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I am very confused regarding the corporate income tax. Please explain me the following scenario:

"Teddy Bears Company" buys stocks of 1000 euro (VAT added). Then, in 1 month sells everything with 1500 euro and makes a profit of 500 euro.

Where comes the income tax? On the profit of 500 euros or on the income of 1500 euros?

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  • $\begingroup$ The income tax should be on the 1500 euros, since government probably does not know how much you purchased the good for. Therefore has no way of knowing your profit, only sold price. $\endgroup$ – AlanZ2223 Feb 20 '15 at 3:34
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    $\begingroup$ @AlanZ2223 Why would the government know about the price sold but not about the underlying expenses? If you imply that firms have to file their sales data with the state in order to pay the Sales tax, then they also have to file more comprehensive statements, in order to pay income tax. $\endgroup$ – Alecos Papadopoulos Feb 27 '15 at 3:01
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"Income tax" for corporations means "profit tax". The 1.500 euros is never called "income" but "Revenue", or "Net Revenue", or "Net Sales turnover" or something similar. But never "income" -"income" is equivalent to "profit", for companies or professionals. (*)

"Profits" are calculated as "Net Revenues minus tax-deductible expenses".

"Net Revenues" means revenues without taking into account any Sales tax (like the V.A.T is). This is what the "net" signifies here.

So the tax rate will be applied to the 500 euros in your example.

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(*) When a professional says "my income is 20.000 EUR" he means "revenues minus professional expenses". When filing a tax-return, he will be taxed on the 20.000 EUR, minus any "living-expenses" tax deductions provisioned for natural persons (like maybe health care etc).

When a person that only works as an employee states "my income is 20.000 EUR", then he has not deducted any expenses from his wages, because it is considered that this person has no professional expenses, only "living" expenses.

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  • $\begingroup$ So this means that that company will pay income tax on the profit where the profit = Revenue-Expenses-VAT? $\endgroup$ – xcosmi Mar 3 '15 at 22:04
  • $\begingroup$ VAT is not considered part of "Revenue". Otherwise, yes. $\endgroup$ – Alecos Papadopoulos Mar 3 '15 at 22:59

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