3 posts tagged


Income tax

Case study 1

Mr x is a resident in country A, and he has a wife and two children.
In year 1:

  • Salary¬†‚Äď Taxable
  • Consulting fee made once¬†‚Äď Non-taxable if made once.
  • Bank interest payment¬†‚Äď usually not¬†taxable?
  • Capital gain from selling market shares¬†‚Äď Taxable usually.
  • Rent payments or¬†inheritance¬†‚Äď Taxable in¬†AT, but¬†typically not.
  • Lottery wins¬†‚Äď in¬†Russia, yes, but¬†generally not¬†taxable. Professional players must pay taxes.

Taxable income: typical sources

  • employment¬†‚Äď most popular type of¬†income
  • self-employment
  • business
  • agriculture¬†‚Äď not¬†a¬†high piece in¬†developed countries
  • investment income
  • use of¬†intangibles (royalties)
  • Capital gains = sales¬†‚Äď cost.

Do all sources of income suffer the same tax burden?

For investment income, we have a 27.5 percent tax.
For real estate, we have a 30% tax.

Income tax rates

  • there is no¬†natural rate of¬†tax.
  • It depends only on¬†policy.
  • People usually mean income tax when saying about tax rates.
  • Income taxes take a¬†considerable part with nothing in¬†return. It creates anger.

Income taxpayers and nontaxpayers are voters. So the social needs have to be solved by taxes.

Ways to design rates

  • Flat rate¬†‚Äď the¬†easiest to¬†count.
  • Progressive rate increases with higher income.

If you have >1m‚ā¨ per¬†year in¬†Austria, you pay 55% of¬†tax; >100k‚ā¨ 50% of¬†tax.

Political parties use the lowering of low-income taxpayers (30-40% of the population) even though they pay too low taxes.

How is income tax levied?

by tax assessment:

  • on¬†annual bass
  • Taxpayer files a¬†tax return
  • The¬†tax office assesses the¬†tax due

by withholding tax (tax levied by payor), e. g., for:

  • Employment income
  • Investment income
  • In¬†some countries: capital gains
    Withholding taxes are outsourcing for tax regulators. Withholding tax makes
    The employer pays all the taxes instead of the employee.
    Tax administration then always gets money at a time without minor problems as in case if employee paid it.

Withholding taxes employers pay monthly.

Pros and cost of withholding taxes

  • WHT secures tax revenues
  • WHT is efficient for¬†tax administrations (but¬†creates risks for¬†payors)
  • WHT usually works on¬†a¬†gross basis (no¬†deductions from WHT base)

Case study: which expenses are tax-deductible?

Mr. X has made the following expenses in Y1:

  • ‚ā¨1000 for¬†expert literature (for¬†his job)¬†‚Äď Tax-deductible, because the¬†book can be helpful only with his job
  • ‚ā¨500 for¬†the¬†business suit¬†‚Äď generally tax-deductible, but¬†in¬†some cases, the¬†government can say that you bought these clothes for¬†everyday use. Example with McDonald‚Äôs outfit¬†‚Äď Tax-Deductible, because no¬†one uses this outfit, not¬†on¬†work.
  • Travel cost to¬†the¬†work¬†‚Äď Can be tax-deductible and¬†can be not, depends on¬†policies.
    bank charges¬†‚ā¨1000
  • Renovation of¬†the¬†apartment last year with¬†‚ā¨0 for¬†rent¬†‚Äď renovation is made once in¬†10-20 years, so this year was nothing made, so no¬†taxes.
  • A¬†donation to¬†the¬†Red Cross of¬†‚ā¨200¬†‚Äď Is not¬†tax-deductible. It is not¬†based on¬†business will but¬†the¬†will of¬†a¬†person. Sometimes policies incentivize donations in¬†specific organizations.

Is income tax based on a gross or net basis?

Tax, commonly based on net income:

  • as¬†a¬†consequence of¬†the¬†ability to¬†pay principle
  • Expenses related to¬†items of¬†taxable income are generally tax-deductible

Tax, based on gross taxation

  • In¬†scheduler systems for¬†specific categories of¬†income
  • Where WHTs are applied¬†‚Äď then voluntary tax assessment could be possible.

Specific types of expenses might be declared non-deductible, e. g.,

  • if relating to¬†private life
  • if relating to¬†non-taxable income
  • criminal fines, penalties

Sometimes generally, non-deductible are specifically made deductible:

  • Various policy reasons for¬†granting deductions
  • E.g., housing loan, interest, specific donations, etc.

Case study

Mr. X has family-related expenses in Y1:

  • Child support¬†‚ā¨500¬†‚Äď
  • School fees¬†‚ā¨5000

Overall, Mr. X covers the general cost of living for his entire family.

Income tax and family situation

Various design options to reflect family situations for income tax purposes.

Individual taxation¬†‚Äď not¬†reflected at¬†all:

  • Instead, typically, tax credits (or¬†other family subsidies) are granted.
  • Overall, family income irrelevant to¬†progressive tax rates.

Family/household taxation¬†‚Äď overall family income as¬†a¬†tax base:

-Divided by the number of family members (e. g., was in France)

  • Strong lowering effect on¬†progressive tax rates.

Marriage split¬†‚Äď Family taxation for¬†married couples:

A limited form of family taxation

  • Equal treatment of¬†unmarried couples/singles
  • All policy options have different effects

Introduction to tax Law

Why are taxes necessary?

  1. for¬†government¬†‚Äď a¬†source of¬†revenue
  2. for¬†business¬†‚Äď the¬†cost of¬†(food, income are taxed) business/living
  3. for¬†society¬†‚Äď a¬†price for¬†civilization (Oliver Wendell Holmes)

How to measure the importance of taxes?

  1. tax to GDP ratio
  2. ‚ÄúHigh‚ÄĚ and¬†‚Äúlow‚ÄĚ tax countries
  3. Is there a¬†‚Äúright‚ÄĚ / ‚Äúfair‚ÄĚ level of¬†tax?

Austria has Tax/GDP = 40%. The government wants to lower it, but it is not possible for now. The re are low and high tax countries: AT and Germany are high-tax, Hungary and Switzerland have low-tax.

There is a suitable level of tax: high tax countries provide better services: Free universities, free insurance, and high pensions.
In low-tax countries, services are mostly paid: In Switzerland, citizens should pay for insurance.

VAT is 20% for every consumption is significant.
There are income taxes of 40%-50% in AT. Taxes have a significant impact on the taxpayers’ budget.

Government should adequately justify the amount of tax paid.
Public deficit: Gov spends more money than it gains.

Taxes can help to attract businesses: Ireland was one of the poorest nations in The EU. At the end of 20 century, Ireland decreased the tax to 12.5% from 25%. The population increased by 25%, and before, it was the immigration country. The Republic of Ireland has become so successful that the UK fears that Northern Ireland will become a part of Ireland.

What is a tax?

  1. compulsory
  2. Imposed by legislation / levied by the government
  3. Under the rule of law
  4. For a public purpose
  5. Not paid in exchange for a specific service to the taxpayer

In the UK, there was a discussion that Social networks do not pay enough taxes. People say that they have to pay more. The law did not require that, but there was a public opinion. Some companies voluntarily pay more taxes to the budget to satisfy the public.

There should be a law where it stays that a taxpayer has to pay the taxes. It goes deep into history.

The rule of law means that the payment should be within the limits of the law. High-income people pay more taxes than others, and this is due to democracy: The majority wants wealthy people to pay more.

After the last financial crisis in 2008, many countries asked banks to pay additional taxes to a fund. The government spends money to rescue packages. So they were forced to pay more without any return, even though that banks pay the highest taxes.

Government imposes (–ĺ–Ī–Ľ–į–≥–į—ā—Ć—Ā—Ź) / levies (–≤–∑—č–ľ–į—ā—Ć—Ā—Ź) taxes on¬†different levels of¬†States:

  1. federal
  2. subnational
  3. municipal

States are free to choose the amount of state income taxes.
Florida is an example of a no-state tax, but it still has the federal tax.

There are such municipal taxes (fees) in Vienna as property-related taxes.

What types of taxes may exist?

  1. Income tax¬†‚Äď has become less critical over time.
  2. Corporate income tax¬†‚Äď Corporate income tax is relatively low
  3. Value-added tax (VAT)/ goods and services taxes (GST)/ sales taxes. Most important, biggest tax in the EU
  4. Wealth taxes
  5. Inheritance and gift taxes
  6. Real estate transfer taxes
  7. Consumption taxes
  8. Energy taxes¬†‚Äď e.¬†g., help to¬†decrease the¬†carbon footprint.

Is there a perfect tax mix?

The US does not have the VAT, but it has the sales tax much lower than VAT in the EU. However, the corporate income is much higher than in the EU.

There are not enough consumption and income taxes in developing countries, so the corporate tax is high.

Inflation is essential now. In some decades, money will lose half of its cost due to inflation. That means that people have to spend their money, consume. The government will get its VAT.

What is a purpose of a tax?

  1. to generate revenue for public budgets
  2. to influence behavior
  3. To¬†price-in external cost (Pigouvian Taxes)¬†‚Äď A¬†carbon tax.
  4. To purpose non-tax goals. e. g., many tax-exemptions, non-deductions.

Tobacco taxes are paid for centuries even though the harm from them was discovered only in the 20th century. The tax was not about behavior before, but the way how to get extra cash. If gov wants to get rid of tobacco behavior, then gov has to raise tobacco taxes in New Zealand significantly.

In¬†AT¬†salaries as¬†5k‚ā¨ and¬†more cannot be tax-deductable because the¬†income was too high.

People in retail, supermarket workers, have a low payment. The government wants to increase the income of these workers by deducting some taxes.

Is a specific purpose/justification legally needed at all?
For the tax as such?/ For the design of a specific tax?

Germany has a problem with introducing carbon taxes. The constitution stays that people and companies pay taxes on consumption, but carbon emission is not consumption; it is production.
Austria can do that, but then everyone will have to pay taxes on the breath.

Who decides on a tax system?

Taxes are at the core of State sovereignty.
‚ÄúThe¬†power to¬†tax is the¬†power to¬†govern‚Ä̬†‚Äď ‚ÄúTaxes are politics converted into money.‚ÄĚ
Tax sovereignty may result in¬†tax competition between states¬†‚Äď pros and¬†cons.

European union

  1. VAT¬†‚Äď fully harmonized (but¬†not¬†on¬†the¬†tax rate: standard rate from 15% to¬†27%. E.g., Hungary has 27%)
  2. Income tax¬†‚Äď not¬†harmonized
  3. Corporate income tax¬†‚Äď Common (Consolidated) Corporate Tax Base (CC(C)TB) proposed
  4. Anti Tax Avoidance Directive (ATAD)
  5. EU fundamental Freedoms¬†‚Äď to¬†ensure non-discrimination in¬†the¬†Single Market
  6. Prohibition of¬†State Aid¬†‚Äď to¬†ensure fair competition

International Agreements (Tax treaties)¬†‚Äď to¬†avoid international double taxation.

Government and Legal Environment 2

purpose of a company law

  • Maximizing welfare of¬†shareholders, creditors, employees
  • Enabling law and¬†protective measures
  • Broader social objectives:
    • reporting on¬†sustainability (long term influence on¬†environment)
    • sustainability as¬†corporate goal
    • gender and¬†race quotas for¬†corporate boards (in¬†AT¬†>40% of¬†same gender required)

Gesellschaftsrecht¬†‚Äď German Law cover company and¬†partnerships
Corporate (company) law and Partnership law are in America. The are separated.

You can’t invent a new type of company type (partnership, gmbh, ag).

General partnership

Every participant is responsible for¬†actions, debts. You can e.¬†g. loose a¬†house of¬†a¬†company will be a¬†bankrupt. You can‚Äôt transfer shares¬†‚Äď if someone could have a¬†higher pie, then this guy can do stupid thing and¬†then everyone will be responsible for¬†this. Everyone will be dependable on¬†the¬†human more

Limited partnership

Partners are not active managers

Silent partnership

Limited liabilities of silent partner
Partner can be hidden, be anonymous. In a register, silent partner can be not written.
Downside¬†‚Äď silent partner can loose a¬†control and¬†will not¬†be reliable for¬†debts of¬†entrepreneur
Account documents are not available for a public.

Partnership under civil law

Not registered.
Joint and several debts of all partner
E.g. go to holiday together and rent a house together.

Criteria for a company

  • Legal personality¬†‚Äď legal fiction to¬†take debts and¬†responsibilities.
  • Members not¬†personally liable for¬†company debts¬†‚Äď and¬†everything belongs to¬†legal personality
  • Delegate management to¬†third parties. Most of¬†the¬†times¬†‚Äď not¬†shareholders. So, you can invest money, but¬†you will not¬†be a¬†manager
  • Transferable shares
  • Investor control / ownership

most of the banks need a human to be a debt taker with your assets to be sure that you will bring the money back.

Types of companies

PLC¬†‚Äď Public Limited Company
AG¬†‚Äď AktienGesellschaft

Can be listed in stock market, but not mandatory.
More regulations
Usually managers and stakeholders are different people

LTD¬†‚Äď Private Limited Company
GmbH¬†‚Äď Gesellschaft mit beschr√§nkter Haftunng

Less members (usually 1 member)
More flexibility
managers are usually the owners of a company.

difference between PLC and LTD

Companies can own the other companies. And they are going to be enterprises. But an owner-company is not responsible of a company which is controlled by her. So it is not a big deal if a company will be a bankrupt.

Tax depends on the type of company


  • hybrids of¬†PLC and¬†LTD
  • cooperatives
  • associations
  • foundations

difference between PLC and LTD

Quotas¬†‚Äď ?....?


If a gov will give an insurance to companies, the , taxpayers will pay for that. Creditors will be less responsible, because they know that if they will be bankrupts, then government will help to pay debt.
Banks don‚Äôt give a¬†credit of¬†a¬†cost of¬†assets in¬†case that there will be the¬†same situation as¬†it 2008. Margin of¬†15%¬†‚Äď if a¬†immobile property will loose 15% from the¬†moment the¬†debt was given, then still bank will still have a¬†profit, even if a¬†creditor will not¬†be able to¬†pay for¬†debt. Of¬†course, after selling a¬†property, creditor will get the¬†money above the¬†indebtedness, if a¬†property cost more.

Company as a national law

  • We will use Austrian law as¬†a¬†starting point
  • codified law
  • court decisions as¬†results of¬†private enforcement


  • Soft law
  • Security law¬†‚Äď affects PLC, majority and¬†minority problem
  • Insolvency law¬†‚Äď if a¬†company can‚Äôt meet the¬†debts, (e.¬†g. bankruptcy). Laws help business and¬†banks to¬†survive and¬†get benefits.

Sources of Law

European Company Law

  • Primary law¬†‚Äď freedom of¬†establishment, freedom of¬†capital
  • [Bonus] Century law¬†‚Äď freedom to¬†incorporate any company in¬†Europe

Harmonisation via Secondary Law

  • Only selected issues
  • important in¬†securities legislation

Separate Company Forms

  • Societas Europaea
  • nothing for¬†SMEs (small, medium enterprises)

Principals and Agents

Principal’s welfare depends on agent’s actions

Principals¬†‚Äď Shareholders. They bring assets and¬†money in¬†heads of¬†Agents.
Agents¬†‚Äď Managers. They have to¬†work in¬†interest of¬†Principal

How can Principal control if Agent plays in interests of Principal?
If agent Doesn’t work properly- what to do?

Principal-agents conflicts in company law

Shareholders¬†‚Äď management

  • Third party managers
  • agency costs, freeriding
  • importance depends on¬†corporate ownership
    • Widely-held companies vs. concentrated ownership
    • Austria vs. UK

Majority shareholders¬†‚Äď minority shareholders

  • more important in¬†Austria
  • salient issue In¬†corporate groups (transfer pricing, corporate opportunities)

Shareholders¬†‚Äď creditors

  • creditors have claims (e.¬†g. for¬†loans) but¬†can‚Äôt influence running of¬†business
  • important if company is in¬†crisis

Shareholders¬†‚Äď employees

  • Employees invest human capital but¬†can‚Äôt make any decisions
  • labor law + board level representation