Double taxation refers to income taxes paid twice on the same source of income. It occurs when income is taxed at both the corporate and personal levels. International businesses often face double taxation, which eats away at profits.
Methods to Eliminate Double Taxation
There are two main methods to eliminate double taxation:
- by allocating taxation rights between countries;
- by requiring tax relief from the country of residence, either through exemption or tax credit.
Only C corporations face double taxation at the corporate level. Business owners can avoid it by paying themselves salaries rather than dividends. Subchapter S corporations avoid double taxation by having income taxed to shareholders as if the corporation were a partnership.
Global exporters can avoid double taxation by using tax treaties between countries that specify which country can tax cross-border income. When there is no treaty, income can be taxed in both countries. Different tax systems between countries can also lead to double taxation when companies are taxed on profits in both countries.
Avoiding or Reducing Double Taxation
As an individual or business owner, you can avoid or reduce double taxation in several ways:
- Use an LLC, sole proprietorship or S corp business structure rather than a C corp.
- Accumulate profits rather than paying dividends (but consult a tax professional before accumulating over $200,000).
- Hire family members and pay them salaries.
In summary, double taxation is an inevitable result of our global economy, but can be avoided by carefully structuring your business and finances.