German Profit Taxes. Christoph Freichel

and indirect taxes

      The distinction originates from the discipline of financial sciences and is related to the possibility provided by the legislature to shift tax liability. In the case of direct taxes, the tax debtor, the ultimate taxpayer, i.e. the party that ultimately bears the tax burden, and the taxpayer are identical (e.g. income tax). The intended shift of the tax liability from the tax debtor to the ultimate taxpayer is characteristic of indirect taxes. Accordingly, in the case of value-added tax, although the business owner is the tax debtor and the taxpayer, it is the final private consumer, who is to be encumbered financially (ultimate taxpayer).

       Note

      Direct taxes: No shift of tax liability is envisaged

      Indirect taxes: Shift of tax liability is envisaged

      •Personal and impersonal taxes

      Personal and/or impersonal taxes are taxes that allow for characteristics related to individuals (e.g. marital status, age). The most important personal taxes are personal income tax (Einkommensteuer – ESt), inheritance tax (Erbschaftsteuer – ErbSt) as well as the corporate income tax (Körperschaftsteuer – KSt). Another fundamental characteristic of the personal taxes is the distinction between the unlimited and limited tax liability. In the case of impersonal taxes, object-related taxes or real-estate taxes, the amount of taxes is generally determined solely by characteristics related to the object. The trade tax (Gewerbesteuer – GewSt) and the land tax (Grundsteuer – GrSt) are examples of impersonal taxes.

      •Classification according to economic factors

      In examining the economic factors and/or the assessment basis of the taxes, the following groups of taxes can be identified:

      -Profit taxes (the economic success forms the assessment basis of the taxes, e.g. personal income tax, corporate income tax and trade tax),

      -Substance taxes (the amount of funds form the assessment basis of the taxes, e.g. land tax and deferred transaction tax),

      -Transaction taxes (are generally based on legal transactions, e.g. land transfer tax),

      -Excise tax (generally based on consumption; for all intents and purposes, however, it is usually the producer who is taxed, e.g. petroleum tax and tobacco tax).

      Value-added tax cannot be clearly classified according to the scheme above. Technically, it is arranged like the transaction tax and takes into account the change of disposing capacity. According to the intentions of the law, it is, however, an excise tax because the final consumer is to be encumbered.

      Additional classification factors were developed especially within the discipline of financial sciences. In this respect, a distinction can be made, for example, between the parties entitled to the revenue (federal, regional, communal or community taxes) or ac- cording to the unit of measure forming the assessment basis (specific taxes or ad valor taxes). Specific taxes are related to physical magnitudes, such as quantity, weight or lot size (e.g. liters for petroleum tax, kWh for electricity tax). In contrast, the assessment basis of ad valor taxes are values (e.g. the taxable income in the case of personal income tax).

       1.4.3Taxation terminology

       1.4.3.1Taxpayer and/or taxable subject

      The taxable subject is the person, who is subjected to taxation. The taxable subject can be a natural person (personal income tax) as well as a legal entity (corporate income tax), such as a capital company. The term “taxable subject” is synonymous with “tax debtor” and “taxpayer.”

       1.4.3.2Subject of taxation and/or taxable object

      The subject of taxation and the taxable object are used synonymously and can be used to describe a thing, an action or a sum of money. The existence of the subject of taxation and/or the taxable object constitutes the tax liability. For example, the personal income tax and/or the corporate income tax are based on the income earned. An economic asset (e.g. real property, business establishment, motor vehicle) or an economic event (e.g. turnover) can be the connecting factor for taxation.

       1.4.3.3Tax base

      The tax base provides information on the extent to which a subject of taxation is subjected to taxation. It is the quantified object of taxation. The assessment basis is often expressed in money (e.g. income). It can, however, also be a technical and/or physical magnitude, such as cubic capacity (e.g. motor vehicle tax – KfzSt) or liters of fluid (e.g. MinöSt).

       1.4.3.4Tax threshold, tax allowance, deductible amount

      A tax threshold is the part of the assessment basis up to the maximum value of which taxes are not levied. If the tax threshold is exceeded, the entire assessment basis shall be subjected to taxation. The tax threshold on private sales transactions of € 600 in accordance with Sec. 23 (3) sent. 5 of the German Income Tax Act (Einkommensteuergesetz – EStG) is the classic example. The intended purpose of the tax threshold is to relieve the tax administration which should not be bothered with insignificant amounts.

      A tax allowance remains tax free regardless of the amount forming the assessment basis. It is an amount that can be deducted in the calculation of the tax base, but which is generally only granted to the extent that it does not cause the assessment basis to be below zero. An example is the basis tax allowance of € 9,000 in accordance with Sec. 32a (1) sent. 2 no. 1 EStG that exempts the taxpayer’s subsistence level from taxation. On account of the progressive character of personal income tax, tax allowances benefit taxpayers with high income more than taxpayers with low income because, when earning a higher income, the resulting reduction of the assessment basis and the tax rate is larger than it is when less income is earned.

      A deductible amount is not deducted from the assessment basis but rather directly from the tax debt. In doing so, it directly reduces the amount of taxes to be paid. While the tax allowance leads to more relief in a progressive tax scale with an increasing assessment basis, the deductible amounts provide relief to all taxpayers to the same degree and are thus perceived as more just. An example for a deductible amount is the deduction of donations to political parties by natural persons amounting to 50 % of the expenditures, at most € 825 (cf. Sec. 34g sent. 1 no. 1 and sent. 2 EStG).

       Note

      A tax threshold is the part of the assessment basis, up to the maximum value of which taxes are not levied.

      A tax allowance is the part of the assessment basis that is exempted from taxation.

      A deductible amount is deducted from the taxpayer’s tax debt.

       1.4.3.5Tax rate and tax scale

      The tax rate indicates what percent of the assessment basis or what absolute amount of money per unit of the assessment basis is levied as taxes by the fiscal authorities. The term tax scale is used if the tax rate is not constant for the entire assessment basis. Thus, a tax scale consists of a sequence of tax rates.

      Tax scales can be simple tax scales (dependent on only one variable, e.g. the personal income tax scale, which is only dependent on the amount of taxable income) or combined scales (dependent on more than one variable, e.g. the inheritance tax scale, which is dependent on the amount of the inheritance as well as the degree of relationship). The scales of personal taxes are usually constructed