Retention of profits
Retained earnings ( ancient Greek θησαυρός thesauros , " Treasury ") is accounting the term for all accounting measures to a withholding of profits aimed at the company and thus not a profit distribution lead.
General
As a rule, shareholders of a company have an interest in profit distributions as compensation for their entrepreneurial risk . If profits are reinvested in whole or in part in stock corporations , this leads to lower or no dividends for shareholders . The consequence is that stocks lose their attractiveness (lower dividend yield than usual in an industry), which usually leads to falling stock prices due to the lower demand .
economic aspects
Retained earnings are a part of self-financing that makes a company independent of borrowing or external capital increases . They serve to improve the equity ratio and thus lead to a better rating through a higher creditworthiness . Specifically, profits are retained if the previous equity ratio is to be retained in the case of investments (in property, plant and equipment or equity investments ). Self-financing through profits can be the only source of financing for companies if external sources of capital are difficult or impossible to develop. Finally, tax aspects also play a role. If there is no legal form neutrality of corporate taxation or if the legislature favors either the distribution or the retention of profits, a company will also have to take tax aspects into account in the distribution policy.
Retained profits are real self-financing because they consist of the shareholders' undistributed profits and therefore actually represent a form of self-financing .
Retention of profits in the annual financial statements
Retention of profits represents a use of profit. The starting point is the taxed annual surplus to be reported in accordance with Section 275 (2) No. 20 of the German Commercial Code . Since retained profits according to Section 272 Paragraphs 2 and 3 of the German Commercial Code (HGB) are to be allocated exclusively to the revenue reserves , allocations to the retained earnings according to Section 275 Paragraph 4 of the German Commercial Code (HGB) must be shown under the item “Net income”. Another option is to carry forward the retained profit to a new account via the item “Profit carried forward”. This means that profits are retained solely through an increase in open reserves .
Stock corporations and limited partnerships based on stocks are legally compelled to retain profits in accordance with Section 150 (1) and (2) No. 1 AktG . This stipulates that 5% of the annual surplus - reduced by any loss carryforward - must be transferred to the statutory reserve annually until 10% of the share capital has been reached. In addition, in accordance with Section 58 (2) AktG , the Management Board and the Supervisory Board may, when adopting the annual financial statements, transfer a maximum of half of the annual surplus - less a loss carried forward and the addition to the statutory reserve - to the free reserves. The articles of association may of course allow a higher allocation, provided that the total free reserves have not grown to more than half of the share capital . The general meeting can resolve on further amounts to be retained .
In the case of partnerships such as a general partnership or limited partnership , the retained profit from the profit and loss account is transferred to the shareholders' individual equity accounts .
Tax implications
The legislature can encourage or restrict the distribution or retention through different taxation of distributed and retained earnings. However, the legislature can also decide to apply the same tax rate for distribution and accumulation; then we speak of usage-independent taxation. In Germany, the principle of taxation of profits independent of use did not always apply. For a long time, corporations favored the distribution of profits through a lower tax rate in order to promote stock savings.
In the case of taxation independent of use, the income is charged regardless of its use. It is irrelevant whether the withdrawals are used for private use or retention. A tax-reducing effect cannot be achieved by not withdrawing profit components. Likewise, it is not possible to influence the profits generated through a time-based distribution behavior. Income is taxed in the year it is earned at the shareholder level. As a rule, the profit determination for the commercial income of the partner of a partnership is based on the portfolio comparison according to § 4 Paragraph 1 or § 5 EStG . The basis is therefore the company's balance sheet. The profit share of the shareholders also includes remuneration that they have received from the company for activities in its service, for granting loans or for the transfer of assets. This remuneration, which is to be recorded as an expense under commercial law at the company, leads to a deviation in the balance sheet from the profit of each shareholder, which is subject to taxation.
Since January 2008, retained earnings for sole proprietorships and partnerships have been given preferential tax treatment in accordance with Section 34a of the Income Tax Act. Retained profits are therefore no longer subject to the personal progressive tax rate, but to a reduced income tax rate of 28.25% (with solidarity surcharge 29.8% effective). If these profits are distributed later, an additional tax of 25% must be made. This also applies in the event of a company being sold or a business closure. At the same time, the corporation tax rate for corporations was reduced from 25% to 15%, so that the total tax burden (corporation tax, trade tax , solidarity surcharge) of corporations is on average 29.83% at the same level as for partnerships. This largely fulfills the objective of corporate taxation to be neutral in terms of the legal form. Legal form neutrality means that all legal forms are charged with similar taxes in the same amount in the same amount.
In general, retained earnings for corporations from an individual marginal tax rate of 25% is still cheaper than for partnerships or sole proprietorships. In the case of corporations, profit retention prevents additional taxation as capital income for the shareholder.
No profit retention
Provisions are formed from profits, but the allocation to provisions ( pension provisions and other provisions) does not represent retained earnings ( spurious self-financing ). On the one hand, these provisions - which are part of borrowed capital - are formed from untaxed profits and, on the other hand, the addition to the provisions does not represent the appropriation of profits. A self-financing process for real retained earnings regularly requires an increase in equity from taxed profits.
literature
- Literature on retained earnings in the catalog of the German National Library
