What is double taxation?

In the business world, double taxation is very common especially doing offshore company. But what that word even means?

What is double taxation?

Double taxation is the collection of taxes in two or more jurisdictions on the same declared income, assets or financial transactions.

In other words, it is when your business is registered in one country, but you do business in another and you pay taxes for both of the countries.

Double liability can be decreased in many ways, for instance:

the principal tax jurisdiction may exempt foreign income;

the main tax jurisdiction may exempt foreign-source income if it has been taxed in another jurisdiction or exceeds a benchmark to exclude the jurisdictions of tax havens;

the principal tax jurisdiction may tax foreign-source income, but may provide for the payment of foreign-jurisdictional taxes.

Another approach for affected jurisdictions is to enter into a tax treaty that sets out rules to avoid double taxation.

The term "double taxation" may also refer to double taxation of income or activities. For example, in some jurisdictions, corporate profits are taxed twice - once when the corporation earns and once again when distributed to shareholders in the form of dividends or other distributions.

There are 2 types of double taxation which are economical and juridical.

Double economic taxation

Double economic taxation involves situations where people or companies pay two or more taxes from a single tax base. The most common situation where double economic taxation arises is when a company pays taxes on its profits and then pays dividends to its shareholders. This amount of dividends is also taxed, but now it is a tax on dividends.

International double taxation

International double taxation occurs when a person pays taxes on an object in different countries at the same time. States may apply this type of double taxation based on the basic or territorial principle of residence. The State may rely on the principal or the residence when it has established that the taxpayer is their place of residence. States can rely on the territorial reference amount when they discover that profits are made in their own country, that is, within their territory. For example, country A has a commercial branch in country B, country A taxes its residents worldwide. The enterprise will pay taxes to State B based on its source and to State A based on residence of the multinational enterprise.

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