Comparison of dividend outflows in EU Member States
Foreign direct investment (FDI) has been gradually increasing since the 1980s, in line with the growth in international trade. Outflows of FDI income have become a major component of the primary income balance in EU countries over time. This box sets out to compare the sizes of these outflows, concentrating on the dividend outflows recorded across EU countries1 in recent years.
Based on the data for 2012–2014,2 FDI income for the most part accounted for less than half of the total investment income paid to non-residents in the traditional EU Member States (see Chart 1). The biggest investment income item in those countries was portfolio investment income, reflecting the high levels of development of their financial sectors and their higher levels of private and government indebtedness.3 By contrast, the ratios of FDI income to total investment income in Member States that have joined the EU since 2004 are high.4 This reflects the higher stocks of FDI in those countries and the higher returns on that FDI, which, in turn, are linked with the continued process of economic convergence and substantial support in the form of investment incentives.
Chart 1 (BOX) FDI income-to-investment income ratios
The ratio of FDI income to investment income is noticeably higher in the Visegrad Group countries than in traditional EU countries
(percentages; averages for 2012–2014; expenditure side of balance sheet)
The FDI income structure is mostly a result of investment strategies and reflects the various stages of the investment life cycle in individual countries. Study results show that the annual return on new FDI initially rises, then peaks in approximately the seventh year and subsequently gradually declines until the sixteenth year after the initial investment, when the investment cycle is completed. Total FDI income is divided into dividends paid to foreign investors, profits reinvested in the host economy, and interest. There is a broad consensus that reinvested earnings dominate in the first stages of the life cycle and that dividends gain in importance only gradually. There is no fundamental difference in dividend-to-reinvested earnings ratios between the traditional and newer EU Member States. Data for 2012–2014 show that the ratios of dividends to total FDI income vary quite considerably across the countries under review (see Chart 2).
Chart 2 (BOX) Dividend-to-FDI income ratios
The ratios of dividends to FDI income vary considerably across EU countries
(percentages; averages for 2012–2014; expenditure side of balance sheet)
Note: The calculations for Austria include only 2012 and 2014.
The lower FDI-to-GDP ratios in the largest traditional EU Member States imply that their dividend-to-GDP ratios are also very low (mostly below 1%; see Chart 3). By contrast, the highest ratios are recorded by tax havens and countries with stable legal frameworks, such as Luxembourg (with an average dividend-to-GDP ratio of 128% in the period under review) and the Netherlands (17%). The ratios of the EU Member States that have joined the EU since 2004 were mostly between 1.1% and 4.2% in 2012–2014. However, the ratio in the Czech Republic was above the upper limit of this range (at 5.2%). A past exception was Cyprus, whose dividend-to-GDP ratio reached double figures but had dropped significantly by 2014. The current record-holder in this respect is Malta (with a ratio of over 100%).5
Chart 3 (BOX) FDI dividend outflow-to-GDP ratios
The largest traditional EU countries have the lowest FDI dividend outflow-to-GDP ratios, while the ratio in the Czech Republic is relatively high
(percentages; averages for 2012–2014)
As is apparent from the comparison with other EU countries, the outflow of FDI dividends to non-residents is – in the absence of significant tax relief – a very important item in the Czech Republic from the perspective of the entire current account, not only the primary income balance. The high ratio of dividends to Czech GDP stems, among other things, from a large amount of FDI and from the structure of FDI, which is characterised by a high proportion of foreign investment in sectors with above-average profitability. The natural counterpart to this outflow of dividends is a goods and services surplus, with exports being generated largely by foreign-controlled corporations.
1 FDI dividends are recorded in the current account under the primary income balance on the debit side in the direct investment income item. The calculations referred to here are based on IMF statistical data.
2 2014 is the most recent year for which final data are available.
3 The exception in this respect is Belgium. Also worth mentioning is the Netherlands’ 72% share of FDI income, reflecting that country’s position as a base for investing in other countries.
4 Recently, only Slovenia and Croatia have recorded shares of less than 40%.
5 In the above cases, the ratios of dividends to GDP are significantly affected by the level of taxation. As regards the taxation of dividends themselves, the basic rate in Malta and Cyprus is only 5%, while in EU countries it is usually 15%. Countries such as Malta and Cyprus also have the lowest effective corporate income tax rates (5% and 10% respectively).