Daisan Company is in the process of deciding where to establish a European manufacturing operation: France, Spain, or Sweden. Daisan's home country does not have a tax treaty with any of these countries. Regardless of location, the operation is expected to generate pre-tax income of 1 million euros annually. The operation will distribute 100 percent of its after-tax income to Daisan Company as a dividend each year. Required: a. Using the information on effective income tax rates and withholding tax rates pro-vided in Exhibits 8.1 and 8.3, determine the net amount of dividend that Daisan would receive annually from an investment in each of these three countries. b. If maximizing after-tax dividends is the sole criterion, in which of the three coun- tries should Daisan locate its European operation?

a.

Calculation of net dividend:

The company wants to set up its operation either in Spain, or France, or in Sweden. The expected earnings would be 1,000,000 euro per year.

Calculation of net dividends out of 1,000,000 euro is as below:

Net dividend

Tax rate is applicable on pretax income to get the tax amount. Suppose for the country Spain, the tax rate is 30%. Therefore, the tax is. The after tax income is the deduction of tax from pretax income.

Withholding tax: If a foreign investor earns dividends, it should be deducted by the country’s tax and should be withheld for payment. Withholding tax rate is applicable on the after tax income to get the withholding tax amount. Suppose in France the withholding tax rate is 30%. The tax amount would be.

Net dividend: This is the excess of after tax income over withholding tax. Withholding tax amount should be subtracted from after tax income to get the net dividend.

b.

Choosing the right location of operation:

Earning dividend is the only criteria of choosing. Since the net dividend in France is the highest among the lot, France should be chosen for operation location.

It means the company earns maximum profit by investing in France.