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A Taxation > Capital 3 > Flashcards

Capital 3 Flashcards

1
Q

What are the 3 pillars of pension system?

A
  1. Public pension: Within social security system, payments by employer
  2. Occupational pension: Usually provided by employer, payments by employer, and or employee
  3. Private pension: Paid soley by taxpayer on a voluntary basic
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2
Q

What is the intertemporal taxation of pensions?

A

A: Contributions by employer and or employee:
- T: paid out of taxed income
- E: Deductible from the tax base

B: Fund´s investment return
- T: Pensions fund is taxable with return on investment
- E: pensions fund is exempt from taxation

C: Withdrawal of pension benefits:
- T: pension payment is fully or partly subject to tax
- E: pension payment is excempt from taxation

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3
Q

Taxation of pensions: Example:
EEE, TTT, TTE, TEE

A

EEE:
- Contribution: 100
- ROI: 100*1,05^10 - 100 = 62.9
- Pension payment: 100+62.9= 162.9
PV: 100

TTT:
- Contribution: 100x(1-0.25) = 0.75
- ROI: 75x(1+0.05x(1-0.25))^10 - 75 = 33.4
- Pension payment: (75+33.4)x(1-0.25)= 81.3
PV: 56.3

TTE:
- Contribution: 100x(1-0.25) = 0.75
- ROI: 75x(1+0.05x(1-0.25))^10 - 75 = 33.4
- Pension payment: (75+33.4)= 108.4
PV: 75

TEE:
- Contribution: 100(1-0.25) = 75
- ROI: 751.05^10 - 75 = 47.2
- Pension payment: 75+47.2= 122.2
PV: 84.5

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4
Q

What is the general formula of net present value?

A

PV: C * (1-ta) * (1+r*(1-tb))^T * (1-tc) * 1/(1+r*(1-td))^T

C = Contribution
r = interest rate
T = the investment period
ta = tax on contriibution
tb = tax on yielded interest
tc = tax on withdrawal
td = tax rate on general capital income

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5
Q

What is director´s renumeration?

A
  • Payments to members of a managing board of directors: usually taxed as employment income
  • Payments to members of a supervisory board: either taxed as employment income, as business income or as income from professional services –>not subject to SSC
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6
Q

What are the 3 kinds of investment icnome?

A
  1. Income from fixed assets (movable or immovable property, rental income)
  2. Income from licences (Licence fees on patents, royalties)
  3. Income from capital market: Interest income, Dividends
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7
Q

What are the two alternative of determination of rental income?

A

Alternative I:
- received rental income - related actual costs,
- often incl. capital allowances or lump-sum deductions

Alternative II:
- Deemed rental income based on e.g. cadastral tables, determined by tax authorities, deductions are not allowed
- Examples: Belgium, Netherlands

–>Income is either subject to progressive tax rates or flat rates

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8
Q

What are the main characteristics how are royalties taxed?

  1. Income type
  2. Tax rate
A
  • Usually, the qualify as investment income or rental income if not part of a business,
  • and are subject to either progressive or flat tax rates
  • Different taxation often related to the kind of royalties; know-how derived from the
    inventor: business income, copyrights: investment income
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9
Q

What are thre 3 forms of dividend taxation?

A
  1. Classical system: no elimination of double taxation, net dividends fully taxable as investment income#
  2. Shareholder relief: dividends are only partly subject to tax, e.g. at 50% or are taxable at reduced rates
  3. Imputation system: corporate tax due is creditable against the tax on gross dividend (dividend payment plus corporate tax due on the underlying profit)

–>Exemption dividends are exempt from PIT

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10
Q

What are the 3 tax systems including capital gains in taxable income?

A
  1. Comprehensive IT (accrual method): capital gains part of the taxable income and included in the ordinary income
  2. Comprehensive IT (only standard income): capital gains not taxable
  3. Comprehensive IT (accrual method/standard income with seperate capital gains tax): capiital gains taxed seperately from ordinary income
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11
Q

Why are capital gains often treated preferentially?

A
  1. Progression
  2. Inflation
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12
Q

Why is progression a reasons for the preferential treatent of capital gains?

A

Progression = means that tax rates increase with income levels

  • When capital gains are taxed upon realization, the entire gain is added to income in the year of sale, possibly pushing the taxpayer into a higher tax bracket
  • And therefore likely to be higher than if capital gains would have been taxed on a constant basis
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13
Q

Why is inflation a reasons for the preferential treatent of capital gains?

A
  • Typically a portion of capital gains can be traced back to price increases in the past, i.e. incurred during holding/possession period
  • this inherent part of a capital gain does not increase the taxpayer’s ability to pay since he cannot maintain his original capital stock
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14
Q

Why is a distinction between capital gains and ordinary business income necessary and in which methods is it necessary?

A
  • necessary in both a comprehensive IT (accrual method) and a separate capital gains tax
  • preferential tax treatment is only granted to capital gains!
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15
Q

What is the criteria to distinguish capital gains from ordinary business income?

A
  • Number of similar transactions: the greater the number of similar transactions in the past, higher liklihood for ordinary business income
  • Nature of asset: when there is a intention to resell at a profit
  • Period of ownership: The shorter ownership, the more likley i the gain regarded as business income
  • related activity: presumption that transaction is connected with taxpayer ordinary business
  • Degree of organization: activities organized and carried on in the manner of a trade ->ordinary business income
  • Circumstances that caused the disposition:
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16
Q

Preferential treatment of capital gains: what methods exist incorporate a preferential treatment?

  • connecting factors for tax base and rate?
A

Tax base:
- exemption (total/partial)
- Allowances
- Indexation
- Roll-over-relief

Tax rate:
- Reduction
- Deferment of taxation

17
Q

Preferential treatment capital gains:

What is meant with exemption, allowances? Country examples

conncenting to the tax base?

A
  • Excemption: In Cyprus, capital gains exempts fromt taxation, außer immmovable prooperty
  • Allowances: Germany grants taxpayers a maximum allowance of 45.000 for capital gains realised upon the sale or termination of their business ->tax reduction: allowances * tax rate
18
Q

Preferential treatment capital gains:

What is meant with Indexation?

conncenting to the tax base?

A

Indexation: Portugal, acquisition cost of i..e fixed business assets are adjusted acc to the appliciable indexation relief after >24 months

  • Indexation relief coefficients lists different coefficients from 1.73 to 1.00
19
Q

Preferential treatment capital gains:

What is meant with , Rollover relief?

conncenting to the tax base?

A

= Rollover relief applies when the capital gain from the disposal of an asset is not immediately taxed
- the gain is deducted from the acquistion of the new replacement asset
- taxation is deferred until the replacement asset is disposed of

Deferment of taxation of capital gains until
- Disposal acquired assets (if non depreciable)
- Depreciation of acquired assets (if depreciable) -> 100k; depreciation 10.000 über 10, aber with gain 50k —> 50000/10 = only 5.000 depreciation which results in higher taxable income

20
Q

Preferential treatment capital gains:

What is meant with reduced tax rate, deferment of taxation?

connected to the tax rate:

A

reduced tax rate:
- reduced tax rates i.e. when assets hold for a longer period

Deferment of taxation:
- In france, short-term gains, i.e. assets held for less than two years, are taxed as ordinary business income ->optionally capital gains can be spread over three years

21
Q

What are other privately held assets?

A

= comprise in particular land and buildings and share in corporations: Land and buildings:

  • Capital gains from the disposal of these assets computed and taxed similar to capital gains from business assets
22
Q

What are the execptions in the taxation of other privately held assets in particular land and buildings ?

A
  • Capital gains from the disposal of residential buildings tax-exempt in most countries
  • Many countries also exempt long-term capital gains from immovable property, i.e. land and buildings held for more than, e.g. five years in Italy and ten years in Germany
  • Reason: to tax only capital gains derived from speculative transactions, i.e. short
    term
  • Otherwise the concept of standard income prevails
  • These capital gains are typically part of other/miscellaneous income
23
Q

What is the taxation rationale regarding shares in corporations?

A
  • Should be subject to tax (principle of fairness)
  • Should be granted preferential treatment like other capital gains (progression of PIT and inflation)
24
Q

What is the issue with taxing capital gains from the disposal of shares?

A
  • Double taxation of corporate profits (CIT + PIT)
  • But: corporate profits (CIT) are also subject to PIT when distributed as dividends
  • Dividends and capital gains from disposing shares are identical types of income from an economic point of view
  • Neutral taxation of corporate finance demands for an equal taxation of dividends and capital gains from disposing shares
25
Q

What is the result of the preferential tax treatment of capital gains from shares and dividends?

A
  • Incentive to sell shares instead of distributing profits when capital gains receive a preferential tax treatment (and vice versa)
  • Incentive to retain profits when dividends and capital gains are subject to
    PIT (lock-in-effect)

Summary

  • Sell Shares: Investors are motivated to sell shares rather than take dividends if capital gains have lower tax rates.
  • Retain Shares: Investors may delay selling shares (lock-in effect) when capital gains are subject to tax only upon realization.
26
Q

What is the shareholdings distinguishen regarind the disposal of capital gains from shares?

A

1.Substantial shareholdings:

  • Relief is either granted by reducing the tax rate or the tax base
  • Example: 1% or more of share capital in Germany

2.Non-substantial shareholdings:
- Short-term capital gains taxed like capital gains from substantial shareholdings in most countries (speculative transactions)
- Long-term capital gains tax exempt in many countries which obviously follow the concept of standard income

A Taxation (12 decks)

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