how double taxation works
double taxation often occurs because corporations are considered separate legal entities from their shareholders as such corporations pay taxes on their annual earnings just like individuals when corporations pay out dividends to shareholders those dividend payments incur income tax liabilities for the shareholders who receive them even though the earnings that provided the cash to pay the dividends were already taxed at the corporate level double taxation is often an unintended consequence of tax legislation it is generally seen as a negative element of a tax system and tax authorities attempt to avoid it whenever possible most tax systems attempt through the use of varying tax rates and tax credits to have an integrated system where income earned by a corporation and paid out as dividends and income earned directly by an individual is in the end taxed at the same rate for example in the u s dividends meeting certain criteria can be classified as qualified and as such subject to advantaged tax treatment a tax rate of 0 15 or 20 depending on the individual s tax bracket the corporate tax rate is 21 as of 2022 debate over double taxationthe concept of double taxation on dividends has prompted significant debate while some argue that taxing shareholders on their dividends is unfair because these funds were already taxed at the corporate level others contend this tax structure is just proponents of double taxation point out that without taxes on dividends wealthy individuals could enjoy a good living off the dividends they receive from owning large amounts of common stock yet pay essentially zero taxes on their personal income stock ownership could become a tax shelter in other words supporters of dividend taxation also point out that dividend payments are voluntary actions by companies and as such companies are not required to have their income double taxed unless they choose to pay dividends to shareholders certain investments with a flow through or pass through structure such as master limited partnerships are popular because they avoid the double taxation syndrome international double taxationinternational businesses are often faced with issues of double taxation income may be taxed in the country where it is earned and then taxed again when it is repatriated in the business home country in some cases the total tax rate is so high it makes international business too expensive to pursue to avoid these issues countries around the world have signed hundreds of treaties for the avoidance of double taxation often based on models provided by the organization for economic cooperation and development iecd in these treaties signatory nations agree to limit their taxation of international business in an effort to augment trade between the two countries and avoid double taxation 