Corporate tax

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Corporate tax refers to a direct tax levied by various jurisdictions on the profits made by companies or associations. As a general principle, this varies substantially between jurisdictions. In particular allowances for capital expenditure and the amount of interest payments that can be deducted from gross profits when working out the tax liability vary substantially. Also, tax rates may vary depending on whether profits have been distributed to shareholders or not. Profits which have been reinvested may not be taxed.

For example, in the United Kingdom, where the main corporate tax is called corporation tax, depreciation on many capital assets (excluding finance leases and certain intangible assets) is disallowable in computing taxable profits. Instead, capital allowances (usually at the rate of 25% per annum on a reducing balance basis) may be claimed. In France, however, depreciation is allowable, within certain rates per classes of asset set down by statute.

Under an imputation tax system, some or all of the tax paid by the company may be attributed pro rata to the shareholders by way of a tax credit to reduce the income tax payable on a distribution. For many years, from 1973 to 1999, the UK operated a partial imputation system, with shareholders being able to claim a tax credit reflecting advance corporation tax (ACT) paid by a company when a distribution was made. A company could set ACT off against the annual corporation tax liability of the company.

Alternatively, in certain jurisdictions, distributions are be fully or partially exempt from tax—for example, certain jurisdictions, such as Austria and Germany, operate a "double income" system on distributions, with only half of the distribution is subject to tax, or, equivalently, the tax rate is halved, and the Netherlands operates a participation exemption under which certain distributions are exempt from tax.

In the United States, the federal rate is 35%. But since 1999, when Treasury annouced the "check the box" system many corporations can elect to be treated as a pass-through entity, thereby skipping the entity level 35% tax and having all income pass through to the shareholders. This is the tax treatment that the much discussed "S" corporations receive but now many more types of state-law corporation may avoid double taxation by "checking the box".

This is the second highest rate among the world's most developed economies (those in the OECD -- the Organisation for Economic Co-operation and Development). Only Japan is higher. The median is 30.0%, with notably low rates for corporations headquartered in Ireland (12.5%), Hungary (16.0%), Iceland (18.0%) ,Slovakia and Poland (19.0%). [1]

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