Corporate tax
Encyclopedia
Many countries impose corporate tax or company tax on the income or capital of some types of legal entities. A similar tax may be imposed at state or lower levels. The taxes may also be referred to as income tax or capital tax. Entities treated as partnership
s are generally not taxed at the entity level. Most countries tax all corporations doing business in the country on income from that country. Many countries tax all income of corporations organized in the country.
Company income subject to tax is often determined much like taxable income for individuals. Generally, the tax is imposed on net profits. In some jurisdictions, rules for taxing companies may differ significantly from rules for taxing individuals. Certain corporate acts, like reorganizations, may not be taxed. Some types of entities may be exempt from tax.
Many countries tax corporate entities on income and also tax the owners when the corporation pays a dividend. Where the owners are taxed, a withholding tax may be imposed. Generally, these taxes on owners are not referred to as corporate tax.
at the entity level on certain type(s) of entities (company or corporation
). Many systems additionally tax owners or members of those entities on dividends or other distributions by the entity to the members. The tax generally is imposed on net taxable income. Net taxable income for corporate tax is generally financial statement income with modifications, and may be defined in great detail within the system. The rate of tax varies by jurisdiction. The tax may have an alternative base, such as assets, payroll, or income computed in an alternative manner.
Most income tax systems provide that certain types of corporate events are not taxable transactions. These generally include events related to formation or reorganization of the corporation. In addition, most systems provide specific rules for taxation of the entity and/or its members upon winding up or dissolution of the entity.
In systems where financing costs are allowed as reductions of the tax base (tax deductions), rules may apply that differentiate between classes of member-provided financing. In such systems, items characterized as interest
may be deductible, subject to interest limitations, while items characterized as dividends are not. Some systems limit deductions based on simple formulas, such as a debt-to-equity ratio, while other systems have more complex rules.
Some systems provide a mechanism whereby groups of related corporations may obtain benefit from losses, credits, or other items of all members within the group. Mechanisms include combined or consolidated returns as well as group relief (direct benefit from items of another member).
Most systems also tax company shareholders on distribution of earnings as dividends. A few systems provide for partial integration of entity and member taxation. This is often accomplished by "imputation systems" or franking credits. In the past, mechanisms have existed for advance payment of member tax by corporations, with such payment offsetting entity level tax.
Many systems (particularly sub-country level systems) impose a tax on particular corporate attributes. Such non-income taxes may be based on capital stock issued or authorized (either by number of shares or value), total equity, net capital, or other measures unique to corporations.
Corporations, like other entities, may be subject to withholding tax
obligations upon making certain varieties of payments to others. These obligations are generally not the tax of the corporation, but the system may impose penalties on the corporation or its officers or employees for failing to withhold and pay over such taxes.
is a juridical person organized under the corporate or company laws of some jurisdiction. The jurisdiction may be a country or a subdivision of a country. For example, in Canada, a corporation may be organized under either Federal or provincial laws. Most jurisdictions recognize as corporations entities organized under the corporate or company laws of other jurisdictions. Under many tax systems, any entity providing limitations on the liability of all members for the actions of the entity is considered a corporation. Characterization as a corporation for tax purposes is based on the form of organization in most taxing jurisdictions. One notable exception applies for United States Federal and most state income taxes within the United states under which an entity may (with exceptions) elect to be treated as a corporation and taxed at the entity level or taxed only at the member level. See Limited liability company
, Partnership taxation
, S corporation
, Sole proprietorship
.
Governments may impose tax on corporations as separately from their owners. Most jurisdictions tax companies or corporations at the entity rather than the member level. Members of the corporate entity are generally not subject to tax on the entity's earnings until such earnings are distributed. By contrast, most jurisdictions tax partnerships at the member level and not the entity level. Members of a partnership are generally subject to tax on the partnership's earnings as they are earned rather than when they are distributed.
Most jurisdictions tax corporations on their income. Generally, this tax is imposed at a specific rate or range of rates on taxable income as defined within the system. Some systems have a separate body of law or separate provisions relating to corporate taxation. In such cases, the law may apply only to entities and not to individuals operating a trade. Such laws may differentiate between broad types of income earned by corporations and tax such types of income differently. Generally, however, most such systems tax all income of a corporation in the same manner.
Some systems (e.g., Canada and the United States) tax corporations under the same framework of tax law as individuals. In such systems, there are normally taxation differences related to differences between the inherent natures of corporations and individuals or unincorporated entities. For example, individuals are not formed, amalgamated, or acquired, and corporations do not generally incur medical expenses except by way of compensating individuals.
Many systems allow tax credits for specific items. Such direct reductions of tax are commonly allowed for foreign taxes on the same income and for withholding tax
. Often these credits are the same as those available to individuals or for members of flow through entities such as partnerships.
Most systems tax both domestic and foreign corporations. Often, domestic corporations are taxed on worldwide income while foreign corporations are taxed only on income from sources within the jurisdiction. Many jurisdictions imposing an income tax impose such tax income from a permanent establishment
within the jurisdiction.
Corporations are also subject to property tax
, payroll tax
, withholding tax
, excise tax, customs duties, value added tax
, and other common taxes, generally in the same manner as other taxpayers. These, however, are rarely referred to as “corporate tax.”
at a specified rate of tax times taxable income as defined in the system. Many systems define taxable income by reference to net income before income taxes per financial statements prepared under locally accepted accounting principles. Such income may be decreased for income subject to tax exemption
. Other adjustments often apply.
Some systems define taxable income within the system. The United States system defines taxable income for a corporation as all gross income
(sales plus other income minus cost of goods sold and tax exempt income) less allowable tax deductions, without the allowance of the standard deduction
applicable to individuals.
Principles for recognizing income and deductions may differ from financial accounting principles. Key areas of difference include differences in the timing of income or deduction, tax exemption
for certain income, and disallowance or limitation of certain tax deductions. The United States system requires that these differences be disclosed in considerable detail for non-small corporations on Schedule M-3 to Form 1120.
Most systems tax resident corporations (generally those organized within the country) on their worldwide income, and nonresident corporations only on their income from sources within the country. A few systems, such as Hong Kong, tax resident and nonresident corporations only on income from sources within the country.
on part or all of their income in some jurisdictions.
Examples of corporate tax rates for a few English-speaking countries include:
See also:
Note: tax rates quoted above and in referenced Wikipedia articles may not be current or accurate.
. The tax may be at reduced rates. For example, the United States provides for reduced amounts of tax on dividends received by individuals and by corporations. By contrast, the United Kingdom provides for reduced amounts of tax only on dividends received by individuals.
The company law of some jurisdictions prevents corporations from distributing amounts to shareholders except as distribution of earnings. Such earnings may be determined under company law principles or tax principles. For example, the United Kingdom permits a company to make dividend distributions only up to the balance of earnings available for distribution according to its last audited accounts. In such jurisdictions, exceptions are usually provided with respect to distribution of shares of the company, for winding up, and in limited other situations.
Other jurisdictions treat distributions as distributions of earnings taxable to shareholders if earnings are available to be distributed, but do not prohibit distributions in excess of earnings. For example, under the United States system each corporation must maintain a calculation of its earnings and profits (a tax concept similar to retained earnings). A distribution to a shareholder is considered to be from earnings and profits to the extent thereof unless an exception applies. Note that the United States provides reduced tax on dividend income of both corporations and individuals.
Other jurisdictions provide corporations a means of designating, within limits, whether a distribution is a distribution of earnings taxable to the shareholder or a return of capital
. For example, in Canada a corporation may designate a distribution to shareholders as a distribution of Paid Up Capital (PUC), and thus not taxable as a dividend, to the extent of remaining capital, or an eligible dividend.
C Corp earns 100 of profits before tax in each of years 1 and 2. It distributes all the earnings in year 3, when it has no profits. Jim owns all of C Corp. The tax rate in the residence jurisdiction of Jim and C Corp is 30%.
Example: John and Mary are United States residents who operate a business. They decide to incorporate for business reasons. They transfer the assets of the business to Newco, a newly formed Delaware corporation of which they are the sole shareholders, subject to accrued liabilities of the business in exchange solely for common shares of Newco. Under United States principles, this transfer does not cause tax to John, Mary, or Newco. If on the other hand Newco also assumes a bank loan in excess of the basis of the assets transferred less the accrued liabilities, John and Mary will recognize taxable gain for such excess.
for interest expense incurred by a corporation in carrying out its trading activities. Where such interest is paid to related parties, such deduction may be limited. Without such limitation, owners could structure financing of the corporation in a manner that would provide for a tax deduction for much of the profits, potentially without changing the tax on shareholders. For example, assume a corporation earns profits of 100 before interest expense and would normally distribute 50 to shareholders. If the corporation is structured so that deductible interest of 50 is payable to the shareholders, it will cut its tax to half the amount due if it merely paid a dividend.
A common form of limitation is to limit the deduction for interest paid to related parties to interest charged at arm's length rates on debt not exceeding a certain portion of the equity of the paying corporation. For example, interest paid on related party debt in excess of three times equity may not be deductible in computing taxable income.
The United States, United Kingdom, and French tax systems apply a more complex set of tests to limit deductions. Under the U.S. system, related party interest expense in excess of 50% of cash flow is generally not currently deductible, with the excess potentially deductible in future years.
The classification of instruments as debt on which interest is deductible or as equity with respect to which distributions are not deductible can be complex in some systems.
Most jurisdictions tax foreign corporations on business income within the jurisdiction when earned through a branch or permanent establishment
in the jurisdiction. This tax may be imposed at the same rate as the tax on business income of a resident corporation or at a different rate.
Upon payment of dividends, corporations are generally subject to withholding tax
only by their country of incorporation. Many countries impose a branch profits tax on foreign corporations to prevent the advantage the absence of dividend withholding tax would otherwise provide to foreign corporations. This tax may be imposed at the time profits are earned by the branch or at the time they are remitted or deemed remitted outside the country.
Branches of foreign corporations may not be entitled to all of the same deductions as domestic corporations. Some jurisdictions do not recognize inter-branch payments as actual payments, and income or deductions arising from such inter-branch payments are disregarded. Some jurisdictions impose express limits on tax deductions of branches. Commonly limited deductions include management fees and interest.
The United States has extensive regulations dealing with consolidated returns. One such rule requires matching of income and deductions on intercompany transactions within the group by use of “deferred intercompany transaction” rules.
In addition, a few systems provide a tax exemption for dividend income received by corporations. The Netherlands system provides a “participation exception” to taxation for corporations owning more than 25% of the dividend paying corporation.
.
may be reduced for a shareholder under a tax treaty
.
Some systems tax some or all dividend income at lower rates than other income. The United States has historically provided a dividends received deduction
to corporations with respect to dividends from other corporations in which the recipient owns more than 10% of the shares. For tax years 2004-2010, the United States also has imposed a reduced rate of taxation on dividends received by individuals.
Some systems currently attempt or in the past have attempted to integrate taxation of the corporation with taxation of shareholders to mitigate the dual level of taxation. As a current example, Australia provides for a “franking credit” as a benefit to shareholders. When an Australian company pays a dividend to a domestic shareholder, it reports the dividend as well as a notional tax credit amount. The shareholder utilizes this notional credit to offset shareholder level income tax.
A previous system was utilised in the United Kingdom, called the Advance Corporation Tax
(ACT). When a company paid a dividend, it was required to pay an amount of ACT, which it then used to offset its own taxes. The ACT was included in income by the shareholder resident in the United Kingdom or certain treaty countries, and treated as a payment of tax by the shareholder. To the extent that deemed tax payment exceeded taxes otherwise due, it was refundable to the shareholder.
United States federal income tax incorporates an alternative minimum tax. This tax is computed at a lower tax rate (20% for corporations), and imposed based on a modified version of taxable income. Modifications include longer depreciation lives assets under MACRS
, adjustments related to costs of developing natural resources, and an addback of certain tax exempt interest. The U. S. state of Michigan previously taxed businesses on an alternative base that did not allow compensation of employees as a tax deduction and allowed full deduction of the cost of production assets upon acquisition.
Some jurisdictions, such as Swiss cantons and certain states within the United States, impose taxes based on capital. These may be based on total equity per audited financial statements, a computed amount of assets less liabilities or quantity of shares outstanding. In some jurisdictions, capital based taxes are imposed in addition to the income tax. In other jurisdictions, the capital taxes function as alternative taxes.
Mexico imposes an alternative tax on corporations, the IETU. The tax rate is lower than the regular rate, and there are adjustments for salaries and wages, interest and royalties, and depreciable assets.
Tax returns can be fairly simple or quite complex. The systems requiring simple returns often base taxable income on financial statement profits with few adjustments, and may require that audited financial statements be attached to the return. Returns for such systems generally require that the relevant financial statements be attached to a simple adjustment schedule. By contrast, United States corporate tax returns require both computation of taxable income from components thereof and reconciliation of taxable income to financial statement income.
Many systems require forms or schedules supporting particular items on the main form. Some of these schedules may be incorporated into the main form. For example, the Canadian corporate return, Form T-2, an 8 page form, incorporates some detail schedules but has nearly 50 additional schedules that may be required.
Some systems have different returns for different types of corporations or corporations engaged in specialized businesses. The United States has 13 variations on the basic Form 1120 for S corporation
s, insurance companies, Domestic international sales corporation
s, foreign corporations, and other entities. The structure of the forms and imbedded schedules vary by type of form.
Preparation of non-simple corporate tax returns can be time consuming. For example, the U.S. Internal Revenue Service
states in the instructions for Form 1120 that the average time needed to complete form is over 56 hours, not including record keeping time and required attachments.
Tax return due dates vary by jurisdiction, fiscal or tax year, and type of entity. In self assessment systems, payment of taxes is generally due no later than the normal due date, though advance tax payments may be required. Canadian corporations must pay estimated taxes monthly. In each case, final payment is due with the corporation tax return.
United Kingdom
Partnership
A partnership is an arrangement where parties agree to cooperate to advance their mutual interests.Since humans are social beings, partnerships between individuals, businesses, interest-based organizations, schools, governments, and varied combinations thereof, have always been and remain commonplace...
s are generally not taxed at the entity level. Most countries tax all corporations doing business in the country on income from that country. Many countries tax all income of corporations organized in the country.
Company income subject to tax is often determined much like taxable income for individuals. Generally, the tax is imposed on net profits. In some jurisdictions, rules for taxing companies may differ significantly from rules for taxing individuals. Certain corporate acts, like reorganizations, may not be taxed. Some types of entities may be exempt from tax.
Many countries tax corporate entities on income and also tax the owners when the corporation pays a dividend. Where the owners are taxed, a withholding tax may be imposed. Generally, these taxes on owners are not referred to as corporate tax.
Overview
Corporate tax or company tax refers to a tax imposed on entities that are taxed at the entity level in a particular jurisdiction. Such taxes may include income or other taxes. The tax systems of most countries impose an income taxIncome tax
An income tax is a tax levied on the income of individuals or businesses . Various income tax systems exist, with varying degrees of tax incidence. Income taxation can be progressive, proportional, or regressive. When the tax is levied on the income of companies, it is often called a corporate...
at the entity level on certain type(s) of entities (company or corporation
Corporation
A corporation is created under the laws of a state as a separate legal entity that has privileges and liabilities that are distinct from those of its members. There are many different forms of corporations, most of which are used to conduct business. Early corporations were established by charter...
). Many systems additionally tax owners or members of those entities on dividends or other distributions by the entity to the members. The tax generally is imposed on net taxable income. Net taxable income for corporate tax is generally financial statement income with modifications, and may be defined in great detail within the system. The rate of tax varies by jurisdiction. The tax may have an alternative base, such as assets, payroll, or income computed in an alternative manner.
Most income tax systems provide that certain types of corporate events are not taxable transactions. These generally include events related to formation or reorganization of the corporation. In addition, most systems provide specific rules for taxation of the entity and/or its members upon winding up or dissolution of the entity.
In systems where financing costs are allowed as reductions of the tax base (tax deductions), rules may apply that differentiate between classes of member-provided financing. In such systems, items characterized as interest
Interest
Interest is a fee paid by a borrower of assets to the owner as a form of compensation for the use of the assets. It is most commonly the price paid for the use of borrowed money, or money earned by deposited funds....
may be deductible, subject to interest limitations, while items characterized as dividends are not. Some systems limit deductions based on simple formulas, such as a debt-to-equity ratio, while other systems have more complex rules.
Some systems provide a mechanism whereby groups of related corporations may obtain benefit from losses, credits, or other items of all members within the group. Mechanisms include combined or consolidated returns as well as group relief (direct benefit from items of another member).
Most systems also tax company shareholders on distribution of earnings as dividends. A few systems provide for partial integration of entity and member taxation. This is often accomplished by "imputation systems" or franking credits. In the past, mechanisms have existed for advance payment of member tax by corporations, with such payment offsetting entity level tax.
Many systems (particularly sub-country level systems) impose a tax on particular corporate attributes. Such non-income taxes may be based on capital stock issued or authorized (either by number of shares or value), total equity, net capital, or other measures unique to corporations.
Corporations, like other entities, may be subject to withholding tax
Withholding tax
Withholding tax, also called retention tax, is a government requirement for the payer of an item of income to withhold or deduct tax from the payment, and pay that tax to the government. In most jurisdictions, withholding tax applies to employment income. Many jurisdictions also require...
obligations upon making certain varieties of payments to others. These obligations are generally not the tax of the corporation, but the system may impose penalties on the corporation or its officers or employees for failing to withhold and pay over such taxes.
Corporation defined
A corporationCorporation
A corporation is created under the laws of a state as a separate legal entity that has privileges and liabilities that are distinct from those of its members. There are many different forms of corporations, most of which are used to conduct business. Early corporations were established by charter...
is a juridical person organized under the corporate or company laws of some jurisdiction. The jurisdiction may be a country or a subdivision of a country. For example, in Canada, a corporation may be organized under either Federal or provincial laws. Most jurisdictions recognize as corporations entities organized under the corporate or company laws of other jurisdictions. Under many tax systems, any entity providing limitations on the liability of all members for the actions of the entity is considered a corporation. Characterization as a corporation for tax purposes is based on the form of organization in most taxing jurisdictions. One notable exception applies for United States Federal and most state income taxes within the United states under which an entity may (with exceptions) elect to be treated as a corporation and taxed at the entity level or taxed only at the member level. See Limited liability company
Limited liability company
A limited liability company is a flexible form of enterprise that blends elements of partnership and corporate structures. It is a legal form of company that provides limited liability to its owners in the vast majority of United States jurisdictions...
, Partnership taxation
Partnership taxation
The rules governing partnership taxation, for purposes of the U.S. Federal income tax, are codified as Subchapter K of Chapter 1 of the U.S. Internal Revenue Code . Partnerships are "flow-through" entities. Flow-through taxation means that the entity does not pay taxes on its income...
, S corporation
S Corporation
An S corporation, for United States federal income tax purposes, is a corporation that makes a valid election to be taxed under Subchapter S of Chapter 1 of the Internal Revenue Code....
, Sole proprietorship
Sole proprietorship
A sole proprietorship, also known as the sole trader or simply a proprietorship, is a type of business entity that is owned and run by one individual and in which there is no legal distinction between the owner and the business. The owner receives all profits and has unlimited responsibility for...
.
Governments may impose tax on corporations as separately from their owners. Most jurisdictions tax companies or corporations at the entity rather than the member level. Members of the corporate entity are generally not subject to tax on the entity's earnings until such earnings are distributed. By contrast, most jurisdictions tax partnerships at the member level and not the entity level. Members of a partnership are generally subject to tax on the partnership's earnings as they are earned rather than when they are distributed.
Taxation of corporations
Corporations may be taxed on their incomes, property, or existence by various jurisdictions. Many jurisdictions impose a tax based on the existence or equity structure of the corporation. For example, Maryland imposes a tax on corporations organized in that state based on the number of shares of capital stock issued and outstanding. Many jurisdictions instead impose a tax based on stated or computed capital, often including retained profits.Most jurisdictions tax corporations on their income. Generally, this tax is imposed at a specific rate or range of rates on taxable income as defined within the system. Some systems have a separate body of law or separate provisions relating to corporate taxation. In such cases, the law may apply only to entities and not to individuals operating a trade. Such laws may differentiate between broad types of income earned by corporations and tax such types of income differently. Generally, however, most such systems tax all income of a corporation in the same manner.
Some systems (e.g., Canada and the United States) tax corporations under the same framework of tax law as individuals. In such systems, there are normally taxation differences related to differences between the inherent natures of corporations and individuals or unincorporated entities. For example, individuals are not formed, amalgamated, or acquired, and corporations do not generally incur medical expenses except by way of compensating individuals.
Many systems allow tax credits for specific items. Such direct reductions of tax are commonly allowed for foreign taxes on the same income and for withholding tax
Withholding tax
Withholding tax, also called retention tax, is a government requirement for the payer of an item of income to withhold or deduct tax from the payment, and pay that tax to the government. In most jurisdictions, withholding tax applies to employment income. Many jurisdictions also require...
. Often these credits are the same as those available to individuals or for members of flow through entities such as partnerships.
Most systems tax both domestic and foreign corporations. Often, domestic corporations are taxed on worldwide income while foreign corporations are taxed only on income from sources within the jurisdiction. Many jurisdictions imposing an income tax impose such tax income from a permanent establishment
Permanent establishment
A permanent establishment is a fixed place of business which generally gives rise to income or value added tax liability in a particular jurisdiction. The term is defined in many income tax treaties and most European Union Value Added Tax systems. The tax systems in some civil law countries...
within the jurisdiction.
Corporations are also subject to property tax
Property tax
A property tax is an ad valorem levy on the value of property that the owner is required to pay. The tax is levied by the governing authority of the jurisdiction in which the property is located; it may be paid to a national government, a federated state or a municipality...
, payroll tax
Payroll tax
Payroll tax generally refers to two different kinds of similar taxes. The first kind is a tax that employers are required to withhold from employees' wages, also known as withholding tax, pay-as-you-earn tax , or pay-as-you-go tax...
, withholding tax
Withholding tax
Withholding tax, also called retention tax, is a government requirement for the payer of an item of income to withhold or deduct tax from the payment, and pay that tax to the government. In most jurisdictions, withholding tax applies to employment income. Many jurisdictions also require...
, excise tax, customs duties, value added tax
Value added tax
A value added tax or value-added tax is a form of consumption tax. From the perspective of the buyer, it is a tax on the purchase price. From that of the seller, it is a tax only on the "value added" to a product, material or service, from an accounting point of view, by this stage of its...
, and other common taxes, generally in the same manner as other taxpayers. These, however, are rarely referred to as “corporate tax.”
Taxable income
Most systems impose income taxIncome tax
An income tax is a tax levied on the income of individuals or businesses . Various income tax systems exist, with varying degrees of tax incidence. Income taxation can be progressive, proportional, or regressive. When the tax is levied on the income of companies, it is often called a corporate...
at a specified rate of tax times taxable income as defined in the system. Many systems define taxable income by reference to net income before income taxes per financial statements prepared under locally accepted accounting principles. Such income may be decreased for income subject to tax exemption
Tax exemption
Various tax systems grant a tax exemption to certain organizations, persons, income, property or other items taxable under the system. Tax exemption may also refer to a personal allowance or specific monetary exemption which may be claimed by an individual to reduce taxable income under some...
. Other adjustments often apply.
Some systems define taxable income within the system. The United States system defines taxable income for a corporation as all gross income
Gross income
Gross income in United States tax law is receipts and gains from all sources less cost of goods sold. Gross income is the starting point for determining Federal and state income tax of individuals, corporations, estates and trusts, whether resident or nonresident."Except as otherwise provided" by...
(sales plus other income minus cost of goods sold and tax exempt income) less allowable tax deductions, without the allowance of the standard deduction
Standard deduction
The standard deduction, as defined under United States tax law, is a dollar amount that non-itemizers may subtract from their income and is based upon filing status. It is available to US citizens and resident aliens who are individuals, married persons, and heads of household and increases every...
applicable to individuals.
Principles for recognizing income and deductions may differ from financial accounting principles. Key areas of difference include differences in the timing of income or deduction, tax exemption
Tax exemption
Various tax systems grant a tax exemption to certain organizations, persons, income, property or other items taxable under the system. Tax exemption may also refer to a personal allowance or specific monetary exemption which may be claimed by an individual to reduce taxable income under some...
for certain income, and disallowance or limitation of certain tax deductions. The United States system requires that these differences be disclosed in considerable detail for non-small corporations on Schedule M-3 to Form 1120.
Most systems tax resident corporations (generally those organized within the country) on their worldwide income, and nonresident corporations only on their income from sources within the country. A few systems, such as Hong Kong, tax resident and nonresident corporations only on income from sources within the country.
Corporate tax rates
Corporate tax rates generally are the same for differing types of income. However, many systems have graduated tax rate systems under which corporations with lower levels of income pay a lower rate of tax. Some systems impose tax at different rates for different types of corporations. Tax rates vary by jurisdiction. In addition, some countries have sub-country level jurisdictions that also impose corporate income tax. Some jurisdictions also impose tax at a different rate on an alternative tax base (see below). Note that some entities may be eligible for tax exemptionTax exemption
Various tax systems grant a tax exemption to certain organizations, persons, income, property or other items taxable under the system. Tax exemption may also refer to a personal allowance or specific monetary exemption which may be claimed by an individual to reduce taxable income under some...
on part or all of their income in some jurisdictions.
Examples of corporate tax rates for a few English-speaking countries include:
- Australia: 30%, however some specialized entities are taxed at lower rates.
- Canada: Federal 11% or 16.5% plus provincial 1% to 16%. Note: the rates are additive.
- Hong Kong: 16.5%
- Ireland: 12.5% on trading (business) income, and 25% on nontrading income.
- New Zealand: 30%
- Singapore: 17% from 2010, however a partial exemption scheme may apply to new companies.
- United Kingdom: 21% to 26% for 2009–2011.
- United States: Federal 15% to 35%. States: 0% to 10%, deductible in computing Federal taxable income. Some cities: up to 9%, deductible in computing Federal taxable income. The Federal Alternative Minimum Tax of 20% is imposed on regular taxable income with adjustments.
See also:
- Corporate tax rates in Canada
- Corporate tax in the United StatesCorporate tax in the United StatesCorporate tax is imposed in the United States at the Federal, most state, and some local levels on the income of entities treated for tax purposes as corporations. Federal tax rates on corporate taxable income vary from 15% to 35%. State and local taxes and rules vary by jurisdiction, though many...
- List of Tax rates of EuropeTax rates of EuropeThis is a list of the maximum potential tax rates around Europe for certain income brackets. It is focused on three types of taxes: corporate and individual taxes and value added taxes...
- List of Tax rates around the world
Note: tax rates quoted above and in referenced Wikipedia articles may not be current or accurate.
Distribution of earnings
Most systems that tax corporations also impose income tax on shareholders of corporations when earnings are distributed. Such distribution of earnings is generally referred to as a dividendDividend
Dividends are payments made by a corporation to its shareholder members. It is the portion of corporate profits paid out to stockholders. When a corporation earns a profit or surplus, that money can be put to two uses: it can either be re-invested in the business , or it can be distributed to...
. The tax may be at reduced rates. For example, the United States provides for reduced amounts of tax on dividends received by individuals and by corporations. By contrast, the United Kingdom provides for reduced amounts of tax only on dividends received by individuals.
The company law of some jurisdictions prevents corporations from distributing amounts to shareholders except as distribution of earnings. Such earnings may be determined under company law principles or tax principles. For example, the United Kingdom permits a company to make dividend distributions only up to the balance of earnings available for distribution according to its last audited accounts. In such jurisdictions, exceptions are usually provided with respect to distribution of shares of the company, for winding up, and in limited other situations.
Other jurisdictions treat distributions as distributions of earnings taxable to shareholders if earnings are available to be distributed, but do not prohibit distributions in excess of earnings. For example, under the United States system each corporation must maintain a calculation of its earnings and profits (a tax concept similar to retained earnings). A distribution to a shareholder is considered to be from earnings and profits to the extent thereof unless an exception applies. Note that the United States provides reduced tax on dividend income of both corporations and individuals.
Other jurisdictions provide corporations a means of designating, within limits, whether a distribution is a distribution of earnings taxable to the shareholder or a return of capital
Return of capital
Return of capital refers to payments back to "capital owners" that exceed the growth of a business. It should not be confused with return on capital which measures a 'rate of return'....
. For example, in Canada a corporation may designate a distribution to shareholders as a distribution of Paid Up Capital (PUC), and thus not taxable as a dividend, to the extent of remaining capital, or an eligible dividend.
Example
The following illustrates the dual level of tax concept:C Corp earns 100 of profits before tax in each of years 1 and 2. It distributes all the earnings in year 3, when it has no profits. Jim owns all of C Corp. The tax rate in the residence jurisdiction of Jim and C Corp is 30%.
| border=0 | Year 1 | Cumulative | Pre-Tax Income | Taxes |
| Taxable Income | 100 | 100 | ||
| Tax | 30 | 30 | ||
| Net After Tax | 70 | |||
| -0- | ||||
| Year 2 | ||||
| Taxable Income | 100 | 200 | ||
| Tax | 30 | 60 | ||
| Net After Tax | 70 | |||
| Jim's Income & Tax | ||||
| Year 3: | ||||
| Distribution | 140 | |||
| Jim's Tax | 42 | 102 | ||
| Net After Jim's Tax | 98 | |||
| Totals | 200 | 102 | ||
| 51% |
Other corporate events
Many systems provide that certain corporate events are not taxable to corporations or shareholders. Significant restrictions and special rules often apply. The rules related to such transactions are often quite complex.Formation
Most systems treat the formation of a corporation by a controlling corporate shareholder as a nontaxable event. Many systems, including the United States and Canada, extend this tax free treatment to the formation of a corporation by any group of shareholders in control of the corporation. Generally, in tax free formations the tax attributes of assets and liabilities are transferred to the new corporation along with such assets and liabilities.Example: John and Mary are United States residents who operate a business. They decide to incorporate for business reasons. They transfer the assets of the business to Newco, a newly formed Delaware corporation of which they are the sole shareholders, subject to accrued liabilities of the business in exchange solely for common shares of Newco. Under United States principles, this transfer does not cause tax to John, Mary, or Newco. If on the other hand Newco also assumes a bank loan in excess of the basis of the assets transferred less the accrued liabilities, John and Mary will recognize taxable gain for such excess.
Acquisitions
Corporations may merge or acquire other corporations in a manner a particular tax system treats as nontaxable to either of the corporations and/or to their shareholders. Generally, significant restrictions apply if tax free treatment is to be obtained. For example, Bigco acquires all of the shares of Smallco from Smallco shareholders in exchange solely for Bigco shares. This acquisition is not taxable to Smallco or its shareholders under U.S. or Canadian tax law if certain requirements are met, even if Smallco is then liquidated into or merged or amalgamated with Bigco.Reorganizations
In addition, corporations may change key aspects of their legal identity, capitalization, or structure in a tax free manner under most systems. Examples of reorganizations that may be tax free include mergers, amalgamations, liquidations of subsidiaries, share for share exchanges, exchanges of shares for assets, changes in form or place of organization, and recapitalizations.Interest deduction limitations
Most jurisdictions allow a tax deductionTax deduction
Income tax systems generally allow a tax deduction, i.e., a reduction of the income subject to tax, for various items, especially expenses incurred to produce income. Often these deductions are subject to limitations or conditions...
for interest expense incurred by a corporation in carrying out its trading activities. Where such interest is paid to related parties, such deduction may be limited. Without such limitation, owners could structure financing of the corporation in a manner that would provide for a tax deduction for much of the profits, potentially without changing the tax on shareholders. For example, assume a corporation earns profits of 100 before interest expense and would normally distribute 50 to shareholders. If the corporation is structured so that deductible interest of 50 is payable to the shareholders, it will cut its tax to half the amount due if it merely paid a dividend.
A common form of limitation is to limit the deduction for interest paid to related parties to interest charged at arm's length rates on debt not exceeding a certain portion of the equity of the paying corporation. For example, interest paid on related party debt in excess of three times equity may not be deductible in computing taxable income.
The United States, United Kingdom, and French tax systems apply a more complex set of tests to limit deductions. Under the U.S. system, related party interest expense in excess of 50% of cash flow is generally not currently deductible, with the excess potentially deductible in future years.
The classification of instruments as debt on which interest is deductible or as equity with respect to which distributions are not deductible can be complex in some systems.
Foreign corporation branches
Most jurisdictions tax foreign corporations differently than domestic corporations. No international laws limit the ability of a country to tax its nationals and residents (individuals and entities). However, treaties and practicality impose limits on taxation of those outside its borders, even on income from sources within the country.Most jurisdictions tax foreign corporations on business income within the jurisdiction when earned through a branch or permanent establishment
Permanent establishment
A permanent establishment is a fixed place of business which generally gives rise to income or value added tax liability in a particular jurisdiction. The term is defined in many income tax treaties and most European Union Value Added Tax systems. The tax systems in some civil law countries...
in the jurisdiction. This tax may be imposed at the same rate as the tax on business income of a resident corporation or at a different rate.
Upon payment of dividends, corporations are generally subject to withholding tax
Withholding tax
Withholding tax, also called retention tax, is a government requirement for the payer of an item of income to withhold or deduct tax from the payment, and pay that tax to the government. In most jurisdictions, withholding tax applies to employment income. Many jurisdictions also require...
only by their country of incorporation. Many countries impose a branch profits tax on foreign corporations to prevent the advantage the absence of dividend withholding tax would otherwise provide to foreign corporations. This tax may be imposed at the time profits are earned by the branch or at the time they are remitted or deemed remitted outside the country.
Branches of foreign corporations may not be entitled to all of the same deductions as domestic corporations. Some jurisdictions do not recognize inter-branch payments as actual payments, and income or deductions arising from such inter-branch payments are disregarded. Some jurisdictions impose express limits on tax deductions of branches. Commonly limited deductions include management fees and interest.
Losses
Most jurisdictions allow interperiod allocation or deduction of losses in some manner for corporations, even where such deduction is not allowed for individuals. A few jurisdictions allow losses (usually defined as negative taxable income) to be deducted by revising or amending prior year taxable income. Most jurisdictions allow such deductions only in subsequent periods. Some jurisdictions impose time limitations as to when loss deductions may be utilized.Groups of companies
Several jurisdictions provide a mechanism whereby losses or tax credits of one corporation may be used by another corporation where both corporations are commonly controlled (together, a group). In the United States and Netherlands, among others, this is accomplished by filing a single tax return including the income and loss of each group member. This is referred to as a consolidated return in the United States and as a fiscal unity in the Netherlands. In the United Kingdom, this is accomplished directly on a pairwise basis called group relief. Losses of one group member company may be “surrendered” to another group member company, and the latter company may deduct the loss against profits.The United States has extensive regulations dealing with consolidated returns. One such rule requires matching of income and deductions on intercompany transactions within the group by use of “deferred intercompany transaction” rules.
In addition, a few systems provide a tax exemption for dividend income received by corporations. The Netherlands system provides a “participation exception” to taxation for corporations owning more than 25% of the dividend paying corporation.
Transfer pricing
A key issue in corporate tax is the setting of prices charged by related parties for goods, services, or the use of property. Many jurisdictions have guidelines on such prices which allow tax authorities to adjust prices charged. Such adjustments may apply in both an international and a domestic context. See Transfer pricingTransfer pricing
Transfer pricing refers to the setting, analysis, documentation, and adjustment of charges made between related parties for goods, services, or use of property . Transfer prices among components of an enterprise may be used to reflect allocation of resources among such components, or for other...
.
Taxation of shareholders
Most income tax systems levy tax on the corporation and, upon distribution of earnings (dividends), on the shareholder. This results in a dual level of tax. Most systems require that income tax be withheld on distribution of dividends to foreign shareholders, and some also require withholding of tax on distributions to domestic shareholders. The rate of such withholding taxWithholding tax
Withholding tax, also called retention tax, is a government requirement for the payer of an item of income to withhold or deduct tax from the payment, and pay that tax to the government. In most jurisdictions, withholding tax applies to employment income. Many jurisdictions also require...
may be reduced for a shareholder under a tax treaty
Tax treaty
Many countries have agreed with other countries in treaties to mitigate the effects of double taxation . Tax treaties may cover income taxes, inheritance taxes, value added taxes, or other taxes...
.
Some systems tax some or all dividend income at lower rates than other income. The United States has historically provided a dividends received deduction
Dividends received deduction
The dividends-received deduction , under U.S. federal income tax law, is a tax deduction received by a corporation on the dividends paid to it by other corporations in which it has an ownership stake.-Impact:...
to corporations with respect to dividends from other corporations in which the recipient owns more than 10% of the shares. For tax years 2004-2010, the United States also has imposed a reduced rate of taxation on dividends received by individuals.
Some systems currently attempt or in the past have attempted to integrate taxation of the corporation with taxation of shareholders to mitigate the dual level of taxation. As a current example, Australia provides for a “franking credit” as a benefit to shareholders. When an Australian company pays a dividend to a domestic shareholder, it reports the dividend as well as a notional tax credit amount. The shareholder utilizes this notional credit to offset shareholder level income tax.
A previous system was utilised in the United Kingdom, called the Advance Corporation Tax
Advance corporation tax
In the United Kingdom, the Advance corporation tax was the scheme under which companies made an advance payment of tax when they distributed dividend payments to shareholders...
(ACT). When a company paid a dividend, it was required to pay an amount of ACT, which it then used to offset its own taxes. The ACT was included in income by the shareholder resident in the United Kingdom or certain treaty countries, and treated as a payment of tax by the shareholder. To the extent that deemed tax payment exceeded taxes otherwise due, it was refundable to the shareholder.
Alternative tax bases
Many jurisdictions incorporate some sort of alternative tax computation. These computations may be based on assets, capital, wages, or some alternative measure of taxable income. Often the alternative tax functions as a minimum tax.United States federal income tax incorporates an alternative minimum tax. This tax is computed at a lower tax rate (20% for corporations), and imposed based on a modified version of taxable income. Modifications include longer depreciation lives assets under MACRS
MACRS
The Modified Accelerated Cost Recovery System is the current tax depreciation system in the United States. Under this system, the capitalized cost of tangible property is recovered over a specified life by annual deductions for depreciation. The lives are specified broadly in the Internal...
, adjustments related to costs of developing natural resources, and an addback of certain tax exempt interest. The U. S. state of Michigan previously taxed businesses on an alternative base that did not allow compensation of employees as a tax deduction and allowed full deduction of the cost of production assets upon acquisition.
Some jurisdictions, such as Swiss cantons and certain states within the United States, impose taxes based on capital. These may be based on total equity per audited financial statements, a computed amount of assets less liabilities or quantity of shares outstanding. In some jurisdictions, capital based taxes are imposed in addition to the income tax. In other jurisdictions, the capital taxes function as alternative taxes.
Mexico imposes an alternative tax on corporations, the IETU. The tax rate is lower than the regular rate, and there are adjustments for salaries and wages, interest and royalties, and depreciable assets.
Tax returns
Most systems require that corporations file an annual income tax return. Some systems (such as the Canadian and United States systems) require that taxpayers self assess tax on the tax return. Other systems provide that the government must make an assessment for tax to be due. Some systems require certification of tax returns in some manner by accountants licensed to practice in the jurisdiction, often the company's auditors.Tax returns can be fairly simple or quite complex. The systems requiring simple returns often base taxable income on financial statement profits with few adjustments, and may require that audited financial statements be attached to the return. Returns for such systems generally require that the relevant financial statements be attached to a simple adjustment schedule. By contrast, United States corporate tax returns require both computation of taxable income from components thereof and reconciliation of taxable income to financial statement income.
Many systems require forms or schedules supporting particular items on the main form. Some of these schedules may be incorporated into the main form. For example, the Canadian corporate return, Form T-2, an 8 page form, incorporates some detail schedules but has nearly 50 additional schedules that may be required.
Some systems have different returns for different types of corporations or corporations engaged in specialized businesses. The United States has 13 variations on the basic Form 1120 for S corporation
S Corporation
An S corporation, for United States federal income tax purposes, is a corporation that makes a valid election to be taxed under Subchapter S of Chapter 1 of the Internal Revenue Code....
s, insurance companies, Domestic international sales corporation
Domestic international sales corporation
This is a provision unique to U.S. tax law. In 1971, the U.S. Congress voted to subsidize exports of U.S. made goods through the income tax law. The initial mechanism was through a Domestic International Sales Corporation , an entity with no substance which received tax benefits...
s, foreign corporations, and other entities. The structure of the forms and imbedded schedules vary by type of form.
Preparation of non-simple corporate tax returns can be time consuming. For example, the U.S. Internal Revenue Service
Internal Revenue Service
The Internal Revenue Service is the revenue service of the United States federal government. The agency is a bureau of the Department of the Treasury, and is under the immediate direction of the Commissioner of Internal Revenue...
states in the instructions for Form 1120 that the average time needed to complete form is over 56 hours, not including record keeping time and required attachments.
Tax return due dates vary by jurisdiction, fiscal or tax year, and type of entity. In self assessment systems, payment of taxes is generally due no later than the normal due date, though advance tax payments may be required. Canadian corporations must pay estimated taxes monthly. In each case, final payment is due with the corporation tax return.
Further reading
U.S.:- Bittker, Boris I. and Eustice, James S.: Federal Income Taxation of Corporations and Shareholders: paperback ISBN 978-0791341018, subscription service
- Kahn & Lehman. Corporate Income Taxation
- Healy, John C. and Schadewald, Michael S.: Multistate Corporate Tax Course 2010, CCH, ISBN 978-0808021735 (also available as a multi-volume guide, ISBN 978-0808020158)
- Hoffman, et al.: Corporations, Partnerships, Estates and Trusts, ISBN 978-0324660210
- Momburn, et al.: Mastering Corporate Tax, Carolina Academic Press, ISBN 978-1594603686
United Kingdom
- Tolley's Corporation Tax, 2007-2008 ISBN 978-0754532736
- Watterson, Juliana M.: Corporation Tax 2009/2010, Bloomsbury Professional, ISBN 978-1847663276