Lesson 4 of 6 · 12 min
Corporate taxation and double taxation
Corporate profit is usually taxed once at the company and again when it is paid out as dividends, but retained profit escapes the second layer, which is why the corporate form still suits businesses that reinvest.
In short
- Corporations pay tax on profit under the tax code of their jurisdiction. Taxable profit often differs from reported profit because tax rules and accounting standards differ.
- Double taxation: profit is taxed at the company, then the dividends are taxed again in the shareholder's hands.
- With full payout, the combined rate is , not .
- Some countries soften it: no personal tax on dividends already taxed at company level, or a tax credit for the shareholder's share of corporate tax; some corporations pay no tax at all.
- Pass-through owners are taxed on all profit, paid out or not; corporate shareholders only on what is distributed. Retaining profit (or lower corporate than personal rates) can favour the corporate form.
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