A corporate tax , also called corporation tax or company tax , is a direct tax imposed by a jurisdiction on the income or capital of corporations or analogous legal entities.
Many countries impose such taxes at the national level, and a similar tax may be imposed at state or local levels. The taxes may also be referred to as income tax or capital tax. Partnerships are generally not taxed at the entity level. A country's corporate tax may apply to:. Company income subject to tax is often determined much like taxable income for individual taxpayers.
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. Countries may tax corporations on its net profit and may also tax shareholders when the corporation pays a dividend. Where dividends are taxed, a corporation may be required to withhold tax before the dividend is distributed. Economists disagree as to how much of the burden of the corporate tax falls on owners, workers consumers and landowners, and how the corporate tax affects economic growth and economic inequality.
A corporate tax is a tax imposed on the net profit of a corporation that are taxed at the entity level in a particular jurisdiction.
Net profit for corporate tax is generally the financial statement net profit with modifications, and may be defined in great detail within each country's tax system. 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. 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 countries exempt certain types of corporate events or transactions from income tax. For example, events related to formation or reorganization of the corporation, which are treated as capital costs. 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, perhaps subject to 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. Many systems additionally tax shareholders of those entities on dividends or other distributions by the corporation.
A few systems provide for partial integration of entity and member taxation. This may be 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. Characterization as a corporation for tax purposes is based on the form of organization, with the exception of United States Federal  and most states income taxes, under which an entity may elect to be treated as a corporation and taxed at the entity level or taxed only at the member level.
What is Corporate Tax?
Most jurisdictions tax corporations on their income, like the United Kingdom  or the United States. The United States taxes corporations under the same framework of tax law as individuals, with differences related to the inherent natures of corporations and individuals or unincorporated entities.
Individuals are not formed, amalgamated, or acquired; and corporations do not incur medical expenses except by way of compensating individuals. 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.
Corporate Tax in India:
The United States defines taxable income for a corporation as all gross income , i. The United States' system requires that differences in principles for recognizing income and deductions differing from financial accounting principles like the timing of income or deduction, tax exemption for certain income, and disallowance or limitation of certain tax deductions be disclosed in considerable detail for non-small corporations on Schedule M-3 to Form The United States taxes resident corporations, i.
The Canadian system imposes tax at different rates for different types of corporations, allowing lower rates for some smaller corporations. Tax rates vary by jurisdiction and some countries have sub-country level jurisdictions like provinces, cantons, prefectures, cities, or other that also impose corporate income tax like Canada, Germany, Japan, Switzerland, and the United States.
Corporate tax rates vary widely by country, leading some corporations to shield earnings within offshore subsidiaries or to redomicile within countries with lower tax rates. In comparing national corporate tax rates one should also take into account the taxes on dividends paid to shareholders. For example, the overall U. Most systems that tax corporations also impose income tax on shareholders of corporations when earnings are distributed.
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.
Corporate income tax in india pdf
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. 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.
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.
C Corp earns 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. 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. 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. 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.
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. Generally, significant restrictions apply if tax free treatment is to be obtained.
This acquisition is not taxable to Smallco or its shareholders under U. 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.
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 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. 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 differently from domestic corporations. However, treaties and practicality impose limits on taxation of those outside its borders, even on income from sources within the country.
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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. 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. Jenson: Sinha, S.