Chapter 2: Income and Corporate Taxation Fundamentals

Question 1

Average tax rate

Answer 1

(total taxes on income)/(total income)

Incorporates taxes paid at all levels of income.
Below marginal tax rate, although for very high income earners they are pretty close.

Question 2

Marginal tax rate

Answer 2

Tax rate applied to every next euro added to your taxable income.

Question 3

When do we use average vs. marginal tax rate?

Answer 3

*Average tax rate-
use when comparing the entire economic activity.
Which NEW subsidiary to choose?
*Marginal tax rate-
use for investment decisions when we expand the business.
To which EXISTING subsidiary to expand?

Question 4

Dividend taxation (Germany)

Answer 4

taxed wit flat rate of 25%

Question 5

Capital gains taxation (Germany)

Answer 5

*Share of equity <1%: reduced flat rate of 25%
*Share of equity >=1%: 60% of gain taxed at personal income tax rate.

*Real estate:
–>short-term as ordinary income
–>long-term (10+ years) not taxed

Financial investments are taxed at lower rates than real investments (ex. real estate). This increases the cost of capital for real investments comparing to financial investments.

Question 6

Difference between payroll tax and income tax.

Answer 6

Payroll tax is taxed on wages (employer takes the tax out of BRUTO and transfers to authorities), the employee does not have to pay it, it is already deducted.

Payroll tax is subject to tax return, it can be higher than needed (because of commute etc. deductions)–> difference as a tax refund.

Income tax is that you file tax return and pay taxes yourself (ex. Money from renting out apartment).

Payroll tax is a component of the income tax.

Question 7

Taxation of Corporation- overview

Answer 7

LLC’s –> 2 separate legal entities
*double taxation:
1. Corporation pays corporate tax
2. Owner pays dividend tax on payment only if company pays dividend.
*Payments to the owner other than dividends ARE TAX DEDUCTIBLE (expenses as wage)
*Any transfer of cash HAS tax consequences (ex. dividends)

Question 8

Taxation of Partnership- overview

Answer 8

Individual liability firms–> firm & owner are ONE legal entity.
*Firm generates profits and they are directly passed through the owners.
*Owner pays personal income tax on profits.
*Payments to owners (ex. wages) ARE NOT TAX DEDUCTIBLE. They only affect profit allocation.
*Transfer of costs IS NOT taxed.

Question 9

Taxation of businesses: Germany

Answer 9

Taxable income determined by using accrual accounting, where change in assets and liabilities is a subject to taxation.

1.) Owners of partnerships and sole proprietorships are subject to:
*Personal income tax
*Local business tax (can be ignored because of credit mechanism)
Owner pays taxes on the profits of the firm.

2.)Corporations are subject to:
*Corporate tax
*Local business tax (profit x 3,5% x local multipl.)
–> both are about 30%
Corporation pays taxes on the profits of the firm.
Shareholders pay personal income tax on dividends.

Question 10

Taxation of businesses: U.S.

Answer 10

Statutory corporate tax rate: 21%
Taxes paid on 3 levels: federal, state, city/county tax.

*Owners of partnerships, limited partnerships, sole proprietorships are subject to personal income tax.
*S corporations- same as partnerships
*C corporations- subject to corporate income tax.