How does double taxation of corporate income occur?

Answer 1

A corporation is a taxpaying entity. That is, it must file an annual tax return and pay taxes on its income. If those earnings are distributed to a shareholder, this distribution is treated as a dividend, which is then taxable to the shareholder. The effect of this is that corporate earnings are taxed twice—once at the corporate level and once at the shareholder level, when the earnings are distributed in the form of dividends.