“Significant risks and potential disadvantages for both developed and developing countries.” Each country shall endeavour to tax income received in its territory on the basis of one or more connecting factors, such as the location of the source, the domicile of the taxable unit, the maintenance of the permanent establishment, etc. The interaction between two tax systems, each belonging to a different country, can lead to double taxation. Here are the main advantages of DTAA. The company itself doesn`t pay taxes twice, but only the noise of “double taxation” can make potential entrepreneurs shuddle. There is, however, another option. Select the “S Corporation” tax status of the Internal Revenue Service (IRS) to avoid double taxation. The company must pay income tax at the entity`s rate before profits can be paid to shareholders. Then, all profits distributed through dividends to shareholders will again be subject to income tax at the individual rate. Corporate profits are thus subject to income tax twice.
Double taxation does not apply to S companies that are able to pass on profits directly to shareholders without the intermediate stage of dividend payments. In addition, many small businesses can avoid double taxation by paying profits to their employees/shareholders as salaries. Yet double taxation has long been criticized by accountants, lawyers and economists. If you are going on a secondment abroad, you should also look at the corresponding double taxation treaty to see if it can bring tax benefits.