What is Double Taxation?

Double taxation occurs when a tax is imposed more than once on the same asset, income stream, or transaction.

How Does Double Taxation Work?

The most well-known example of double taxation in the U.S. is the income tax levied once on corporate income and then again when profits are distributed as dividends to shareholders.

Double taxation can also occur if two or more countries assume jurisdiction over the same asset, income, or transaction. This form of double taxation is often mitigated by tax treaties between countries.

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Why Does Double Taxation Matter?

Double taxation issues have prompted significant debate in the past. Some believe that the double taxation is unfair and that the government should levy taxes at either the corporate or individual level, but not both.

Those who believe that double taxation is fair often cite the fact that dividend policy is set at the corporate level, and if the company is concerned about double taxation issues, it should not make dividend payments to shareholders.

Pass-through entities like master limited partnerships (MLPs), limited liability companies (LLCs) and S corporations are popular largely because their special corporate structure circumvents the double taxation issue.

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Paul Tracy
Paul Tracy

Paul has been a respected figure in the financial markets for more than two decades. Prior to starting InvestingAnswers, Paul founded and managed one of the most influential investment research firms in America, with more than 3 million monthly readers.

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