External financing in tax law

In the context of external financing you get business financial resources through the finance markets. The different tax effects result from the external procurement of equity and debt capital, from ongoing taxation and from restructuring processes (conversion). When raising capital through contributions in kind, the company strives for the highest possible valuation.
The equity as well as the debt capital procurement process is not included value added tax (Capital tax) charged. When shares are issued, the associated expenses can be taken into account to reduce profits. Issue costs for bonds (debt financing) are also tax-deductible. With current taxation, a different tax treatment of equity and debt capital can be determined for all legal forms (financing in tax law). While interest on borrowed capital is generally deductible when determining profits (but see the exception for shareholder borrowing), dividends represent the appropriation of profits. The distribution tax is decisive.

At the recipient, dividends are subject to income or corporation tax. Interest income is also subject to income or corporation tax; In the case of private individuals, interest and dividend income up to an amount of € 1,370 / € 2,740 (single / married) is tax-free. In the case of trade tax, only short-term borrowing costs remain deductible. Half of the long-term interest on borrowed capital (debt interest) is deductible. As a result, debt financing is more favored than equity financing.

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