Double Taxation Definition and Legal Meaning

On this page, you'll find the legal definition and meaning of Double Taxation, written in plain English, along with examples of how it is used.

What is Double Taxation?

n. Property tax which is taken twice in one year for the same purpose. This practice is generally prohibited in situations such as a transfer of property whose tax is imposed on a new owner even though it has been taxed once before. However, if all of a jurisdiction’s properties are taxed twice in the same year, the practice is legal since it is not discriminatory or unfair.

History and Meaning of Double Taxation

Double taxation refers to the imposition of tax by more than one jurisdiction on the same income, asset, or financial transaction. It is a practice that has been around for a long time and is common in international trade and cross-border transactions when two countries tax the same income or asset. Double taxation can occur at the corporate level or at the individual level.

Double taxation can happen in various ways, including when a corporation pays taxes on its earnings, and then that income is taxed again when it is distributed as dividends to the shareholders. Individuals may also be subject to double taxation when they work or conduct business in multiple tax jurisdictions.

Examples of Double Taxation

  1. A company based in the United States that does business in Canada is subject to both US and Canadian taxes on its Canadian earnings.
  2. An individual living in the US who owns a rental property in another country is required to pay taxes on the rental income to both the foreign country and the US.
  3. A company based in Japan that sells goods to customers in the US is subject to both Japanese and US taxes on its profits.

Legal Terms Similar to Double Taxation

  1. Tax Treaties: Agreements between countries that are designed to prevent double taxation and promote cooperation between the countries.
  2. Foreign Tax Credit: A tax credit offered by many countries that allows individuals or corporations to offset the taxes paid to a foreign government against their domestic tax liabilities.
  3. Transfer Pricing: A tax mechanism that is enforced to ensure that transactions between related parties are conducted at arms’ length to avoid incorrect allocation of profits across different jurisdictions.