What is Capital Gains Distribution?

Capital income distribution is the distribution of the results of capital utilization. The result of capital utilization is the profit realized after deducting various costs from various incomes obtained by the enterprise. The broad distribution refers to the process of dividing and distributing investment income such as sales income and profit, while the narrow distribution refers only to the distribution of net profit.

Distribution of capital gains

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Capital gains distribution

The distribution of capital gains is multi-level. The income obtained by an enterprise through investment must first be used to make up for production and operating expenses and pay turnover tax, and the rest is the operating profit of the enterprise; operating profit and net investment income, net non-operating income and expenditure constitute the total profit of the enterprise. The total profit must first be subject to income tax in accordance with national regulations, and the net profit must be drawn from the provident fund and public welfare fund, which are used to expand accumulation, make up for losses, and improve employee collective welfare facilities. Or as an additional investment by investors. ^[1]

1. Distribution form of cash dividends ^[2]

Earnings before interest and taxes, referred to as EBlT, include after-tax profits enjoyed by business owners and human capital suppliers, such as virtual share dividends and after-tax profit sharing held by senior management personnel. The corporate income tax that the government enjoys on behalf of the country's investment in infrastructure and the policy environment, as well as the interest expense that creditors provide for debt capital. Here, interest expenses include not only the financial expenses of the person and the interest expenses deducted from the income, but also the capitalized interest expenses of the original value of the fixed assets of the person. ^[3]

(1) The principle of sequential allocation ^[3]

The distribution order of corporate capital income mainly includes three basic steps: distribution of profit before interest and tax, distribution of total profit, and distribution of profit after tax. ^[3]

(1) Distribution of profit before interest and tax

The distribution of profit before interest and taxes mainly includes the payment of interest on debt capital and the calculation of total profit. Among them, the interest paid on debt capital should be calculated before the total profit. This is because whether it is the interest expense for the financial cost of the person or the interest expense for the value of the fixed asset, it has nothing to do with whether the business is profitable. Since the payment of interest on debt capital has nothing to do with whether the business is profitable, the total profit of the business may be positive or negative.

(II) Distribution of total profits

The distribution of total profit mainly consists of three parts: the use of profit before tax to make up losses, and the calculation of corporate income tax and profit after tax. Among them, although the calculation of income tax has a certain relationship with the total profit of the enterprise, when the enterprise has permanent and temporary differences, the tax base for calculating the enterprise income tax is not the total profit but the taxable income. Therefore, even if the enterprise pays a certain percentage of income tax, the enterprise may pay the income tax at the same time without profit after tax or the profit after tax is negative.

(3) Distribution of profit after tax

The distribution of after-tax profits includes two parts: retention of various surplus reserves and distribution of various dividends. Among them, the retention of surplus reserves includes both statutory provident funds and statutory public welfare funds as required by national policies, as well as arbitrary surplus providents required by the board of directors of enterprises.