Double Taxation

Intermediate

Double taxation is when the same income is taxed twice, either at two levels in one country, such as company profits and then dividends, or by two different countries.

Economic double taxation happens when company profits are taxed, and then the same profits are taxed again when they are paid to shareholders as dividends.

For example, a company earns 100 and pays corporate tax of 25%, leaving 75. It pays this as a dividend, and the shareholder pays 20% tax on it, or 15. The shareholder keeps 60, so the combined tax on the original 100 is 40. Many countries reduce this effect through lower tax rates on dividends or credits for corporate tax already paid.

International double taxation happens when someone earns income in one country while being resident in another, and both countries claim the right to tax it. Without relief, international work and investment would be heavily discouraged.

Countries reduce international double taxation through tax treaties and through foreign tax credits, which let taxpayers subtract tax paid abroad from the tax owed at home. Some countries simply exempt certain foreign income.

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