Updated
GL-C-04
Glossary · Taxes and residency
Corporate income tax - the first of two tax layers for a business owner
01 / In 30 seconds
The short answer
- What it is
- Tax on a company’s profits in its country of tax residence
- How it is calculated
- On profit, that is, income less allowable expenses
- The second layer
- When dividends are paid to the owner, a further tax arises
- What to look at
- Not the headline rate but the effective one — taking deductions and reliefs into account
- For the owner
- After a move, the company’s profits may fall under CFC rules
02 / In plain words
What Corporate income tax means
Corporate income tax is the tax a company pays on the profit it earns in its country of tax residence. The base is not turnover but profit: income less the expenses allowable under local rules. That is why what matters is not only the rate but also which expenses the country allows to be deducted.
It is important to see two levels. First the company pays tax on its profit. Then, when the profit is distributed to the owner as dividends, a second tax arises — for the recipient. The total burden is made up of both, and comparing countries on the corporate rate alone is misleading.
For an owner who is changing country of residence, a third layer is added. After a change of tax residence, a foreign company may fall under CFC rules: its profits will have to be declared in your place of residence, even if they have not been distributed. That is why corporate taxes are calculated together with personal ones, not separately.
A case from practice
A client was choosing a jurisdiction for its low corporate rate. Once the tax on dividends in the country of their future residence and the CFC rules were added, the difference from a simpler option almost disappeared — while the administration was noticeably more complex.
When it needs to be calculated
- Choosing a jurisdiction for a company
- Planning the owner’s relocation
- Distributing dividends
- Group restructuring
- Comparing countries by burden
- Assessing the effective rate
03 / What it covers
What the burden consists of
Company
- Headline rate
- Allowable expenses
- Reliefs and regimes
Owner
- Tax on dividends
- Rate in the country of residence
- Credit for tax paid
CFC
- Controlled company rules
- Declaring profits
- Control thresholds
Other
- Substance requirements
- Permanent establishment
- Transfer pricing
04 / How it works
How to calculate the burden
Determine the company’s residence
Where the company pays tax: its place of incorporation or of management.
Calculate the effective rate
The rate after deductions, reliefs and special regimes.
Add the tax on dividends
The owner's tax when profit is paid out, and the treaties between countries.
Check the CFC rules
Whether the company falls under CFC rules in the owner's country of residence.
Get the full picture
The total burden on profit from the company through to the owner.
05 / Key facts
What you need to know
01Tax base
Profit, not revenue
Income minus the expenses recognised by the company's country of residence. Deduction rules matter as much as the rate.
02Second layer
Tax on dividends
When profit is paid out to the owner, the owner pays tax too. The total burden is the sum of both.
03What to compare
The effective rate
The real share of tax after deductions and reliefs, not the headline rate in the law.
04After relocation
CFC rules
A foreign company's profit may be taxed in the owner's country of residence even if it was not distributed.
Common mistakes
Comparing countries by the headline rate
Calculate the effective rate together with the dividend tax.
Forgetting the owner's tax on dividends
Include the tax in the owner's country of residence and the double tax treaties.
Ignoring CFC rules after moving
Check whether the company falls under CFC rules in the new country before changing residence.
Registering a company with no economic substance
Plan for an office, staff and management in the country if the rules require it.
06 / Expert advice
How to prepare in advance
The effective rate is calculated, not the headline one: taking into account allowable expenses, reliefs and special regimes. To this is added the tax on dividends in your country of residence, and the CFC rules are checked. Only the sum of these layers shows the real burden — and it is this that is compared between jurisdictions.
What we do for you. We always calculate taxes at two levels: the company and you personally after the move. An attractive corporate rate is often cancelled out by the tax on dividends and the CFC rules in the country of your new residence.
Dmitry NagyTax consultant, international taxation and compliance (ex-Big4)
07 / Questions
Frequently asked questions
On the company’s profit: income less the expenses allowable under the rules of the company’s country of tax residence.
The real share of tax in profit, taking deductions, reliefs and special regimes into account. It may differ noticeably from the headline rate.
The burden is made up of two levels: the company’s tax on profit and the owner’s tax on receiving dividends. Treaties may soften the second.
The CFC regime may come into play: the foreign company’s profits will have to be declared in your place of tax residence.
No. You need to look at the effective rate, the tax on dividends, the CFC rules and economic substance requirements.
Yes, they allocate taxing rights between countries and often allow tax paid to be credited or withholding rates to be reduced.
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