Half income method
The half-income procedure was a procedure for tax relief on income from investments in corporations . In Germany it had replaced the crediting procedure that was valid from 1977 to 2000 , as this was contrary to European law. The half-income method has been in effect since 2001 for income from foreign equity investments and since 2002 also for domestic investments in corporations. The half-income method was introduced to compensate for the financial disadvantages of corporation tax, which has not been creditable since 2002, for shareholders of corporations. The dividends received by a mutual fund were also subject to the half-income system . For assessment periods from 2009 onwards, the half-income method has been replaced by the flat-rate withholding tax and the partial income method ( Corporate Tax Reform Act 2008 of 14 August 2007).
scope of application
The half-income method was to be applied up to (including) the assessment period 2008. Legally, it was based on the version of Section 3 No. 40 EStG (old version) that was valid up to and including 2008 . Thereafter, 50% of the defined in this paragraph were income exempt from income tax. For example, letter d of this § exempted half of the earnings i. S. d. Section 20 (1) No. 1 EStG (this specific income from capital assets ). The reason for the half exemption from income tax for the defined income from capital assets was to avoid double taxation of the same income: the corporations are responsible for the distributed profits u. a. the corporation and trade tax owed. Charging 100% of these distributed profits again would result in double taxation.
From the 2009 assessment period, the half-income method was replaced by the withholding tax and the partial income method, which are described below:
At the level of the shareholder ( shareholder or partner ), taxation depends on whether the shareholder is a natural person or a corporation (legal status January 1, 2010):
- If the shareholder is a natural person, distributions of equity investments are taxed with the capital gains tax of 25%.
- If the shareholder is a partnership, then distributions and taxable capital gains from capital investments are 40% tax-exempt ( Section 3 No. 40 EStG).
- If the shareholder is a corporation, distributions and profits from the sale of equity investments are fully tax-free in accordance with Section 8b (1) of the Corporate Income Tax Act . However, there is a general prohibition of deduction of business expenses of 5% of the respective distribution or the capital gain in accordance with Section 8b (5) KStG. The tax exemption is effectively only 95% (modified zero income method). However, the corporation may deduct all expenses associated with these investments as operating expenses . However, this does not apply to losses in value of equity investments (losses on sales or partial write-offs ).
Procedure
Dividends and taxable profits from the sale of equity investments were only subject to half the amount of income tax and the solidarity surcharge (if they exceeded the exemption limit in the case of Section 23 EStG ) .
Profits from the sale of equity investments were taxable if there was a period of at most one year between the purchase and sale of the shares ( speculation period according to Section 23 Paragraph 1 Sentence 1 No. 2 EStG) (the time of purchase of the shares had to be before 2008, since since January 1, 2009 § 20 Paragraph 1 Clause 1 No. 1 EStG comes into effect). If this was not the case, they were only subject to income tax if the seller of the shares within the meaning of Section 17 (1) sentence 1 EStG holds at least 1% of the nominal capital of the company or within the last 5 years before the sale was, but only to the extent that the exemption specified in Section 17 (3) EStG was exceeded.
The purpose of the half-income method was to prevent double taxation of distributed profits, as these are already subject to corporation tax at company level . An additional full taxation of the distributed profits for the shareholders would therefore amount to a double burden. The problem with the half-income method, however, was that the double burden was only alleviated in a flat-rate form. The overall tax burden was therefore too high if the shareholder's personal income tax rate was below 40%; it was too low when the shareholder's personal income tax rate was over 40%.
The church tax is not taken into account in the following example:
| Case A: Top earners (personal income tax rate 42%) |
Case B: Low wage earners (personal income tax rate 15%) |
|
| Profit corporation according to trade tax (gross dividend) | € 100.00 | € 100.00 |
| - corporation tax 25% | € 25.00 | € 25.00 |
| - Solidarity surcharge on corporation tax 5.5% | € 1.38 | € 1.38 |
| = Cash dividend (KESt not taken into account *) | € 73.62 | € 73.62 |
| of which taxable as income from capital assets (50%) | € 36.81 | € 36.81 |
| - Income tax (A: 42%, B: 15%) | € 15.46 | € 5.52 |
| - Solidarity surcharge on income tax 5.5% | € 0.85 | € 0.30 |
| = remain after taxes (net dividend) | € 57.31 | € 67.80 |
- The capital gains tax of 20% was paid by the corporation to the tax authorities and treated like an advance income tax payment by the shareholders.
In the case of dividend payments by financial institutions ( Section 20 (1) No. 1 EStG), the interest discount on the full cash dividend was made at a tax rate of 20% (+ solidarity surcharge 5.50%). A possible exemption order had to be taken into account by the financial institution.
The half-income method also applied if the shares in the corporation were part of business assets. In this case, the 50% reduction was to be carried out off-balance sheet, i.e. In other words, 100% of the income (e.g. dividends) was initially booked and the reduction was only made when the taxable income was determined.
Effects on church tax
If the taxpayer had income that was subject to the half-income method, the full amount of this income was the assessment base for church tax. To calculate the church tax, a second tax calculation was carried out, from which a fictitious income tax was calculated. The church tax was then 8% or 9% of the fictitious income tax calculated in this way.
Effects on business tax
The trade tax provided for the reduction of certain profit shares under certain conditions. It should be noted that the reduction was only made to the extent to which the profit share had previously had an impact on trade income. In other words, since the half-income method only resulted in a 50% rate, the reduction could only be made by 50%.
Credit of capital gains tax for the shareholder
Withholding taxes (+ associated solidarity surcharge ) withheld by the distributing company could be claimed in full. This applied regardless of the fact that only half of the distribution was to be recognized as income ( Section 43 (1) sentence 1 no. 1a EStG).
Foreign dividends were also taxed on the basis of 50% of the cash dividend, regardless of the local tax rate.
Situation in Austria
The half- rate procedure is used in Austrian income tax law .
Situation in Switzerland
Individual cantons in Switzerland also know this taxation; Efforts are underway at the federal level as part of the Corporate Tax Reform II to introduce this type of taxation throughout Switzerland.
Individual evidence
- ↑ Federal Law Gazette I p. 1912.
