Double Taxation


DEFINITION of 'Double Taxation'

A taxation principle referring to income taxes that are paid twice on the same source of earned income.

Double taxation occurs because corporations are considered separate legal entities from their shareholders. As such, corporations pay taxes on their annual earnings, just as individuals do. 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.


Loading the player...

BREAKING DOWN 'Double Taxation'

The concept of double taxation on dividends paid to shareholders has prompted significant debate. While some argue that taxing dividends received by shareholders is an unfair double taxation of income (because it was already taxed at the corporate level), others contend that this tax structure is fair.

Proponents of keeping the "double taxation" on dividends point out that without taxes on dividends, wealthy individuals could enjoy a good living off the dividends they received from owning large amounts of common stock, yet pay essentially zero taxes on their personal income. As well, supporters of dividend taxation point out that dividend payments are voluntary actions by companies and, as such, they are not required to have their income "double taxed" unless they choose to make dividend payments to shareholders.

  1. Dividend Yield

    A financial ratio that shows how much a company pays out in dividends ...
  2. Dividend

    A distribution of a portion of a company's earnings, decided ...
  3. Double Taxing

    A tax law that causes the same earnings to be subjected to taxation ...
  4. Income Tax

    A tax that governments impose on financial income generated by ...
  5. Conduit Theory

    A theory stating that an investment firm that passes all capital ...
  6. Franking Credit

    A type of tax credit found in countries such as Australia that ...
Related Articles
  1. Taxes

    Explaining Double Taxation

    Double taxation refers to income taxes being imposed twice on the same source of earned income.
  2. Taxes

    Dividend Tax Rates: What Investors Need To Know

    Find out how legislation enacted in 2003 is benefiting both investors and corporations, and when it's scheduled to expire.
  3. Active Trading

    Finding The Best Yields

    Using yields to supplement earnings can mean big bucks, with the right strategy.
  4. Investing Basics

    How Dividends Work For Investors

    Find out how a company can put its profits directly into your hands.
  5. Economics

    Explaining Corporate Tax

    A corporate tax is a tax levied on the profits a corporation generates.
  6. Professionals

    How to Sell Mutual Funds to Your Clients

    Learn about the various talking points you should cover when discussing mutual funds with clients and how explaining their benefits can help you close the sale.
  7. Taxes

    The 5 Countries Without Income Taxes

    Discover information on some of the best countries to consider relocating to that offer the financial benefit of charging no income tax.
  8. Mutual Funds & ETFs

    Top Three Transportation ETFs

    These three transportation funds attract the majority of sector volume.
  9. Investing Basics

    Statistical Proof That Buy-and-Hold Investing Pays Off

    Learn about how the data suggests that the buy-and-hold investment strategy still works, even after the huge declines of the Great Recession.
  10. Investing Basics

    5 Things To Ask Before Hiring A Financial Advisor

    Choosing a financial advisor isn't an easy task. Here's a list of the most important things to consider when planning for your financial future.
  1. What are the differences between an MLP exchange traded fund (ETF) and an MLP exchange ...

    The main difference between a master limited partnership (MLP), exchange-traded fund (ETF) and an MLP exchange-traded note ... Read Full Answer >>
  2. What are the advantages to structuring a business as a master limited partnership ...

    A master limited partnership (MLP) offers tax benefits for corporate entities that can reduce the cost of capital for capital-intensive ... Read Full Answer >>
  3. How is taxation treated for both the parent and subsidiary company during a spinoff?

    A common separation strategy used by corporations includes divestiture activities that segment a portion of a company's operations, ... Read Full Answer >>
  4. Why would a company make drastic cuts to its dividend payments?

    A dividend cut occurs when a dividend paying company either completely stops paying out dividends (a worst-case scenario) ... Read Full Answer >>
  5. What is the double taxation of dividends?

    After all is said and done, companies that have made a profit can do one of two things with the excess cash. They can (1) ... Read Full Answer >>
  6. How does a stock split affect cash dividends?

    When a company decides to issue a stock split (or stock dividend), a couple of possibilities could occur concerning what ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Gross Profit

    A company's total revenue (equivalent to total sales) minus the cost of goods sold. Gross profit is the profit a company ...
  2. Revenue

    The amount of money that a company actually receives during a specific period, including discounts and deductions for returned ...
  3. Normal Profit

    An economic condition occurring when the difference between a firm’s total revenue and total cost is equal to zero.
  4. Operating Cost

    Expenses associated with the maintenance and administration of a business on a day-to-day basis.
  5. Cost Of Funds

    The interest rate paid by financial institutions for the funds that they deploy in their business. The cost of funds is one ...
  6. Cost Accounting

    A type of accounting process that aims to capture a company's costs of production by assessing the input costs of each step ...
Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!