German Profit Taxes. Christoph Freichel

exercising options under tax law and in the arrangement of planned circumstances in order to minimize the total tax burden.

      •The evaluative-normative theory of business taxation: Critical opinions on the current state of tax law (de lege lata) as well as planned changes (de lege ferenda).

      It is an indispensable prerequisite to first examine tax law in terms of a portrayal of legal norms because tax law constitutes, on the one hand, the framework within which fiscal arrangements are made and, on the other hand, the instrument of such arrangements. Building on this, the effects of taxation can be examined for subsequent targeted tax planning afterwards.

       Note

      There are three different tax disciplines:

      •Tax law

      •Financial science and

      •Business taxation

       1.4The tax system

       1.4.1Earnings of the state

      The public sector is financed by public and extraordinary earnings. Ordinary earnings end up with the state and are thus available to the state indefinitely. A difference must be drawn between earned income of the state and (sovereign) compulsory levies. Earned income of the state is acquired by the public sector’s participation in the market, e.g. by way of private businesses with public shareholding (Deutsche Post, Deutsche Bahn, Deutsche Telekom, as well as banks, research centers, harbor companies, airport companies and construction companies, etc.). Compulsory levies are divided into taxes, fees, contributions and special duties. Extraordinary earnings are only available to the state temporarily and must be paid back when a certain deadline has been reached. These extraordinary earnings also include public borrowing.

      Figure 4: Possibilities of financing for the state

       1.4.1.1Taxes

      Taxes make up the largest portion of state earnings in all industrial countries, including Germany. According to the legal definition contained in Sec. 3 (1) AO (The Fiscal Code of Germany), taxes are “payments of money that do not represent counter-performance for a particular performance and that are imposed by a polity on all those who fulfill the statutory requirements for the tax liability, in order to generate income”. The term “tax” possesses the following characteristics:

      •Compulsory levies: Taxes are levied by public corporations by virtue of their financial sovereignty. The taxpayer is to pay these levies if certain statutory requirements are fulfilled. It is not voluntary.

      •Payments of money: According to their definition, taxes are payments of money, not performances in kind. They can be payment obligations that occur once (e.g. inheritance tax, and land transfer tax GrESt) or periodically recurring payment obligations (e.g. income tax, corporate income tax, and trade tax).

      •No counter-performance: Taxes neither establish an entitlement to counter-performance by the state, nor is the level of taxes calculated directly according to the public services received by the taxpayer. Thus, taxes are not calculated in accordance with the equivalence principle.

      •Public polity: Tax sovereignty is a prerequisite to levying taxes. In Germany, this is vested in the federal government (Bund), the federal states (Länder), the municipalities (Gemeinden) as well as those religious communities that possess the status of a corporation under public law.

      •Statutory basis: Taxes must be levied from all who fulfill the statutory requirements for the tax liability. Taxes may not be levied in the absence of a statutory basis.

      •Realization of earnings also as secondary objective: Taxes not only serve in the realization of earnings, but also economic- and socio-political (steering-) purposes. For this reason, the discipline of financial science also points out the possibility of using taxes to influence the behavior of the taxpayers (“ecology tax”).

      The levy of taxes is accompanied by the so-called ancillary expenses related to taxes. According to Sec. 3 (4) AO, these are late fees, interest, surcharges on arrears, administrative fines and costs. In doing so, the legislature does not intend to realize earnings, but rather to cause a certain behavior on the part of the taxpayer. Ancillary expenses related to taxes are imposed if the tax-related obligations are not or are belatedly fulfilled by the taxpayer.

       1.4.1.2Fees

      Fees (under public law) are also levies by the state for the realization of earnings. In contrast to taxes, however, the performance by the citizen (in the form of a fee) is matched by a counter-performance by the state. Thus, they are levied for the actual, individual use of public facilities; the equivalence principle applies. A distinction must be made between the following:

      •Administrative fees (e.g. passport fees, motor vehicle registration fee),

      •Utilization fee (e.g. road tolls, entrance fee for the local public swimming pool, trash collection fee), and

      •Licensing fees (e.g. for concession fees, UMTS-license fees).

       1.4.1.3Contributions

      Contributions are expense reimbursements imposed for the potential utilization of the concrete services performed by public facilities. They also serve as financing. Contributions only entitle the party liable to pay to the possibility of utilizing the services performed, whereby a concrete counter-performance is rendered in the case of fees. The party liable to pay contributions must fulfill the payment obligation, even if he does not take advantage of the counter-performance (e.g. tourism levy).

       1.4.1.4Special levies

      Special levies are levies that are not assessed to cover the general fiscal requirements of the state, but rather serve to finance special tasks and are only levied from certain groups of citizens. Inaddition to financing, steering objectives are also pursued; in doing so, an incentive is intended for a certain behavior and undesirable behavior is to be sanctioned. An example of this is the equalisation levy in accordance with the German Severely Handicapped Persons Act (Schwerbehindertengesetz) paid by the employer if a certain minimum number of severely handicapped persons is not employed.

       1.4.2Classification of the tax types

      The tax system consists of all individual taxes levied as well as the way in which they are levied. Considering the numerous federal, regional and communal taxes that are levied in Germany from different taxpayers, for different taxable objects, and on different assessment bases in different forms – partially with dependencies and interdependencies – the German tax system is a very complex system. On 19 September 2003 the law of taxes and levies for the Federal Republic of Germany consisted of 118 laws, 87 ordinances as well as several hundred statements made by the German Federal Ministry of Finance (BMF). Additionally, there are innumerable laws that are not tax laws per se, but are of relevance to tax matters.

      Scholars have developed several different approaches to systemizing the (individual) taxes.

      Figure 5: Approaches of systematization