Corporation tax is a tax imposed by a government on the taxable profits or income of companies and certain other corporate entities. It is commonly called corporate income tax in many jurisdictions, although the precise terminology and legal design differ between countries. The tax is generally imposed on the company as a separate taxpayer rather than directly on its shareholders, meaning that the company's tax liability is distinct from personal tax liabilities arising when shareholders receive dividends, remuneration or other distributions.
The taxable amount is normally not identical to accounting profit because tax legislation determines which income is taxable, which expenses are deductible, how losses are relieved, how capital expenditure is treated and whether particular transactions receive exemptions or special treatment. Corporation tax is therefore a legal tax computation based on statutory rules rather than simply a percentage of the profit shown in financial statements.
The basic corporation-tax mechanism involves determining taxable profits for a defined accounting or tax period and applying the relevant statutory rate or rates. A simplified calculation might start with accounting profit before tax, add back expenses that are not deductible, subtract qualifying deductions or exempt amounts, incorporate tax depreciation or capital allowances, account for losses and other reliefs, and arrive at taxable profit.
The applicable corporation-tax rate is then applied, subject to any thresholds, marginal rules, supplementary rates, sector-specific taxes, minimum-tax systems or other provisions. The resulting gross liability can be reduced by qualifying tax credits or other statutory reliefs. Businesses must distinguish the tax charge recognised in financial statements from the amount actually payable to the tax authority because accounting tax expense can include current and deferred tax.
Corporation tax has a long historical development connected to governments' need to raise revenue from incorporated businesses while recognising that companies are legally distinct entities. Modern corporate taxation developed alongside the expansion of incorporated companies, industrial economies and international trade. The terminology reflects the legal concept of a corporation or company being treated as a taxpayer in its own right.
Different countries have adopted different approaches to corporate taxation, including systems that tax companies separately from shareholders, systems that integrate corporate and shareholder taxation to varying degrees, and systems that provide special treatment to particular forms of enterprise. International corporate taxation has subsequently become increasingly important because multinational groups can earn income, own intellectual property, borrow money and conduct operations across multiple jurisdictions.
Taxable profit is affected by numerous rules concerning business expenditure and income. Ordinary operating costs may be deductible where they satisfy the relevant statutory requirements, while personal expenditure, certain penalties, capital costs or other specified categories may be restricted or prohibited. Capital assets often receive tax treatment different from their accounting treatment. Instead of deducting accounting depreciation, a jurisdiction may provide statutory capital allowances, tax depreciation or other mechanisms.
Interest deductions can also be restricted under rules addressing excessive leverage or base erosion. Charitable contributions, research and development expenditure, entertainment, losses, provisions and related-party transactions may each have specialised rules. Consequently, two companies with identical accounting profits can have different corporation-tax liabilities because their underlying expenditure, assets, losses and transactions receive different tax treatment.
Corporation tax interacts closely with international taxation. A company operating in more than one country may have taxable presence in several jurisdictions, potentially creating obligations based on residence, source, permanent establishment or other connecting factors. Countries may tax foreign income subject to exemptions, credits or other mechanisms, while treaties can allocate taxing rights and reduce certain forms of double taxation. Payments such as interest, royalties and dividends can generate withholding-tax obligations. Transfer-pricing rules may require transactions between associated companies in different jurisdictions to be priced consistently with the arm's-length principle. International corporate taxation has therefore developed into a complex field involving domestic legislation, bilateral treaties and increasingly coordinated international standards.
Corporation tax is distinct from several other business taxes. It differs from VAT or sales tax because those taxes generally target taxable consumption or transactions rather than corporate profits. It differs from payroll tax because payroll taxes are associated with employment remuneration. It also differs from dividend taxation because corporation tax is imposed on the company's taxable profits, while dividend taxation generally concerns distributions received by shareholders. A company's overall tax burden can involve all of these taxes simultaneously. Corporation tax also should not be confused with the accounting concept of profit before tax or with deferred tax, which is a financial-reporting mechanism reflecting temporary differences between accounting carrying amounts and tax bases.
From an accounting perspective, corporation tax normally creates both current-tax and, where applicable, deferred-tax considerations. Current tax represents tax payable or recoverable in respect of taxable profit for the reporting period, while deferred tax generally reflects future tax consequences of temporary differences between financial-reporting carrying amounts and their corresponding tax bases. This distinction is important because a company's tax expense in its financial statements does not necessarily equal the cash tax paid during the same period. Businesses therefore maintain tax reconciliations explaining differences between accounting profit and the effective tax rate or between tax expense and expected statutory taxation. Such reconciliations help management, auditors, investors and tax authorities understand the relationship between financial results and tax outcomes.
Corporation tax has substantial practical significance because it affects cash flow, investment decisions, financing structures, acquisition planning, loss utilisation and reported financial performance. Companies generally need systems for calculating taxable profits, retaining supporting evidence, preparing returns, making payments, monitoring deadlines and responding to enquiries. Tax planning can lawfully involve choosing among structures or transactions that legislation permits, whereas deliberately concealing income, fabricating deductions or misrepresenting transactions can constitute tax evasion and may carry serious penalties. The precise corporation-tax rate, filing requirements, residence rules, reliefs and deductions vary by jurisdiction and tax period, so a real corporation-tax computation must always be based on the legislation applicable to the specific company rather than on a generic rate or formula.
