German Profit Taxes. Christoph Freichel

       1Introduction to German profit tax law

       1.1The importance of taxes

      Taxes form an important part of every citizen’s financial endeavors. The liability to pay taxes accompanies every citizen from the cradle to the grave. The tax liability is imposed by the polity to finance the services performed by the state and influences citizens’ economic dealings. The state must observe certain basic principles when levying taxes, e.g. the principles of legality and uniformity of taxation. In particular, taxation is supposed to be based on the economic capacity of the taxpayer. The state may not unduly call on individual citizens (strangulation effect) if it desires to participate in the success of the private economy in a sustainable manner. Non-uniform taxation can lead to evasive reactions by the eco- nomic actors and presents credibility and legitimacy problems that, inter alia, can lead to a decrease in tax revenue.

      Thus, a state must take care to levy taxes so as to reflect the relationship between the legal protection of ownership and the social obligation arising from ownership in a legal and comprehensible manner which is seen to be just. The opposition of the objectives and interests that play a role in taxation must be taken into account in levying taxes. Economic actors want to and must reduce the tax liability, inter alia because of the pressure of globalization. On the other hand, the taxes finance tasks whose fulfillment can be for the benefit of the economic actors and provide the state with the opportunity to intervene in the economic process, inter alia, for the benefit of all.

       1.2Tax burden and tax justice

      Modern industrial states fulfill a number of political tasks of a social, regulatory and economic nature. The extent of the tasks vested in the respective political system is always reflected in its so-called Staatsquote, which indicates the ratio of government expenditures to gross national product (GNP). In Germany, this ratio was 44.3 % in 2016:

      Figure 1: Ratio of government expenditures to the GNP for Germany 2016

      Figure 2: Development of the expenditure-GNP ratio from 1980 to 2016

      States levy contributions, predominantly in the form of taxes, to finance the public services. A high public expenditure quota generally means that the economic actors are subject to an increased liability to pay taxes and contributions. This liability to pay taxes and contributions is expressed by the so-called tax ratio which indicates the ratio of taxes and social contributions to the gross national product. In 2016, this tax ratio amounted to 42.7 %:

      Figure 3: Tax and contribution ratio for Germany 2016

      Taxes influence the economic activities of the people and change their consumption, investment and savings habits. Thus, taxes must be arranged in a “just” manner. “Just” means that the circumstances of each individual case must be taken into account, as only specially tailored rules prevent generalized and therefore unjust legal consequences in individual cases. However, the more the tax laws take details into account, the more complex they become and the more difficult they become to apply or carry out. As is the case when there are too few regulations, the complexity of tax provisions caused by the increasing number of rules for specific cases leads to injustices because only those who have access to correspondingly qualified advice are able to make fiscally optimal arrangements. Those taxpayers who receive no or poor advice are thus at a disadvantage

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