What is the Conduit Theory?
The conduit theory is an understanding that has to do with the taxation applied to an investment firm. Essentially, the conduit theory states that if the firm routinely passes interest, dividend income, and capital gains on to the client base and the shareholders of the firm, then the company should not be liable for taxes on those monies. Instead, the recipients of the funds should be liable for the taxes only, and not the investment firm as well. An underlying principle of the conduit theory is the rejection of an action that effectively amounts to double-taxation on the funds involved. Since the investment firm does not hang on to the dividends or capital gains, the perception is that there is no long term benefit derived from those funds. As such, there is no reason for the investment firm to pay taxes on funds that do not remain at its disposal, and in fact are already subject to taxes that are imposed on the shareholders and clients of the firm. In short, the conduit theory holds
