How does a tax credit work

economy : Tax credit for shareholders

Many a shareholder may be surprised when they study their income statements at the end of the year.While the capital gains tax due on the dividend is a uniform 25 percent, the relationship between the amount distributed and the so-called corporation tax credit, which is also shown on the dividend certificate, falls In some cases, such as Dürr or Mannesmann, no corporation tax is reported at all. This begs the question: What does this tax actually stand for and how does it work?

The answer is initially very simple: what income tax is for employees, corporation tax is for commercial companies. Roughly speaking, it is due on the operating profit shown in the profit and loss account. Unlike income tax, however, progression is a foreign word. The German tax authorities only have two tax rates for corporation tax: 45 percent if the profits are added to the reserves, and 30 percent if they are distributed to the shareholders - for example in the form of a dividend.

As with the income tax, the solidarity surcharge is also due. So what is paid out to the shareholders is the already taxed profit. Ten marks dividend was originally around 14.30 marks. This already taxed ten marks the shareholder must theoretically Tax again as capital income - which is equivalent to double taxation. The tax authorities themselves have seen this disadvantage compared to interest income and have made the following regulation: The corporation tax to be paid by the company is only an advance payment. The final taxation is carried out at the personal tax rate of the shareholder as part of its Income tax return.

Shares investors, whose capital income does not exceed the exemption of DM 6100 (single) or DM 12,200 (married) annually, not only receive the dividend without deduction of capital gains tax, but also the pro-rata corporate income tax is paid out in cash In this way, the shareholder can count on an additional three-sevenths of the cash dividend. If one takes into account the proportional solidarity surcharge, which is also paid out, it is around 46 percent, but only if the company has made all of its profits domestically and has accordingly taxed it.

Equity investors who regularly read the business section of the Tagesspiegel know, however, that this situation is becoming more and more the exception, because domestic companies are increasingly moving abroad because tax rates are lower there than at home. The scheme is as simple as it is effective. Great abroad, lean domestically, is the motto: Production stays domestically - and so do the costs. Profits from the sale of the products are generated abroad - for example through specially founded subsidiaries in neighboring European countries, Latin America or the Far East This is not a problem at all for large corporations. It is especially worthwhile for those who already sell their products mainly abroad - for example, for the German mechanical engineering companies. The tax kick results from the fact that the German tax authorities on profits that have already been taxed abroad As a rule, no further taxation is required, but for the shareholders this means: No corporation tax is paid on this portion of the dividend, so there is no credit. The final ratio between domestic and foreign-taxed profits depends on the company, its business structure and its bottom line.

Rule of thumb: the more export-oriented the business, the smaller the tax credit is likely to be in the next few years - especially since the cards will also be reshuffled in tax matters after the introduction of the euro.

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