Understanding Theoretical vs. Capitalization Value & Tax Implications
Understanding Theoretical and Capitalization Value
Theoretical Value: This represents the value each partner would correspond to if society were closed out. The theoretical value is calculated as follows:
Theoretical Value = (Total Social Capital + Reserves) / Number of Shares
Theoretical Value = Total Social Capital / Number of Shares + Reserves / Number of Shares
Theoretical Value = Nominal Value + Reserves / Number of Shares
Increased reserves cause the theoretical value to rise above the nominal value. However, these reserves are nourished with society capital, which has already been taxed at the corporate tax rate. Therefore, it doesn’t make sense to tax them again on income tax.
Capitalization Value: This represents what you are willing to pay for a share that generates a return, particularly in the case of dividend shares, over time. If the saver believes the shares will pay a dividend, they will be willing to pay a figure X, where:
X = z / r (where z is the dividend and r is the required rate of return)
In this case, a dividend reduction due to tax reduces the capitalization value of the company. If this limitation of the dividend is due to corporate tax, it directly affects potential profit. Taxing the profit independently is unnecessary.
The Taxpayer Unit
The question arises when two or more components of family income are obtained. If the tax were proportional, it wouldn’t matter whether to declare jointly or separately, as the tax rate is constant. However, if income is progressive, the amount is subject to a rate higher than what corresponds to each of the individual components.
Consider a family with two spouses and two minor children. Suppose only the parents get income: the mother earns 18,000 and the father earns 12,000. Applying the rules, we have the following table:
| Joint Statement | Separate Statement | ||
|---|---|---|---|
| Base realizable | 30,000 | Base husband liquidable | 12,000 |
| Resulting share husband | 1,212 | ||
| Fee resulting | 9,781.6 | Liquidable Base woman | 18,000 |
| Resulting share wife | 2,677.6 | ||
| Average | 32.61% | Resulting total quota | 3,889.6 |
| Average | 12.97% |
The difference between getting married or not is obvious. If the two spouses decide to form a de facto partnership, their tax saving is €1921.6, and the average rate is 12.97% instead of 32.61%. Possible solutions include:
- Allow the separate return even if married. This solves the problem radically but generates a common incentive to put income in the name of the preceptor of the lowest income. This phenomenon is called tax arbitrage. If both spouses declare €15,000, they would pay a fee equal to 1932, which means a total quota of €3864, and a real average of 12.88%.
- The splitting system involves adding the income of both spouses, splitting it by the number of beneficiaries, and using this ratio to determine the average tax rate. The quota is obtained by applying this average to the sum of income:
(12,000 + 18,000) / 2 = 15,000; 15,000 Average = 12.88%; share = 12.88% x 30,000 = 3,864
This system generates the same result as a separate statement when taxpayers engage in tax arbitrage but has the advantage of not requiring spouses to alter the allocation of revenues.
- The system involves adding the incomes of the spouses, but the divisor in this case is calculated by adding one point for each income earner and a half point for each dependent child. 1 + 1 + 0.5 + 0.5 = 3. From the calculation of the divisor, the procedure is similar to that described above. This is divided by the number, the average ratio is calculated, and the balance is obtained by multiplying the average amount of income. This system is the most beneficial to the taxpayer, especially when dealing with large families.