Corporate tax is a levy on the profits generated by legal entities such as companies, corporations, banks, and enterprises. The applicable tax rate is established by the government or legislation of the particular country in which the legal entity is registered. Typically, the tax or reporting period aligns with the calendar year.
In simple terms, governments collect corporate taxes as a significant source of government revenue.
In many jurisdictions, both local and foreign corporations are subject to taxation. Local companies may be taxed on income earned globally, while foreign companies typically pay tax only on income generated within a specific jurisdiction. To prevent double taxation, countries often establish special agreements with each other, such as Double Taxation Avoidance Agreements (DTAAs).
Corporate income tax is generally calculated by the government on the net income after deducting expenses. The actual amount a company pays in corporate tax can be reduced through deductions, government subsidies, and tax loopholes. Consequently, the effective corporate tax rate, which represents the amount a corporation pays, is often lower than the statutory rate due to these deductions and subsidies.
Tax Rates
Corporate tax rates vary widely across jurisdictions. For instance, as of 2023, France and Spain have a corporate income tax rate of 25%, the Czech Republic and the UK have a rate of 19%, and Denmark’s rate is 22%. Hungary boasts the lowest tax rate in Europe at 9%. In some countries, companies are obligated to pay not only federal but also provincial (local) corporate taxes.
Corporation tax can be imposed on either a flat or progressive basis. In the former system, tax rates are consistent regardless of income, a system prevalent in most countries globally.
In the latter, where taxes follow a progressive scale, the tax rate is contingent on the corporation’s income level — in other words, higher profits incur higher tax payments. The United States is an example of a country with a progressive corporate tax system.
Nearly every country maintains a list of goods and/or activities eligible for a reduced tax rate. This often includes sectors like the production of pharmaceutical products and IT companies. Certain types of companies may even be entirely exempt from corporate tax.
Indeed, because tax rates can vary significantly among different countries, entities often seek out so-called offshore zones or tax havens. These are jurisdictions that provide more favourable tax and business conditions, attracting corporations to relocate their operations there. You can learn more about offshore companies here.
