This chapter deals with taxation when a corporation distributes income. It presumes all events occur within a particular country and that the capital structure of the corporation does not change. Dividends as payments with respect to corporate rights are discussed. Corporate financing in the forms of debt and equity are explored with a consideration of hybrid instruments and thin capitalisation. The discussion proceeds to consider the fundamental features of dividends and hidden profit distributions, which have tax consequences at both the corporate and shareholder levels. The dual nature of corporate income is identified, which involves dividends constituting taxable income. With the taxation of corporate income when derived, the result is economic double taxation, the classical system. Arguments in support of and against this double taxation are considered before the discussion turns to consider the options for relieving the double taxation (dividend relief). Dividend relief options at the corporate level and the shareholder level are explored with a consideration and categorisation of recent international practice. Systems behave differently when faced with expenses in deriving dividends, preference income and dividend streaming. Finally, the manner in which a corporate tax system allocates profits as retained or distributed is considered.

Companies are one of the most common forms of legal entity. They are popular business and investment vehicles and are also used for many other purposes. ASIC’s website indicates that there were 3,241,836 registered companies in Australia as at July 2023. While some of these have only one member, others have many thousands of members. Many large companies are listed on stock exchanges around the world, and their shares are traded daily. At the time of writing, the largest company listed on the Australian Securities Exchange (‘ASX’) was the mining company, BHP Group, which had a market capitalisation of around $230 billion. Companies make up the majority of Australia’s largest taxpayers. Traditionally, Australia has relied heavily on corporate taxation for its tax revenue, and it has one of the highest corporate tax-to-GDP ratios in the OECD. This chapter examines how the tax law applies to companies and their members (eg shareholders). Special taxation rules apply to certain companies, such as PDFs, life insurers, co-operatives, listed investment companies and corporate collective investment vehicles. A separate taxation regime also applies to companies that are members of a consolidated group.