Legal Definitions - double taxation

Double taxation occurs when the same income, assets, or financial transaction is subject to taxation more than once, either by the same taxing authority at different stages or by different taxing authorities.

This concept typically arises in two main forms:

• Economic Double Taxation: This happens when corporate profits are taxed first at the company level, and then again when those profits are distributed to shareholders as dividends, which are then taxed as personal income. The same underlying earnings are thus taxed twice at different points in their journey from company profit to individual wealth.
• Example: Imagine a successful manufacturing company, "Global Gadgets Inc.," earns $10 million in profit in a year. The company first pays corporate income tax on this $10 million. After paying taxes, Global Gadgets Inc. decides to distribute a portion of its remaining profit, say $2 million, to its shareholders as dividends. Each shareholder who receives these dividends must then declare them as personal income and pay individual income tax on them. In this scenario, the initial $2 million of profit that eventually became dividends was taxed once as corporate profit and then again as individual shareholder income.
• International (or Legal) Double Taxation: This occurs when two different countries both claim the right to tax the same income or assets of an individual or company. This can happen if an individual is considered a tax resident in more than one country simultaneously, or if a company operates across borders. Many countries have signed tax treaties to prevent this.
• Example 1: Consider Dr. Anya Sharma, a medical researcher who is a citizen of Country X but accepts a two-year research fellowship in Country Y. Country X's tax laws state that its citizens are always subject to its income tax, regardless of where they live. Country Y's tax laws state that anyone residing and earning income within its borders for more than 183 days is a tax resident. Dr. Sharma earns her salary in Country Y. Without a tax treaty between Country X and Country Y, Dr. Sharma's salary could be taxed by Country Y because she resides and works there, and then again by Country X because she is a citizen.
• Example 2: A multinational tech company, "Innovate Global," has its headquarters in Country A but earns significant profits from its sales and operations in Country B. Country A taxes Innovate Global on its worldwide income, while Country B taxes the profits generated within its borders. If there is no tax agreement or mechanism to prevent it, the profits earned in Country B could be taxed by both Country A and Country B, leading to international double taxation for Innovate Global.