The Problem of Economic Double Taxation
Economic double taxation occurs when corporate profits are taxed twice: first at the company level through Corporate Income Tax, and second at the shareholder level through personal income taxes on distributed dividends.
[ Corporate Gross Profit ] =======> Taxed at Entity Level via Corporate Income Tax (CIT)
                                       |
                                       v (Distribution of Dividend)
[ Individual Shareholder ] ======> Taxed again via Withholding Tax (WHT) on Dividend

The Imputation System vs. Classical System
Governments resolve this double-taxation problem using different structural systems:
  • The Classical System: Corporate profits and individual dividends are taxed completely independently, accepting double taxation as a structural reality.
  • The Imputation System: Shareholders receive a tax credit that matches the corporate tax already paid by the company on those distributed profits, neutralizing the second layer of taxation.
  • The Final Withholding Tax System: Dividends are subjected to a low, flat-rate withholding tax (e.g., 5% or 10%) deducted at source by the company, which serves as the final tax liability on that income.

Inter-Corporate Dividend Exemptions
To prevent multi-layered taxation within corporate groups, dividends distributed from one resident subsidiary company to its resident parent company are typically tax-exempt, provided the parent entity maintains a significant equity ownership threshold (e.g., at least 12.5% voting control).
 
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