Corporate Tax

Corporate tax refers to a tax levied by various jurisdictions on the profits made by companies or associations. As a general principle, the tax varies substantially between jurisdictions. In particular, allowances for capital expenditure and the amount of interest payments that can be deducted from gross profits when working out the tax liability vary substantially. Also, tax rates may vary depending on whether profits have been distributed to shareholders. Profits that have been reinvested may not be taxed.

For example, in the United Kingdom, where the main corporate tax is called corporation tax, depreciation on many capital assets (excluding finance leases and certain intangible assets) is disallowable in computing taxable profits. Instead, capital allowances (usually at the rate of 25% per annum on a reducing balance basis) may be claimed. In France, however, depreciation is allowable, within certain rates per classes of asset set down by statute.

Under an imputation tax system, some or all of the tax paid by the company may be attributed pro-rata to the shareholders by way of a tax credit to reduce the income tax payable on a distribution. From 1973 to 1999, the UK operated a partial imputation system, with shareholders able to claim a tax credit reflecting advance corporation tax (ACT) paid by a company when a distribution was made. A company could set off ACT against the company’s annual corporation tax liability.

Alternatively, in certain jurisdictions, distributions such as dividends are fully or partially exempt from tax—for example, Austria and Germany operate a “double income” system on distributions, where only half the distribution is subject to tax, or, equivalently, the tax rate is halved; the Netherlands operates a participation exemption under which certain distributions are exempt from tax. In Canada, dividends taxable in the hands of eligible shareholders may qualify for a dividend tax credit to compensate for taxes already paid by the corporation.

In the United States, the top marginal federal corporate rate for income over $18.3 million is 35% (it can be as low as 15% for income under $50,000). But, since the Treasury Department announced in 1999 the “check the box” system, many corporations can elect to be treated as a pass-through entity, thereby skipping the entity-level 35% tax and having all income pass to the shareholders. This is the tax treatment that the much-discussed “S” corporations receive; now, many more types of state-law corporations may avoid double taxation by “checking the box”. Dividends are also subject to a lower rate of income tax in the United States.

Tax rates around the world vary considerably both in their statutory rates, and in their effective rates after all offsets are considered, preventing any straightforward comparisons of tax rates between countries. Detailed data is available for the world’s most developed economies, i.e. those in the Organisation for Economic Co-operation and Development.

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