Legal Definitions - deficiency dividend

A deficiency dividend is a type of dividend paid by a company to reduce or avoid personal-holding-company tax in a previous year. Dividend refers to a portion of a company's earnings or profits distributed pro rata to its shareholders, usually in the form of cash or additional shares.

For example, if a company did not pay enough dividends in a previous year and is subject topersonal-holding-company tax, it may pay a deficiency dividend to reduce or avoid the tax. This type of dividend is not paid to reward shareholders but to meet tax requirements.