Explanation

In a split-rate tax system, the effective tax rate on distributed earnings is calculated as:

Effective Tax Rate = Corporate Tax Rate on Dividends + (1 - Corporate Tax Rate on Dividends) × Shareholder Tax Rate on Dividends

Given:

• Corporate tax rate on dividends: 15%
• Shareholder tax rate on dividends: 40%

Calculation:

• Corporate tax paid: 15% of pretax income
• After corporate tax: 85% of pretax income remains
• Shareholder tax: 40% × 85% = 34% of pretax income
• Total effective tax rate = 15% + 34% = 49%

Therefore, the effective tax rate on pretax income distributed as dividends is 49%.