The income earned from the business activities from operating as private trader (can also be called “sole trader” or “self-employed professional”) is equated with the part-time entrepreneur’s other earned income for tax purposes. Thus, the company’s business activity is not taxed separately. The total net income earned from the business activities is divided between capital income portion and earned income portion based on the net assets. The general rule is that private trader’s capital income is 20% of the net assets (net assets = assets of the business – liabilities of the business). The Valuation of Assets Act provides more detail on how net assets must be calculated. This blog post will not explore in more detail how this valuation is done in practice. The proportion of earned income from the business activities that exceeds the capital income is considered as earned income. It is important to note that the entrepreneur can request that 10% of net assets is considered as capital income portion or that all of the earned income from the business activities is earned income. The entrepreneur must calculate which model is more affordable for them.
Unlike private traders, limited liability companies are always independently liable to pay corporate income tax. A limited liability company’s income is taxed as income of the company rather than of the owner, as is the case with private traders. A limited liability company’s taxable income is calculated by subtracting deductible expenses from the company’s taxable income. Thus, if the company has more income than expenditure, this generates taxable income. However, if the company has more expenditure than income, this generates a loss, which can be deducted from the results of the coming years.
The owner can withdraw funds from a limited liability company in the form of salary, dividend, fringe benefit, interest, rent or another type of expense. The owner cannot take funds from a limited liability company as a single withdrawal, as is possible for private traders. The owner’s salary in a limited liability company is taxed normally as his earned income.
If the owner receives dividend from a non-listed limited liability company, this is divided into earned income and capital income. 25% of this dividend is taxable capital income and 75% is non-taxable income up to 150,000 € if the dividend is up to 8% of the mathematical value of a share. 85% of the portion that exceeds 150,000 € is taxable capital income and 15% is non-taxable income. It is important to note that this limit of 150,000 € includes all dividends from a non-listed company received by that person in that year. The portion of the dividend that is taxed as capital income is taxed at 30% up to 30,000 € and any excess of this is taxed at 34%.
If the dividends exceed 8% of the mathematical value of an asset, then 75% of the excess part is the owner’s earned income and the remaining 25% is non-taxable income. Earned income is always taxed using the progressive scale.