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. Conduit Theory

    A theory stating that an investment firm that passes all capital ...
  4. Income Tax

    A tax that governments impose on financial income generated by ...
  5. Double Taxing

    A tax law that causes the same earnings to be subjected to taxation ...
  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. Taxes

    Tax Breaks For Volunteering

    Your volunteer ventures could earn you some welcome tax deductions, along with the satisfaction of helping others.
  6. Taxes

    Six Ways Your Tax Preparer Knows You’re Lying

    Cheating on your taxes is asking for trouble. You might get away with it, but you’re playing with fire and likely to get burned.
  7. Stock Analysis

    Why did Wal-Mart's Stock Take a Fall in 2015?

    Wal-Mart is the largest company in the world, with a sterling track-record of profits and dividends. So why has its stock fallen sharply in 2015?
  8. Investing News

    Should You Invest in Disney Stock Before Star Wars?

    The force is strong with Disney stock, as it continues to make gains going into the launch of EP7. But is this pricey stock a good buy at these levels?
  9. Investing News

    Silicon Valley Startups Fly into Space

    Space enthusiasts are in for an exciting time as Silicon Valley startups take on the lucrative but expensive final frontier.
  10. Taxes

    How & Where to File Form 1040 (And Which Version)

    All taxpayers need to know three things when filing a 1040: which form to use, how to file and where to file. After reading this, you'll know all three.
  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. Black Friday

    1. A day of stock market catastrophe. Originally, September 24, 1869, was deemed Black Friday. The crash was sparked by gold ...
  2. Turkey

    Slang for an investment that yields disappointing results or turns out worse than expected. Failed business deals, securities ...
  3. Barefoot Pilgrim

    A slang term for an unsophisticated investor who loses all of his or her wealth by trading equities in the stock market. ...
  4. Quick Ratio

    The quick ratio is an indicator of a company’s short-term liquidity. The quick ratio measures a company’s ability to meet ...
  5. Black Tuesday

    October 29, 1929, when the DJIA fell 12% - one of the largest one-day drops in stock market history. More than 16 million ...
  6. Black Monday

    October 19, 1987, when the Dow Jones Industrial Average (DJIA) lost almost 22% in a single day. That event marked the beginning ...
Trading Center