Capital 6: Business taxation II Flashcards
What is the classification of corporation tax systems?
It depends on the degree of integration of CIT into PIT:
- No integration: classical system
- Partial integration: double taxation reducing systems
- Full integration: double taxation avoiding system
What methods exist to reduce or avoid double taxation at the Corporate and shareholder level?
At the Corporate Level:
- Dividend deduction: Dividends are treated as a business expense
- Split corporation tax rate: Lower tax rates on distributed profits
At the Shareholder Level:
- Corporate income tax credit: Credited against personal income tax
- Reduced taxation of dividends: Compared to ordinary income (shareholder relief).
What happens under a classical system?
- Dividends subject to personal income tax without any tax relief
- Double taxation of dividends with corporate and personal income tax
- Applied in Czech Republic, Hungary, Ireland and Lithuani
Which systems avoid double taxation and which system mitigate double taxatipon?
Double taxation is avoided under:
- Full imputation system
- Dividend exemption system
Double taxation is mitigated under:
- Partial imputation system
- Shareholder relief system
What happens under the full imputation system?
A system where double taxation is avoided by
- fully crediting corporate income tax (CIT) on distributed profits against personal income tax (PIT) on dividend income
What are the key features of the full imputation system?
- Corporate tax credit is part of the shareholder’s taxable income
- Taxable income equals the corporation’s profit before CIT
- Dividends are taxed at the individual PIT rate, with adjustments for differences between PIT and CIT rates
How are differences between PIT and CIT rates adjusted under the full impuation system?
- PIT rate > CIT rate: PIT is levied on the difference (PIT rate – CIT rate)
- PIT rate < CIT rate: CIT is reimbursed for the difference (PIT rate – CIT rate)
What is the partial imputation system in taxation?
A system where double taxation is mitigated by
- partially crediting corporate income tax (CIT) on dividends against personal income tax (PIT).
What are the key features of the partial imputation system?
- Corporate tax credit is included in the shareholder’s taxable income
- Tax credit is lower than the CIT on distributed profits
- The shareholder’s taxable income is lower than the corporation’s pre-tax profits.
How does the total tax burden on dividends compare to the individual income tax rate in a partial imputation system?
The total tax burden on dividends exceeds the individual income tax rate, as the corporate tax credit is only partial — and thus we still have a double taxation but only partial
What is the shareholder relief system in taxation?
A system where double taxation is mitigated by
- considering corporate income tax (CIT) on profits before taxing dividends at the shareholder level.
How does the shareholder relief system reduce taxation on dividends?
Reduction of Tax Rate on Dividends:
- Final tax due
- Option to include dividend income in personal income tax for low taxable income
Reduction of Tax Base for Dividends:
- Dividends partially exempt from personal income tax base
- Ordinary income tax rate applied to a reduced tax base.
How is the total tax burden on dividends determined in the shareholder relief system?
- The total tax burden is undetermined compared to the personal income tax rate
- Minimum tax burden: Corporation tax becomes definitive.
- Depending on the relief extent, the tax burden can be below, equal to, or above the personal income tax rate
What is the dividend exemption system?
A system where double taxation is avoided by
- fully exempting dividends from personal income tax (PIT)
- Dividends are taxed only once, at the corporate income tax (CIT) level
How does the dividend exemption system differ from the full imputation system?
Tax Burden: determined solely by the corporate tax rate, not by the PIT rate