2. Introduction to German Tax System and Income Tax
Topics : System of Income Tax (EStG) and Tax Liability Scope of Business Income Non-business activities Determination of Income Compensation of losses
Prof.Dr. von Wuntsch - Spezielle Probleme der Einkommensteuer
Tax Law
is a part of public financial law and
linked to civil law (tax provisions refer to terms and definitions determined in civil law, esp. company law).
Prof.Dr. von Wuntsch - Spezielle Probleme der Einkommensteuer
Allocation of Tax Revenue – Art. 106 GG
Federation - e.g. customs duties, solidarity charge
German States - e.g. inheritance and gift tax, real estate transfer tax, property tax
- tax equalisation among states
Joint Taxes - allocated to the Federation and the States (e.g. share in EStG / KStG / USt)
Municipalities - share in trade tax (GewSt) and real estate tax
Prof.Dr. von Wuntsch - Spezielle Probleme der Einkommensteuer
Direct Taxes = tax payer and tax debtor is identical
Income Tax
Corporation Tax
Trade Tax
Einkommensteuer (ESt)
Körperschaftsteuer (KSt)
Gewerbesteuer (GewSt)
Prof.Dr. von Wuntsch - Spezielle Probleme der Einkommensteuer
Indirect Taxes= Tax Payer and Tax debtor are not identical
Value Added Tax Umsatzsteuer (USt)
Prof.Dr. von Wuntsch - Spezielle Probleme der Einkommensteuer
Tax Revenue 2006 in Germany (bn €)
Joint Taxes: 329.3 Federal Taxes: 88.1 States Taxes: 21.7 Community Taxes: 49.3
Prof.Dr. von Wuntsch - Spezielle Probleme der Einkommensteuer
Tax Revenue 2007 billion €
Value Added Tax 169.6
Income Tax on income from employment 131.8
Income Tax on other income
Withholding Tax
25.0
13.8
Trade Tax 40.1
Corporation Tax 22.9
Total Tax Revenue 538.2
Prof.Dr. von Wuntsch - Spezielle Probleme der Einkommensteuer
National tax ratio in Germany = tax revenue/GNP
Year national tax ratio 2000 23 % 2001 21.6 % 2002 21.0 % 2003 20.9 % 2004 20.0 % 2005 20.1 % 2006 21.2 %
Prof.Dr. von Wuntsch - Spezielle Probleme der Einkommensteuer
Sources of German Tax Law
= Binding norms (come into existence by legeislative power or by decree)
= Issued by the Minister of Finance, binding only the
members of the Internal Reveneue Service
Tax Acts (Steuergesetze)
Ordinances(Durchführungsverordnungen)
Administrative Guidelines (Einkommensteuerrichtlinien)
Prof.Dr. von Wuntsch - Spezielle Probleme der Einkommensteuer
Principle of Residence - § 1 EStG
Unlimited Tax Liability§ 1 para. 1 EStG
» Principle of residence (flat/dwelling or presence for more than 6 months in Germany)
» Worldwide income is taxable
Limited Tax Liability§ 1 para. 4 EStG
» Principle of residence (no residence in Germany)
» Only domestic income is taxable
Prof.Dr. von Wuntsch - Spezielle Probleme der Einkommensteuer
Determination of Taxable Income according to § 2 EStG
(1) Income from agriculture and forest economy(2) Income from trade and business(3) Income from independent personal services(4) Income from employment(5) Income from capital investments(6) Income from rent and leasing(7) Other income within the definition of § 22 EStGSum of income (of an individual)- Special reliefs (i.g. for elder people)Total amount of income (= Gesamtbetrag der Einkünfte)
Prof.Dr. von Wuntsch - Spezielle Probleme der Einkommensteuer
Determination of Taxable Income (Continuation)
- Compensation of losses according to § 10d EStG- Personal deductions
(Sonderausgaben and außergewöhnliche Belastungen)
= Income
- Tax allowances (= preferential treatments)
= TAXABLE INCOME
Apply Income Tax Rate according to § 32a EStG You can use the Income Tax Table (basic and splitting-table)
Prof.Dr. von Wuntsch - Spezielle Probleme der Einkommensteuer
Income = Net Income = EinkünfteGross Income
from sources
(1) to (7)
Revenues from sources (1) to (3)
(= Gewinneinkünfte
Revenues from sources (4) to (7)
(Überschusseinkünfte)
less:
source related expenses
less:
Business Expenses
less:
Income related Expenses (= Werbungskosten)
= Net Income
(= Einkünfte)
Profit Surplus of income above income related
expenses
Prof.Dr. von Wuntsch - Spezielle Probleme der Einkommensteuer
Activities must be determined to achieve income (= Einkünfteerzielungsabsicht)
Financial benefits and expenses covered by the 7
categories of income are only subject to
income tax as long as there is a fair chance to
produce a surplus.
Total income must exceed total expenses during
the period of the total project.
Permanent losses or hobby-projects will not be excepted for tax purposes!
Prof.Dr. von Wuntsch - Spezielle Probleme der Einkommensteuer
Income from sources (1) to (3) Profit oriented sources = Gewinneinkünfte
Income from agriculture/forest economy - § 13
Income from trade and business - § 15
Income from
independent personal services - § 18
Prof.Dr. von Wuntsch - Spezielle Probleme der Einkommensteuer
Income from source (2) - § 18 EStG
Independent service income includes: Income from professional services (i.g.
scientific, artictic, musical, educational or literary activities exercised in an independent capacity)
Listed professions: i.g. notaries, attorneys, dentists, tax advisors, ...
Similar professions Independent service income is not subject to
trade tax !
Prof.Dr. von Wuntsch - Spezielle Probleme der Einkommensteuer
Income from source (3) - § 15 EStG
Scope of income from business and trade - § 15 (2):
Any independent activity, undertaken to make a profit, requiring business relationships to third parties, which is not an independent personal service
related to sources (1) and (2).
Prof.Dr. von Wuntsch - Spezielle Probleme der Einkommensteuer
Income from source (3) § 15 EStG
All business and trade income is subject to trade tax !
Prof.Dr. von Wuntsch - Spezielle Probleme der Einkommensteuer
Profit determination methods
A. Comparison of
business property (= Betriebsvermögensvergleich)
§ 4 (1 EStG
B. Comparison of
business property (= Betriebsvermögensvergleich)
§ 5 (1) EStG
C. Cash based accounting (= Überschuss der Einnahmen über die
Ausgaben)
§ 4 (3) EStG
Prof.Dr. von Wuntsch - Spezielle Probleme der Einkommensteuer
Determination of profit from business and trade - § 5 (1) EStG Relevant for taxpayers who have to (or
voluntarily) keep books and records and to prepare financial statements for tax purposes according to §§ 140 or 141 AO (= profit more than 50.000 € per year)
Financial statements have to be prepared in accordance with the Generally Accepted German or International Accounting Principles
» Correlation Principle (see: § 5 (1) EStG)
Prof.Dr. von Wuntsch - Spezielle Probleme der Einkommensteuer
Other profit determination methods- § 4 (1) EStG Relevant for farmers
and persons operating independent services who
voluntarily keep books and records.
No correlation with Generally Accepted German Accounting Principles
Prof.Dr. von Wuntsch - Spezielle Probleme der Einkommensteuer
Profit determination - §§ 4 (1) and 5 (1) EStG
Comparison of business property = Profit
+ Withdrawals from business
(Entnahmen)
- Value of contributions
(Einlagen)
= taxable Profit
Prof.Dr. von Wuntsch - Spezielle Probleme der Einkommensteuer
Other profit determination methods- § 4 (3) EStG Relevant for taxpayers who do not have to
keep books and records and who do not voluntarily keep books and records (= profit till 50.000 € per year)
No correlation with Generally Accepted German Accounting Principles
» Cash based accounting ! (see: § 8 EStG) Relevant for persons operating an
independent service or a small business.
Prof.Dr. von Wuntsch - Spezielle Probleme der Einkommensteuer
Business expenses
Basic provision: § 4 (4) EStG
According to § 4 (5) EStG some expenses are not deductible or limited for the purpose of tax accounting.
Give examples !
Prof.Dr. von Wuntsch - Spezielle Probleme der Einkommensteuer
Income from sources (4) to (7) Non-profit sources = Überschusseinkünfte Determine surplus of income above
income-related expenses
(= Income less „Werbungskosten“)
Surplus is determined on a cash basis only !
(see: § 8 EStG)
Prof.Dr. von Wuntsch - Spezielle Probleme der Einkommensteuer
Income from sources (4) to (7) Non-profit sources = Überschusseinkünfte Definition of income-related expenses
= Werbungskosten (see: § 9 EStG)
Cash-flow principle (see: § 11 EStG)
Expenses are deductible in the year being paid
Compensation of LossesTopics:
(a) Off-set losses within each or other sources of income (§ 2 para. 3 ESG)
(b) Carrying losses back and/or forward (§ 10d EStG)
Prof.Dr. von Wuntsch - Spezielle Probleme der Einkommensteuer
Determination of Income - § 2 EStG
7 Sources of Income (= Summe der Einkünfte)
Sum of Income
- special Reliefs Total amount of Income (= Gesamtbetrag der Einkünfte)
- Losses carried back or forward (§ 10d EStG)
- other deductible expenses or reliefs= Taxable Income (= zu versteuerndes Einkommen)
Prof.Dr. von Wuntsch - Spezielle Probleme der Einkommensteuer
Off-setting losses
(Verlustausgleich)
see: § 2 (3) EStG
• horizontal:
within one source of
income
• vertical:
among different
sources of income
Carrying losses to other periods(Verlustabzug)
see: § 10d EStG
• carry back Verlustrücktrag
• carry forward Verlustvortrag
Prof.Dr. von Wuntsch - Spezielle Probleme der Einkommensteuer
Compensation of Losses
Off-setting losses is prohibited in special cases (i.g. § 15b EStG):
Check:
• Is the investment project designed as a model for
the main purpose of saving taxes ?
• Does the tax benefit exceed the original
investment ?
Prof.Dr. von Wuntsch - Spezielle Probleme der Einkommensteuer
Carrying losses back – § 10d Abs. 1 EStG
Losses exceeding the total amount of income (= Gesamtbetrag der Einkünfte) in one period shall be carried back to last year.
The tax payer can opt for the carry forward method instead.
The limit for carrying losses back amounts to 511.500 € (1,023,000 € for married persons).
Prof.Dr. von Wuntsch - Spezielle Probleme der Einkommensteuer
Carrying losses forward – § 10d Abs. 2 EStG
Remaining losses shall be carried forward in 2 steps:
(1) unlimited deduction up to 1 mill. € ( 2 mill. € for
married persons), and in case of remaining losses:
(2) limited deduction up to 60 % of the remaining total
amount of income
Prof.Dr. von Wuntsch - Spezielle Probleme der Einkommensteuer
Ways of levying income tax
Assessment: Each tax payer is assessed according to the amount of his/her taxable income (after handing in a tax return)
Certain other income is taxed by means of Withholding at Source. Individuals only receiving income from employment can hand in a tax return (option). In the case Withholding Tax exceeds the amount of standard income tax according to the tariff rate, the difference shall be refunded to the tax payer.
Withholding Tax on income from employment (Lohnsteuer)
Withholding Tax on income from capital investments (Kapitalertragsteuer)
Prof.Dr. von Wuntsch - Spezielle Probleme der Einkommensteuer
Individual and Joint Assessment
Although, each tax payer is assessed according to his/her taxable income, there is an exception for married couples.
If husband and wife are both German reseidents they may elect the joint assessment (Zusammenveranlagung). In this case the income splitting system applies according to §§ 26 and 32a para. 5 EStG (= tax on ½ joint income * 2).
Assessment
(a) in accdordance to individual income
(Einzelveranlagung)
(b) in accordance to joint income of married couples
(Ehegattenveranlagung)
Assessment per person and per married couple
Alternative I Alternative II Tax per person (A)
Tax per couple (B)
Mr. Merkel 0 47,000
Mrs. Merkel 94,000 47,000
Joint income 94,000 94,000
Sum of taxes per person
?
Joint taxes for couple
?
Prof.Dr. von Wuntsch - Spezielle Probleme der Einkommensteuer
Assessment per person and per married couple
Mr. Merkel Mrs. Merkel Tax per person (A)
(sum)
Tax per couple (B)
(splitting)
Income A 47,000 47,000
Tax per person (basic)
11,64424.7 %
11,64424.7 %
23,288 23,288
Income B 0 94,000
Tax sum (basic table)
0 31,29633.3 %
31,296
Joint Tax(splitting table)
23,288
24.7 %
23,288
Advantage 8,008Prof.Dr. von Wuntsch - Spezielle Probleme der Einkommensteuer