highest return possible according to
his expectation for the ex-dividend stock price. If the investor chooses to sell the stock cumdividend (i.e., until the last day the share trades with full dividend rights), the stock will be sold
at a higher price implying that the marginal taxes will be computed over the difference between
the selling and the acquisition price. Otherwise, if the investor decides to sell the stock exdividend, it will receive the dividend but will observe a stock price reduction as the stock does
not maintain any dividend rights when it is sold. In this case, the investor’s tax bill will include
the tax on the dividends received and the tax on (smaller) capital gains (calculated over the
difference between the selling price and the acquisition price). In equilibrium, prices will be such
that the marginal tax burden will be independent from any particular dividend distribution
policy.
4 Note that the left-hand side of (2) is the return that an investor would get when selling the
cum-dividend stock, while the right-hand side presents the alternative strategy of selling it on
ex-dividend.
5 Notice that the left-hand side of the equation is the ratio between the price change and the
dividend (QVP) while the right-hand side is the tax discrimination factor between dividends and
capital gains (TD).
5
Re =
Pe − Pc + D
D  td − t gc
= (1 − QVP )
=
Pc  1 − t gc
Pc
D

 Pc

(4)
According to Elton and Gruber (1970), the ratio between the price change and
the dividend (QVP) allows the estimation of the marginal tax rate for the
marginal investor. From such formulation one can also derive the basis for
justifying the clientele hypothesis: bearing in mind the usual asymmetry in
the tax treatment of dividends versus capital gains, investors holding high
dividend shares (that is, firms where a large proportion of profits are
distributed) should be positioned in low tax brackets in comparison to those
shareholders holding low dividend yield stocks. The tax effect has been tested
extensively, either under settings of changing tax regimes [Barclay (1987),
Lasfer (1995), Bell and Jeckinson (2002)], different countries [Menyah (1993),
McDonald (2001), Lasfer and Zenonos (2003)] or over different kinds of asset
classes [Shaw (1991), Michaely and Murgia (1995), Elton et al (2003)]. The
results of these studies are largely consistent to Elton and Gruber’s (1970)
findings: On one hand, prices will reflect the differential taxation of dividends
and capital gains; on the other hand, price changes are positively correlated
with the dividend yield, referring this interpretation as the clientele
hypothesis.
In contrast to Elton and Gruber’s (1970) tax effect, Kalay’s (1982) arbitrage
hypothesis considers that the tax system does not influence prices but does
affect the behaviour of investors. Kalay (1982) clarifies that the actions of
short-term investors (arbitrageurs), for whom there is no differential
taxation, will force the ex-dividend price reduction to be precisely equal to the
dividend amount. In this context, the fact that prices do not fall according to
the exact value of the dividend is not related to tax effects but to transaction
costs instead. Eades et al (1984) show evidence consistent with Kalay’s (1982)
hypothesis, noting a drop in excess returns caused by a change in transaction
costs in the US market from 1975 onwards. Lakonishok and Vermaelen
(1986) also confirm Kalay’s (1982) argument as they identify (also for the US)
a significant increase in transaction volume around the ex-dividend day
which is more pronounced for high dividend yield stocks.
More recent literature has been suggesting that, even when arbitrageurs are
absent from the market, ex-dividend price formation may be influenced by
factors other than taxes. Frank and Jagannathan (1998) observe that,
although there are no taxes on dividends or capital gains for listed companies
on the Hong Kong Stock Exchange, prices still fall at the ex-dividend date by
an amount which is smaller than the dividend. The authors justify this with
a market microstructure argument. Similarly, Bali and Hite (1998) remind
that the fact that prices are a discrete and not a continuous function can have
an impact on the way prices are formed around the ex-dividend day, lending
thus support also for a market microstructure argument which can compete
with tax or clientele stories.
6
II.
THE PORTUGUESE TAX SYSTEM
Portugal endured a significant tax reform in 1988 with the creation of the
new IRS (Personal Income Tax) and IRC (Corporate Income Tax) codes. One
of the major changes such codes introduced was the elimination of the old
double taxation regime by allowing a regime of partial imputation (or partial
credit) for corporate tax paid. According to the new tax scheme, dividendreceiving shareholders could benefit from a dividend tax credit fraction of
corporation tax already paid by the company6. Apart from Portugal, similar
tax credits are observable in many other European countries such as France,
Italy, Ireland and the United Kingdom.
Under the Portuguese tax system it is possible to classify investors into four
different tax categories: i) Individuals (Classes A.1, A.2, B.1 and B.2); ii)
Corporations classified into the so-called “Less Favourable Tax Regime”
(Class C); iii) Corporations classified into the so-called “More Favourable Tax
Regime” (Class D); and iv) Tax-Exempt Investors (Class E). Of all these four
major groups, only the first two benefit the dividend tax credits system.
Regarding these, one should clarify the exact tax system that took place
during our sample period. From 1988 on, dividends were taxed as soon as
they were paid by applying an appropriate withholding income tax rate.
Furthermore, only in the case of individual shareholders, such withholding
tax rate (taxa liberatória) could be a final tax rate that freed them from
further tax liabilities. Companies, however, were required to add such income
to all other sources of income for taxation purposes7. Lastly, at the time of
applying the effective tax rate on the overall income, and in order to avoid
economic double taxation on dividends, both individuals (only those that
decided to add dividends to all other income for taxation purposes) and
companies would benefit from a tax credit (CI) that in essence corresponded
to the IRC taxes paid by the distributing firm. Such tax credit is computed
according to the following formula:
CI =
ci(1 − tirc )tirc
= ci ⋅ tirc
(1 − tirc )
(5)
In equation (5) ci is the percentage of the IRC tax paid by the distributing
company that could be accepted as a tax credit by the dividend-receiving
shareholder and tirc is the IRC tax rate. The tax credit thus computed was
then added back to the gross dividend to determine the marginal tax rate and
was finally deducted in the tax bill so as to eliminate the double taxation on
dividends. In the case of capital gains, individuals were exempted from any
Until 1988, the tax system was characterized by total double taxation of dividends. A
corporation paying out dividends would pay taxes on profits declared and the shareholder
receiving those dividends would suffer the full burden of dividend taxation without any tax
allowance for corporate taxes already paid by the company.
7 For our sample period, i.e., between 1993 and 2002, it was observed that a rational choice for
individuals was to avoid the possibility, given by the tax system, of adding the gross dividend
income to all other sources of income received and only then being taxed for all income. In fact,
for all income tax brackets, the individual’s withholding dividend tax rate was smaller than any
of his possible marginal tax income rates.
6
7
taxation as long as they held their shares for a minimum period of 12
months. At the corporate level, apart from capital gains taxes becoming due
only when the shares were actually sold, the possibility of reinvesting the
amount received at the sale so as to delay taxation actually meant that the
effective tax rate tended towards zero.
According to the Elton and Gruber’s (1970) methodology, the expected ratio
between the change in prices and the dividend received (QVP) reflects the tax
discrimination factor between dividends and capital gains for the marginal
investor (TD). Within the Portuguese tax system, and bearing in mind the
two first tax categories of investors mentioned earlier on (individuals and
corporations classified into the “Less Favourable Tax Regime”, the so-called
Classes A, B and C) the tax discrimination factor (TD) is given by the
following equation8:
TD =
(1 + CI )(1 − tirc )(1 − tm ) = (1 + CI )(1 − tm )
(1 − tirc )(1 − t gc )
(1 − t gc )
(6)
For corporations classified into the “More Favourable Tax Regime” (Class D),
these could also benefit from a tax credit as they were allowed to deduct, in
their own company taxation, 95% of the gross dividend received. Regarding
capital gains taxes, the system was the same as applicable to all other
companies. According to Elton and Gruber’s (1970) formula, the tax
discrimination factor for this group of investors was therefore the following:
TD =
s(1 − tirc )(1 − tm ) s(1 − tm )
=
(1 − tirc ) 1 − t gc
1 − t gc
(
) (
(7)
)
where s is the percentage of the dividend that can be exempted from
taxation. Finally, for the tax-exempt investors (Class E), the inexistence of
any tax discrimination factor translated into a ratio equal to unity:
TD =
(1 − tirc )(1 − tm ) = (1 − tm ) = 1
(1 − tirc )(1 − t gc ) (1 − t gc )
(8)
Table 1 shows the tax discrimination factors (TD) computed in the sample
period for the different investor tax categories. One should recognize that
during the period in question the Portuguese tax system showed a
consistently larger tax burden on dividends vis-à-vis capital gains. Such tax
discrimination was considerably more visible for the B and C tax classes. In
8 It should be mentioned that, with the sole purpose of simplifying notation at this stage, we did
not take into account either the existence of a dividend special tax benefit granted solely to listed
firms (whereby only a fraction of dividends are subject to taxes) or the application of another tax,
the Inheritances and Donations Tax (corresponding to 5% of the amount of dividends). However,
when computing the effective tax discrimination factors TD shown in Table 1 all these aspects
will be included.
8
the Appendix a more detailed explanation of the Portuguese tax system
evolution is presented.
Table 1
Summary for the Tax Discrimination Factors Across
Different Investor Classes
This table shows the tax discrimination factors (TD) for four investor tax categories according to the
Portuguese Tax System for the period 1993-2002, taking into full consideration the tax benefits granted to
companies listed in the Portuguese Stock Exchange and the Inheritances and Donations Tax. The tax
discrimination factor for tax-exempt investors (Class E) is not shown since in that case TD equals one.
Year
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
1993-2001
1994-2001
Individual
Marginal Tax Rate = 35%
Investor Class
Individual
Marginal Tax Rate = 40%
t gc = 0
t gc = 10%
t gc = 0
t gc = 10%
(Class A.1)
0,8497
0,8497
0,8847
0,8847
0,8847
0,8755
0,8755
0,8605
0,8168
0,7750
0,8646
0,8665
Class A.2)
0,9441
0,9441
0,9830
0,9830
0,9830
0,9727
0,9727
0,9562
0,9076
0,8611
0,9607
0,9628
(Class B.1)
0,8113
0,8113
0,8513
0,8513
0,8513
0,8427
0,8427
0,8213
0,7655
0,7500
0,8276
0,8297
(Class B.2)
0,9014
0,9014
0,9458
0,9458
0,9458
0,9364
0,9364
0,9125
0,8506
0,8333
0,9196
0,9218
Corporation in
the “Less
Favourable
Regime”
(Class C)
0,8420
0,8420
0,8780
0,8780
0,8914
0,8820
0,8820
0,8841
0,8476
0,8000
0,8697
0,8731
Corporation in
the “More
Favourable
Regime”
(Class D)
0,9820
0,9820
0,9820
0,9820
0,9830
0,9830
0,9830
0,9840
1,0000
1,0000
0,9846
0,9849
III. RESEARCH HYPOTHESES
The tax impact on prices around the ex-dividend day has been the subject of
many analyses, namely under settings where a tax asymmetry between
dividends and capital gains exists. Almost unanimously9, the empirical
results obtained in these studies are consistent with the presence of a tax
discrimination factor in the explanation of the ex-dividend market price
behaviour. In the former Section it was recognized that in the period between
1993 and 2001, the Portuguese tax environment was characterized by a
larger tax burden on dividends vis-à-vis capital gains for all investor classes
except tax-exempt shareholders.
Combining the theoretical arguments presented earlier with the knowledge of
the Portuguese tax system, and assuming the inexistence of other factors
such as arbitrage costs or microstructure effects that could also influence
price movements of dividend paying stocks around the ex-dividend day, then
one can expect that, similar to the US market, the estimated QVP will be
smaller than one. In fact, with the information about the tax discrimination
factors (TD) for all investor classes, it is possible to test the hypothesis not
See, for example, Barclay (1987), Menyah (1993), Lasfer (1995), Lasfer and Zenonos (2003) and
Elton et al (2003), among others.
9
9
only that the QVP is lower than the unity but also that it is equal to the
marginal investor’s TD. As far as the identification of the marginal investor
is concerned, although one cannot objectively measure the relative
importance of each investor class in the Portuguese Stock Exchange, informal
contacts that we had with Stock Exchange officials and other market
professionals allowed us to initially anticipate that the long term individual
investor was the most likely class influencing the marginal prices in the
market. Within such category, given the level of sophistication required by
such market participants, it is most likely that these investors would be in
the highest personal income tax bracket. Combining these arguments we are
led to our first research hypothesis:
H1:
The behaviour of stock prices at the ex-dividend day is the result of
a tax effect associated with a marginal investor identified as an
individual in the highest personal income tax bracket. Thus one
will expect that the average QVP is not significantly different from
the average tax discrimination factor (TD) identified for such
investor.
Secondly, we can analyze if a clientele effect is observable in the market, as
acknowledged by Miller and Modigliani (1961). If in fact taxes do influence
the way investors value dividends, then one can expect that more heavily
dividend-taxed groups of investors will prefer to form portfolios with lower
dividend yield stocks in comparison with less dividend-taxed investors. This
brings us to our second research hypothesis:
H2:
As the result of a clientele effect, one will expect a positive relation
between QVP and dividend yield, as more heavily dividend-taxed
investors show a preference for lower dividend yield stocks in
contrast with more heavily dividend-taxed shareholders.
A particular feature of the Portuguese tax system in the period of our sample
was the existence of an additional tax benefit for shareholders that acquired
stocks of privatized firms. In those circumstances only a fraction of the
dividend would be considered for tax purposes. That percentage was initially
set at 60% until 1994, but reduced to 50% from 1995 on. Once again, if tax
treatment differences between dividends and capital gains do influence exdividend prices, then this should translate into an overall reduction of the
relative tax burden on dividends, eliminating part of the tax discrimination
factor. The implication is that the relative change in price for privatized firms
will be lower than that observed for all the other listed firms. The related
research hypothesis is as follows:
H3:
Given that dividends of privatized firms are entitled to a tax
benefit that reduces the tax discrimination factor of dividends in
comparison with other listed firms, we should expect that the
average QVP will be significantly higher for privatized firms than
for all other the listed firms.
10
Although fundamentally stable, the Portuguese tax system that existed
between 1993 and 2001, experienced a number of changes in IRC rates, in the
amount of tax credits and in general dividend tax benefits for listed firms. As
an example, taking into consideration the average of the tax discrimination
factor of the individual investor in the highest personal income tax bracket
(Class B.1), the maximum change in relation to the average was 2.9%, while
not exceeding 3% and 0,26% for the companies included in the “Less
Favourable” and “More Favourable” tax regimes, respectively. However, the
year 2002 brought some major changes to the system, with a negative impact
on two classes of investors: individuals and corporations included in the “Less
Favourable” tax regime. This change meant the elimination of dividends tax
credits as dividends began to be fully taxed on 50% of their amount. This
change has as a consequence an increase of more than 10% in TD in
comparison to the average value in 1993-2001. In the case of corporations in
the Less Favourable tax status, the TD increased almost 9% vis-à-vis the
average 1993-2001 value. Thus, given this significant increase in the tax
discrimination factor, one would expect the average QVP in 2002 to be
significantly lower than that observed in the previous period. Our fourth
research hypothesis is therefore as follows:
H4:
In 2002, due to a dividend tax change that caused a general
increase in the tax discrimination factor between dividends and
capital gains, it is expected that the average QVP in 2002 will be
significantly lower than that observed for the 1993-2001 period.
The final and most remarkable research hypothesis in our study provides a
direct test for market efficiency. Assuming that investors in any tax category
will focus their attention in the market between the cum-dividend and exdividend days, we will attempt to analyze if for any of those investor
categories it is possible to obtain abnormal returns after considering all
relevant transaction and tax costs. Testing for this hypothesis is an
interesting issue in the sense that one can understand if, particularly for the
non-marginal investors, the ex-dividend drop in prices enables any
shareholder to achieve abnormal gains from potential tax-induced arbitrage
opportunities after transaction costs (bid-ask spreads) and taxes. Our final
research hypothesis is the following:
H5:
It is expected that, given market efficiency, for any tax category of
investors, it is not possible to achieve abnormal returns in shortterm trades between the cum-dividend and ex-dividend dates.
IV.
METHODOLOGY AND SAMPLE DESCRIPTION
IV.1. Methodology used
Within the framework of Elton and Gruber’s (1970) model, QVP is defined as
the arithmetic mean of all observations, that is,
11
QVP =
1
N
N
 Pc − Pe 

D i
n =1
∑ 
(9)
where
N : Number of observations;
Pc : Closing price at the cum-dividend day;
Pe : Opening (or closing) price at the ex-dividend day;
D : Gross dividend per share.
This statistic could, alternatively, be computed from the following regression:
QVPi = QVP + εi , where E(εi ) = 0 and Var(εi ) = σ 2 .
(10)
However, as referred by several authors like Eades et al (1984), Barclay
(1987) or Bell and Jeckinson (2002), a number of problems can be pointed out
at the regression model in (10) as an instrument for estimating QVP. Firstly,
it is not expected that the variable QVP will follow a normal distribution.
Secondly, the residual term in (10) suffers from heteroscedasticity since QVP
is scaled by the amount of the dividend which will mean that the weight
given to changes in observations where dividends are low will be excessive
(that is, the lower the QVP denominator, i.e., the dividend, the larger the
QVP and, as a consequence, the larger also the weight given to that
observation).
We should recall that, according to equation (4) and assuming the inexistence
of the estimation problems just referred, the ex-dividend return of stock i,
Re,i, will be given by:
(
 P − Pc + D 
 = 1 − QVP
Re,i =  e
Pc
i

) PD 

c
i
+ εi
(11)
if we assume that E(εi ) = 0 and Var(εi ) = σ 2 .
When one estimates equation (9) using ordinary least squares (OLS) the
result, however, will be that the variance of the residuals will be increasing
in the dividend yield. In other words,
P 
QVPi = QVP - εi  c 
 D i
(12)
To deal with the problem of heteroscedasticity, we use a methodology
proposed by Boyd and Jagannathan (1994) and Bell and Jeckinson (2002),
where a reduced weight is given to observations in which the dividend yield is
lower and the ex-dividend change is larger. From (11), we can obtain the
following new equation:
12
 Pc − Pe 
D


 
 P  = α2  P  + µi
c

i
 c i
(13)
The equation above shows the relationship between the ex-dividend price
change scaled by the cum-dividend price and the dividend yield in a way that
overcomes the heteroscedasticity problem. The QVP is now given by the slope
in (13). One should add that some authors like Boyd and Jagannathan (1994)
or Frank and Jagannathan (1998), within a market microstructure
perspective, suggest that the inclusion of an independent term in (13) will
allow testing for the existence of microstructure effects10. The inclusion of an
independent term implies the following new regression to be estimated:
D
 Pc − Pe 
 


 P  = α1 + α2  P  + µi
c
 c i

i
(14)
Finally, both the models in (13) and (14) are estimated according to market
adjusted data. The market adjustment is made by transforming the exdividend price according to the following procedure:
Pe* = Pe − Pc βRem
(15)
where Rem is the return on the Portuguese Stock Exchange Index PSI-20 on
the ex-dividend day. To obtain the β for each stock, the market model is used
with daily observations during the period (-365;-1) relative to the ex-dividend
day. The market model is specified as follows:
Ri,t = λ + βi Rm,t + ωi
(16)
This estimation is based on the event study methodology developed by Brown
and Warner (1985) where, similar to the procedures for computing returns in
Lasfer (1995), daily observations are used. We should note, however, that
some authors suggest that the usage of weekly or monthly data for returns
for periods up to 5 years could ensure more stability to the estimates. In our
case, however, since the PSI-20 Index was created only in 1993, while at the
same time the presence of the most listed firms in Portuguese Stock
Exchange is a relatively recent phenomenon, we chose, so as to ensure a
larger sample, to use an estimation period that corresponded to a full civil
year in relation to the ex-dividend day11.
One final note relates to the variable description. As mentioned earlier, the
variables which are used are essentially the ex-dividend and cum-dividend
prices, as well as the gross amount of the dividends. One might question,
however, which price, opening or closing, ought to be used on the ex-dividend
The expected sign for the independent term is a negative one since those microstructure effects
will exert a negative impact on the size of the ex-dividend price adjustment.
11 This corresponded to a number of observations that varied between a minimum of 209 and a
maximum of 254.
10
13
day in order to estimate QVP, and, within closing prices, if either the directly
observed price or one which is market-adjusted. The existing empirical
studies do not provide us with a consensual approach in this regard. Elton
and Gruber (1970) take into perspective that the usage of closing prices can
bias the results since after a full day of transactions one might expect that at
least part of the observed market price movements are correlated to other
factors than taxes. Other authors suggest the opposite, that is, that the usage
of opening ex-dividend prices is not the most correct procedure since the
initial transaction orders given by investors are likely to be made so as to
cause an impact on prices according to a perfect adjustment, that is, by the
exact amount of the dividend. In this sense, only the closing price will
eliminate such arbitrage effect from the part of investors. A third alternative
would be to adjust prices according to overall market movements. Although
the author’s opinion favours the usage of the non-adjusted opening prices,
given the existing controversy over this issue we chose to estimate QVP
according to all the alternatives, i.e., opening and closing prices, both
adjusted or non-adjusted. The remaining details on the computational
aspects of the procedures used are presented in Section V, along with the
empirical results.
IV.2. Sample description
To build our sample, we initially took all the quoted firms in the Lisbon Stock
Exchange. Then, in order to ensure that the information on all companies in
the sample is completed and sufficiently meaningful (namely for the purpose
of computing betas) we chose to include only those firms that were at some
time constituents of the PSI-20 Index. Between 04/01/1993 (when the Index
was created) and 31/12/2002, we were able to identify 74 firms with this
requirement met. From these initial observations we then chose those
companies that paid ordinary dividends, that is, that distributed profits
declared from 1992 to 200112. We then excluded those observations related to
firms that were not part of the PSI-20 Index on the ex-dividend day. Lastly,
in the final sample only firms with transactions on both the cum-dividend
and ex-dividend days were included.
After these selection procedures, our final sample was composed by 140
observations for 40 firms, gathered between 04/01/1993 and 12/06/2002. If we
withdraw the 2002 observations due to that year’s tax reform, the sample size
is reduced to 128 observations for 35 firms13. The sources of data were
DataStream for information on dividends, relevant dates (for dividend
announcements, ex-dividend, cum-dividend and actual dividend payments),
and Lisbon Stock Exchange’s own database Dathis for cross-checks14. Daily
opening, minimum, maximum, closing, bid and ask prices (for individual
stocks and the PSI-20 Index) were collected from Dathis. Information on
changes in the constituents of the PSI-20 Index was also obtained from
Dathis.
In Portugal, corporations typically do not pay interim dividends and this was the case with the
period in question where only full year dividend payments were identified.
13
This is the subject of our H3 hypothesis.
14 We did not find, however, any data discrepancies between these two databases.
12
14
Table 2
Sample Descriptive Statistics
This table presents sample descriptive statistics (means and standard deviations) for each fiscal year and for
the overall period. N. Obs. is the number of observations identified for each year. N. Firms is the number of
firms in the sample for each year. β is estimated from the market model, computed for each stock considering a
full civil year up to the ex-dividend day (-365;-1). Div is the gross dividend per share, measured in euros (€).
Pcum is the cum-dividend closing price, measured in €. Dy (dividend yield) is the ratio between Div and Pcum,
multiplied by 100 and reported as a percentage. Standard deviations are presented in parentheses.
N. Obs.
N. Firms
β
Div (€)
Pcum (€)
Dy (%)
1993
1994
1995
1996
1997
1998
1999
2000
2001
Total
10
-
0,64
(0,36)
13,57
(6,18)
11
0,97
(0,64)
0,59
(0,36)
16,02
(6,40)
16
0,75
(0,41)
0,54
(0,43)
18,47
(16,09)
16
0,72
(0,43)
0,50
(0,27)
15,16
(13,65)
15
0,84
(0,31)
0,48
(0,22)
19,20
(11,32)
17
0,96
(0,20)
0,58
(0,34)
43,10
(33,47)
17
0,88
(0,23)
0,65
(0,54)
29,37
(31,06)
15
0,66
(0,37)
0,34
(0,27)
14,75
(10,64)
11
0,59
(0,39)
0,26
(0,22)
7,92
(8,17)
128
35
0,80
(0,39)
0,51
(0,37)
20,92
(21,43)
5,04
(2,47)
3,82
(2,69)
3,13
(1,53)
3,74
(1,47)
2,85
(1,30)
1,47
(0,62)
2,32
(1,18)
2,45
(1,28)
3,59
(1,88)
3,01
(1,82)
-
Table 2 shows the main descriptive statistics on the variables used.
Regarding dividends distributed, we can note that the minimum (maximum)
amount paid was 0,03 € (2,247 €), the mean (median) being 0,51 € (0,748 €).
As for the dividend yield (Dy), the mean is 3%, more than three times from
what observed by Borges (2001) in the Portuguese market between 1990 and
1998 (0,9%). Although not directly comparable, the mean dividend yield on
our sample is also higher than that obtained in the US by Grullon and
Michaely (2002), who observed for 1993-2000 a mean of 1,76%, but closer to
the number reported by Daunfeldt (2002) for Swedish firms (2,73%) in the
1988-1995 period or that observed by McDonald (2001) in 1990-1997 for
constituents of the German DAX-30 Index (2,46%).
Table 3
QVP and Ex-Dividend Returns
This table shows statistics (mean and standard deviation) for the ex-dividend fall in stock prices scaled by
gross dividends (QVP) and for the ex-dividend return (Re). Pc and Pe are the cum-dividend and ex-dividend
prices, respectively. Both QVP and Re variables are calculated using opening and closing ex-dividend prices.
Standard deviations are presented in parentheses.
1993
1994
1995
1996
1997
1998
1999
2000
2001
Total
0,638
(0,503)
0,362
(2,082)
0,835
(0,522)
0,274
(0,561)
0,785
(0,248)
0,717
(0,999)
0,482
(0,646)
0,621
(2,731)
0,526
(1,202)
0,729
(0,562)
0,628
(0,562)
0,667
(1,242)
0,742
(1,153)
0,655
(2,485)
0,334
(0,953)
1,614
(1,567)
0,593
(0,843)
0,606
(1,936)
1,070
(0,912)
0,460
(3,514)
0,944
(1,957)
0,729
(1,567)
0,952
(1,131)
0,895
(2,322)
( ) used for computing QVP = (Pc − Pe ) D
Opening price P
e
1,081
(1,098)
0,695
(0,795)
1,312
(1,574)
0,728
(0,340)
1,035
(1,055)
0,884
(0,341)
( ) used for computing QVP = (Pc − Pe ) D
Closing price P
e
0,737
(0,785)
0,498
(0,317)
( ) used for computing Re = 100 × (Pe − Pc + D ) Pc
Opening price P
e
-0,019
(4,190)
0,677
(1,391)
-0,332
(4,973)
1,033
(1,470)
0,278
(2,224)
0,454
(1,374)
( ) used for computing Re = 100 × (Pe − Pc + D ) Pc
Closing price P
e
0,883
(2,033)
1,944
(1,266)
15
In Table 3 the QVP and the ex-dividend returns are presented, according to
both the opening and closing ex-dividend prices. Regarding QVP, computed
using the opening prices, we observe a sample mean of 0,717, with a standard
deviation greater than the mean (0,999). The standard deviation is even
higher when we observe the QVP computed using the closing ex-dividend
prices. But it is still in the individual investors category (B.1 class), which we
identified a priori as the marginal class, that the observed QVP is closer to
the theoretical TD.
V.
EMPIRICAL RESULTS
The estimation of the ratio between the ex-dividend price change and the
gross dividend (QVP) is the starting point for us to test H1, that is, the
hypothesis that price formation at the ex-dividend date is a function of the
tax status of the marginal investor, which we have tentatively identified as
individuals in the B.1 class. Table 4 shows the first regression results for this
hypothesis using ordinary least squares (OLS) estimation procedures15.
Table 4
QVP Estimates
This table shows the QVP (ratio between the ex-dividend price change and gross dividend) estimation for 19932001, according to the specifications presented in (13) and (14). Standard deviations are presented in
parentheses.
N. Obs.
α1
α2
White test
(p-value)
( ) used to compute (Pc − Pe )
Opening prices P
e
α2 = 1
(p-value)
R
2
Pc
Regression 1
α1 = 0
128

0,8435*
(0,0491)
0,1021
0,0014

Regression 2
α1 ≠ 0
128
-0,0051
(0,0033)
0,9675*
(0,0949)
0,2075
0,7318
0,4522
0,9274
0,0000

0,9126
0,0540
0,2793
( ) used to compute (Pc − Pe )
Closing prices P
e
Regression 3
α1 = 0
128

Regression 4
α1 ≠ 0
128
-0,0024
(0,0040)
* Significant
0,7245*
(0,0577)
0,7840*
(0,1122)
Pc
at the 1% level.
The estimated QVP is quite close to the mean tax discrimination factors (TD)
computed in the same period for the B.1 (TD = 0,8297) and C (TD = 0,8697)
investor classes, particularly when the opening ex-dividend prices are used.
In all regressions we find not only that the estimated QVP is statistically
We ran four different regressions, using alternatively not only opening or closing ex-dividend
prices to compute the dependent variable, but also with or without the inclusion of a constant
term (to analyze our market microstructure hypothesis).
15
16
significant but also that the hypothesis that the QVP is equal to one can be
rejected, a necessary (but not sufficient) condition to document the existence
of the tax effect. The results from regressions 2 and 4 show that, although the
constant term bears a negative sign (which would be in agreement with a
market microstructure argument), it is not statistically significant. We can
thus conclude that any existing particularities of the Portuguese market will
be of residual importance16. This result is consistent with similar findings by
Bell and Jeckinson (2002), but in contradiction with the evidence reported by
Boyd and Jagannathan (1994), Koski (1996) and Frank and Jagannathan
(1998).
As referred in the last Section, the model we used for estimation purposes
was subject to a transformation so as to minimize heteroscedasticity
problems with the residuals. The White test we computed rejects in fact the
hypothesis that the estimates are influenced by this potential problem.
In our attempt to identify the marginal investor, we recall that in our own
point of view it is the B.1 class the most likely one that determines the exdividend price formation, which means that the estimated QVP is not
significantly different from the theoretical tax discrimination factor TD
identified for this investor category. The results presented in Table 5, show
that, when using closing prices for estimation purposes, one cannot identify
any of the investor classes as the marginal one. When we repeat, however,
such test using opening prices we find not only that for the B.1 and C classes
one cannot reject the null hypothesis, but also that the significance levels
suggest that the B.1 class is the one whose TD is the closest in statistical
terms to the estimated QVP. We chose not to test the coefficients in
regressions 2 and 4 given that the independent term is statistically
insignificant in both regressions.
Table 5
Marginal Investor Identification
This table shows the results of a Wald test for the α̂2 coefficient in regressions 1 to 4 in Table 4. For each
regression the null hypothesis is the equality between the QVP (ratio between the ex-dividend price change
and the gross dividend) for each of the dividend tax discrimination factors TD found for each investor category
as reported in Table 3. The numbers shown in this table are the p-values for this test.
H 0 = TDi
(Class B.1)
(Class B.2)
(Class C)
(Class D)
αˆ 2 = 0,8276
αˆ 2 = 0,9196
αˆ 2 = 0,8697
αˆ 2 = 0,98466
0,0041
Regression 1
0,7460
0,0982
0,5938
Regression 2




Regression 3
0,0007
0,0735
0,0118
0,0000
Regression 4




One should add, in this regard, that until 1996, the Lisbon Stock Exchange rulings implied
that the ex-dividend day corresponded to the exact dividend payment day. More concretely, the
dividend liquidation system before 1996 meant that for a period of four trading days prior to the
dividend payment the stock was suspended from trading [the so-called “technical interruption”
mentioned in article number 447, paragraph 1 c), of the Regulamento do Código dos Mercados e
Valores Mobiliários, the Portuguese Stock Exchange regulation code]. We empirically examined
this feature of the Portuguese Stock Exchange by comparing QVP estimates for the period before
and after 1997. No statistically significant differences were found, however, thus supporting the
conclusion that our results do not seem to be biased by such institutional particularity.
16
17
In contrast with Borges (2001), but in line with findings by Elton and Gruber
(1970), Barclay (1987), Shaw (1991), Lasfer (1995) and Elton et al (2003), we
find evidence consistent with the presence of a tax effect in the formation of
ex-dividend prices. This conclusion reinforces the results of a recent study by
Lasfer and Zenonos (2003) that shows very similar findings for the period
1988-2002 in a European tax context17. The results we find for the
Portuguese market in the 1993-2001 period strongly suggest that the tax
discrimination factor between dividends and capital gains does influence the
way investors value cash payouts, particularly when our analysis is made
using opening ex-dividend prices (instead of closing prices).
We also repeated the estimation for testing the tax hypothesis using
transformed ex-dividend prices as an alternative procedure. According to the
specifications presented in Section IV, when adjusting the ex-dividend
returns according to the market model in (15), or, as suggested by Booth and
Johnston (1984) or Lasfer and Zenonos (2003), assuming β=1, we found
essentially the same results. In other words, the evidence was still
significantly in accordance with the tax hypothesis and inconsistent with a
market microstructure perspective. We chose to present only the non-marketadjusted results not only because no differences were found using other
procedures but also because of likely redundancy as our sample includes the
constituents firms in the PSI-20 index, which is the market index used in the
market model. Finally, we made an additional estimation by splitting our
sample according to different years. Such split created relatively small subsamples (with a number of observations from 10 to 17), which implied a loss
in the reliability of the estimations and an increased difficulty in identifying
the marginal investor with sufficient statistical significance.
V.1. Clientele effects
We should recall that the clientele effect first stated by Miller and Modigliani
(1961) suggests that stocks with high (low) dividend yields will be held by
investors in low (high) tax brackets. When applying such concept to Elton and
Gruber’s (1970) approach, the possibility of a positive relation between QVP
and dividend yield emerges. In order to test for this hypothesis, the initial
sample was split into quintiles18 in the dividend yield variable. As can be
seen in Table 6, the first quintile depicts a mean dividend yield of 0,01, while
for the last quintile, which shows stocks with higher yields, the corresponding
value is 0,06. The results on the QVP estimation were obtained according to
the specification in (13), and using opening ex-dividend prices19. More
precisely, the adopted specification was:
Lasfer and Zenonos (2003) study the behaviour of stock prices around the ex-dividend date for
four European countries (Italy, France, Germany and the United Kingdom), with similar tax
systems as the one found in Portugal. For further details see Lasfer and Zenonos (2003), pp. 3738.
18 The sample was also split into quartiles and deciles but the results which were obtained were
not very different from the ones presented here.
19 This estimation procedure was also repeated using ex-dividend closing prices but the results
were less clear.
17
18
 Pc − Pe 
D


 
 P  = α jQ  P  + µi , where j = 1,2,...,5 .
c

i
 c i
(17)
With the exception of the first quintile, the results obtained are much in line
with what was expected: the existence of a positive relation between the
estimated QVP and dividend yield. We can interpret such relationship as
consistent with the hypothesis that higher dividend yield stocks are typically
held by investors in lower tax brackets. The estimates are all statistically
significant at a minimum level of 5%. All regressions were tested for
heteroscedasticity but no evidence was found to reject the hypothesis that the
residuals were homoscedastic.
Table 6
Clientele Effects
This table presents the estimation results for QVP (ratio between ex-dividend price change and gross dividend)
by quintile, according to DY, the dividend yield (ratio between dividend and cum-dividend price). In all of the
regressions opening ex-dividend prices are used. N.Obs. is the number of observations. Standard deviations are
presented in parentheses.
Quintile
*
**
N. Obs.
DY
1
26
0,011
2
26
0,018
3
25
0,027
4
26
0,037
5
25
0,058
α1Q
α 2Q
α 3Q
α 4Q
α 5Q
0,8675**
(0,3215)
0,6837**
(0,2046)
0,7620*
(0,1626)
0,7933*
(0,0726)
0,8912*
(0,0793)
Significant at the 1% level.
Significant at the 5% level.
To check the robustness of these results a number of additional statistical
tests were performed (Table 7). The first one tested the equality between the
quintile coefficients with the purpose of verifying if such estimates are
independent. The statistical evidence cannot reject in any of the five tests the
null hypothesis: the QVP estimate obtained on the i-th quintile is equal to
that which was estimated for the previous (i-1)th quintile. The second test
analyses if the estimated QVP for a particular quintile is higher than that
estimated for the previous quintile. Along the same line as before, we cannot
reject any of the hypotheses that α kQ ≤ α jQ , where j = 1,2...,4 and k = j − 1.
Following Elton and Gruber (1970), we also estimated Spearman’s Rank
Correlation, from which a weak positive correlation between the variables
was confirmed (0,4). Although the estimates initially presented in this
Section were consistent with the presence of a clientele effect, the tests we
performed subsequently led us to conclude in favour of the presence of weak
evidence only on this effect.
One may conclude that the clientele effect remains a highly controversial
issue, as many empirical studies, even though generally agreeing with the
idea that taxes play an important role in influencing ex-dividend pricing, are,
19
however, not able to find a significant positive relation between QVP and
dividend yield.
Table 7
Statistical Tests for Clientele Effects
Test for the null hypothesis of equality between coefficients for quintiles
α 1Q = α 2Q
p-value
0,5676
α 2Q = α 3Q
α3Q = α 4Q
α 4Q = α 5Q
0,7019
0,8474
0,1775
One-Tail Test
t. obs.
Critical t
(1%)
(5%)
(10%)
α 2Q ≤ α 1Q
α 3Q ≤ α 2Q
α 4Q ≤ α 3Q
α 5Q ≤ α 4Q
-0,8983
0,4816
0,4311
1,2346
2,485
1,708
1,316
2,492
1,711
1,318
2,485
1,708
1,316
2,492
1,711
1,318
For instance, Booth and Johnston (1984) and Menyah (1993) do not find
empirical evidence supporting such an effect. In the Portuguese market,
Borges (2001) also fails to find evidence in favour of the existence of a
clientele effect, but, in contrast with our results, documents a negative
relationship between dividend yield and QVP.
V.2. The preferential tax treatment of privatized firms
The changes introduced in the Portuguese tax system in the late nineties,
besides including a number of measures to reduce dividend double taxation,
also created special tax allowances for a number of particular situations. One
of theses was aimed for investors who bought shares (from the Portuguese
Government) of quoted firms under a privatization programme. A tax benefit
that was maintained throughout all the period in the sample was a dividend
tax allowance for the already mentioned shares. Such benefit materialized in
the form of an application of a coefficient smaller than one to dividends
received so as to determine the taxable amount of the dividend. This
allowance assumed a greater importance for those investors in high tax
brackets. Table 8 shows the result for the QVP estimates and for the
differences between those estimates according to a sample split in two, that
is, according to privatized and non-privatized firms. The results were built
following the same methodology described in (13) and (14), but with the
addition of the dummy variable (Priv) that takes the value of 1 in the
presence of privatized firms or 0 in the opposite case (Npriv). The general
specification is then:
 Pc − Pe

 P
c


D
 = α1NPriv + α1Priv Priv + α2NPriv 

P
i
 c
where i = 1,2,...,128 .
20

D
 + α2Priv Priv

P
i
 c

 + µi

i
(18)
Regarding the estimates found for QVP (all of which are statistically
significant) we can observe that for regressions 1 and 3 the estimated QVP
for privatized firms is smaller than the corresponding estimate for the
remaining sample firms. This result is inconsistent with our hypothesis since
one would expect exactly the opposite to occur given that the tax benefit in
question should reduce the dividend tax discrimination factor, thus
increasing the QVP. For regressions 2 and 4, where an independent term is
included, the estimated QVP is in line with our expectation. However, for all
four regressions the differences between QVPs are never statistically
significant.
Table 8
Privatized versus Non-Privatized Firms
This table shows the estimates for the QVP in the sample period, computed using non-adjusted data. The
results presented for the independent term in regressions 2 and 4 use the specification given in Equation (14)
for the sub-sample of non-privatized firms (NPriv). The estimates are obtained using Equations (13) and (14)
for sub-samples of non-privatized (NPriv) and privatized firms (Priv), respectively. Diff. is the difference
between the two coefficients, given by the estimated α2Priv in model (18). N.Obs. is the number of observations.
Pc and Pe are the cum-dividend and ex-dividend prices, respectively. Standard deviations are shown in
parentheses.
N.Obs.
NPriv / Priv
Opening prices
α1
α 2NPriv
α2Priv
(Pe ) used to compute (Pc − Pe )
Diff.
R2
Pc
Regression 1
α1 = 0
103/25

0,8641*
(0,0561)
0,7027*
(0,0904)
-0,1614
(0,1421)

Regression 2
α1 ≠ 0
103/25
-0,0036
(0,0036)
0,9482*
(0,0979)
1,2660*
(0,2471)
0,3178
(0,4050)
0,4642
( ) used to compute (Pc − Pe )
Closing prices P
e
Regression 3
α1 = 0
103/25

0,7379*
(0,0670)
Regression 4
α1 ≠ 0
103/25
-0,0015
(0,0042)
0,7737*
(0,1166)
* Statistically
Pc
0,6279*
(0,0097)
-0,1100
(0,1675)

0,9696*
(0,2886)
0,1959
(0,4825)
0,2857
significant at the 1% level.
While the considerable disproportion between the two sub-samples suggests a
degree of caution in interpreting the results, our findings are consistent with
the idea that the marginal investor does not correctly value the tax benefit
offered to dividends paid by privatized firms, or alternatively, that such
benefit is not relevant for the dominant investor. This can question the
results obtained earlier regarding the identification of the marginal investor.
These results however ensure us that the inclusion of the 25 observations
related to the privatized firms in the main sample do not change its
homogeneity, therefore confirming the robustness of our earlier conclusions.
V.3. The 2002 Tax Change
In 2002 the Portuguese tax system experienced some relevant changes,
essentially an increase in the tax discrimination factor of dividends versus
capital gains for investors in classes B and C. The increase in the relative tax
21
burden on dividends led to an unfavourable change in the TD factor of 9.4%
and 8% in 1993-2001, for those two investor categories, respectively20. Thus,
one would expect a negative change for the QVP in 2002 in comparison to the
QVP for the remaining sample period. To analyze this hypothesis, we use the
original specification with the addition of a dummy variable (Pos02) taking
the value of 1 for year 2002 observations or 0 for all others (Pre02 refers to
observations in the 1993-2001 period). The transformed model is as follows:
 Pc − Pe

 P
c


D
D
 = α1Pre02 + α1Pos02 Pos02 + α2Pre02   + α2Pos02 Pos02   + µi

P 
P 
i
 c i
 c i
(19)
where i = 1,2,...,140 .
From the results reported in Table 9, we can observe that the difference in
the estimated QVP for the two periods has the expected sign only when
opening prices are used. However, for all the four regressions the computed
differences are never statistically significant at conventional levels. We can
interpret these results in two ways. On one hand, we may question the profile
of the marginal investor that was identified in earlier sections. If, however,
we assume that it is the investor from Class D or E – for whom the 2002 tax
change did not have any impact21 - that is the marginal investor, then the
robustness of earlier results will be strengthened. On the other hand, the tax
change introduced in 2002 may not have been sufficiently meaningful to
imply a relevant change in the way marginal investors evaluate dividends. In
this regard, in a number of empirical studies [Michaely (1991), Lasfer (1995),
Bell and Jeckinson (2002 and Elton et al (2003)] that analyzed the impact of
tax changes in ex-dividend pricing, the change in TD is always greater than
15%22, almost the double of what happened in the Portuguese 2002 tax
change.
One should also mention that our results may be affected not only by the
limited size of our sample, but also by the imbalance between the number of
observations in each sub-sample, a limitation that is absent from earlier
studies, where each sub-sample is similarly sized23.
For a better evaluation of this tax change, one should mention that between 1993 and 2001 the
largest change in TD, the tax discrimination factor, was 6.5% for the B and C classes, being the
average change in the period less than 1%. In cumulative and absolute terms for the same
period, the change in TD was 17,3% and 16,9% for the B and C classes, respectively.
21 For the D Class the change in TD was positive (1,8%), while in Class E the tax change did not
affect the existing discrimination factor.
22 Michaely (1991) investigated the reaction of investors to the elimination of the tax
discrimination factor on dividends (Tax Reform Act 1986) in the US market, a change that
implied a positive variation on TD of about 19%. Lasfer (1995) studied a tax change in the
United Kingdom (1988 Income and Corporation Taxes Act) that also implied the elimination of
the tax discrimination factor between dividends and capital gains causing a positive change in
TD of around 22%. Bell and Jeckinson (2002) analyzed changes in pension fund taxing (Finance
Act 1997) and documented a fall in TD of 25%. Elton et al (2003) looked at different periods with
different tax regimes including a negative change in TD of about 15% between the 1988-1992
and 1993-1996 periods in the US.
23
Except in Lasfer (1995), where there is a one-to-three imbalance between the two sub-samples.
20
22
Table 9
The Impact of 2002 Tax Changes
The table below presents the estimates for QVP (the ratio between the ex-dividend price change and gross
dividend) for the sample period computed using non-adjusted data. The results shown for the independent
term in regressions 2 and 4 are given by equation (14) estimated for the 1993-2001 period. Pre02 is a dummy
variable taking the value of one for 2002 observations. Pre02 refers to 1993-2001 observations. The estimates
are obtained using the specifications given in (13) and (14) for 1993-2001 and 2002 respectively. Diff. is the
difference between the two coefficients, given by the estimated α Pos02 in model (19). N.Obs. is the number of
2
observations. Standard deviations are presented in parentheses.
N. Obs. Pre02
/ Pos02
α1
α 2Pre02
α 2Pos02
( ) used to compute (Pc − Pe )
Opening prices P
e
Regression 1
α1 = 0
128/12

Regression 2
α1 ≠ 0
128/12
-0,0054
(0,0033)
Diff.
R2
Pc
0,8417*
(0,0492)
0,6339*
(0,1105)
-0,1478
(0,1804)

0,9735*
(0,0949)
1,1349*
(0,0077)
0,1615
(0,4361)
0,4673
( ) used to compute (Pc − Pe )
Closing prices P
e
Pc
Regression 3
α1 = 0
128/12

0,7226*
(0,0577)
0,7841*
(0,0050)
0,0615
(0,2090)

Regression 4
α1 ≠ 0
128/12
-0,0028
(0,0040)
0,7900*
(0,1124)
0,7945*
(0,1288)
0,0045
(0,5117)
0,2904
* Statistically
significant at the 1% level.
Borges (2001) also looked at changes in the Portuguese tax system, choosing
to test the stability of the model considering three different periods (1990,
1991 a 1993 e 1994 a 1999). Borges (2001) observed, in contrast to our
findings, a significant change in the estimated QVP for each different
period24.
V.4. Tax-induced arbitrage opportunities in the Portuguese market
Up until now our findings show that a tax effect is present in the formation of
ex-dividend prices. That hypothesis was tested by looking at the behaviour of
QVP, the ratio between the ex-dividend price reduction and the gross amount
of the dividend. This methodology has been used in earlier studies by Elton
and Gruber (1970), Bell and Jeckinson (2002), and Elton et al (2003), among
others. The study of the presence of such tax effects can alternatively be
made by observing the abnormal gross returns assuming that the existence of
a tax discrimination factor on dividends will imply a positive abnormal
return.
24
We should mention that although Borges (2001) concludes there was a structural change in the
model, only in his last period, in fact, is there an estimated coefficient which is not significantly
different from the minimum theoretical value. Borges (2001) offers two justifications for his
result: on one hand, it may be the outcome of other potential explanatory variables that can
affect prices such as transaction costs; another possibility is that existing arbitrage forces are not
sufficiently strong to eliminate all market anomalies. We can add, when comparing the two
studies, not only that these employ different methodologies but also that our paper tests the
impact of tax changes from the perspective of the dominant investor and not in the broader way
considered by Borges (2001).
23
Bearing this possibility in mind, and in order to test for the existence of taxinduced arbitrage opportunities in the Portuguese market, we adopted a
more intricate methodology by including in our calculations and return
analyses the differential tax costs according to the different investors’ tax
categories and other transaction costs faced by investors trading in secondary
markets. Therefore, instead of the usual procedure that looks at abnormal
gross returns, we use the methodology of looking at abnormal net returns
after tax and transactions costs for each investor tax status. Our purpose is
to test whether for any kind of investor it is possible to earn net abnormal
returns from short term trades around ex-dividend days aimed at exploring
potential tax-induced arbitrage opportunities. This attempt to analyze in
greater depth the knowledge on the efficiency of the Portuguese market
required a number of additional assumptions: first, we assumed that all
investors can trade only between the cum-dividend and the ex-dividend
dates: this means that all investors will presumably decide, after analyzing
their QVP expectation and comparing this with their TD factor, whether to
buy a stock cum-dividend and sell it ex-dividend or, instead, sell it short cumdividend and buy it ex-dividend25; second, we assumed the inexistence, or
irrelevance, of direct transaction costs (such as brokerage fees); finally, we
introduced transaction risk costs in the form of bid-ask spreads in both the
cum-dividend and ex-dividend days26. To compute the abnormal returns by
investor category, we follow the event-study methodology27, developed by
Brown and Warner (1985). To calculate and analyze the abnormal returns
after taxes and bid-ask spread costs we take four steps, as follows:
1. Calculation, for each observation and for each year, of the after-tax
*
:
ex-dividend day return Rex
( )
*
Rex
=
(Pe − Pc )(1 − tgc )
Pc
+
D(1 − tm )
Pc
(20)
One must note that the after-tax ex-dividend day return has two
components: the return generated by the price change28 and the
One should note that such strategy will have as a consequence other costs than mere
transaction fees and tax costs.
26 Although in this methodology the bid-ask spread is understood as reflecting the risk that an
investor faces when trading in the market, some studies consider that this variable is instead a
proxy for transaction costs [Karpoff and Walking (1988), Koski (1996) and Lasfer and Zenonos
(2003)]. Alternatively, Amihud and Mendelson (1986) share the view that the ask quote includes
a premium for immediate buy just as the bid quote incorporates a discount for those who wish to
sell immediately. Thus, they observe that the bid-ask price can be seen as a measure for the
liquidity of a stock, where a higher liquidity will translate into a lower bid-ask spread.
27 In the current test, the event being investigated is the ex-dividend day.
28 One would expect such return to be negative thus ensuring that the ex-dividend price is lower
than the cum-dividend price. Note, however, that such negative capital gain can be used as a tax
shield by all investors except individuals. For these, the tax system allowed to use an eventual
negative capital gains balance of a particular year as a tax shield for the following two years only
if the investor made the option to be taxed globally, that is, with the addition of the capital gains
income to its overall income for the purpose of taxation. Such rule implied that, from the
perspective of an individual investor, if the ex-dividend return is positive the tax rate of 10%
25
24
dividend return, each of these being adjusted according to the tax
regime applicable to each specific investor.
2. Estimation of the abnormal net returns according to two different
methodologies developed by Brown and Warner (1985):
(
*
*
AbRex
= Rex
− E (Rex ) 1 − t gc
)
(21)
This is the so-called market-adjusted return, which is calculated as
the difference between the net return obtained in the first step and
the expected ex-dividend day return E(Rex), estimated according to
(16).
(
**
*
AbRex
= Rex
− Rm,ex 1 − t gc
)
(22)
This is the stock return adjusted by the market return, that is, the
difference between the net return from (20) and the ex-dividend day
market return Rm,ex .
3. Once the abnormal after tax returns are obtained, these are reduced
by the amount of the bid-ask spread both the one observed cumdividend (BAScum ) and ex-dividend (BASex ) , defined as follows:
BASi =
Pask ,i − Pbid ,i
Pbid ,i
, where i = cum-dividend, ex-dividend.
(23)
4. Observation of the significance of the abnormal returns after taxes
and bid-ask spread costs for each investor category.
Table 10 shows the results obtained according to the methodology just
described. The first relevant observation is the existence of positive abnormal
returns after taxes but before bid-ask spread costs, regardless of the type of
investor in question or the particular form used for the estimation of
abnormal returns. If statistically significant, such result would be consistent
with market inefficiency where an investor could buy stocks cum-dividend,
sell them ex-dividend and reap abnormal profits. However, when looking at
the statistical significance of the abnormal returns after taxes and
transaction costs, using the standard t test, such returns are always
statistically insignificant, even when a level of significance of 10% is
considered. Thus, we cannot reject H5, the null hypothesis of no abnormal
returns from short-term trading strategies around the ex-dividend date, for
any investor tax category. A relevant result from our test is the size of the
bid-ask spreads, which at the ex-dividend date are almost the double of what
would be used given the short-term nature of the transaction. When a negative return was
observed, however, the negative capital gains did not generate in our analysis any tax
deductibility.
25
is found for the cum-dividend date, which seems to limit considerably the
opportunity for short-term trading gains.
Table 10
Abnormal After-Tax Returns from Short-Term Trading
Strategies for Different Investor Tax Categories
This table depicts the results from the estimation of abnormal after-tax returns in the period 1994-2001
according to two different estimation procedures described in (21) and (22). Numbers presented as percentages.
N. Obs. is the number of observations. R*ex is the non-adjusted return at the ex-dividend date. Rm,ex is the PSI20 Index market return at the ex-dividend date. E(Rex) is the expected stock returns at the ex-dividend date
computed according to a market model. BAScum and BASex are the difference between bid and ask prices scaled
*
by the bid price at the cum-dividend and ex-dividend dates, respectively. AbRex
and AbR*ex* are, respectively, the
estimated ex-dividend abnormal returns according to a market model or by simply subtracting the ex-dividend
market return. Standard deviations are presented in parentheses.
Investor Class
Class B.2
Class C
Class D
Class E
N. Obs.
118
118
118
118
*
R ex
0,564
(1,920)
-0,193
(1,125)
-0,314
(1,275)
0,757
(1,795)
0,877
(1,860)
0,594
(1,937)
1,051
(1,397)
-0,888
(3,186)
0,450
(1,937)
-0,164
(1,168)
-0,280
(1,330)
0,614
(1,805)
0,730
(1,879)
0,594
(1,937)
1,051
(1,397)
-1,031
(3,192)
0,741
(1,940)
-0,164
(1,168)
-0,280
(1,330)
0,905
(1,826)
1,022
(1,906)
0,594
(1,937)
1,051
(1,397)
-0,740
(3,211)
0,782
(1,945)
-0,164
(1,168)
-0,280
(1,330)
0,946
(1,833)
1,063
(1,912)
0,594
(1,937)
1,051
(1,397)
-0,700
(3,220)
E (Rex ) 1 − tgc
(
)
Rm,ex 1 − t gc
(
)
*
AbRex
AbR *ex*
BAS cum
BASex
*
AbRex
− BAS i
tobs
AbR *ex*
− BAS i
tobs
0,279
0,323
0,230
0,217
-0,768
(3,257)
-0,915
(3,271)
-0,623
(3,294)
-0,582
(3,298)
0,236
0,278
0,189
0,177
Although not shown here, we repeated the tests in Table 10 for each of two
separate periods, according to the different transactions settling procedures
adopted by the Portuguese Stock Exchange. The results show that in the
1994-1996 period the returns are lower than those observed after 1997 (with
also a reduction in the mean bid-ask spreads, both cum and ex-dividend), but
the abnormal returns still remain statistically insignificant at conventional
levels for any of such sub-periods.
We can thus conclude that for most of the nineties, it was not possible for any
investor to obtain abnormal returns from short-term attempting to profit
from potential tax-induced arbitrage opportunities around the ex-dividend
date, after taxes and bid-ask spread costs. One must also note that such
conclusion would be reinforced with the inclusion of other transaction costs
26
such as brokerage and Stock Exchange fees or short-selling costs, all of which
were not considered here.
An assumption made in Table 10 was that all investors when buying (or
selling) shares on the cum-dividend day and closing their positions at exdividend day would bear the full burden of the bid-ask spread cost in each of
those dates. So as to measure the sensitivity of the results to the size of the
bid-ask spreads, we re-estimated the models considering as an alternative,
either half of the bid-ask spreads or the proxy variable suggested by Karpoff
and Walking (1988)29, for the two transaction days. Although not reported
here, the results, in all the relevant aspects, remained unchallenged, thus
adding robustness to the conclusion that there are no short-term arbitrage
opportunities for investors in each tax category.
Table 11
Abnormal Returns for Tax-Exempt Investors According to
Dividend Yield Quintiles
The table below shows the results from the estimation of abnormal after-tax returns by dividend yield quintiles
in the 1994-2001 period for tax-exempt investors and according to the different estimation models described in
(21) and (22). N. Obs. is the number of observations. DY is the dividend yield (dividend divided by the cumdividend price). R*ex is the non-adjusted return at the ex-dividend date. Rm,ex is the PSI-20 Index market return
at the ex-dividend date. E(Rex) is the expected stock returns at the ex-dividend date computed according to a
market model. BAScum and BASex are the difference between bid and ask prices scaled by the bid price at the
*
cum-dividend and ex-dividend dates, respectively. AbRex
and AbR*ex* are, respectively, the estimated ex-dividend
abnormal returns according to a market model or by simply subtracting the ex-dividend market return.
Standard deviations are in parentheses. Numbers are presented in percentage terms.
1st
Quintile
2nd
Quintile
3rd
Quintile
4th
Quintile
5th
Quintile
N. Obs.
24
24
23
24
23
DY
1,057
1,712
2,620
3,558
5,364
*
R ex
*
AbR ex
− BAS i
0,046
(2,720)
-0,212
(1,868)
-0,132
(1,976)
0,258
(2,539)
0,178
(2,579)
0,786
(0,736)
1,008
(0,857)
-1,535
(2,369)
0,873
(1,731)
0,220
(1,137)
0,157
(1,154)
0,653
(1,398)
0,716
(1,421)
0,926
(0,877)
1,231
(2,060)
-1,504
(2,801)
1,254
(1,534)
-0,322
(1,090)
-0,604
(1,512)
1,576
1,257)
1,858
(1,417)
0,117
(3,831)
1,163
(1,594)
0,296
(5,007)
1,382
(1,623)
-0,070
(0,611)
-0,329
(0,993)
1,452
(1,667)
1,711
(1,803)
0,493
(1,770)
1,024
(1,394)
-0,065
(2,520)
1,472
(1,683)
-0,455
(0,620)
-0,517
(0,452)
1,927
(1,732)
1,989
(1,699)
0,628
(0,480)
0,827
(0,709)
0,472
(2,413)
tobs
0,648
0,537
0,059
0,026
0,196
AbR *ex* − BAS i
-1,615
(2,561)
-1,441
(2,909)
0,578
(5,042)
0,194
(2,588)
0,534
(2,365)
tobs
0,631
0,495
0,115
0,075
0,226
E (Rex ) 1 − tgc
(
)
Rm,ex 1 − t gc
(
)
*
AbRex
AbR *ex*
BAS cum
BAS ex
29
BAS =
Ask − Bid
(Ask + Bid ) 2
27
For further checking of the robustness of our results, we re-estimated in
Table 11 the empirical models for the particular case of tax-exempt investors,
looking at the same time at different dividend yield quintiles.
The results from the table above allow us to analyze if, in the extreme
situation where a potential arbitrageur is exempt from both dividends and
capital gains taxation, it is possible to earn abnormal returns from a shortterm trading strategy around the ex-dividend day. We also test if such
possibility varies for corporations offering substantially different dividend
yields. The findings reported in Table 11 are, however, in accordance with the
inexistence of profitable arbitrage opportunities after spread costs are taken
into consideration. In fact, even at the less demanding significance level of
10% there are no statistically meaningful abnormal returns for such
investors in any dividend yield quintile.
VI.
SUMMARY AND CONCLUSIONS
The special characteristics of the Portuguese tax system and the changes it
experienced between 1993 and 2002 allows an unique opportunity to examine
the relation between ex-dividend pricing, investors’ tax status and market
efficiency. For this purpose we first identified different investor categories
according to their particular tax profile regarding differential dividend and
capital gains taxation. Our initial results show that the changes in prices at
the ex-dividend day are consistent with the argument that it is indeed the tax
effect the dominant force behind ex-dividend pricing in the Portuguese
market, in accordance to Elton and Gruber (1970). Our findings also strongly
suggest that a particular investor category (class B.1.) is the most likely
investor determining prices at the margin in this market. The profile for this
investor is that of a typical long-term shareholder in the highest tax bracket.
Our methodology and results also allowed us to conclude that the behaviour
of ex-dividend pricing in the Portuguese market is not consistent with market
microstructure arguments such as that of Bali and Hite (1998). Regarding
the clientele hypothesis, although some positive correlation between dividend
yield and the ratio between price changes and gross dividend (QVP) was
found as expected, the overall evidence was moderately consistent only with
the presence of such effects.
Given the existence of different tax statuses and corresponding investor
categories, we also analysed the possibility that some of those investors were
able to earn abnormal returns using short-term trading strategies around the
ex-dividend date. This potential opportunity is particularly interesting given
not only the large differences between the dividend tax discrimination factors
between investors but also the small size and low liquidity of the Portuguese
Stock Exchange which could potentially lead to magnified arbitrage
opportunities. To test such possibility, we estimated abnormal returns on the
ex-dividend day according to several different methodologies taking into
account not just tax effects but also bid-ask spread costs. Our results are
consistent with market efficiency as we find that not a single investor
category is able to earn abnormal returns when all the relevant costs are
28
considered. The robustness of this finding is strengthened when we also
observe that even those investors which are tax-exempt would not have been
able to reap abnormal profits when undertaking a short-term trading
strategy even in the highest yield stocks.
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31
APPENDIX
The Evolution of the Portuguese Tax System: Dividends versus Capital Gains (Individuals)
1989 – 2000
Dividends
Dividends are taxed according to a withholding
tax (taxa liberatória) that liberates investors
from further tax responsibilities (given the tax
allowance attributed to listed firms, the
withholding tax was 25% in 1991, 15% from
1992 to 1994, 12,5% from 1995 to 1999 and
15% in 2000).
2001
2002
Dividends are taxed in definite terms according to a withholding tax
of 20%.
Dividends are added to other sources of income for
taxing purposes.
Possibility of adding dividend income to the investor’s overall income
for taxing purposes. However, for the sake of determining the
marginal tax rate applicable to all other sources of income dividends
are always taken into account.
Substitution of the former tax credit system by the
consideration of 50% only of the dividend for taxing
purposes.
The 10% withholding tax is eliminated.
Regime switches back to existing one before the
2001, and for all stocks bough before 31/12/2002,
that is:
Withholding tax reduced to 15%.
Possibility of adding for taxing purposes
dividend income to the investor’s overall
income with the benefit of a tax credit (such tax
credit changed as follows: 20% of dividends
in1989, 35% in 1991, 50% in 1993 and 60% em
1995).
Capital gains are taxed according to a 10%
withholding tax that liberates investors from
further tax responsibilities (taxa liberatória);
Capital gains are compulsively added to all other sources of income
according to the following percentages:
Possibility of adding for taxing purposes capital
gains income to the investor’s overall income;
Capital Gains
Full tax-exemption if the holding period
exceeds 12 months.
Holding period
% of capital gains
income added to
other sources of
income for taxing
purposes
≤ 12 months
75%
12 months < period ≤ 24 months
60%
24 months < period ≤ 60 months
40%
> 60 months
30%
•
Capital gains are taxed according to a
10% withholding tax that liberates
investors from further tax
responsibilities;
•
Possibility of adding for taxing purposes
dividend income to the investor’s overall
income;
•
Full tax-exemption if the holding period
exceeds 12 months.
The Evolution of the Portuguese Tax System: Dividends versus Capital Gains (Corporations)
1989 – 2000
2001
Dividends are taxed according to two conditions:
“More Favourable” Regime:
‚
100% of dividends are tax-exempted;
‚
Any company stake can be included in
this regime as long as its holding period is
at least one year;
‚
Exemption from withholding tax only if
the holding period is at least 2 years at
the time of the dividend payment.
“More Favourable” Regime:
“Less Favourable” Regime:
‚
Withholding tax changed to 20%.
“Less Favourable” Regime:
Until 1993, capital gains could be exempt from taxes as long as the shares
were held for at least 12 months and as long as their sale value was
reinvested in fixed tangible or financial assets that remained in the firm
at least until the end of the second fiscal year following its acquisition.
Capital gains are fully taxed but enjoy a 5 year
deferral benefit in case of reinvestment of the
sale amount in fixed assets before the end of
the second fiscal year after the sale
This tax benefit was substituted in 1993 by a regime where any capital
gains profits would be entitled to a mere tax deferral benefit, being taxed
when the reinvested assets were subject to tax depreciation and/or when
those assets were later sold.
Capital gains are fully taxed in the same year
as that of the sale if no reinvestment under the
conditions above is made.
50% only of net capital gains (gains minus
losses) made after 01/01/2002 are taxed as long
as the reinvestment of the sale amount is made
before the end of the second fiscal year
following the sale.
% ownership / holding
period
Dividends
2002
< 25%
≥ 25%
< 2 years
(i)
(i)
≥ 2 years
(i)
(ii)
(i) “Less Favourable” Tax Regime: withholding tax equal to that of
Personal Income Tax (IRS) (25% in 1991, 15% from 1992 to 1994, 12,5%
from 1995 to 1999, and 15% em 2000); tax credit benefits according to the
same conditions and percentages as defined for IRS.
(ii) “More Favourable” Tax Regime: 95% of dividends are not subject
to taxation or to withholding taxes. Such regime is also applicable to a
number of special institutions that included venture capital firms
(Sociedades de Capital de Risco) , regional development companies
(Sociedades de Desenvolvimento Regional), societies for entrepreneurial
development (Sociedades de Fomento Empresarial), holding companies
(Sociedades Gestoras de Participações Sociais, or SGPS), investment
companies (Sociedades de Investimento) and stockbroking financial firms
(Sociedades Financeiras de Corretagem), regardless of the holding period
or the percentage owned in the dividend paying firm.
‚
‚
‚
Reduction, from 25% to 10%, of the
minimum ownership percentage required
to enjoy this tax status;
Reduction of the minimum holding period
required to enjoy this tax status from 2
years to 1.
Tax credit elimination, being substituted
by a tax exemption applicable to 50% of
the dividend income.
(iii) “Consolidation Profits Regime”: firms are taxed according to the
consolidated profit only.
Capital Gains
This regime is applicable to all stakes in
companies as long as the sale amount is
reinvested in other company stakes as the
stakes sold have a holding period of at least 1
year and correspond to an ownership of at least
10%. In the case of holding firms (SGPS), there
is no minimum stake requirement.