Capital 7: Group taxation II

Question 1

What are the different screnarios between the relationship of tax and civil law?

Answer 1

Scenario 1: Tax law ties up to Civil Law: full legal identity for both

Scenario 2: Tax law ties up to Civil Law: No/partial legal identiy

Sceanrio 3: Classification of Partnerships in Civil Law negated for Tax purposes:
- Civil : full legal identity
- Tax: No/partial legal identity

Scenario 4: Corporation Principle desprite lacking civil law capacity
- Civil: no/partial legal identity
- Tax: Full legal identity

Scenario 5: Taxation independent from Civil law
- Civil: Option
- Tax: Hybrid

Question 2

What are the What are the two main classifications of contractual relations for tax purposes?

Answer 2

1.Recognition for tax purposes (business expense).

2.No recognition for tax purposes (no business expense).

Question 3

What are the types of taxation when contractual relations are recognized for tax purposes?

Answer 3

• Intransparent taxation
• Transparent taxation
• Hybrid taxation

Question 4

What are the types of taxation when contractual relations are not recognized for tax purposes?

Answer 4

• Transparent taxation
• Hybrid taxation

Question 5

What are the key differences in the civil law treatment of partnerships?

Answer 5

Differences arise regarding:
Legal identity vs. no legal identity.

Question 6

How are contractual relations treated in countries with intransparent taxation?

Answer 6

Contractual relations are treated consistently and recognized as a business expense.

Question 7

What happens to contractual relations in transparent or hybrid taxation systems?

Answer 7

Contractual relations may be recognized or negate

Question 8

What is the taxation in scenario 1+4 with Cofrporate taxation of partnerships with Full legal identity

• Partnership, Partners and Contractual relations

Answer 8

Partnerships:
- Tax subject, Determination of profits and qualification of income
- Deferral principle
- Losses are not transfered to partners, loss deduction at partnership level

Partners:
- Subject to PIT and cash principle
- Profit: withdrawn/distributed
- Taxation follows dividend taxaton/corporation tax system

Contractual relations
- recognized for tax purposes
- Differrent incoem categories at the level of the partners
- cash principle

Question 9

What is the taxation in scenario 2+3 with Transparent Taxation of Partnerships with No/Partial legal identity

• Partnership, Partners and Contractual relations

Answer 9

Partnership
* No tax subject
* Qualification of income

Partners
* Tax subject
* Determination of profits (exceptions)
* Apportioned profits = business income (accrual)
* (Progressive) PIT
* Losses are transferred to partners

Contractual relations
* Not accepted in most countries
* Minor exceptions (Italy, Malta, Poland, United Kingdom)

Question 10

What is the taxation in scenario 5 with Hybrid taxation

• Partnership, Partners and Contractual relations

Answer 10

No option: see scenario 2 (transparency principle)

If Option: see scenario 1 (corporate principle)

Question 11

What are the two main principles under the dual system of company taxation?

Answer 11

• Corporate principle: Partnerships are subject to tax (legal capacity)
• Transparency principle: Partners are taxed on their portion of profits (no legal capacity).

Question 12

What are the key features of the corporate principle in partnership taxation?

Answer 12

• Taxation of partnerships is similar to corporations.
• CIT (partnership) and PIT (partners) coexist.
• Income shifting is possible via contractual relations.

Question 13

What are the key characteristics of the transparency principle?

Answer 13

• Taxation is similar to that of sole proprietors
• Partners pay PIT on partnership profits
• No income shifting via contractual relations (with exceptions).

Question 14

What are the approaches to determine financial profits?

Answer 14

1.Balance sheet approach: Change of equity capital between the end and the begining of acc year

2.Profit and loss account approach: difference between receipts and expenses of account year –>measurement: Accured and cash

–>Since all receots and expenses correspond to a change of value of assets and liabilititees, both approaches result in the same amount of financial profits

Exception: simplified accounting for small businesses

Question 15

What is the procedure for tax accounting under the two appproach to determine financial profits?

Answer 15

1.Balance sheet approach:

• Seperate/modified tax balance sheet (capitalisation and/or valuation of assets and liabilities) if adjustments are prescribed

2.Profit and loss account approach:

• Add backs/deductions of certain receipts and expenses and deductions/add backs of specified tax receipts and expenses if adjustments are prescribed

Question 16

What are the generally accepted principles for tax accounting?

Answer 16

Framework:
- Item by item principle
- Going concern principle
- Principle of showing revenue, expenses, assets and liabilities

Realisation principle
- Profits are taxed upon realisation
- Accrual principle for receipts and expenses

Net principle
- Expenses incurred in connection with business operations are in principle
deductable
- Deviations, e.g. thin-capitalisation-rules, loss trafficking

Prudence principle
- Account for future losses/liabilities
- Write-off of assets

Question 17

What are the important similarities between tax and accounting profit?

Answer 17

• Framework principles (see section 3.5.4
  above)
• Profit realisation: realisation/accrual
  principle
• Definition of assets and liabilities
• Initial measurement of assets and
  liabilities (acquisition costs and production costs)
• Increasing relevance of IFRS

Question 18

What are the important differences between tax and accounting profit?

Answer 18

Recognition of self-developed intangible assets

Recognition of provisions

Simplified determination of cost values (e.g. LiFo, FiFo, weighted average)

Depreciation (methods and rates)
− Buildings
− Goodwill
− Plant and machinery
− Low-cost assets
− Timing differences

Losses

Question 19

What aare the different treatments of the recognition of self-developed intangible assets?

What is the impact on taxable profits?

Answer 19

• Mandatory/optional
• Prohibited

Impact on taxable profits
− Recognition: capitalisation of costs and subsequent depreciation
− No recognition: immediate write-off
− Impact on annual profits, no impact on total profits

Question 20

What are the different treatments of the recognition of provisions and what are the respective impact on taxable profits?

Answer 20

• Permitted (in principle but exceptionts)
• Prohibited (in principle but exceptions)
• Prohibited in general

Impact on taxable profits

• Permitted: liabilities deductible when accrued
• Prohibited: liabilities deductible upon payment
• Impact on annual profits, no impact on total profit