Tax law in Germany is subject to certain basic principles according to which it should be guided. In addition to an objective net principle and the performance principle, there is also a subjective net principle. This generally regulates the amount of taxes that may be incurred and what should be excluded from taxation.

1st Subjective Net Principle – Introduction

If you ask taxpayers in Germany whether they consider the amount of their taxes to be too high, you usually get approval. Very few taxpayers suspect that Germany may only levy taxes according to strict rules. The rules are strict because they are derived from the Basic Law. For example, the principle is that taxes can only be levied on the basis of laws. In addition, these laws must themselves be constitutional. In the opposite case, there may be a suspension of the tax, such as the property tax. Usually, however, the legislature introduces changes in its tax laws in order to bring them back into line with the Basic Law, as with the reform of the property tax.

One of these principles is the subjective net principle. If you want to find out what special significance the subjective net principle has for taxation in Germany, read on here. If you would rather continue to complain about excessive taxes without knowing the details of the subjective net principle, then you can also find suggestions on tax saving in many of our other blog posts. This also reduces your complaint potential, and even potentially increases your satisfaction.

2nd subjective net principle: regulations on the level of taxes

The subjective net principle can be understood as a complement to the objective net principle. Both generally determine what is subject to taxation and how high the tax may be. Both principles are particularly relevant in the collection of income taxes. The subjective net principle is more important in this respect, however, because it demands that taxes be limited to the freely available income.

The freely available income must be considered from a socio-political point of view. Because this is the part of the income that is above the subsistence minimum. In other words, taxpayers must always remain a part of their income tax-free so that they can make a living from it.

Of course, even trying to define such a limit is not an easy task. For example, there are huge differences in rent levels in the various regions in Germany alone. After all, the application of the subjective net principle leads to a regular adjustment of the basic allowance, which serves to safeguard the subsistence minimum. Recently, this could be seen in the increase in the basic allowance under the annual tax law 2022, which was required due to the general inflation.

Subjective net principle: application beyond the subsistence level

By preserving the subsistence minimum before taxation, the subjective net principle has covered an essential aspect of the regulations of German taxation principles. But over time, you had to realize that you should include other areas in this consideration. The examination of whether taxes are to be collected or services are to be provided in order for the legislature to sufficiently enforce the Basic Law was ultimately the responsibility of the Federal Constitutional Court (BVerfG). This judged in various proceedings what the state may do and what it must refrain from doing in order to comply with the objective as well as the subjective net principle. This includes groundbreaking judgments on the recognition of health and nursing insurance contributions in the determination of income and the recognition of realistic maintenance benefits. In addition, the BVerfG clarified that childcare costs of single parents must be assessed appropriately for tax purposes. Similarly, although without direct (but indirect) reference to the subjective net principle, judgments are made about the amount of child benefit, or about the admissibility of child benefit cuts.

4. taxation in violation of the subjective net principle

Now one may have got the impression that the subjective net principle is to be observed universally. In reality, however, there may well be deviations from this principle. For example, under certain circumstances, income tax is levied even if there is actually a loss that can be determined across all income. This can occur if one has made a loss in the area of income from capital assets that is greater than all other positive incomes. The reason for this is the prohibition of offsetting losses on capital income with other income. In this way, it may happen that a taxable person has to pay income tax out of his private assets.

Also in another context of taxation of income from capital assets, there is an urgent suspicion that the subjective net principle does not apply. The capital gains tax does not include the basic allowance as a withholding tax.

On the other hand, the limitation of the subjective net principle to income tax means that corporations are not entitled to its effect in their taxation. Finally, unlike natural persons, legal persons do not have a tax-recognised subsistence minimum, because their existence essentially does not require a financial basis. Therefore, there is no legal contradiction to the difference in treatment when applying business tax to natural and legal persons. At least the BFH recently ruled.

5th Subjective Net Principle – Final Word

The subjective net principle is an important part of the instruments with which the constitution has prepared but also obligated the welfare state. The fact that this is a principle which only affects the taxation of natural persons is strange. Finally, as an entrepreneur who operates in the legal form of a GmbH or AG, neither the corporate income tax nor the capital gains tax show any factual consideration of the subsistence minimum. At least there is no counterpart to the basic allowance. Even in the absence of a business tax as an operating expense in the context of corporate taxation, one may have doubts as to whether the shareholders of the limited liability company receive adequate protection of their subsistence minimum. The above-mentioned BFH judgment does not change this much, because it only referred to the taxation of the legal person, without also including the taxable shareholders behind it.

However, as long as the taxation of corporations and their shareholders remains generally balanced and comparable to that of natural persons in partnerships, it would be difficult to defend the argument of unequal treatment by excluding the net subjective principle of corporate taxation. After all, shareholders of a corporation ultimately pay a similar amount of taxes as entrepreneurs whose subsistence minimum is protected by the application of the subjective net principle.