Corporate Tax - Overview

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 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. A company has been defined as a juristic person having an independent and separate existence from its shareholders. Income of the company is computed and assessed separately in the hands of the company. In certain cases, distributions from the company to its shareholders as dividends are taxed as income to the shareholders.