Double taxation occurs when a corporation or individual is taxed twice on the same income. Corporations and individuals pay taxes on earnings they make, and their shareholders pay taxes on dividends they receive.
One instance of this is when a business pays corporate taxes on earnings or profits and then distributes dividends to shareholders, who are then responsible for paying personal taxes on the money.
A jurisdiction may impose a tax on dividends that a corporation pays to its shareholders (stockholders). Although a tax requirement in the form of a withholding tax may also be imposed on the corporation, the shareholder has the principal tax liability.
Due to the movement of funds from the corporation to the shareholders when a company chooses to pay out dividends, the government taxes the earnings twice. The business is first taxed at year's end when it is required to pay taxes on its profits.
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