Dividend imputation is a corporate tax system in which some or all of the tax paid by a company may be attributed, or imputed, to the shareholders by way of a tax credit to reduce the income tax payable on a distribution. In comparison to the classical system, it reduces or eliminates the tax disadvantages of distributing dividends to shareholders by only requiring them to pay the difference between the corporate rate and their marginal rate.
Australia, Malta and New Zealand have imputation systems. Chile, Canada, Korea and the United Kingdom have a partial imputation system. Germany had a dividend imputation system until 2000 and France until 2004. Other jurisdictions (Singapore, for example) achieve a similar result by not taxing dividends at all. The difference under this arrangement is that shareholders obtain a tax benefit even though the company may not have paid any tax at the corporate level, and it also benefits non-resident shareholders. The imputation system effectively taxes the company profit at the shareholders' average tax rates.
The objective of the dividend imputation system is to eliminate double taxation of company profits, once at the corporate level and again on distribution as dividend to shareholders. More specifically, it is intended to create a "level playing field" by taxing the same activity in the same way, irrespective of the business structure being used, namely a company or trust, sole trader or partnership.