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s system each corporation must maintain a calculation of its earnings and profits a tax concept similar to retained earnings 52 a distribution to a shareholder is considered to be from earnings and profits to the extent thereof unless an exception applies 53 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 example edit the following illustrates the dual level of tax concept widget 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 widget corp the tax rate in the residence jurisdiction of jim and widget corp is 30 year 1 cumulative pre tax income taxes taxable income 100 100 tax 30 30 net after tax 70 jim s income tax 0 year 2 taxable income 100 200 tax 30 60 net after tax 70 jim s income tax 0 year 3 distribution 140 jim s tax 42 102 net after jim s tax 98 totals 200 102 51 other corporate events edit 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 edit 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 54 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 55 acquisitions edit 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 56 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 edit 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 57 interest deduction limitations edit most jurisdictions allow a tax deduction 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 58 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 59 the internal revenue service had proposed complex regulations under this section see td 7747 1981 1 cb 141 which were soon withdrawn td 7920 1983 2 cb 69 citation needed foreign corporation branches edit most jurisdictions tax foreign corporations differently from domestic corporations 60 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 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 61 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 62 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 63 some jurisdictions impose express limits on tax deductions of branches commonly limited deductions include management fees and interest nathan m jenson argues that low corporate tax rates are a minor determinate of a multinational company when setting up their headquarters in a country 64 losses edit 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 65 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 edit 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 66 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 edit see also 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 transfer pricing which allow tax authorities to adjust transfer prices used such adjustments may apply in both an international and a domestic context taxation of shareholders edit 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 tax 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 67 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 citation needed 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 alternative tax bases edit 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 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 68 a computed amount of assets less liabilities 69 or quantity of shares outstanding 70 in some jurisdictions capital based taxes are imposed in addition to the income tax 69 in other jurisdictions the capital taxes function as alternative taxes mexico imposes an alternative tax on corporations the ietu citation needed 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 edit most systems require that corporations file an annual income tax return 71 some systems such as the canadian united kingdom and united states systems require that taxpayers self assess tax on the tax return 72 other systems provide that the government must make an assessment for tax to be due citation needed some systems require certification of tax returns in some manner by accountants licensed to practice in the jurisdiction often the company s auditors 73 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 74 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 eight 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 75 for s corporations insurance companies domestic international sales corporations 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 76 in self assessment systems payment of taxes is generally due no later than the normal due date though advance tax payments may be required 77 canadian corporations must pay estimated taxes monthly 78 in each case final payment is due with the corporation tax return see also edit income taxes in canada corporate income taxes corporate tax in the united states united kingdom corporation tax corporation tax in the republic of ireland tax rates of europe list of countries by tax rates references edit the 2025 tax debate international taxes before and since the tax cuts and jobs act bipartisan policy center bipartisanpolicy org archived from the original on 2024 09 15 retrieved 2025 05 23 auerbach alan j january 2006 who bears the corporate tax a review of what we know tax policy and the economy 20 1 40 doi 10 1086 tp...
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