Capital 6: Business Taxation I Flashcards
What are the connecting factors of business taxation - What are the different types of taxes.
1.Personal taxes: Natural persons and Legal persons
2.Taxes on objects: Businesses and Real Estate
3.Transaction taxes: Services and Transfer of property
–>No seperate and uniform taxation exists
What are the two main tax subjects under the dual system of business taxation?
- Natural persons (individuals)
- Separate legal entities (corporations)
Dual system
How are natural persons e.g. sole propreitors and partners of a partnership taxed under the transparency principle in the dual tax system
the transparency principle is applied:
- Personal income tax
- Taxed on worldwide income.
- Business income includes all assets and liabilities, as contractual separation between business and owner is impossible.
- Income is classified as business income.
- Based on the accrual method of accounting
How are corporations taxed under the dual system?
- Corporate income tax applies
- Taxed on worldwide income and business income.
- Uses the accrual method.
- Retained income is sheltered from taxation at the shareholder level (deferral principle).
How are shareholders of corporations taxed?
- Personal income tax on capital income (e.g., dividends, capital gains)
- Taxation based on the cash method
What are the rules for contractual relations between a corporation and its shareholders?
- Possible under civil law (e.g., management, financing, lending)
- Accepted in tax law if concluded on an arm’s length basis
- Shareholders’ personal income may include categories such as employment income, capital income, and rental income
What determines the tax liability of a sole proprietor?
- Unlimited liability: Based on residence or habitual abode, taxed on worldwide income
- Limited liability: Based on income from domestic sources.
What type of income category is income from a sole proprietor taxed ?
Business income is taxed
How is business income determined for sole proprietors?
- Calculated based on profit
- Uses the accrual method (with an exception for SMEs, which can use modified cash flow)
- The profit amount is taxed regardless of whether it is retained or withdrawn
What is the date of taxation for sole proprietors?
- Based on the accrual method.
- Applied on an annual basis.
How are losses treated for sole proprietors?
- Losses can be offset against income from other sources (limited by personal income tax rules)
- Losses can also be deducted from total income in previous or subsequent years.
Why are contractual relations impossible for sole proprietors?
- The business has no separate legal capacity
- All profits are classified as business income
- All assets are considered business assets.
What tax rates apply to sole proprietors?
- Progressive tax rates generally apply
- Joint taxation depends on the personal circumstances of the proprietor
- Special concepts (e.g., dual income tax in Nordic countries).
In Germany:
- Retained profits taxed at 28.25%.
- Withdrawals taxed at 25%.
- Overall tax rate: 46.19%.
How is a corporation taxed at the corporate level?
- Taxed on corporate income (tax bases, rates, and systems).
- May include additional taxes (e.g., profit and non-profit taxes) or special taxation concepts like the dual income tax (DIT)
How are shareholders of a corporation taxed?
Shareholders pay personal income tax on dividends and capital gains
Can corporations and their shareholders have contracts?
Yes, subject to:
- Payments being deductible at the corporate level, verified by the arm’s length test.
- Payments being taxed at the shareholder level as personal income (e.g., employment income, rental income)
What defines a corporation in terms of taxation?
- Own legal capacity
- Legal status depends on its legal form (e.g., Aktiengesellschaft, limited company, European company)
- Subject to unlimited taxation on worldwide income based on its residence
- Taxation is independent of the taxation of individual shareholders.
Which question do we need to ask ouselves when looking at specific tax scenarios? For example the taxation of a business?
Liability to tax:
- unlimited vs.
- limited liability
Type of income:
- trade or business or
- personal income?
Determination of income:
- Accrual vs.
- Cash
Date of taxation:
- Accual/Cash,
- annually?
What is liabiltiy to tax, type of income for corporations?
Liability to tax
Unlimited liability: Resident corporations
- Legal seat or effective place of management
- Worldwide income
Limited liability:
- Non-resident corporation
- Source (domestic) income
Type of income
- Companies having an own legal capacity are treated as a trade or business in commercial law (book-keeping)
- All income is treated as business income
How is profit determined using the balance sheet approach?
(Adjusted for: ..)
Net business assets at the end of the tax period
- Minus net business assets at the beginning of the tax period
- Equals the change in equity during the tax period.
Adjusted for:
- Add: Withdrawals
- Subtract: Contributions
- Adjust: Specific modification for CIT (Corporate Income Tax)
= Profit of the tax period:
+ Non-deductible items for tax purposes
- Tax exempt income
= Taxable income of the tax period
How is profit determined using the profit and loss account approach?
Total receipts of the tax period (as accrued)
- Minus total expenses of the tax period (as accrued)
- Equals: Net receipts of the tax period
Adjusted for:
- Add: Withdrawals
- Subtract: Contributions
- Adjust: Specific modification for CIT (Corporate Income Tax)
= Profit of the tax period:
+ Non-deductible items for tax purposes
- Tax exempt income
= Taxable income of the tax period
What is CIT, and how does it modify taxable income?
Corporate Income Tax (CIT) modifies taxable income by adding or deducting specific items beyond the calculation of equity changes
What are examples of additions to taxable income for CIT?
- 50% of fees paid to supervisory board members (e.g., in Germany)
- Interest paid on shareholder debt financing, subject to thin capitalization rules.
What are examples of deductions from taxable income for CIT?
- Donations to non-profit organizations, within limits (e.g., France, Germany)
- Intercompany dividends and capital gains, under specific conditions.
