Corporate Tax
March 14, 2009
Corporate tax is also known as the Corporation tax, and it is a tax which is levied on the profits made by a corporation or a company or an association, by various governing jurisdictions. The tax is levied on the value placed on the profits made by the corporate entity. How the taxable profit is measured varies from one country to another. Additionally, the rules governing the maximum amount of funds that can be used for capital expenditure as well as for interest payments are very different from country to country.
In the United States, both the federal government and the state governments levy corporate tax. Compared to the state levied corporate taxes, the federal corporate tax is of higher significance, higher rates and higher complexity. Federal corporate tax also affects more companies that state corporate tax does.
A corporation is subject to federal corporate tax as long as it is incorporated in the United States or conducts business within the borders of the United States. Under certain circumstances, even companies which are not corporations like Limited Liability Company (LLC) or a Partnership firm may be treated as a corporation for the purpose of taxation.
In some cases, it is possible to find instances of double taxation on the profits made by a company. The corporation itself is taxed on the value of its profits. On the other hand, shareholders of the company who earn a dividend on the profits of a corporation are also taxed on the dividends received by them. This is a classic example of double taxation.
However, it is possible to alter this situation for certain closely held corporations which has been formed in the United States if they can meet certain shareholder and capital structure limitations. If they do meet these limitations, these companies are not obliged to pay the corporation tax themselves. Instead the burden of the tax is shifted to the shareholders of the corporation alone. In such cases, shareholders are taxed on the corporation’s income as it arises, but not when it is distributed.
Corporations that fall under these criteria are called the S Corporations. On the other hand, businesses that do not meet the required shareholder and capital structure limitations, and are unable to get exemption from the payment of taxes by the corporation, are called C Corporations. On the other hand, business that are not corporations and are not treated as corporations do not fall under either the S corporation category or the C corporation category. Such businesses are known as “pass-through”, “fiscally transparent” or flow through entities. They too are not required to pay double taxes. The company as an entity does not pay any taxes, only the equity holders of the businesses have to. These equity holders have to pay the United States income tax on their shares of the passed-through income, even if they are not actually distributed, on their own separate income tax returns.
Foreign corporations that operate within the borders of the United States are also required to pay corporate tax. In the case of foreign corporations, the tax is levied on the profits of the branch or branches in the United States. A corporation which has additional sources of income like dividends or royalties will find that these incomes are subjected to a withholding tax of about 30%. This amount which is withheld from the corporations may eventually be reduced or completely eliminated by putting a tax treaty into effect. Apart from royalties and dividends, even rental income of foreign corporations, if any is subjected to withholding tax.
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