mit freundlicher Genehmigung der
Law, Administration & Economics
De Gruyter Open
unser besonderer Dank für die federführende Begleitung gilt
der (Mit-)Herausgeberin von Heft 7 und Heft 8
Fr. Dr. Renata Kusiak-Winter
FISCAL EQUALIZATION SYSTEMS FOR EUROPEAN STATES
AND RESTRICTIONS FOR THE ARRANGEMENTS IN GERMANY AND POLAND 13
INTRODUCTION AND RELEVANCE OF THE TOPIC ........................................... 13
I. FISCAL EQUALISATION SYSTEMS ..................................................................... 16
JURIDICAL APPROACH ............................................................................................ 16
ECONOMIC APPROACH .......................................................................................... 18
SUGGESTED REFORM .............................................................................................. 19
PUBLIC PRODUCTS INSTEAD OF PUBLIC TASKS.............................................. 19
FINANCIAL CONSEQUENCES OF PUBLIC DECISIONS .................................... 21
CONTROLLING AND COST ACCOUNTING .......................................................... 21
TOTAL COSTS BASED BUDGETING ....................................................................... 22
HOMOGENEOUS ACCOUNTING STANDARDS .................................................. 23
CONCLUSION ............................................................................................................. 25
THE SYSTEM FOR EQUALIZATION OF LOCAL SELF-GOVERNMENT UNITS
REVENUE IN POLAND .......................................................................................... 27
INTRODUCTION ......................................................................................................... 27
EQUALIZATION COMPONENT OF THE GENERAL SUBSIDY .......................... 31
THE BALANCING (REGIONAL) COMPONENT OF THE GENERAL SUBSIDY35
CONCLUSION ............................................................................................................. 37
TAXATION OF THE PUBLIC SECTOR IN GERMANY
AN INTRODUCTION ....... 41
INTRODUCTION ......................................................................................................... 41
DEFINITION "ÖFFENTLICHE HAND" ..................................................................... 41
THE INCOME TAX TREATMENT OF LEGAL ENTITIES GOVERNED BY PUBLIC
LAW .............................................................................................................................. 42
TAXATION OF ECONOMIC ACTIVITIES ONLY .................................................... 42
UNLIMITED TAX LIABILITY ..................................................................................... 42
LIMITED TAX LIABILITY............................................................................................ 43
COMMERCIAL OPERATIONS (BGA) ..................................................................... 44
DEFINITION ................................................................................................................. 44
SUSTAINABLE ECONOMIC ACTIVITY ................................................................... 45
GENERATION OF INCOME ...................................................................................... 46
ECONOMIC WEIGHT ................................................................................................ 47
DEFINITION "HOHEITSBETRIEB" ........................................................................... 47
EXCEPTION: PARTICIPATING INTERESTS IN COMPANIES............................. 49
TAXATION OF INCOME ............................................................................................ 50
TYPE OF INCOME AND PROFIT DETERMINATION ........................................... 50
SPECIAL FEATURES FOR LEGAL ENTITIES OF PUBLIC LAW .......................... 51
THE VAT TREATMENT OF LEGAL ENTITIES GOVERNED BY PUBLIC LAW .. 52
PRESSURE FOR NEW LEGISLATION ..................................................................... 52
NEW LEGISLATION ................................................................................................... 53
GENERAL ..................................................................................................................... 53
ENTREPRENEUR STATUS ......................................................................................... 54
GENERAL EXCLUSIONS FROM SIGNIFICANT DISTORTION OF
SERVICES PROVIDED TO OTHER LEGAL ENTITIES OF PUBLIC LAW ........... 56
CATALOGUE OF ENTREPRENEURIAL ACTIVITIES ............................................. 58
TRANSITIONAL ARRANGEMENT AND OPTIONAL APPLICATION ................. 58
SUMMARY .................................................................................................................. 59
TAXATION OF THE PUBLIC SECTOR IN POLAND ................................................ 61
ENTREPRENEURS’ OBLIGATIONS TO DISCLOSURE, RECORDING, BILLING, AND
THE SAFE-KEEPING OF BILLS WITH REGARD TO VAT ...................................... 69
THE OBLIGATION TO DISCLOSE WITH REGARD TO VAT ................................ 70
THE OBLIGATION TO A TAX DECLARATION ....................................................... 70
THE ADVANCE SALES TAX RETURNS .................................................................. 71
ANNUAL SALES TAX RETURN ................................................................................ 75
CONSEQUENCES IN THE CASE OF A DELAYED SUBMISSION OR NON-
SUBMISSION .............................................................................................................. 76
FURTHER MANDATORY DECLARATIONS ........................................................... 76
THE SUMMARY STATEMENT OF TURNOVER ACCORDING TO PARA 18A
USTG ............................................................................................................................. 77
SPECIAL DECLARATION OF INTRA-COMMUNITY EXPORTS AND SPECIAL
OTHER SERVICES AND GOODS ACCORDING TO PARA 18B USTG ............ 78
THE OBLIGATION TO REGISTER THE DELIVERY OF NEW VEHICLES
ACCORDING TO PARA 18C USTG ........................................................................ 78
MANDATORY RECORD-KEEPING FOR ENTITIES SUBJECT TO VAT ............. 79
OBLIGATION TO ISSUE AND STORE INVOICES ................................................ 80
OBLIGATION TO ISSUE AN INVOICE ................................................................... 81
FORM OF THE INVOICE ........................................................................................... 81
CONTENT OF A QUALIFIED INVOICE ................................................................... 81
MANDATORY RETENTION AND FILING .............................................................. 82
CONSEQUENCES IN CASE OF BREACH OF THE REGULATIONS .................. 83
CONCLUSION ............................................................................................................. 83
INFORMATION ASYMMETRIES IN THE COMMUNICATION BETWEEN
BUREAUCRACY AND CITIZENS ............................................................................ 85
INTRODUCTION ......................................................................................................... 85
BUREAUCRACY .......................................................................................................... 87
THE PRINCIPAL-AGENT-MODEL .......................................................................... 88
THE INTERACTION BETWEEN CITIZEN AND BUREAUCRACY ...................... 89
CHALLENGES FOR THE ADMINISTRATION ........................................................ 91
POSSIBLE SOLUTIONS ............................................................................................. 92
CONCLUSION ............................................................................................................. 94
THE AGENCY THEORY APPROACH TO THE PUBLIC PROCUREMENT SYSTEM . 97
ASSUMPTIONS TO THE AGENCY THEORY ......................................................... 97
CONTRACTING OUT. RESTRICTIONS OF THE AGENCY THEORY ................ 100
HIDDEN INFORMATION. HIDDEN ACTION ...................................................... 104
CONCLUSION ........................................................................................................... 108
Liebe Leserinnen, liebe Leser,
es ist mir heute eine besondere Freude, Ihnen mit Heft Nr 7 der
Meißner Hochschulschriften erstmalig eine englischsprachige
Ausgabe unserer wissenschaftlichen Schriftenreihe vorlegen zu
können. Die Beiträge zu Heft 7 sind im Rahmen einer inter-
wissenschaftlichen Konferenz mit dem Titel „Current
research problems in Administrative studies in Poland and
Germany“ an der Universität Breslau im Oktober 2016 entstanden.
Aufgrund des Umfangs der Beiträge werden die Beiträge zeitnah
in Heft 8 der Schriftenreihe fortgesetzt und abgeschlossen.
Die insgesamt fünfzehn Beiträge sowohl deutscher als auch
polnischer Autoren/-innen wurden bereits im Vorfeld zu den
aktuellen Heften der Schriftenreihe sowohl in der Wroclaw Review
of Law, Administration & Economics als auch auf der
Internetplattform De Gruyters Open international veröffentlicht.
Sie decken eine große Bandbreite verschiedenster Themen aus
Rechtswissenschaften ab. So z.B. zu den öffentlichen Aufgaben
der Kommunen in Polen und Deutschland, zum Verhältnis
zwischen Bürgern und Sozialverwaltung, zur vergleichenden
Rechtwissenschaft, zur Ressource Mensch in der Verwaltung oder
der Besteuerung der öffentlichen Hand in Deutschland und Polen.
Durch die Betrachtung der Themen sowohl aus deutscher als auch
polnischer Sicht ergeben sich interessante Gemeinsamkeiten, wie
nicht anders zu erwarten aber auch Abweichungen. In jedem Fall
stellen die Hefte 7 und 8 der Meißner Hochschulschriften einen
kleinen Beitrag zur Stärkung des gegenseitigen Verständnisses in
einem zusammenwachsenden Europa der Regionen dar.
Mein besonderer Dank gilt an dieser Stelle Fr. Dr. Renata Kusiak-
Winter von der Universität Breslau, die nicht nur bereits die
internationale wissenschaftliche Konferenz in Breslau, sondern
auch die nachfolgenden Publikationen federführend begleitet hat.
Prof. Frank Nolden
Ich wünsche Ihnen eine angenehme und informative Lektüre.
Ihr Frank Nolden
Meißen im September 2018
INTRODUCTION AND RELEVANCE OF
After the extreme decrease of public revenues during the
financial crisis 2008-2011, tax revenues steadily increased
again. Nevertheless, the fiscal balances of the majority of
European countries are still negative, i.e. the amount of public
revenues is smaller than the amount of public spending. This
paper shows that this net borrowing is independent of the form
of government and aims to offer a solution for the avoidance of
future financing deficits.
Considering the financial situation of the 28 member states of
the European Union, a depiction of their financial balances
shows fig. 1.
Considering the sum of public revenues and public spending of
all countries in the EU, at no time in the time span of 2006-
2014 were the public revenues sufficient to cover public
spending. In the chart above, the dotted lines present public
revenues. It is irrelevant whether one regards all members of
the EU or only the members of the EURO-Zone, there is a
financial deficit in all cases. The biggest deficit occurs during
the years of the crisis 2008-2011. 2014 and 2015 see a
decrease of the deficits in most countries of the EU, due to
increased tax revenues.
FISCAL EQUALIZATION SYSTEMS
FOR EUROPEAN STATES
POSSIBILITIES AND RESTRICTIONS
FOR THE ARRANGEMENTS IN
GERMANY AND POLAND
Public Finance and
Economics, PhD in
Centre for Conti-
of Law, Admini-
stration and Eco-
Vol. 7, No.1(2017),
php/wrlae) and De
Financial deficits occur independently of the structure of the states.
Distinguishing between different state structures, two groups can be formed. The
first group contains the 25 states with a (mostly) centralised state structure.
Those are organized as unitary states, some centralised, some decentralised
second group is formed by only three federally organized states: Austria, Belgium
and Germany. With regard to the assignment of duties and finances within the
states, in an economic sense, those are not federal countries, though. In those
countries, as in the unitary states, the financial allocation is mostly task-related,
i.e. according to a juridical approach.
Source: data basedon Eurostat
revenue, expenditure and main
ang=en> accessed 15 October 2016.
Development of total expenditure and total revenue, 2006–14
(1 000 million €)
Comparing the development of public revenues and public spending in the U.S.
as a federal country with a more economically characterised fiscal equalisation
system, it is obvious that such an approach does not necessarily lead to balanced
Information about the European member countries cf. European Union, ‘European Union’
(2016) <https://europa.eu/european-union/about-eu/countries_de> accessed 15 October
Source: data based on OECD ‘12th Government deficit/ surplus, revenue, expenditure and main aggregates‘
accessed 15 October 2016.
Public revenues and expenditures in USA (USD in millions)
The relevant literature distinguishes between a mostly public economics-oriented
consideration of the income-aspects and a mostly administrative science-based
view of the public spending with regards to controlling and regulation. The
existing literature for both topics is wide, so there will be some authors referred
to exemplarily. For public economics Blankart
or Brümmerhoff and Büttner
be cited; for the basics of public economics and especially for this analysis the
Jahresgutachten 2014/15 from The German Council of Economic Experts
referred to. The research of public spending is associated with public
management and administration will reference the publications from Budäus and
as well as the Bertelsmannstiftung with KGSt
The income side discusses the generation of income in general, as well as its
allocation to the different levels of the state. The spending side concentrates on
the efficient management of tasks and the resulting consequences for public
Charles Beat Blankart, Öffentliche Finanzen in der Demokratie (8th edn, Vahlen 2011).
Dieter Brümmerhoff, Thiess Büttner, Finanzwissenschaft (11th edn, De Gruyter Oldenbourg
The German Council of Economic Experts, Annual Report 2014/15 (Bonifatius 2014).
Dietrich Budäus, Dennis Hilgers, ‘Neues doppisches
Haushalts- und Rechnungswesen als
Grundlage öffentlicher Ressourcensteuerung’ (2010) 5 Betriebswirtschaftliche Forschung
und Praxis (BFUP) 62.
Andreas Glöckner, Neue öffentliche Rechnungslegung (Nomos 2014).
Bertelsmannstiftung, KGSt, Manifest zum öffentlichen Haushalts- und Rechnungswesen in
Deutschland, (Bertelsmannstiftung KGSt 2009).
spending. So far, there is no integral approach that combines both aspects. The
following text gives a first descriptive introduction by relating the key aspects.
FISCAL EQUALISATION SYSTEMS
The majority of the necessary public income stems from taxes, i.e. compulsory
levies that do not lead to a direct service in return. Therefore, spending for the
provision of public services is not linked with tax revenues. The principle of fiscal
, i.e. that the financial contribution covers the costs for the public
service, does not apply in this case. In addition, there is the possibility to impose
fees for specific purposes, especially at a community level, e.g. for the provision
of childcare or infrastructure.
For the organisation of the allocation of finances within the states, i.e. for the
constitution of public finance law, there are two approaches: on the one hand,
there are juridical regulations for the allocation of public tasks, the resulting
spending and the necessary revenues. On the other hand, there are, especially for
federal states, suggestions for an economic approach that strongly considers
incentives and efficiency in the allocation of public goods and services.
In most European countries, the financial constitutions are based on the idea
that the political level defines tasks and the levels of provision. The decision
about the necessity of fulfilling the public tasks is in the hands of the
parliaments of the respective levels. The implementation of the tasks and the
following amount of public spending rests with the administration. The collection
of the necessary revenues, e.g. taxes or fees, is regulated in the legislation and
therefore decided upon by the parliaments. The tasks lead to spending which
must be covered by revenues. The financial constitutions of the states legally rule
the distribution of revenues among the different levels responsible for fulfilling
Cf. Charles Beat Blankart, Öffentliche Finanzen in der Demokratie (8th edn, Vahlen 2011)
188 et seq.
Cf. Bodo Leibinger, Reinhard Müller, Herbert Wiesner, Öffentliche Finanzwirtschaft (13th
edn, R. v. Decker 2014) 2.
A possible approach to a distribution of public tasks on the different levels is the
principle of subsidiarity
Source: own depiction. For the principle of subsidiarity cf. Brümmerhoff, Büttner (n 6) 337.
The principle of subsidiarity
This approach assumes that the smallest administrative unit possible is
responsible for fulfilling the task. Only if this unit is not able to do so, is the next
higher level responsible. In different countries, there are different structures of
the respective levels and the assignment of tasks. The responsibility for
education, for example, can be organised centrally or decentrally. For the public
good defence, on the other hand, there will be a central responsibility in all
Generally, this means that with regards to the allocation of finances, the level
that is responsible for providing the task is allocated the means to do so. The
German financial constitution is based on the principle of connectivity. This
means that the level responsible for the task is also responsible for the
. As a consequence, the responsible level must dispose of the
necessary revenues to do so. A possibility to ensure this is to enable the levels to
raise the revenues necessary for their expenses independently. Alternatively, the
central level can generate public revenues and allocate them to the other levels
according to their tasks.
The principle of subsidiarity is regulated in art 5 of the Treaty on European Union. Cf.
European Union ‘EurLex‘ <Vertrag über die Europäische Union, Artikel 5 (EUV) und
accessed 15 October 2016.
Cf. Horst Zimmermann, Klaus-Dieter Henke, Michael Broer, Finanzwissenschaft (12th edn,
Vahlen 2012) 218.
If this approach were applied consistently, there should be no negative financial
balances as shown in section 1. The reality in the last decades shows increased
public spending, and, in most cases, financial deficits, even though laws in
almost all countries are explicit with regards to public revenues covering public
spending. In addition, at the European level there are the Maastricht criteria
stating that the public financial deficit must not be more than 3% of a country’s
The rather theoretical economic approach
assumes that the public service or
good and its payment are directly related. In this case, the fiscal principle of
equivalence takes effect. The duty of payment is only effective in case of
claiming the public service. Due to the connection between provision and
payment of the service, there is fiscal competition between regions. This
concerns the supply of public goods and services as well as the amount of
payment due for their utilisation. Therefore, citizens can vote with their feet by
choosing the region best suited to their requirements. Public goods and services
exist on a national as well as a regional level. Examples are the national
provision of the good ‘defence’ and the regional provision of infrastructure. There
is also the possibility of international public goods such as climate protection.
The voting by feet is therefore dependent on the sphere of influence of the public
good. The theory of federalism assumes that an efficient allocation of the public
good is achieved, because the level with the best information about costs and
necessary quantities of the good or service provides them
This concept only works if the necessary information about cost and quantity is
available. The development of the financial deficits on a European level shows
that either the information is not available or, if it is available, it is not used
efficiently. The following section therefore provides a suggestion for the
avoidance of financial deficits that applies to countries with juridical as well as
economic approaches in their financial constitutions.
accessed 15 October 2016.
A complete economic approach cannot be found in any European state. Single
components can be found, e.g., in Switzerland.
For the theory on federalism cf. Charles Beat Blankart, Öffentliche Finanzen in der
Demokratie (8th edn, Vahlen 2011) 613 et seq.
It can be shown that financial deficits are mainly independent of the regulation
of the allocation of finances within a country. Neither a mainly juridical nor a
mainly economically based financial constitution leads to balanced finances. This
is mainly due to the regulation of spending by considering needs, leading to an
automatic deficit in case of high needs. Spending is considered a target figure
and revenues must be determined accordingly to cover spending. The system
works like a one-way street in only considering one direction.
Source: own depiction.
The real economic approach
A system solving these discrepancies must therefore also include the spending.
Expanding the basic approaches to financial allocation within those parameters,
the result is the real economic solution, i.e. a system that leads to an efficient
rationing of spending and revenues. Budget controlling is then necessary and
further deficits are avoided.
PUBLIC PRODUCTS INSTEAD OF PUBLIC TASKS
The legal regulations of the allocation of finances are based on the assumption
of public task. The formulation and realisation of public tasks focuses on the
input side, though. This can be illustrated by the example of a day-care centre. If
parents have a legal right for day-care for their children, local authorities must
provide a place in a day-care facility. If this is the case, the task is fulfilled. This
is the end of the input control. In addition, it is necessary to present the
resources necessary to provide the place in the day-care unit. When defining
tasks, i.e. the provision of a public service or good, it is not necessary to specify
targets such as quality or costs. This is a deficit in the system, because qualified
information about the cover ratio or the satisfaction of the users etc. are not
If public services or goods are presented as products instead, one switches from
input- to output control. In this case, the resources needed can be included and
it is possible to state targets and to control whether those targets are reached.
Source: based on Gunnar Schwarting, Effizienz in der Kommunalverwaltung (2nd edn, Erich Schmidt 2005) 38.
The product in the new management model
As can be seen in the figure above, the product is the focus of the budget
management of the new management model
. The strategic decision about the
provision of a product is made by the council or the administrative leadership.
Based on a guiding principle, targets and target agreements are connected with
the product and resources and budgets for the provision of the product are
planned. The operative level shows the costs and qualities of the product, which
then give feedback to the controlling of aims and budgets. In some cases, this
will show that budgets are insufficient and must be increased. Based on this
On the new management model cf. Gunnar Schwarting, Effizienz in der
Kommunalverwaltung, (2nd edn, Erich Schmidt 2005) 21 et seq. On a community level
there is an enhanced version to a community management model, cf. Kommunale
Steuerungsmodell (KSM) (KGSt-Bericht 2013, No. 5).
management principle, the decision about such an increase can be made based
on better information.
FINANCIAL CONSEQUENCES OF PUBLIC DECISIONS
The legal approach to the provision of public goods and services only considers
the necessity of fulfilling a task. It defines whether a task is necessary or not, but
does not stipulate in which quantity it must be provided. Therefore, the necessity
is considered independently of direct and indirect middle- and long-term costs
caused by the product. In Germany, for example, investments in big projects are
decided on without reflection on the follow-up costs of the investments.
Fulfilling the task is therefore independent of the product costs and the budget.
CONTROLLING AND COST ACCOUNTING
To efficiently fulfil public tasks, they must be defined as products. This enables
output management for the completion, i.e. efficient provision, of the task. The
target-oriented management of administrative units with the help of controlling
systems, which are based on a cost- and performanceaccounting system, is
crucial for this approach. With the help of those systems, information about
targets such as costs, performance and economic efficiency of the provision are
available and can be analysed.
A controlling process that is helpful for the administration
following steps: planning, controlling, information, management. Planning
includes the setting of targets and the determination of a budget for the
realisation of the targets. Planning therefore anticipates future situations and
weighs different alternatives with the help of objective information to set the
targets. These decisions are strategic, i.e. the planning horizon is at least five
years. It is crucial for the successful implementation of controlling systems in the
public sector that there is an awareness for the necessity that the responsible
politicians and the managers have to use the planning system and the planning
process. The controller only takes over after the planning, i.e. is responsible for
the comparison of targets and actual performance and analyses the reasons for
possible discrepancies. This is a necessary addition to the planning process to
analyse the achieving of the targets. The information system collects information
from both the planning and controlling process and uses this as the base for the
On the controlling process for the administration cf. André Tauberger, Controlling für die
öffentliche Verwaltung (Oldenbourg 2008) 31 et seq.
work of the management unit. In addition, the information system has a
reporting function for the analyses made in the controlling system. If all relevant
information is available, management can take measures to correct deviations of
the actual performance from the planned situation.
The information necessary for the information system comes mainly from the
public accounting as well as the public cost- and performance accounting. To
ensure the availability of the necessary data, public budgets must be planned
according to double-entry bookkeeping standards. Especially the annual accounts
according to these standards provide considerable information on the actual
performance due to the availability of data in the balance of accounts,
profitability analysis and financial accounting
In addition, budgets based on double-entry bookkeeping are a part of the
planning system, because they show monetary consequences of future events for
every product. This information is supplemented by an assignation of costs by
cost type to their cost unit or cost centre and the resulting information on actual
costs of the provision of different public goods or services.
TOTAL COSTS BASED BUDGETING
Budget regulations and budget institutions in the public administration are
necessary to improve budgetary discipline.
The target of budgeting is to
improve aggregated financial discipline, to attain allocation efficiency (allocation
of resources according to the formulation of the political will and objectives) and
the technical efficiency (efficient provision of public goods). The improvement of
the aggregated financial discipline can be among the macroeconomic targets of
a state. Achieving allocative efficiency is a target of the relevant level, and
technical efficiency is an operative target for the level realising the provision.
Cf. Isabelle Jaenchen, ‘Das Sächsische Kommunale Kennzahlensystem.
für die sächsischen Städte, Gemeinden und Landkreise (2012) 4(12) Sachsenlandkurier
Cf. Angelika Pasterniak, Budgetregeln und die Qualität der öffentlichen Finanzen (1st edn,
Deutscher Universitätsverlag 2006) 8.
ibid 67 et seq.
In 1998, the World Bank published basic rules for a solid budgeting policy
are as follows:
Comprehensiveness and discipline.
Transparency and accountability.
Especially for the principle of information, but based on the information also the
principles of honesty and transparency, it is necessary to include all costs
resulting from the provision of public goods and services. Budgeting based on the
inclusion of total costs is therefore essential. To achieve this, it is necessary to
change the management system to one based on products, and to transfer the
budget and accounting system to double-bookkeeping principles
The product-oriented booking of expenditures and revenues leads to necessary
insights for the creation of cost- and performance-accounting systems. If cost-
and performance-accounting systems are introduced, necessary information
about costs, but also output and outcome, are available. This information is
essential for a planned and systematic budgeting.
HOMOGENEOUS ACCOUNTING STANDARDS
Allocative and technical efficiency can only be realized if the necessary
information about the disposable resources and their optimal allocation is
available. The predominant system in Europe, the cameralistic accounting, does
not provide this information. It only contains information suitable for input-
control, but not the necessary data on costs, output and outcome. Therefore, the
European Commission strongly promotes the introduction of consistent budget-
and accounting standards (EPSAS)
. The transfer from cameralistic to double-
The World Bank, Public Expenditure Management Handbook (The World Bank Washington
Gemeinkostenmanagement (Erich Schmidt 2011) 17 et seq.
EPSAS: European Public Sector Accounting Standards based on IPSAS, International Public
Sector Accounting Standards, cf. EPSAS ’Towards harmonized European Public Sector
accessed 15 October 2016.
entry accounting and the subsequent target-oriented use of the information
about costs, output and outcome is essential to produce balanced budgets. The
objective of a harmonised solution for all member-states is the provision of
comparable budget- and annual account-data for all member-states. Only then
is a target-oriented management with the help of the aforementioned
instruments possible. The political resistance to the introduction of harmonised
European standards, especially in Germany, is large, though. In Germany there
are 16 different regulations of the federal states for the districts. The
restructuring of the budgets of the Länder follows different standards.
Source: own depiction based on data from Dennis Hilgers ’Die Dispersion der Doppik’
rechnungswesen-zwischenkommunaler-routine-und-europaeischer-harmonisierung.html.> accessed 15 October 2016.
Fig. 6 State of the realisation of harmonised standards
In addition, the need for reforms as well as the effort needed for the transfer to
EPSAS on the German federal level is very high and the proximity to the IPSAS
standards very low (less than 35%) compared to other EU member states. Poland
has to put considerably lower effort into the transformation and has a much
higher proximity to the IPSAS (66%), even though it is not one of the most
advanced states in this respect. Almost half the EU member states have a degree
of proximity of more than 70% to the IPSAS and therefore a considerably lower
effort to transform and lower need for reforms.
Bringing about the suggested reform is independent of the state structure. Parts
of the reform have already been completed in some EU member states, and the
development of harmonised budget- and accounting standards on a European
level shows a solution to the dilemma. An integrated system with revenues and
expenditures leads to considerably higher transparency
. Currently, the
individual states are working on partial solutions, though, therefore, the
introduction of double-entry bookkeeping standards as well as harmonised
accounting systems in all EU member states are still lacking.
In addition, a clear assignment of tasks and the accompanying assignment of
responsibilities is crucial for a successful realisation of the reform. It is also
necessary to transfer public tasks to public products which must then be
classified as either tradable goods, e.g., childcare, and sovereign, e.g. defence and
security. Tradable goods could be managed as service with return service
according to the principle of fiscal equivalence; sovereign goods can be managed
as basic requirements.
If the assignment of tasks is clear and costs are transparent due to the
parameters introduced above, the revenue competences of the responsible levels
must be regulated. This increases institutional congruence and creates better
regional identities for the use of public goods.
The relevant instruments to effect the reform are well-known. Therefore, the
current task is to increase the willingness to implement the existing instruments.
This paper offers the groundwork for the combination of public income and
public spending. Further research should aim at the development of integration
approaches for a more efficient public administration.
Blankart Charles B, Öffentliche Finanzen in der Demokratie (8th edn, Vahlen
Cf. Isabelle Jaenchen, ‘Kommunaler
Investitionsbedarf und Liquidität
Betrachtung‘ (Winter 2015) Public Governance 16.
Brümmerhoff Dieter, Büttner Thiess, Finanzwissenschaft (11th edn, De Gruyter
Budäus Dietrich, Hilgers Dennis, ‘Neues doppisches
Rechnungswesen als Grundlage öffentlicher Ressourcensteuerung’ (2010) 5
Betriebswirtschaftliche Forschung und Praxis BFUP
Glöckner Andreas, Neue öffentliche Rechnungslegung (Nomos 2014)
A ’Die Dispersion der Doppik’
und-europaeischer-harmonisierung.html.> accessed 15 October 2016
Gemeinkostenmanagement (Erich Schmidt 2011)
Jaenchen Isabelle, ‘Das Sächsische Kommunale Kennzahlensystem. Eine
Empfehlung für die sächsischen Städte, Gemeinden und Landkreise‘ (2012) 4(12)
Jaenchen Isabelle, ‘Kommunaler Investitionsbedarf und Liquidität –
doppische Betrachtung‘ (2015) Public Governance
Leibinger Bodo, Müller Reinhard, Wiesner Herbert (2014): Öffentliche
Finanzwirtschaft (13th edn, R. v. Decker)
Pasterniak Angelika, Budgetregeln und die Qualität der öffentlichen Finanzen
(1st edn, Deutscher Universitätsverlag 2006)
Schwarting Gunnar, Effizienz in der Kommunalverwaltung (2nd edn, Erich
Tauberger Andre, Controlling für die öffentliche Verwaltung (Oldenbourg 2008)
Zimmermann Horst, Henke Klaus-Dirk, Broer Michael, Finanzwissenschaft (12th
edn, Vahlen 2012)
Article 166 of the Polish Constitution
distinguishes own tasks
and allocated tasks, while art 167 sec 2 indicates that revenues
of local selfgovernment units (LSGUs) are comprised of own
revenues, general subsidies and specific grants from the state
budget. These provisions, analysed together, are of importance
in delineating the assumed functions of particular types of
revenue by local self-government units. The assumed function
of own revenues and of the general subsidy is to finance own
tasks, while specific grants are designed to fund allocated
. In respect of financing own tasks, the primary role is
played by own revenues
. However, because the sources of own
revenues are distributed unevenly across the country, it is
necessary for the system of local self-government unit revenues
to contain an equalizing mechanism complementing own
revenues and allowing local selfgovernment units to finance
the performance of own tasks.
Constitution of the Republic of Poland of 2 April 1997 (Dziennik
Official Journal of Laws of the Republic of Poland
(hereinafter: Dz. U.) No 78, item 483 with amendments), hereinafter:
The Local Self-Government Revenue Act (Dz. U. 2015, item 513 with
amendments) does envision financing of own tasks from targeted
subsidies (cf. art 42, 43, 51), but it does not seem that they should
be the primary source of financing for own tasks.
konstytucyjna wraz z częścią ogólną [Financial law. Constitutional
part with general part] (C.H. Beck 2010) 231.
THE SYSTEM FOR EQUALIZATION OF
LOCAL SELF-GOVERNMENT UNITS
REVENUE IN POLAND
PhD in Law,
at the Chair of
Faculty of Law,
(WRLAE, Vol. 7,
No. 1 (2017),
php/wrlae) and De
The axiological justification for the functioning of this equalization mechanism
can be found in the constitutional principles of social justice (art 2 Constitution),
the unitary character of the state (art 3 Constitution) and sustainable
development (art 5 Constitution). The need for an equalization mechanism is also
indicated in art 9 sec 5 of the European Charter of Local Self-Government
. Under this provision, the protection of financially weaker local
authorities' calls for the institution of financial equalisation procedures or
equivalent measures which are designed to correct the effects of the unequal
distribution of potential sources of finance and of the financial burden they must
support. The European Charter of Local SelfGovernment explicitly states there is
an obligation for the system of local selfgovernment unit revenues to include a
permanent financial equalization system, the function of which is to ameliorate
objective differences in revenue and expenses among local self-government units
at a given level
The necessity of a system for equalizing local self-government unit revenues is
also indicated in the justification for the Local Self-Government Revenue Act
(LSGR Act) presently in force: "The draft bill contains a proposal for
strengthening the role of the equalization system, whose task will be to correct
the imbalances in revenues of local self-government units with reference to
average income across the country adjusted for the relevant territorial unit, i.e.
commune, county and province. This system is also important in the light of
significant differences among regions in Poland. Regardless of the potential for
generating own revenues in a given part of the country, all units of local self-
government should be equipped to ensure appropriate social and economic
. Another passage emphasizes that "with consideration to the
significant discrepancies in revenue across communes, counties and provinces, an
appropriate equalization system will be introduced with the task of protecting
the economically weakest units”
European Charter of Local Self-Government, Strasburg, 15 October 1985 (Dz. U. 1994 No
124, item 607, correction Dz. U. 2006 No 154, item 1107).
Wiesława Miemiec, `Europejska Karta Samorządu Terytorialnego jako zespół gwarancji
teoretycznoprawne` [The European Charter of Local Self-Government as a set of
guarantees financial independence of commune
selected theoretical and legal issues]
(1997) 10 Samorząd Terytorialny 68.
Justification to the government draft bill of the Local Self-Government Revenue Act, Sejm
Paper No 1732/IV term 21.
The function of equalizing the revenues of local self-government units assumed
by the legislator is performed by the general subsidy. This equalizing function of
the general subsidy consists in complementing the own revenues of local self-
government units with funds from the state budget (vertical equalization) or
from the budgets of other local self-government units (horizontal equalization),
in order to help all units accomplish their own tasks to a degree that meets at
least the minimum standards in conditions of differing potential for self-
government entities across the country to generate own revenue. In other words,
imbalances in access to potential own revenue sources leads to the necessity of
equalizing those revenues to the level assumed by the legislator as sufficient to
ensure the potential for all local selfgovernment units to finance the
performance of own tasks. The equalizing function of the general subsidy is thus
always linked to own revenues (the general subsidy complements own revenues)
and own tasks (whose performance, alongside own revenues, is financed by the
general subsidy). In relations between the state budget and the budgets of
LSGUs, the vertical divide is of primary significance. It consists in transfers of
money to LSGUs; these transfers constitute state budget expenditures in the
legal form of subsidies and grants
. The horizontal divide, which is of a
complementary nature with respect to the vertical, consists in receiving and
redistributing a portion of funds from some LSGUs pursuant to criteria defined by
statute, and then transferring them to other LSGUs
The general subsidy is made up of the equalization component, the balancing
component (in respect of provinces
regional) and the educational component
An equalizing function is only performed by two portions of the subsidy
equalization component, which comes from the state budget, and the portion
derived from payments by LSGUs, id est the balancing (regional) portion
Attention is drawn to this fact by the justification for the Local Self Government
Revenue Act, which does not list the educational component in the context of
the assumed equalizing function performed by the general subsidy: “differences
in revenues will be equalized by the equalizing component as well as the
balancing component (communes, counties) and regional component (provinces)
Zbigniew Ofiarski, Subwencje i dotacje jednostek samorządu terytorialnego [General
subsidies and specific grants for the local self-government units] (Difin 2002) 24.
Hanna Sochacka-Krysiak, Finanse lokalne [Local finances] (Poltext 1995) 31.
Art 7 sec 1 LSGUR Act.
In the case of communes, this includes from the surplus of the complementary amount of
the equalizing component of the general subvention (art 21 sec 1 LSGR Act).
of the general
. In respect of both of the portions their assumed
function is the same, whereas they are distinguished by different sources of
financing (state budget vs budgets of LSGUs). The assumed function of the
educational component is also different. As in the case of the equalization and
balancing (regional) components of the general subsidy, it serves as a
supplement to the own revenues of LSGUs. The grounds for this supplement is
not, however, the need to correct for the potential to generate own revenues, but
rather to ensure that LSGUs have sufficient funding to perform tasks related to
education. This means that the amount of funding due to a given LSGU is
independent of that unit’s own revenues, therefore it follows that the
educational component does not serve to equalize own revenues. The value of
the educational component in the general subsidy is derived from criteria set out
in the relevant decree of the minister responsible for matters of education and
child welfare, in particular the types of schools and other institutions operated
by LSGUs, the professional rank attained by teachers, and the number of pupils
attending those schools and institutions
. It should be emphasized that what is
being discussed here is the assumed function of the educational component in
the general subsidy from the perspective of criteria used in determining its
amount. From the perspective of LSGU expenditures, the educational component
does not differ from other portions of the general subvention as LSGUs are free
to dispose of funds received from that portion of the general subsidy as they see
In summarizing the foregoing deliberations it should be concluded that the
assumed function of the general subsidy in respect of its equalizing and
balancing (regional) components is the aforementioned equalizing function. Prior
to proceeding to a presentation and examination of how the equalizing and
balancing (regional) components of the general subsidy perform their assumed
functions, we should first answer the question of whether the general subsidy
should equalize only the uneven access of LSGUs to potential sources of revenue,
or whether they should also serve to equalize uneven spending burdens. Invoking
art 9 sec 5 of the ECLSG it would seem that equalization applies to both
revenues and expenses of particular LSGUs
. The problem arises, however, of
Justification to the government draft bill of the Local Self-Government Revenue Act, Sejm
Print No 1732/IV term, 6.
Art 28 sec 6 LSGR Act.
Art 7 sec 3 LSGR Act.
Andrzej Niezgoda, `Subwencja ogólna i wpłaty
jednostek samorządu terytorialnego do
budżetu państwa jako elementy finansowego mechanizmu wyrównawczego` [The general
subsidies and payment of local self-government units to the state budget as part of the
how to objectively account for uneven expenditure levels when determining the
value of the equalization, particularly in light of the absence of legal regulation
concerning the standardization of costs for the performance of public tasks by
LSGUs. It would seem that one solution is to account for expenditure burdens
when calculating the number of residents in a given LGSU, which along with tax
revenue levels is used in calculating the level of equalization. Taking into account
particular expenditure needs should primarily affect large cities in which many
people using communal services do not have a place of residence. The proposed
mechanism can take the form of a population conversion factor, such as the one
which was applied under the Act on financing communes and the Local Self-
Government Unit Revenue Act in effect during the period 1999-2003
which is successfully employed in Germany
A doctoral discourse will be conducted using a legal-dogmatic method, therefore,
on analysis of the legal regulations.
EQUALIZATION COMPONENT OF THE GENERAL
The primary role in equalization of objective inequalities in the level of own
revenues generated by LSGUs is
and should be
played by the equalization
component of the general subsidy coming from the state budget. In accordance
with the constitutional principle of adequacy, it is the State which bears the
burden of ensuring that LSGUs participate in public revenues to such an extent
financial equalization mechanism] in Jolanta Gliniecka, Edward Juchniewicz, Tomasz
Sowiński (eds) Finanse publiczne jednostek samorządu terytorialnego.
terytorialnego we współczesnych regulacjach prawnych [Public
finances of local self-government units. Sources of financing of local government in
modern legal regulations] (CeDeWu 2014) 71-72.
The Commune Financing Act of 10 December 1993 (Dz. U. No 129, item 600 with
amendments) in art 15 the Local Self-Government Revenue Act of 26 November 1998 in
the years 1999-2003 (Dz. U. No 150, item 983 with amendments) in art 22 divided
communes into three groups based on population: 1) for communes with fewer than
5,000 residents the population conversion factor was also 5,000; 2) for communes with
between 5,000 and 10,000 the population conversion factor was equal to the number of
residents; 3) for communes with over 10,000 residents, the population conversion factor
was based on a special table under which the largest cities (over 300,000 residents) had a
conversion factor based on the formula 354,000 + 125% of the number of residents over
Cf. Joanna Mackiewicz-Łyziak, Elżbieta Malinowska-Misiąg, Wojciech Misiąg, Marcin
Tomalak, Wyrównywanie dochodów jednostek samorządu terytorialnego. Możliwości
wykorzystania w Polsce doświadczeń niemieckich krajów związkowych [Equalization of
local self-government units revenue. Possibilities of using in Poland experience of the
German federal states] (Instytut Badań Nad Gospodarką Rynkową 2008) 155-156.
as necessary for them to maintain at least a minimum of standards in the
performance of the public tasks assigned to them
. The idea is for the residents
of every LSGU in the unitary state of Poland to have access to public services
provided by those entities of a similar standard and at a similar price
. With a
view to the previously-mentioned constitutional principles of social justice (art 2
Constitution), the unitary character of the state (art 3 Constitution) and
sustainable development (art 5 Constitution), it is impermissible for there to exist
significant disproportions in the quality and level of communal services provided
by LSGUs around the country. The assumed function of the general subsidy, i.e.
equalization, is supposed to prevent this from occurring. Whether that function
is, in fact, carried out is decided by the criteria for equalization that are adopted.
Since the equalizing and balancing (regional) components of the general subsidy
are supposed to equalize the uneven distribution of own incomes around the
country, the base for calculating the value of the equalization should be the
amount of the own revenues belonging to a given LSGU. Comparison of the
amount of the own revenues generated by particular LSGUs at a given level
should allow for determining a particular average level of those revenues, in
order for those LSGUs below the average to receive equalization from the
equalizing and balancing (regional) components of the general subsidy.
Enumerations of the own revenues of communes, counties and provinces are
contained in art 4, art 5 and art 6 LSGUR Act. These revenues can be classified
into one of four basic categories: revenues from public law tributes, which
include revenues from local taxes and fees, as well as shares in revenues from
income tax, income generated by assets, payments from organizational entities
and self-government juridical persons, as well as other incomes like inheritances,
bequests and donations to the benefit of LSGUs
It should be emphasized that ameliorating differences in levels of own revenues
generated by LSGUs of a given level on a national scale concerns only public law
own revenues, and not private law own revenues. This is a result of the
constitutional principle of adequacy, which in art 167 sec 1 of the Constitution
Dębowska-Romanowska (n 3) 244.
Wiesława Miemiec, Prawne gwarancje
samodzielności finansowej gminy w zakresie
dochodów publicznoprawnych [Legal guarantees of financial independence of the
communities in public revenues] (Kolonia Limited 2005) 134.
Kowalczyk in Ryszard Mastalski, Eugenia
Fojcik-Mastalska (eds), Prawo
finansowe [Financial law] (Wolters Kluwer 2013) 461 et seq.
obliges the State to ensure participation for LSGUs in public revenues in a
manner adequate to the tasks assigned to them. The use of the phrase “public
revenues” in this provision should be understood to mean that only
in respect of
public law revenues does the State have a duty to guarantee them to a given
local self-government to the degree that allows it to perform its tasks
Equalization of own revenues in the legal form of the equalizing and balancing
(regional) components of the general subsidy will concern imbalances in public
law revenues across the country, and thus primarily revenue generated by public
law tributes. It is precisely the level of revenues from public law tributes that
leads to disproportions in own income levels among LSGUs. The uneven
distribution of revenues from public law tributes is most often the result of
objective factors over which local self-government units have no influence:
geographical location, climate conditions, the presence or absence of raw
materials, the quality of soil, and attractiveness for tourists. What follows is that
it is precisely the level of own revenues from public law tributes collected by
LSGUs which should be used as the criterion for equalization. Such a
construction of the equalizing and balancing (regional) components of the
general subsidy facilitates performance of the assumed function of those
portions of the general subsidy.
In accordance with art 20 sec 1, art 22 sec 1 and art 24 sec 1 LSGUR Act, the
equalizing component of the general subsidy from the state budget earmarked
for LGSUs is composed of the base amount and a supplementary amount. In
calculating the base amount of the general subsidy two criteria are taken into
account: the amount of tax revenues and the number of residents in a given
LSGU. The concept of "tax revenues” gives rise to certain doubts of a
terminological nature, as alongside revenues from local taxes the legislator also
includes fees and participation in revenue from income taxes (and in respect of
counties and provinces - only that last category); nevertheless, the solution itself
should be assessed positively
. As has already been indicated, calculation of the
Wiesława Miemiec, `Artykuł 167` [Article 167] in Jan Boć
Rzeczypospolitej oraz komentarz do Konstytucji RP z 1997 roku [Constitutions of the
Republic of Poland and the commentary to the Constitution of 1997] (Kolonia Limited
Doubts are raised by art 20 sec 3 LSGR Act, which excludes from the catalogue of
communal tax revenues receipts from the inheritance and gift tax, as well as from the
market, local, health spa, and dog taxes. These tributes are not, however, of significance in
generating meaningful disproportions in the level of own revenues generated by
communes at the national level.
value of equalizing funds that a given LGSU should receive is to be based on the
value of public law tributes constituting public law revenues of that particular
unit. Indeed, it is the disproportions in the level of revenues from public law
tributes which are the cause of the equalization system, which is designed to
eliminate those imbalances. The construction adopted for calculating the value
of the base amount of the equalizing component in the general subsidy thus
performs the assumed function of the general subsidy, and it therefore follows
that the assumed and the performed function are one and the same.
Equalization of the revenues of LSGUs cannot, however, lead to an extreme form
of egalitarianism and a drive to make equal the level of revenues generated by all
LSGUs on a given level across the country. This would serve to sap local
authorities’ motivation to stimulate economic growth locally
. For this reason
the legislator decided to limit the maximum extent of equalization. In the case of
communes, a given unit does not receive the base amount of the equalizing
component in the general subsidy if its tax revenues are greater than 92% of the
average tax revenues for all communes
. However, such a mechanism limiting
the maximum level of equalization is not to be found in regulations concerning
counties and provinces. In the subject literature this aspect of the general
subsidy is at times said to perform a separate stimulating function
In respect of the supplemental amount of the equalizing component in the
general subsidy, whether a given commune receives this funding depends on the
population density of the commune in comparison to the average population
density of the country; the upper limit of the equalization is, in turn, dependent
on the value of tax revenues collected by a given commune
. In respect of
counties, the unemployment rate is the decisive factor as to whether a county
receives the supplemental amount
. As for provinces, the value of tax revenues
plus number of residents in the province (which cannot exceed 3 million)
Beata Guziejewska, `Podstawowe
założenia subwencji ogólnej dla jednostek samorządu
terytorialnego w Polsce na tle konstrukcji teoretycznych` [The basic assumptions of
general subsidies for local self-government units in Poland on the background of
theoretical constructions] (2004) 11 Samorząd
Terytorialny 42; Paweł Swianiewicz,
`Transfery z budżetu państwa dla samorządów lokalnych` [Transfers from the state budget
for the local governments] (2003) 1 Studia Regionalne i Lokalne 99.
Art 20 sec 2 LSGR Act.
samorządu terytorialnego [Local self-
government units finance] (LexisNexis 2012) 113.
Art 20 sec 7-9 LSGR Act.
Art 22 sec 7-8 LSGR Act.
Art 24 sec 7-9 LSGR Act.
means that in respect of the supplemental amount of the equalizing component
in the general subsidy for communes and provinces, the value of public law
tributes is taken into account when calculating the extent of equalization. What
follows is that, in respect of the supplemental amount of the equalizing
component in the general subsidy for communes and provinces, the assumed
function of the general subsidy is in fact also performed. This is different in the
case of counties, where the value of tax revenues is not factored into
calculations of the supplemental amount.
THE BALANCING (REGIONAL) COMPONENT OF THE
Along with the equalizing component, the second part of the general subsidy,
whose assumed function is to ameliorate the effects of the uneven distribution
of own revenue sources, is the balancing (regional) component. Distinctly from
the equalizing component, which comes entirely from the state budget, the
balancing (regional) component is taken from payments made by LSGUs within
the framework of the vertical equalization system, also referred to as the
. As scholars of financial law indicate, the
vertical equalization system is intended to prevent those differences that are of
an extreme nature, but not every example of disproportion in own revenues.
The vertical equalization system is composed of two stages. In the first, LSGUs
defined by statute make equalizing payments to the state budget. In this manner,
the revenues of LSGUs exceeding levels defined by the legislator are collected by
the State. The second stage entails transfer of the proceeds of such payments in
the legal form of the equalizing component (in the case of provinces
in the general subsidy, to LSGUs indicated using statutorily defined criteria. This
is therefore not a “pure” system of vertical equalization, such as in the case of a
self-government equalization fund remaining under the control of self-
. The transfer of equalizing funds in the legal form of the
balancing (regional) component in the general subsidy is performed via the state
See: Teresa Dębowska-Romanowska (n 4) 244.
Wiesława Miemiec, `Transfery
środków pieniężnych pomiędzy budżetem państwa a
budżetami jednostek samorządu terytorialnego
wybrane aspekty finansowoprawne`
The value of tax revenues that determined the value of the equalization within
the framework of the equalizing component in the general subsidy is used here
to identify LSGUs obliged to remit equalization payments
. Payments made by
LSGUs are transferred via the state budget to LSGUs in the legal form of the
balancing (regional) component of the general subsidy. It would thus seem that,
since the assumed function of the general subsidy is to correct the effects of the
unequal distribution of own revenues across the entire country, then the criteria
used for identifying beneficiaries of the balancing (regional) component in the
general subsidy should also be based on the own revenues of LSGUs from public
law tributes. In this manner the assumed function of the balancing (regional)
component in the general subsidy would be performed.
Under current law, following verdicts of the Constitutional Tribunal addressing
the vertical equalization system
and the passing of temporary legislation
governing that system at the provincial level
, the decision as to which LGSUs
will receive the balancing (regional) component in the general subsidy will
primarily depend on selected expenditures and (less frequently) selected revenues
of those units. In respect of communes, as much as 75% of the balancing
component of the general subsidy is transferred on the basis of a selectively
applied expenditures criterion, such as expenditures on housing subsidies
remaining 25% is divided up according to a selectively applied revenue criterion,
i.e. revenues from participation in receipts from personal income tax, agriculture
tax and forest tax. In the case of counties, disbursement of 76% of the balancing
component in the general subsidy is determined by selected county expenditures,
primarily (60%) expenses on road network maintenance, and 24% is transferred
[Transfers between the state budget and the budgets of self-government units
financial aspects] (2010) 1–2 Finanse Komunalne 73.
Art 29 sec 1, art 30 sec 1 and art 70a sec 1 LSGR Act.
Pest, `Wyrównywanie poziome dochodów jednostek
terytorialnego („janosikowe”) –
kierunki zmian` [The horizontal alignment of local
selfgovernment units incomes (“janosikowe”) –
trends] in Jolanta Gliniecka, Edward
finansowania samorządu terytorialnego we współczesnych
regulacjach prawnych [Public finances of local self-government units. Sources of
financing of local government in modern legal regulations] (CeDeWu 2014) 99 et seq.;
Wiesława Miemiec, Przemysław Pest, `Wyrównywanie poziome dochodów jednostek
samorządu terytorialnego ("janosikowe")
w orzecznictwie Trybunału Konstytucyjnego` [The
horizontal alignment of local selfgovernment units incomes (“janosikowe”) in the
Constitutional Tribunal jurisprudence] in Marcin Smaga, Mateusz Winiarz (eds), Dyscyplina
finansów publicznych. Doktryna, orzecznictwo, praktyka [The discipline of public finances.
The doctrine, case law, practice] (C.H. Beck 2015) 376 et seq.
Cf. arts 70a-70c LSGR Act.
Art 21a sec 1 LSGR Act.
on the basis of the amount of revenues generated by a given county
. In turn,
for provinces, in accordance with temporary regulation in effect for the period
2015-2019, the division of the regional component of the general subsidy is
determined in 52% by the unemployment rate and 48% by the amount of tax
revenues generated by the province
Assuming, as has already been mentioned, that the function of the equalizing
and balancing (regional) components of the general subsidy is to complement
the own revenues of LSGUs in conditions of differentiated levels of own revenues
around the country, the base for calculating the level of equalization should be
the public law own revenues of LSGUs. It is precisely the disproportion in the
level of own revenues among LSGUs at a given level that determines the
necessity of the existence of an equalization system in the legal form of a
general subsidy. It follows that the adopted construction of the balancing
(regional) component of the general subsidy, based on selected expenditures and
selected revenues of LSGUs does not facilitate the achieving of the assumed
function of the general subsidy. The criteria for determining the beneficiaries of
the balancing (regional) component in the general subsidy should be the value of
own revenues from tributes received by LSGUs. Differentiating expenditure
needs, as indicated by art 9 sec 5 ECLSG, should be taken into account within the
population criterion, and thus in the second
alongside the criterion of tax
element in calculation of the balancing (regional) component in the
general subsidy. As was indicated in the first part of the article, the population
criterion can take the legal form of the population conversion factor already
functioning within the Polish system for revenues of LSGUs. Under present law,
the unequal distribution of own revenues across the country is taken into
account when determining LSGUs obliged to pay into the state budget funds
later earmarked for the balancing (regional) component in the general subsidy,
but not when dividing that component among LSGUs.
The equalization function in the system of revenues of LSGUs is performed by the
equalizing and balancing (regional) components of the general subsidy, which is
indicated in the justification to the present LSGU Revenue Act. This equalization
function consists in complementing own revenues of LSGUs using funds from the
Art 23a sec 1 LSGR Act.
Art 70b LSGR Act.
state budget (vertical equalization) or the budgets of other LSGUs (horizontal
equalization), to facilitate the performance by those entities of own tasks to at
least a minimum level of standards, in conditions of differing potential to
generate own revenues by LSGUs around the country. The normative justification
for the necessity of equalization LSGUs’ own revenues can be found in the
constitutional principles of social justice (art 2 Constitution), unitary character of
the state (art 3 Constitution) and sustainable development (art 5 Constitution),
as well as in art 9 sec 5 ECLSG. In order for the assumed equalizing function of
the general subsidy to be performed, the primary criteria in determining the
value of the equalization should be the amount of own revenues generated by
public law tributes paid to particular LSGUs. The equalizing component in the
general subsidy, applying tax revenues as the criterion of equalization, performs
the assumed function of the general subsidy. However, in respect of the
balancing (regional) component in the general subsidy, the criteria for equalizing
are selected expenditures and revenues of LSGUs. As a result, the balancing
(regional) component does not perform the assumed function of the general
Dębowska-Romanowska Teresa, Prawo finansowe. Cz
konstytucyjna wraz z
[Financial law. Constitutional part with general part] (C.H. Beck
Guziejewska Beata, `Podstawowe założenia subwencji ogólnej dla jednostek
samorządu terytorialnego w Polsce na tle konstrukcji teoretycznych` [The basic
assumptions of general subsidies for local self-government units in Poland on the
background of theoretical constructions] (2004) 11 Samorząd Terytorialny
Kornberger-Sokołowska Elżbieta, Finanse jednostek samorz
[Local self-government units finance] (LexisNexis 2012) Kowalczyk Rafał in:
Ryszard Mastalski, Eugenia Fojcik-Mastalska (eds), Prawo finansowe [Financial
law] (Wolters Kluwer 2013)
Mackiewicz-Łyziak Joanna, Malinowska-Misiąg Elżbieta, Misiąg Wojciech,
Tomalak Marcin, Wyrównywanie dochodów jednostek samorz
zkowych [Equalization of local self-government units revenue. Possibilities
of using in Poland experience of the German federal states] (Instytut Badań Nad
Gospodarką Rynkową 2008)
Miemiec Wiesława, `Artykuł 167` [Article 167] in Boć Jan (ed.), Konstytucje
Rzeczypospolitej oraz komentarz do Konstytucji RP z 1997 roku [Constitutions of
the Republic of Poland and the commentary to the Constitution of 1997]
(Kolonia Limited 1998)
Miemiec Wiesława, `Europejska Karta Samorządu Terytorialnego jako zespół
gwarancji zabezpieczających samodzielność finansową gmin
zagadnienia teoretycznoprawne` [The European Charter of Local Self-
Government as a set of guarantees financial independence of commune
selected theoretical and legal issues] (1997) 10 Samorząd Terytorialny Miemiec
Wiesława, Prawne gwarancje samodzielno
ci finansowej gminy w zakresie
dochodów publicznoprawnych [Legal guarantees of financial independence of
the communities in public revenues] (Kolonia Limited 2005) Miemiec Wiesława,
`Transfery środków pieniężnych pomiędzy budżetem państwa a budżetami
jednostek samorządu terytorialnego
wybrane aspekty finansowoprawne`
[Transfers between the state budget and the budgets of self-government units
selected financial aspects] (2010) 1–2, Finanse Komunalne
Miemiec Wiesława, Pest Przemysław, `Wyrównywanie poziome dochodów
jednostek samorządu terytorialnego ("janosikowe") w orzecznictwie Trybunału
Konstytucyjnego` [The horizontal alignment of local selfgovernment units
incomes (“janosikowe”) in the Constitutional Tribunal jurisprudence] in Smaga
Marcin, Winiarz Mateusz (eds), Dyscyplina finansów publicznych. Doktryna,
orzecznictwo, praktyka [The discipline of public finances. The doctrine, case law,
practice] (C.H. Beck 2015)
Niezgoda Andrzej, `Subwencja ogólna i wpłaty jednostek samorządu
terytorialnego do budżetu państwa jako elementy finansowego mechanizmu
wyrównawczego` [The general subsidies and payment of local selfgovernment
units to the state budget as part of the financial equalization mechanism] in
Gliniecka Jolanta, Juchniewicz Edward, Sowiński Tomasz (eds) Finanse publiczne
terytorialnego we współczesnych regulacjach prawnych [Public finances of local
self-government units. Sources of financing of local government in modern legal
regulations] (CeDeWu 2014) Ofiarski Zbigniew, Subwencje i dotacje jednostek
du terytorialnego [General subsidies and specific grants for the local
self-government units] (Difin 2002)
Pest Przemysław, `Wyrównywanie poziome dochodów jednostek samorządu
terytorialnego („janosikowe”) –
kierunki zmian` [The horizontal alignment of local
units incomes (“janosikowe”) –
trends] in Gliniecka Jolanta,
Juchniewicz Edward, Sowiński Tomasz (eds) Finanse publiczne jednostek
ródła finansowania samorz
du terytorialnego we
współczesnych regulacjach prawnych [Public finances of local self-government
units. Sources of financing of local government in modern legal regulations]
Sochacka-Krysiak Hanna, Finanse lokalne [Local finances] (Poltext 1995)
Swianiewicz Paweł, `Transfery z budżetu państwa dla samorządów lokalnych`
[Transfers from the state budget for the local governments] (2003) 1 Studia
Regionalne i Lokalne
This paper reproduces the content of the author's presentation
to "Current research problems in administrative studies in
Poland and Germany" conference held at the University of
Wrocław on 21-22 October 2016. It illustrates the fundamental
methods and problems concerning taxation of the public sector
in Germany based on the examples of corporation tax and
DEFINITION "ÖFFENTLICHE HAND"
The German-language term "öffentliche Hand" is essentially a
for the public sector that, as a legal
concept, is indeterminate in terms of both definition and
interpretation. For taxation purposes, the concept is more
specifically understood to include legal entities governed by
public law (“legal entities of public law” or “l.e.p.l.”,
"juristische Personen des öffentlichen Rechts" or "jPöR" for
short). This encompasses primarily public authorities (e.g. the
federal government, federal states, districts, municipalities,
municipal associations), publicsector associations, religious
affiliations under public law, guilds, chambers of craft and
trade, chambers of industry and commerce, and institutions and
However, the term is also used in legislation to a limited extent as
an indeterminate legal concept, e.g. in sec 141 of the Ninth Book of
the German Social Security Code (SGB IX), which refers to "Aufträge
der öffentlichen Hand" (public-sector contracts).
TAXATION OF THE PUBLIC SECTOR
Income Tax Law
Fiscal Law, Head
of Department of
Centre for Con-
(WRLAE, Vol. 7,
No. 1 (2017),
php/wrlae) and De
foundations established under public law, e.g. public service broadcasters.
law status may be conferred by federal or state law. The fundamental tasks of a
legal entity of public law (l.e.p.l.) lie in the exercise of public authority for the
performance of sovereign functions.
THE INCOME TAX TREATMENT OF LEGAL ENTITIES
GOVERNED BY PUBLIC LAW
TAXATION OF ECONOMIC ACTIVITIES ONLY
To the extent that a legal entity of public law (l.e.p.l.) performs the sovereign
functions assigned to it, it is generally exempt from income tax.
this nature are not consistent with the underlying principle of income tax law,
namely the taxation of activities aimed at generating income. To the extent that
a legal entity of public law (l.e.p.l.) performs activities that are not reserved for it
by custom and by law
but that can also be performed by private individuals,
however, this places it in competition with the free economy, meaning that it
must be taxed in order to ensure the equal treatment of these activities. As such,
taxation is intended to prevent the distortion of competition and ensure fair
UNLIMITED TAX LIABILITY
In accordance with para 1 sec 1 no 6 Corporation Tax Act (KStG for short), only
the commercial operations ("Betriebe gewerblicher Art" or "BgA" for short) of a
legal entity of public law (l.e.p.l.) within the meaning of para 4
Corporation Tax Act (KStG) are subject to unlimited corporation tax liability
cf. sec 4.1 of the Corporation Tax Guidelines 2015 (KStR 2015). Note: The KStR/KStH are
administrative instructions developed by the German Federal Ministry of Finance (BMF) in
conjunction with the federal states and published by the BMF.
"Sovereign operations" are explicitly discussed in sec 4 (5) sentence 1 of the German
Corporation Tax Act (KStG) of 22 April 1999 (BGBl. I 1999, 817), most recently amended
by the German Investment Tax Reform Act (InvStRefG) of 19 July 2016, BGBl. I 2016,
cf. sec 4.4 "Sovereign operations/exercise of public authority" of the Corporation Tax
Information 2015 (KStH 2015).
cf. sec 1.1 (3) sentence 2 Corporation Tax Guidelines 2015 (KStR 2015)
by contrast, the
corporation tax liability of a foreign legal entity of public law (l.e.p.l.) is governed by para
2 sec 1 Corporation Tax Act / KStG (= limited tax liability in respect of income generated
In Germany, the taxation of the income of entities (including entities governed by public
law (jPöRs) is governed by the provisions of the Corporation Tax Act / KStG. By contrast,
means that unlimited tax liability often only relates to a limited portion of a
legal entity of public law (l.e.p.l.) that gives the outward appearance of a
However, the taxable entity, as such, is not the BgA but
the legal entity of public law (l.e.p.l.), and specifically for each individual BgA it
As a matter of principle, different activities must be evaluated
separately and the resulting income calculated separately.
Tax assessment for
each individual BgA is performed with respect to the legal entity of public law
(l.e.p.l.) as the taxable entity.
LIMITED TAX LIABILITY
One special feature of legal entities of public law (l.e.p.l.) taxation is that a
legal entity of public law (l.e.p.l.) may be subject to unlimited corporation tax
liability and limited corporation tax liability simultaneously.
If the activities of
a legal entity of public law (l.e.p.l.) fail to meet the conditions for classification
as a BgA, they are generally not taxable at the level of the legal entity of public
law (l.e.p.l.). In particular, this benefits the area of asset management in the form
of rental and lease income (para 21 Income Tax Act (EStG for short) or income
from capital assets (para 20 Income Tax Act (EStG). As an exception, para 2 no 2
Corporation Tax Act (KStG) states that a legal entity of public law (l.e.p.l.) with
that is fully or partially tax-deductible is subject to limited
the income of natural persons is governed by the provisions of the German Income Tax
cf. German Federal Finance Court (BFH), verdict of 22 September 1976, I R 102/74, BStBl.
II 1976, 793.
cf. German Federal Finance Court (BFH), verdict of 13 March 1974, I R 7/71, BStBl. II
cf. para 4 sec 6 Corporation Tax Act / KStG
BgAs may be combined under certain
conditions (for more information see German Federal Ministry of Finance (BMF), circular
of 12 November 2009, IV C 7
S 2706/08/10004, BStBl. I 2009, 1303 under A. Combining
This presents an interesting difference compared with the treatment for value-added tax
purposes. A legal entity of public law (l.e.p.l.) can only be a single entrepreneur under
German value-added tax law (cf. sec 2 of the German Value-Added tax Act (UStG). In this
case, the entity encompasses all of the legal entity of public law (l.e.p.l.)`s activities and
must be registered under a single tax number.
Note: In accordance with the provisions of para 1 Income Tax Act (EStG), natural persons
may not be simultaneously subject to unlimited tax liability for certain income and limited
tax liability for other income. At most, their tax liability status may change during the
course of the year. In accordance with paras 1, 2 Corporation Tax Act / KStG, the same
applies e.g. to corporations.
cf. para 8 sec 1 sentence 1 Corporation Tax Act / KStG: The definition of income is
governed by the provisions of the Income Tax Act (EStG) and the Corporation Tax Act
(KStG). Opinion is divided as to whether para 2 no 2 Corporation Tax Act / KStG defines a
limitation on the income specified in para 49 Income Tax Act (EStG) (affirmative: Gerrit
corporation tax liability. This relates primarily to income from capital assets, as
these are generally subject to the provisions on the deductibility of capital gains
tax in accordance with para 43 ff. Income Tax Act (EStG). Income covered by
para 50a Income Tax Act (EStG) also comes into consideration to a limited
extent. The tax deduction is definitive in accordance with para 32 sec 1 no 2
Corporation Tax Act (KStG).
COMMERCIAL OPERATIONS (BGA)
In accordance with para 1 sec 1 no 6 Corporation Tax Act (KStG), a legal entity of
public law (l.e.p.l.) is subject to unlimited corporation tax liability only to the
extent that it conducts commercial operations ("Betriebe gewerblicher Art" or
"BgA" for short).
In accordance with para 4 sec 1 sentence 1 Corporation Tax
Act (KStG), this is the case if: a) a body ("Einrichtung") exists that b) performs a
sustainable economic activity c) in order to generate income and that d) is
economically distinct within the overall activity of the legal entity of public law
"Einrichtung" is an indeterminate legal concept whose interpretation is based
primarily on the judgements issued by the German Federal Finance Court (BFH).
Accordingly, an "Einrichtung" may be deemed to exist on the basis of a specific
management team, a closed scope of business, accounting or another
characteristic suggesting the existence of a separate entity.
Frotscher in Gerrit Frotscher, Klaus-Dieter Drüen, Corporation Tax Act / KStG
(HaufeLexware GmbH & Co. KG 2008) para 2 Corporation Tax Act / KStG m.n. 28;
negative: Sven-Christian Witt in Carl Herrmann, Gerhard Heuer, Arndt Raupach, Income
Tax Act (EStG)/Corporation Tax Act (KStG) (21st ed. Verlag Dr. Otto Schmidt KG 2006),
275th instalment, June 2016, para 2 Corporation Tax Act / KStG, m.n. 105).
Note: Unlimited tax liability continues to apply in accordance with para 4 sec 2
Corporation Tax Act / KStG even if the BgA is itself a legal entity of public law (l.e.p.l.).
Typical examples include district or municipal savings banks under public ownership
(whose primary purpose is private economic enterprise), which are subject to the
provisions of para 1 sec 1 no 6 Corporation Tax Act / KStG despite themselves being a
legal entity of public law (l.e.p.l.).
Note: As a matter of principle, public utilities (water, gas, electricity, heat), public
transport undertakings and port authorities constitute BgAs in accordance with para 4 sec
3 Corporation Tax Act / KStG.
cf. German Federal Finance Court (BFH), verdict of 26 May 1977, V R 15/74, BStBl. II 1974,
independence may also be suggested by characteristics other than organisational
The level of revenue generated from the economic activity may
also be a relevant factor.
In sec 4.1 (4) sentence 2 Corporation Tax Guidelines
2015 (KStR 2015), the authorities define a threshold for the latter as annual
revenue of EUR 130,000 within the meaning of para 1 sec 1 no 1 Value Added
Tax Act (Umsatzsteuergesetz; UStG for short). The threshold is particularly
relevant in cases where the activity of the legal entity of public law (l.e.p.l.) is
not already clearly delineated from the other activities at an organisational level,
e.g. in the case of a public undertaking ("Regiebetrieb") of a municipality.
3.4.3 SUSTAINABLE ECONOMIC ACTIVITY
In income tax law, tax-relevant activities are typically defined by reference to
the sustainability principle. The concept described in para 4 sec 1 sentence 1
Corporation Tax Act (KStG) is the same as the concept described in para 15 sec 2
sentence 1 Income Tax Act (EStG).
An activity is considered to be sustainable if
it is intended to be a repeated activity. This intention is an internal fact that
must be verified by reference to external circumstances. Accordingly, if similar
actions are actually repeated, an activity can generally be considered to be
sustainable. However, a one-off activity that is evidently intended to be a
repeated activity may be sufficient for classification as sustainable.
The economic activity of the legal entity of public law (l.e.p.l.) must go beyond
pure asset management. The statements by the authorities in sec 15.7 of the
Income Tax Guidelines (EStR) 2012 can be applied for definition purposes.
cf. German Federal Finance Court (BFH), verdict of 13 March 1974, I R 7/71, BStBl. II
cf. German Federal Finance Court (BFH), verdict of 26 February 1957, I R 327/56 U, BStBl.
II 1957, 146.
A "Regiebetrieb" is an unincorporated, legally and economically dependent branch of a
municipality that is integrated into the municipal budget. It is distinct from e.g. a
municipal enterprise (cf. e.g. para 95 sec 1 no 2 and para 95a of the Municipal Code for
the Free State of Saxony (SächsGemO) in the version published on 3 March 2014,
SächsGVBl. 2014, 146, and the Regulation on Municipal Enterprises of the Free State of
Saxony (SächsEigBVO) of 16 December 2013, SächsGVBl. 2013, 941), which is also
unincorporated but which constitutes an independent municipal body in terms of both
organisation and budget.
cf. Norbert Meier, Thomas Semelka in Carl Herrmann, Gerhard Heuer, Arndt Raupach (eds),
Income Tax Act (EStG)/Corporation Tax Act (KStG) (21st ed. Verlag Dr. Otto Schmidt KG
2006), 275th instalment, June 2016, sec Corporation Tax Act / KStG, m.n. 23.
cf. sec 15.2 of the Income Tax Information (EStH) and BFH, verdict of 31 July 1990, I R
173/83, BStBl II 1991, 66.
cf. Meier, Semelka (n 19) para 4 Corporation Tax Act / KStG, m.n. 28.
example, a municipality does not establish a BgA merely by transferring land for
use in exchange for a fee without the performance of any additional services
by generating income from capital assets
. Although economic activities are
generally performed in competition with other market participants, para 4 sec 1
sentence 2 Corporation Tax Act (KStG) states that participation in the free
is not a prerequisite. Monopoly status may give rise to a BgA under
certain circumstances, e.g. the granting of assigned pitches at a market event.
This means that a self-sufficient undertaking ("Selbstversorgerbetrieb") may also
be a BgA. Although the economic activities of a legal entity of public law
(l.e.p.l.) are evaluated separately as a matter of principle, different activities in
accordance with sec 4.1 (3) sentence 3 Corporation Tax Guidelines 2015 (KStR
2015) are also treated as a single entity if this is consistent with prevailing
3.4.4 GENERATION OF INCOME
In accordance with para 4 sec 1 sentence 2 Corporation Tax Act (KStG), the
intention to make a profit
is not necessary. para 4 sec 1 sentence 1 Corporation
Note: However, the formation of separate companies using legal forms such as the GmbH
(limited liability company under German law) is often encountered in the area of
residential letting in particular. The income generated by these companies is generally
taxable in accordance with sec 1 (1) no 1 Corporation Tax Act / KStG.
Note: However, cf. also sec 3.3; limited tax liability may exist in this respect.
To this extent, a BgA may make use of a special variation of the criteria for the
delimitation of types of profit income that would otherwise apply in accordance with para
15 sec 2 sentence 1 Income Tax Act / EStG for short.
cf. sec 4.5 Corporation Tax Information 2015 (KStH 2015), "Market events (weekly and
Note: In this respect
in the same way as for the requirement of participation in the free
economy (see sec 3.4.3)
the Corporation Tax Act / KStG deviates from the basic
requirements that otherwise apply to commercial operations in accordance with para 15
sec 2 sentence 1 Income Tax Act / EStG. This may have consequences for the trade tax
liability of the BgA. In accordance with para 2 sec 1 sentence 2 of the German Trade Tax
Act (GewStG), a commercial operation with a permanent domicile is subject to taxation,
whereby a commercial operation is defined within the meaning of the Income Tax Act /
including the intention to generate a profit and participation in the free economy.
cf. Marion Frotscher in Gerrit Frotscher, Klaus-Dieter Drüen, German Trade Tax Act /
GewStG, para 2 GewStG, m.n. 50, Haufe-Lexware GmbH & Co. KG Freiburg, Steuer Office
Kanzlei-Ed., version dated 6 September 2012; sec 2.1 (6) of the Trade Tax Guidelines
(GewStR). Para 8 sec 1 sentence 2 contains a provision with the same wording. As the
intention to generate a profit is not a prerequisite, the principles of income tax law
concerning hobby activities do not apply and it is possible for a BgA to be permanently
loss-making (cf. Ulrich Schallmoser in Carl Herrmann, Gerhard Heuer, Arndt Raupach,
Income Tax Act (EStG)/Corporation Tax Act (KStG) (Verlag Dr. Otto Schmidt KG Köln 2006),
275th instalment, June 2016, para 8 Corporation Tax Act / KStG, m.n.28). Also of interest
in this respect is the provision of para 8 sec 7 Corporation Tax Act / KStG negating the
Tax Act (KStG) states that the intention to generate income is sufficient. The
generation of income is not required to be the primary objective of the activity,
but can also be an ancillary objective.
The term "income" corresponds to the
definition in para 8 sec 1 Income Tax Act (EStG), meaning that it includes cash as
well as non-cash benefits.
Income from economic activities includes fees charged in this context
3.4.5 ECONOMIC WEIGHT
One of the characteristics of a BgA is that its activity must be distinct within the
overall activity of the legal entity of public law (l.e.p.l.). However, the benchmark
to be applied in this respect is debatable. It can certainly be asserted that the
authorities do not follow the case law established by the German Federal Finance
Court, which states that the ratio of the BgA's income to the total budget, or a
certain portion of the total budget, of the legal entity of public law (l.e.p.l.) may
be a relevant benchmark
. The benchmark defined by the authorities in sec 4.1
(5) sentence 1 Corporation Tax Guidelines 2015 (KStR 2015) is whether the
annual revenue of the BgA within the meaning of para 1 sec 1 no 1 Value Added
Tax Act (UStG) sustainably exceeds EUR 35,000. However, this does not represent
a fixed threshold
3.4.6 DEFINITION "HOHEITSBETRIEB"
In accordance with para 4 sec 5 sentence 1 Corporation Tax Act (KStG), the
operations of a legal entity of public law (l.e.p.l.) that are aimed primarily at the
exercise of public authority, known as "Hoheitsbetriebe" (sovereign operations)
expressly do not constitute a BgA. The exercise of public authority is typically
existence of a concealed profit distribution for permanently loss-making operations under
cf. German Federal Finance Court (BFH), verdict of 3 March 2010, I R 8/09, BStBl. II 2010,
502, concerning mediation activities of statutory health insurance companies.
cf. Meier, Semelka (n 20) para 4 Corporation Tax Act / KStG, m.n. 25.
cf. German Federal Finance Court (BFH), verdict of 11 January 1979, V R 26/74, BStBl. II
1979, 746 and German Federal Finance Court (BFH), verdict of 14 April 1983, V R 3/79,
BStBl. II 1983, 491.
cf. sec 4.1 (5) sentence 4, 5 Corporation Tax Guidelines 2015 (KStR 2015)
legal entity of public law (l.e.p.l.) may assert a competition situation even if the actual
amount falls below this benchmark.
For information on trade tax treatment, see para 2 sec 2 of the Regulation on the
Implementation of the German Trade Tax Act (GewStDV)
Sovereign operations are not
classified as commercial operations.
understood to describe an activity that is reserved for the legal entities of public
law (l.e.p.l.) by custom and by law.
One feature is the performance of public law
functions deriving from governmental authority and serving governmental
Compulsory acceptance due to a legal or official order
may also be
considered to represent a characteristic of sovereign authority
. As a matter of
principle, different activities of the legal entity of public law (l.e.p.l.) must be
evaluated separately (cf. sec 4.1 (3) sentence 1 Corporation Tax Guidelines 2015
If an area of activity has the characteristics of both sovereign activity and
economic activity, the primary intended use for sovereign purposes should be
emphasised. This is the case if the areas of activity are intertwined to the extent
that precise delimitation is neither possible nor reasonable. In other words, the
economic activity must be integrally linked to the sovereign activity and
constitute a form of ancillary activity within the framework of the inherently
sovereign activity. The inclusion of an intrinsically commercial activity in a
sovereign operation alone is not sufficient to satisfy this criterion; the activities
must be evaluated separately.
"However, the exercise of public authority is excluded to the extent that the
bodies of the entity participate in the free economy and perform an activity
whose content is not materially different to that of the activity of a private
cf. German Federal Ministry of Finance (BMF), circular of 11 December 2009, IV C 7
2706/07/10006, BStBl. I 2009, 1597 under I.1.a) Assignment on the basis of federal law,
state law, or state law based on federal law with compulsory usage under public law;
example: sewage disposal.
cf. German Federal Finance Court (BFH), verdict of 21 November 1967, I 274/64, BStBl. II
cf. German Federal Finance Court (BFH), verdict of 25 January 2005, I R 63/03, BStBl. II
2005, 501 and sec 4.4 (1) sentence 1 Corporation Tax Guidelines 2015 (KStR 2015).
For example, the operation of parking meters under the terms of road traffic regulations is
considered to be a sovereign activity, whereas the provision of off-street parking spaces in
multi-storey car parks, underground car parks, or continuous parking areas is considered
to be an economic activity (cf. sec 4.5 (4) Corporation Tax Guidelines 2015 (KStR 2015)
and sec 4.5 Corporation Tax Information 2015 (KStH 2015), "Parking space management").
Sovereign activities also include household waste disposal (cf. sec 4.5 (6) Corporation Tax
Guidelines 2015 (KStR 2015) and funeral services (cf. sec 4.5 Corporation Tax Information
2015 (KStH 2015), "Cemetery administration, grave maintenance etc.").
cf. German Federal Finance Court (BFH), verdict of 26 May 1977, V R 15/74, BStBl. II 1977,
Verdict relating to a cemetery administration that performed grave maintenance
services and arrangement and support services for private funerals in addition to the
sovereign function of funeral services.
As the provisions of state law also apply, different
evaluations may arise at state level in individual cases.
The evaluation must be
based on the principles of equal taxation, fair competition and preventing the
distortion of competition.
3.4.7 EXCEPTION: PARTICIPATING INTERESTS IN COMPANIES
In addition to performing activities in its own right, a legal entity of public law
(l.e.p.l.) may hold participating interests in forms of private law company to the
extent that this is permitted by law. This includes interests in both partnerships
. If a legal entity of public law (l.e.p.l.) holds a participating
interest in a commercial partnership
, the opinion of the German Federal
is that this always constitutes the formation of a BgA. In
contrast, the authorities do not consider a participating interest in a corporation
to constitute the formation of a BgA unless the legal entity of public law (l.e.p.l.)
cf. German Federal Finance Court (BFH), verdict of 12 July 2012, I R 106/10, BStBl. II.
2012, 837, m.n. 9
Municipal nursery schools are not a sovereign operation even though
the obligation to ensure the provision of childcare is regulated by law.
cf. Meier, Semelka (n 20) para 4 Corporation Tax Act / KStG, m.n. 71. cf. German Federal
Finance Court (BFH), verdict of 29 October 2008, I R 51/07, BStBl. II 2009, 1022
verdict addresses the issue of sovereign operations by reference to the example of a
municipal crematorium. See also German Federal Ministry of Finance (BMF), circular of 11
December 2009, loc. cit., I.1.b) The operation of a crematorium by a legal entity of public
law (l.e.p.l.) without compulsory usage under public law does not constitute a sovereign
This relates primarily to the legal forms of the "Gesellschaft bürgerlichen Rechts" or "GbR"
(civil law partnership; para 705 ff. of the German Civil Code (BGB), the "offene
Handelsgesellschaft" or "OHG" (general partnership; para 105 ff. of the German
Commercial Code (HGB) and the "Kommanditgesellschaft" or "KG" (limited partnership,
including the special form of the GmbH & Co. KG; para 161 ff. HGB).
This relates in particular to the legal forms of the "Aktiengesellschaft" or "AG" (stock
corporation in accordance with the German Stock Corporation Act (AktG) and
"Gesellschaft mit beschränkter Haftung" or "GmbH" (limited liability company in
accordance with the German Limited Liability Companies Act (GmbHG).
Income tax law also refers to a "partnership" within the meaning of para 15 sec 1
sentence 1 no 2 Income Tax Act / EStG.
cf. German Federal Finance Court (BFH), verdict of 25 March 2015, I R 52/13, BStBl. II
2016, 172, m. n. 19. In its circular of 8 February 2016 (IV C 2
S 2706/14/10001, BStBl I
2016, 237), the German Federal Ministry of Finance (BMF) instructs the fiscal authorities
to apply the grounds for the verdicts without restriction only up to and including the
2008 assessment period. A further circular is to be issued for assessment periods from
2009 onwards. The authorities are likely to be particularly disturbed by the BFH's finding
that a participating interest in a partnership gives rise to a BgA even if the activity would
not constitute the formation of a BgA if it were performed directly by the legal entity of
public law (l.e.p.l.) (the verdict in question related to a waste management centre with the
legal form of a GmbH & Co. KG; waste disposal may constitute a sovereign activity
depending on the circumstances).
actually exercises an influence on the management of the corporation
legal criteria for a company split are fulfilled. However, participating interests in
companies that are solely involved in asset management do not give rise to a
Irrespective of the existence of a BgA, the income generated by the
corporation itself is taxable in accordance with the general provisions of the
German Corporation Tax Act.
TAXATION OF INCOME
3.5.1 TYPE OF INCOME AND PROFIT DETERMINATION
The income of a BgA always constitutes commercial income within the meaning
of para 15 Income Tax Act (EStG) even if the BgA is leased.
In the case of
commercial income, taxation is based on the profit generated. In accordance
with para 4 sec 1 sentence 1 in conjunction with para 5 Income Tax Act (EStG),
profit is calculated by comparing the operating assets of an entity at the start
and end of the reporting period. If there is no statutory obligation for the entity
to keep accounts and regularly prepare financial statements, a simplified method
of profit determination using the cash method of accounting within the meaning
of para 4 sec 3 Income Tax Act (EStG) may be applied. Non-fiscal obligations to
keep accounts and regularly prepare financial statements also apply for tax law
(cf. para 140 of the German Fiscal Code (AO). In a specific case, for example,
such an obligation may arise from the provisions of the HGB
or the state
regulations on municipal enterprises
. As a matter of principle, the obligation to
cf. sec 4.1 (2) sentences 2-5 Corporation Tax Guidelines 2015 (KStR 2015). A small
participating interest may be sufficient to assume the existence of a BgA if control and
influence are exercised jointly with other legal entities of public law (l.e.p.l.). According to
these criteria, participating interests in municipal public utilities would typically give rise
to a BgA, for instance.
cf. Meier, Semelka (n 20) para 4 Corporation Tax Act / KStG, marginal no 29 for
partnerships; sec 4.1 (2) sentence 5 Corporation Tax Guidelines 2015 (KStR 2015) for
cf. sec 4.1 (7) Corporation Tax Guidelines 2015 (KStR 2015).
cf. German Federal Finance Court (BFH), verdict of 1 August 1979, I R 106/76, BStBl. II
1979, 716. For information on leased BgAs, see also para 4 sec 4 Corporation Tax Act /
KStG. The assumption of commercial income at all times corresponds to the treatment of
other taxpayers with unlimited tax liability; see para 8 sec 2 Corporation Tax Act / KStG.
47 cf. Klaus J. Hopt in Adolf Baumbach, Klaus J. Hopt, Handelsgesetzbuch, Verlag C.H.
Beck, 36th ed., Munich 2014, para 1 m.n. 27
Entities required to keep accounts include
Deutsche Bundesbank, savings banks and public insurance companies.
e.g. arising from para 11 sec 1 sentence 3 SächsEigBVO in the case of the Free State of
perform double-entry bookkeeping
does not exclude the possibility of applying
the cash method of accounting. An obligation for solely tax-related purposes is
possible if the thresholds set out in para 141 AO are exceeded. For the purposes
of profit/income determination, a legally dependent BgA is notionally separated
from the legal entity of public law (l.e.p.l.) to the extent that agreements such as
rental and lease agreements between the jPöR and the BgA are fundamentally
recognised, albeit subject to the restrictive conditions applicable to controlling
shareholders under corporation tax law.
3.5.2 SPECIAL FEATURES FOR LEGAL ENTITIES OF PUBLIC LAW
In accordance with para 23 sec 1 Corporation Tax Act (KStG), the income
generated by a BgA is initially subject to a tax rate of 15%. To ensure equal tax
treatment with the free economy, however, the economic benefits gained by the
legal entity of public law (l.e.p.l.) as a result of the BgA must also be taxed. If a
GmbH were to distribute taxable profits to its shareholders, for example, this
profit distribution would also be taxable as income from capital assets at the
level of the shareholders in accordance with para 20 sec 1 no 1 Income Tax Act
(EStG). Income tax law achieves a similar effect for the taxation of legal entities
of public law (l.e.p.l.) through the provisions of para 20 sec 1 no 10 a and b
Income Tax Act (EStG)
that were introduced as a result of the German Tax
. The legal entity of public law (l.e.p.l.) has limited tax liability in
accordance with para 2 no 2 Corporation Tax Act (KStG) for this income, which is
subject to withheld capital gains tax in accordance with para 43 sec 1 sentence
1 no 7b and no 7c Income Tax Act (EStG). The withholding of capital gains tax is
limited to 15% in accordance with para 43a sec 1 sentence 1 no 2 Income Tax
Act (EStG), thereby corresponding to the corporation tax rate set out in para 23
sec 1 Corporation Tax Act (KStG). The withheld tax is definitive in accordance
with para 32 sec 1 no 2 Corporation Tax Act (KStG).
e.g. arising from para 72 sec 2 sentence 2 SächsGemO in the case of the Free State of
Saxony; cf. BMF, circular of 3 January 2013, IV C 2
S 2706/09/10005, BStBl I 2013, 59
(including with regard to the special features of regulations on municipal enterprises).
cf. sec 8.2 (1) and (2) Corporation Tax Guidelines 2015 (KStR 2015), sec 8.2 Corporation
Tax Information 2015 (KStH 2015), "Rental and lease agreements" and "Agreements".
For further information cf. German Federal Ministry of Finance (BMF), circular of 9
January 2015, IV C 2
S 2706a/13/10001, BStBl. I 2015, 111.
German Act on the Reduction of Tax Rates and Reform of Business Taxation (StSenkG) of
23 October 2000, BGBl. I 2000, 1433.
THE VAT TREATMENT OF LEGAL ENTITIES
GOVERNED BY PUBLIC LAW
PRESSURE FOR NEW LEGISLATION
In addition to the general conditions for classification as an entrepreneur in
accordance with para 2 sec 1 Value Added Tax Act (Umsatzsteuergesetz, UStG for
short), which also apply to legal entities of public law (l.e.p.l.), to date the
treatment of legal entities of public law (l.e.p.l.) for value-added tax purposes has
been based in particular on para 2 sec 3 sentence 1 Value Added Tax Act (UStG).
According to this provision, a legal entity of public law (l.e.p.l.) performed
commercial or professional activities within the meaning of para 2 sec 1 Value
Added Tax Act (UStG) only within the framework of its commercial operations
(BgA) and agricultural and forestry operations. The existence of a BgA was
subject solely to corporation tax criteria (cf. para 1 sec 1 no 6, para 4
Corporation Tax Act (KStG). This resulted in exemption from VAT for activities
that, in themselves, were very much performed in competition with the free
economy but that were not treated as such on account of the BgA criteria. This
related to asset management activities performed by legal entities of public law
(l.e.p.l.) as well as assistance services provided between legal entities of public
law (l.e.p.l.). Even bodies that were not economically distinct within the overall
activity of the legal entity of public law (l.e.p.l.)
were exempt from VAT as a
However, this treatment did not necessarily result in a tax benefit. As
entrepreneur status also provides the option of input tax deduction, VAT may
even be the more economically attractive variant for investments in particular.
As such, it comes as no surprise to learn that the German Federal Finance Court
has found itself having to address the VAT treatment of legal entities of
public law (l.e.p.l.) in Germany to a growing extent in recent years; this also
cf. sec 4.1 (5) sentence 1 Corporation Tax Guidelines 2015 (KStR 2015)
threshold for examining this criterion is annual revenue of EUR 35,000 (see also sec 3.4.5).
cf. e.g. German Federal Finance Court (BFH), verdict of 15 April 2010, V R 10/09, UR 2010,
646 (permission for the installation of vending machines by a university); German Federal
Finance Court (BFH), verdict of 3 March 2011, V R 23/10, BStBl. II 2012, 74 (costs of
marketplace renovation); German Federal Finance Court (BFH), verdict of 10 November
2011, V R 41/10, UR 2012, 272 (plaintiff: a municipality in the Free State of Saxony /
known as the "sports hall verdict").
involves taking into account the judgements issued by the European Court of
The fact that, by reference to the provisions of art 13 of the Directive on the VAT
, the national evaluation of entrepreneur status based on corporation
tax criteria is not supported in EU law should not come as a surprise. As such, it
can also be concluded that this connection is ultimately no longer relevant based
on the BFH's case law.
According to the BFH, the evaluation should be based
primarily on the form taken by the legal entity of public law`s (l.e.p.l.) activity. If
a legal entity of public law (l.e.p.l.) acts on a private law basis, it is treated as an
entrepreneur; by contrast, if its activity has a basis in public law, a legal entity of
public law (l.e.p.l.) is treated as an entrepreneur only if it enters into competition
with other providers. This case law was not generally applied by the authorities.
Instead, the legal entity of public law (l.e.p.l.) was merely given the option of
invoking the more favourable scenario; however, this would then be required to
be applied uniformly for all of its activities. In practice, this meant that taxation
was able to follow either the strict wording of national legislation or its
interpretation in case law.
The introduction of para 2b Value Added Tax Act (UStG) as a result of the
German Tax Amendment Act 2015
represented the legislator's response to the
case law established by the courts and the need for the national statutory
provisions on the VAT treatment of the public sector to be adapted to reflect EU
Paragraph 2b sec 1 Value Added Tax Act (UStG) clearly incorporates the
cf. e.g. ECJ, verdict of 14 December 2000, C-446/98 "Fazende Publica", UR 2001, 108; ECJ,
verdict of 16 September 2008, C-288/07 "Isle of Wight Council", IStR 2008, 734; ECJ,
verdict of 4 June 2009, C-102/08 "Salix Grundstücks-Vermietungsgesellschaft", BFH/NV
2009, 1222; ECJ, verdict of 29 October 2015, C-174/14 "Saudacor", UR 2015, 901.
Council Directive 2006/112/EC of 28 November 2006, ABl. no L 347 2006, 1 (previously:
art 4 (5) of Sixth Council Directive 77/388/EEC of 17 May 1977 on the Harmonisation of
the Laws of the Member States relating to Turnover Taxes (ABl. no L 145 1977, 1).
For further information cf. Pierre Frotscher, ‘Umsatzbesteuerung der Kommunen –
Rechtliche Rahmenbedingungen in der EU und im nationalen Recht sowie aktuelle
Entwicklungen in der Rechtsprechung (2013) 4 Sachsenlandkurier 254 et seq.
Introduced by art 12 no 3 of the German Tax Amendment Act 2015 (StÄndG 2015),
legislation of 2 November 2015, BGBl. I 2015, 1834.
cf. Bundestag printed paper 18/6094 of 23 September 2015
and report of the Finance Committee, 91.
provisions of art 13 sec 1 of the Directive on the VAT System. As a result, the
previous connection between VAT and corporation tax law no longer applies. In
future, classification as an entrepreneur will be based solely on VAT criteria.
Doubts have been raised as to the conformity of the new provision with EU law
to the extent that para 2b sec 2 and sec 3 Value Added Tax Act (UStG)
supplements the general provision in para 2b sec 1 Value Added Tax Act (UStG)
with definitions of the concept of "significant distortion of competition" that are
not based on the Directive on the VAT System in this form. As such, the new
provision can be expected to be the subject of case law sooner or later,
particularly at the level of the ECJ.
In addition to the issue of EU law, it is
especially notable that the legislator has used a number of indeterminate legal
concepts in formulating the new legislation. Based on past experience, this tends
to lead to substantially greater scope for interpretation. Accordingly, the
authorities are currently preparing a circular on application that will address
material legal questions of interpretation; this is expected to be published by the
end of 2016 by all accounts.
4.2.2 ENTREPRENEUR STATUS
The classification of a legal entity of public law (l.e.p.l.) as an entrepreneur is
initially based on the general criteria of para 2 sec 1 Value Added Tax Act (UStG).
These state that a legal entity of public law (l.e.p.l.) is classifiable as an
entrepreneur if it performs economic activities, i.e. independent, sustainable
activities with the intention of generating income. An exception is granted by
para 2b sec 1 sentence 1 Value Added Tax Act (UStG), which states that a legal
entity of public law (l.e.p.l.) performing activities in the exercise of public
authority is not classifiable as an entrepreneur. Activities are performed in the
exercise of public authority if they are based on a special provision of public law,
e.g. an act of law, a legislative decree, an international treaty or special
provisions of canon law.
If treatment as a non-entrepreneur results in
significant distortion of competition, however, the legal entity of public law
(l.e.p.l.) must be treated as an entrepreneur in accordance with para 2b sec 1
sentence 2 Value Added Tax Act (UStG).
Heidner, ‘VAT treatment of the public sector –
consequences of case
law for the new legislation in para 2b Value Added Tax Act (UStG)’
Umsatzssteuer-Rundschau 45 et. seq.
significant distortion of competition is an
autonomous concept of EU law.
cf. Bundestag printed paper 18/6094 of 23 September 2015
and report of the Finance Committee, 91.
The work establishments of a penal institution serve as a good example of the
effect of para 2b Value Added Tax Act (UStG). Based on the judgements issued by
, the work establishments of a penal institution do not constitute
economic activity, but rather are considered to be sovereign operations
employment of prisoners forms part of the penal system. As such, this does not
result in the formation of a BgA in accordance with para 4 sec 5 sentence 1
Corporation Tax Act (KStG) and no entrepreneurial activity is performed in
accordance with para 2 sec 3 sentence 1 Value Added Tax Act (UStG; old
version). If the matter is evaluated in accordance with para 2b sec 1 sentence 1
Value Added Tax Act (UStG), it remains the case that the activities are performed
in the exercise of public authority; however, the circumstances described in para
2b sec 1 sentence 2 Value Added Tax Act (UStG) are clearly met in respect of the
services provided by a modern penal institution, which range from stainless steel
barbecues and smoker grills to nesting boxes, small bottle cases and children's
, all of which are currently advertised online as "VATexempt".
These activities on the basis of public law, which could potentially be VAT-
exempt, must be distinguished from activities on the basis of private law.
Activities of this nature are already excluded from the scope of para 2b sec 1
Value Added Tax Act (UStG) and hence must be evaluated solely in accordance
with the criteria of para 2 sec 1 Value Added Tax Act (UStG). In this respect, the
new legislation systematically reflects the case law established by the BFH and
4.2.3 GENERAL EXCLUSIONS FROM SIGNIFICANT DISTORTION OF
In accordance with para 2b sec 2 no 1 Value Added Tax Act (UStG), significant
distortion of competition does not exist if the (annual) revenue generated by a
legal entity of public law (l.e.p.l.) from similar activities is not expected to exceed
EUR 17,500. This is an irrebuttable legal presumption. Annual revenue in relation
to this threshold must be forecast at the start of the year. The definition of what
exactly is meant by "similar" has a considerable influence on actual taxation, and
hence is likely to occupy the courts. The effect of this provision must be
cf. German Federal Finance Court (BFH), verdict of 14 October 1964, I 80/62 U, BStBl. III
cf. Meier, Semelka (n 19) para 4 Corporation Tax Act / KStG, m.n. 76 "Work establishments
of penal institutions".
cf. The product range of the penal institutions of Lower Saxony state at https://jvashop.de.
scrutinised, as the threshold could be utilised multiple times if different activities
are performed. For example, if a legal entity of public law (l.e.p.l.) has four
separate areas of activity, it may arrange for revenue of up to EUR 70,000 p.a. to
be taxexempt. This would significantly exceed the maximum permitted
taxexempt total revenue of EUR 17,500 for small entrepreneurs.
In addition, para 2b sec 2 no 2 Value Added Tax Act (UStG) states that there is no
significant distortion of competition if similar services performed on the basis of
private law are tax-exempt without right of waiver in accordance with para 9
Value Added Tax Act (UStG). This provision relates to an area in which there are
no concerns of distortion of competition from a VAT perspective, as a potential
competitor would also be nonoptionally exempt from VAT. However, this
explicitly excludes activities covered by the optional tax liability provided by para
9 Value Added Tax Act (UStG). To this extent, a legal entity of public law (l.e.p.l.)
should also be able to benefit from input tax deduction by exercising the option
provided by para 9 Value Added Tax Act (UStG), thereby preventing itself from
being subject to a competitive disadvantage
. In practice, this is likely to apply
primarily to the letting of land or buildings, which is fundamentally tax-exempt
in accordance with para 4 no 12 a Value Added Tax Act (UStG; with no
entitlement to deduct input tax in accordance with para 15 sec 1 and sec 2 no 1
Value Added Tax Act (UStG), but for which an option is fundamentally provided
by para 9 sec 1 Value Added Tax Act (UStG) (with input tax deduction e.g. for
investment costs in buildings in accordance with para 15 sec 1 Value Added Tax
4.2.4 SERVICES PROVIDED TO OTHER LEGAL ENTITIES OF PUBLIC LAW
With specific reference to services provided between legal entities of public law
(l.e.p.l.), para 2b sec 3 Value Added Tax Act (UStG) describes additional
exceptional situations in which there is not assumed to be any significant
distortion of competition, meaning that no VAT is levied. According to the
grounds of the legislation
, the provisions are justified in light of demographic
change, the shortfall in public funds and the leveraging of synergy effects by
harnessing the existing material and human resources to minimise costs and
hence reduce the burden on citizens. The provisions relate to sovereign functions
cf. para 19 sec 1 sentence 1 and (3) Value Added Tax Act (UStG).
cf. Bundestag printed paper 18/6094 of 23 September 2015
and report of the Finance Committee, 91.
as well as public welfare services, particularly in the area of inter-municipality
If the statutory provisions mean that services can be performed by legal entities
of public law (l.e.p.l.) only, there is no competition with other providers.
Accordingly, para 2b sec 3 no 1 Value Added Tax Act (UStG) states that there can
be no significant distortion of competition in such cases. The essence of para 2b
sec 1 sentence 1 Value Added Tax Act (UStG), namely that the exercise of public
authority does not involve entrepreneurial activity, therefore applies accordingly.
The examples cited in the grounds of the legislation
administrative districts for registry offices and public order offices or the
activities of joint local residents' registration offices. However, there is some
doubt as to how apposite these examples really are. If two municipalities
establish a "joint" registry office, for example, this formulation suggests that the
expenses of establishing the registry office are shared between the parties. At
first glance, at least, it is therefore not immediately obvious as to where there is
supposed to be a potential exchange of services requiring prevention by way of a
provision such as para 2b sec 3 no 1 Value Added Tax Act (UStG).
Paragraph 2b sec 3 no 2 Value Added Tax Act (UStG) of the new legislation
undoubtedly provides the greatest scope in terms of interpretation. This provision
states that there is no significant distortion of competition even if the
cooperation is determined by shared public interests. This is typically the case if
the criteria set out in para 2b sec 3 no 2 sentence 2 a to d Value Added Tax Act
(UStG) are fulfilled: a) the service provision has a long-term basis in public law
(e.g. public contract, international treaty; question: what constitutes "long-
term"?), b) it involves the maintenance of public infrastructure and the
performance of a public function that is incumbent upon all parties (e.g.
technical infrastructure or education), c) it is remunerated solely in the form of
cost reimbursement (how is this determined, not least since it tends to be
unlikely that cost accounting is performed with the required depth?) and d)
services are provided primarily to other legal entities of public law (l.e.p.l.)
(question: what constitutes "primarily"?). The grounds of the legislation
relatively succinctly that the aforementioned criteria are based on EU public
procurement law. However, the provisions of public procurement law are
supposed to apply only to the extent that they are compatible with the Directive
on the VAT System.
It is clear to see that the provisions of para 2b sec 3 no 2 Value Added Tax Act
(UStG) provide a legal entity of public law (l.e.p.l.) with significant leeway while
simultaneously entailing a not insubstantial risk of a different interpretation in
case law to that which was applied in concluding the respective agreements.
addition, there may be an issue in terms of distortion of competition due to the
exclusion of other market participants.
4.2.5 CATALOGUE OF ENTREPRENEURIAL ACTIVITIES
In nos 1-4, para 2b sec 4 Value Added Tax Act (UStG) starts by reproducing the
catalogue of public-sector activities that are always considered to be
entrepreneurial as set out in the old version of para 2 sec 3 sentence 2 Value
Added Tax Act (UStG). The catalogue is supplemented by a reference in para 2b
sec 4 no 5 Value Added Tax Act (UStG) to Annex I to the Directive on the VAT
System (cf. art 13 sec 1 para 3 of the Directive on the VAT System). The extended
scope of the new legislation is likely to remain manageable, as the activities
listed in Annex I are also considered to have been typically taxable as BgAs under
the previous legislation.
TRANSITIONAL ARRANGEMENT AND OPTIONAL
The new version of para 2b Value Added Tax Act (UStG) came into force on 1
; according to para 27 sec 22 sentence 1 Value Added Tax Act
), however, it is applicable for the first time only to revenue generated
after 31 December 2016. This gives a legal entity of public law (l.e.p.l.) just
under a year to adapt to the new legal conditions.
Furthermore, para 27 sec 22 sentence 3 Value Added Tax Act (UStG) provides
legal entities of public law (l.e.p.l.) with the option of submitting a declaration to
the tax office stating that they intend to apply para 2 sec 3 Value Added Tax Act
(UStG) in the version in force on 31 December 2015 to all revenue generated
after 31 December 2016 and before 1 January 2021. This declaration must be
cf. Heidner (n 62) 45 et seq.
cf. art 18 sec 4 StÄndG 2015.
Introduced by art 12 no 6 StÄndG 2015.
submitted by 31 December 2016 at the latest (cf. para 27 sec 22 sentence 5
Value Added Tax Act (UStG). The declaration may be revoked at a later date with
effect from the start of a subsequent calendar year (cf. para 27 sec 22 sentence
6 Value Added Tax Act (UStG).
If a legal entity of public law (l.e.p.l.) exercises this option, it will continue to be
taxed in accordance with the existing legislation. This means that asset
management activities and assistance services will remain taxexempt until 31
December 2020 at the latest. The exercise of this option is intended to allow
legal entities of public law (l.e.p.l.) to extend the one-year transitional period
provided by para 27 sec 22 sentence 1 Value Added Tax Act (UStG) for up to a
further four years in order to enable an orderly transition to the new taxation
As there is currently considerable uncertainty with regard to the
consequences of applying the new standard from 2017, not least as a result of
the large number of indeterminate legal concepts contained in para 2b Value
Added Tax Act (UStG), many legal entities of public law (l.e.p.l.) are expected to
initially exercise the option in order to give themselves more time to intensively
examine the individual steps that will be required to adapt to the new legal
The public sector in Germany is subject to both income tax and value-added tax
when its activities go beyond the area of public administration to the extent that
they enter into competition with other providers. The taxation of public-sector
entities is intended primarily to prevent the distortion of competition. The
delimitation of the spheres that are relevant for taxation purposes requires a
complex system of statutory provisions. The German Tax Amendment Act 2015
seeks to establish a new statutory basis for the VAT treatment of the public
sector that is compliant with EU law.
cf. German Federal Ministry of Finance (BMF), circular of 19 April 2016, III C 2
7106/07/10012-06, BStBl. I 2016, 986
on the application of the transitional
arrangement provided by sec 27 (22) Value Added Tax Act (UStG).
cf. Bundestag printed paper 18/6094 of 23 September 2015
and report of the Finance Committee, 93.
For further information cf. Fritz Lang, ‘The new VAT legislation for legal entities governed
by public law in accordance with para 2b Value Added Tax Act (UStG)
to exercise the
option or not to exercise?’ (2016) 4 Sachsenlandkurier 186 et
Frotscher Gerrit in Frotscher Gerrit, Drüen Klaus-Dieter, Corporation Tax Act
(Haufe-Lexware GmbH & Co. KG 2008)
Frotscher Marion in Frotscher Gerrit, Drüen Klaus-Dieter, German Trade Tax Act /
GewStG (Haufe-Lexware GmbH & Co. KG 2012)
Frotscher Pierre, ‘Taxation of the Public Sector’ (2013) 4 Sachsenlandkurier
‘VAT treatment of the public sector –
case law for the new legislation in
para 2b Value Added Tax Act (UStG)’ (2016) 2
Hopt Klaus J. in Baumbach Adolf, Hopt Klaus J., Handelsgesetzbuch (Verlag C.H.
Lang Fritz, ‘The new VAT legislation for legal entities governed by public law in
accordance with para 2b Value Added Tax Act (UStG)
to exercise the option or
not to exercise?’
(2016) 4 Sachsenlandkurier
Meier Norbert, Semelka Thomas in Herrmann Carl, Heuer Gerhard, Raupach
Arndt, Income Tax Act (EStG)/Corporation Tax Act (KStG) (Verlag Dr. Otto
Schmidt KG Köln 2006)
Schallmoser Ulrich in Herrmann Carl, Heuer Gerhard, Raupach Arndt, Income Tax
Act (EStG)/Corporation Tax Act (KStG) (Verlag Dr. Otto Schmidt KG Köln 2006)
Witt Sven-Christian in Herrmann Carl, Heuer Gerhard, Raupach Arndt, Income
Tax Act (EStG)/Corporation Tax Act (KStG) (Verlag Dr. Otto Schmidt KG Köln
A definitive explanation of “public sector” does not exist in the
Polish law. However, there are some provisions which may
suggest the legal meaning of this term. They are related first of
all to European acts on public procurement
2014/24/EU of the European Parliament and of the Council of
26 February 2014 on public procurement and repealing
, but not only repeating their wordings.
Act of 29 January 2004
Law on public procurement
according to art 3 sec 1, should be applied for contracting by
public finance sector bodies,
other state units without legal personality
other legal persons established for the specific purpose of
meeting needs in the general interest, not having an
industrial or commercial character, if financed in more than
50% or managed by bodies mentioned above and if it does
not act in the ordinary competitive market.
The most characteristic seems to be pointing to the public
finance sector bodies as the main scope of relevant subjects.
Therefore, “public sector” and “public finance sector” aren`t
OJ L 94 of 28 March 2014, 65.
Official Journal of Laws of the Republic of Poland
(hereinafter: Dz. U.) 2017, item 1986.
TAXATION OF THE PUBLIC SECTOR
PhD in Law,
at the Chair of
Faculty of Law,
(WRLAE, Vol. 7,
No. 1 (2017),
php/wrlae) and De
. Following art 9 of the Act of 27 August 2009 on public finance
public finance sector includes: public governance bodies, local government units,
budgetary entities, selfgovernment budgetary establishments, budgetary
institutions, state agencies and funds, some institutions ruled by special laws
(public high schools, the Polish Academy of Sciences, cultural institutions etc.)
except enterprises, research institutes, banks and commercial companies. Though
this list is relatively clear, some doubts on qualifying into the public finance
sector still remain
The, so declared public, sector taken as a whole is not a subject of any special
rules on taxation in Poland. Acts of tax law even don`t use the term "public
sector” and there is no system of taxation of the public sector. Therefore, its
position in the sphere of taxation must be analyzed through detailed provisions
of each tax separately.
The first evident example with reference to public sector can be found in the Act
of 11 March 2004 on goods and services tax
(Polish version of VAT). Subject of
the tax are individuals and organisational units, irrespective of their legal form
among others legal persons and organisational units without legal personality
(art 151) of this Act). Such an expression, often used in different acts of tax law,
means the widest scope of subjects to be taxed. However, in the same Act there
are additional conditions, important for public sector bodies. First, taxpayers
should perform their economic activity independently (art 15 sec 1 in fine).
Second, public governance organs and their offices are not regarded as taxpayers
in respect of activities in carrying out their statutory functions, excluding
transactions of civil law (art 15 sec 6). All this is consistent with art 13 sec 1 and
2 of Council Directive 2006/112/EC of 28 November 2006 on the common
system of value added tax
Both of these conditions were analyzed by courts. The most characteristic were
cases of the Municipality (City) of Wrocław.
Cezary Kosikowski, Sektor finansów publicznych (Wolters Kluwer Polska, Dom Wydawniczy
ABC 2006) 25.
Dz. U. 2017, item 2077 with later changes.
Kosikowski (n 3) 19.
Dz. U. 2017, item 1221 with changes.
OJ L 347 of 11 December 2006, 1.
Shortly after introducing the tax on goods and services (in middle 1990-ties)
Wrocław did not tax numerous transactions of selling of the municipal property,
considering them as public activity, executing independently, but not on their
own account and for inhabitants` needs. The Administrative Court of the
Voivodship in Wrocław, in the decision of 10 November 1999
, decided that such
deals are part of the common formula of taxation and there is no legal reason to
apply any exemptions. At that time tax provisions were different, but similar to
present, so the conclusion remains fully actual and nowadays even quite
In recent years, one important solution to this problem was passed by the Court
of Justice of the European Union. The question
referring to the case of the
Municipality of Wrocław
was if a budgetary entity could be a taxpayer of the
tax on goods and services. According to art 11 of the Act on public finance,
budgetary entities are state or municipal units without legal personality, fully
dependent on the municipality in the organizational and financial spheres.
Particularly they do not have their own revenues and do not have their own
they are both directly revenues and expenditures of relevant
budget, so also of the state or the relevant municipality.
In the judgement of The Grand Chamber of the Court of 29 September 2015
answer was that because taxable activity should be independent, such entities
must not be considered as subjects of this tax: “art 9 sec 1 of Council Directive
2006/112/EC of 28 November 2006 on the common system of value added tax
must be interpreted as meaning that bodies governed by public law, such as the
municipal budgetary entities at issue in the main proceedings, cannot be
regarded as taxable persons for the purposes of value added tax in so far as they
do not satisfy
the criterion of independence set out in that provision”. So it is the
municipality itself who is the taxpayer in connection with transactions realized
through budgetary entities.
The sentence was soon implemented into Polish law. The Act of 5 September
2016 on special principles of settlement of tax on goods and services and
I SA/Wr 1697/99,
(accessed 1 December
C 276/14, EU:C:2015:635,
ageIndex=0&doclang=EN&mode=lst&dir=&occ=first&part=1&cid=58846 (accessed 10
reimbursement of public funds allocated for the implementation of projects
financed with funds from the European Union budget, or from Member States of
the European Free Trade Agreement, by local governments
, fully confirmed the
Court`s position. According to art 3 and 4 of this Act, self governments must
undertake settlements of the tax on goods and services together with their
organizational units at the very latest by 1 of January 2017.
Regarding this sentence the situation of "self-government budgetary
establishments” (another form of public sector
units, settled in arts 14-17 of the
Act on public finance) is still unclear. There also do not have legal personality,
but are more independent than budgetary entities. First of all they execute their
activity (in the municipal public sphere only, such as public transport,
maintaining of municipal apartments, roads, cemeteries and greenery and some
other functions) covering the expenses by revenues gained for their services and
allowed additional grants. That`s why they were usually treated as taxpayers.
However, one decision of the Supreme Administrative Court of 26 October
has accepted the municipality`s right of deduction of the tax paid in
respect of the investment transferred for budgetary establishment, when such a
possibility is usually characteristic for homogeneous taxpayers only. All these
remarks were mentioned in the explanatory statement to the bill of The Act on
special principles of settlement…
. Therefore this Act concerns all municipal
organizational units listed in the art 2 point 1 of this Act
entities and budgetary establishments, as well as offices of self governments.
Serious doubts still remain on taxation of state budgetary entities (staying out of
the Act on special principles of settlement…). Their formal situation
as units of
the public finance sector is very similar to the municipal entities, but relations
with superior subjects or even the state itself may be much more complicated
because of expanded structure of state public bodies. On the one hand financial
and organizational dependence of state budgetary entities fulfils all criteria of
tax exclusion; on the other hand
lack of proper provisions may suggest their
different position. The same question may apply to “budgetary institutions”; state
legal persons with their financial status similar to self-government budgetary
establishments (art 24-28 of the Act on public finance).
Dz. U. 2018, item 218 with later changes.
I FPS 4/15,
(accessed 10 September 2017).
Parliamentary paper of the Sejm of the VIII term, no 709,
ile/709.pdf (accessed 10 September 2017).
So, finally, the public units are taxed not only according to the general
construction of the goods and services tax
which creates important subjective
exclusion. The Act on special principles of settlement… was declared
specific, special provision, supplementary to the Act on goods and services.
In the Corporate Income Tax, taxpayers are legal persons and organizational
units without legal personality (art 1 of the Act of 15 February 1992 on
corporate income tax
). However, there are numerous exempted subjects, mostly
from the public sector and from the public finance sector: among others the
State Treasury, self-governments, state agencies and funds, the Polish National
Bank, budgetary entities (art 6 of this Act).
Others (not listed as above) should be taxed normally. Some of them can stay out
of taxation, if their activity regards to public utility. Article 17 of the same Act
(named “Objective exemptions”) introduces special settlement of the profit
free of tax is the amount of the profit or its part spent for
statutory public purposes. The most important regulation (art 17 sec 1 point 4)
concerns incomes of the organizational units of: science, education, culture,
physical culture and sport, environmental protection, supporting social initiatives
for the construction of roads and telecommunications network in rural areas and
rural water supply, charity, health service, social assistance, professional and
social rehabilitation of disabled, worship. Some of them (like public high schools,
research institutes, museums, public health service units) are, once more, public
and public finance bodies; others (like societies, foundations, sport clubs, private
schools and high schools) usually use to be private subjects. The tax privilege
from the art 17 depends on many additional details and conditions. The exclusion
does not cover, with subjective exceptions, incomes from some kinds of
commercial activity, such as selling tobacco, alcohol, electronic equipment (art
17 sec 1a). Not excluded at all are incomes of state or municipal enterprises,
establishments and other organizational units without legal personality if the
object of their business is to satisfy the needs of the public indirectly related to
environmental protection in the following areas: water supply and sewage, waste
water treatment, landfills and municipal waste and transport (art 17 sec 1c).
Dz. U. 2018, item 1036 with later changes.
The unit must produce and keep the tax rolls and declare the relevant statutory
purpose of expenditures in proper tax returns. There is no time limit for spending
the exempted income, but its assignment other than declared causes adding of
such a quote to the present income and tax assessment
17 sec 6).
Therefore, irrespective on the individual situation, all these subjects are called
All these provisions are undoubtedly the most detailed tax regulation of the
public sector`s tax status. According to them, typical public bodies are practically
In real estate taxes (real property tax, land tax, forest tax) there are also listed
subjects exempted from taxation. All these provisions: art 7 sec 2 of the Act of
12 January 1991 on local taxes and fees
, art 12 sec 2 of the Act of 15
November 1984 on land tax
, art 7 sec 2 of the Act of 30 October 2002 on
are identical. Free of these taxes are (among others) schools, high
schools, research institutes.
First, it expresses a clear intention of the tax relief of some public bodies.
(Though the exemption concerns also parallel private units
forms of property are treated equally -such private units are not representative
for those spheres of activity). Second, this tax preference relates to only a small
part of public sector bodies. The essential explanation is that all these taxes are
revenues of the municipalities, when both the goods and services tax and the
corporate income tax are revenues of the state budget. So the tax amounts are
received from private subjects, but also from the State, voivodships, districts
being owners of real estate placed in the area of the municipality. Only in the
land tax is the State Treasury personally freed of tax (art 3a point 1of the Act on
land tax). When state or self-government property is possessed by other subjects,
they are taxpayers (immovable property in direct disposal of municipalities
themselves are obviously free of tax).
For more details see Adam Mariański
in Włodzimierz Nykiel, Adam
Komentarz do ustawy o podatku dochodowym od osób prawnych 2015 (ODDK 2015)
Rafał Golat, Opodatkowanie
działalności kulturalnej (Dom Wydawniczy ABC 2005) 69.
Dz. U. 2018, item 1445 with later changes.
Dz. U. 2017, item 1892 with later changes.
Dz. U. 2017, item 1821.
State Treasury and self-governments are exempted from two smaller tax burdens,
also municipalities` receipts.
In the tax on civil law transactions both of these public subjects are pointed by
simple and direct exemptions, as well as one only state agency (art 8 points 4, 5
and 8 of The Act of 9 September 2000 on the tax on civil law transactions
Self-governments and budgetary entities are also directly exempted of the most
stamp duty, another municipality budgetary revenue (art 7 points
2 and 3 of the Act of 16 November 2006 on stamp duty
This short review of the main tax regulations relating to public sector bodies
shows that, in different tax acts, different solutions may by binding at law.
Actually they all attempt to introduce special tax exemptions, but with a
substantial variety of legal constructions and –most importantly
subjective scope of exempted bodies. Perhaps it is possible to prove that there is
some general trend not to tax public sector subjects. However, relevant
provisions are fragmentary and incoherent. The most difficult situation seems to
be in the tax on goods and services. Even clear regulation of some detailed
questions may cause serious doubts as to the legal position of similar (but not
settled so directly) spheres
like state budgetary entities as taxpayers of this tax.
Other tax provisions usually do not provoke important disputes.
ci kulturalnej (Dom Wydawniczy ABC
Kosikowski Cezary, Sektor finansów publicznych (Wolters Kluwer Polska, Dom
Wydawniczy ABC 2006)
Nykiel Włodzimierz, Mariański Adam (eds), Komentarz do ustawy o podatku
dochodowym od osób prawnych 2015 (ODDK 2015)
Dz. U. 2017, item 1150.
Dz. U. 2018, item 1044 with later changes.
In connection with the new regulation of entrepreneurship of
the public sector in para 2b of the German Value Added Tax Act
, the legislator granted legal entities of
public law (hereinafter:
l.e.p.l.) the right to use the former regulation of para 2 sec 3
UStG, i.e. the previous regulation
, until 31.12.2020 in para 27
sec 22 cl 3 UStG. According to this regulation, tasks which have
a sales volume of less than 35.000 EUR, are part of the pure
asset management sector, part of the agriculture or forestry
sectors, or have been assigned to the public sector, can be
excluded from taxation of turnover until 31.12.2020 if the
concerned declares the option effective to the competent fiscal
Cf. Fritz Lang, ‘Taxation of the public sector in
introduction’, in this volume.
On former regulations and administrative interpretation cf. Pierre
Frotscher, ‘Umsatzbesteuerung der Kommunen
Rahmenbedingungen in der EU und im nationalen Recht sowie
Sachsenlandkurier 254 et seq.
This concession of the national legislation is not without problems
as it defies the decisions of the CJEU and therefore European
ENTREPRENEURS’ OBLIGATIONS TO
DISCLOSURE, RECORDING, BILLING,
AND THE SAFE-KEEPING OF BILLS
WITH REGARD TO VAT
PhD in Law,
Lecturer at the
Department of Tax
(WRLAE, Vol. 7,
No. 1 (2017),
php/wrlae) and De
On the other hand it may be of interest to relinquish such an option and to apply
the new regulation immediately, especially to achieve a deduction of input tax in
the case of planned investments. Tasks that so far have been classified as non-
entrepreneurial would then expand the entrepreneurial tasks of the l.e.p.l or, if
the l.e.p.l. has not been liable to pay VAT for other tasks so far, would constitute
its entrepreneurial status.
The VAT-liable entrepreneurial status has a number of further obligations and
duties, though, which not only lead to high efforts and expenditures, but which
can incur sanctions and disadvantages if the obligations and duties are not
This text shall give an overview over the entrepreneurs’ obligation to disclose,
record, bill and safe-keep bills with regard to VAT.
To do so, the legal requirements will be discussed and summarized with a
supplementary analysis of administrative orders and the relevant literature. This
will offer the l.e.p.l. concerned by the regulations an overview over additional
administrative obligations, and enable them to better estimate the effort
necessary for the expected legal consequences.
THE OBLIGATION TO DISCLOSE WITH REGARD TO
An entrepreneur in the sense of the VAT-act has a number of obligations to
disclose, especially his obligation to a tax declaration.
In addition, there are further special obligations to disclose. They are less
important for l.e.p.l., but are not completely unlikely and shall therefore be
THE OBLIGATION TO A TAX DECLARATION
According to para 149 sec 1 cl 1 of the German Fiscal Code (AO), the tax laws
determines who has to file a tax report.
For the VAT, this is mainly regulated in para 18 UStG. As a basic principle, every
entrepreneur is therefore obliged to declare advance sales tax returns as well as
an annual sales tax return.
The duties to declare are independent of the existence of taxable and declarable
. Even small businesses in the sense of para 19 UStG, which are
exempt from the VAT liability, are obliged to declare an annual sales tax return
that are not entrepreneurs have to provide a
tax declaration according to para 18 sec 4a UStG, if they owe VAT for the intra-
community acquisition according to para 1 sec 1 no 5 in conjunction with para
or as recipient of benefits according to para 13b sec 5 UStG
The sales tax returns have to not only include all facts relevant to levying the
taxes, but the entrepreneur must calculate the VAT, according to para 18 sec 1 cl
1 and 3 UStG, himself. According to para 150 sec 1 cl 3 AO, these tax
declarations are therefore tax self-assessments.
2.1.1 THE ADVANCE SALES TAX RETURNS
According to para 18 sec 1 cl 1 UStG every entrepreneur has to declare an
advance no later than 10 days after the end of the advance declaration period.
PERIOD FOR THE ADVANCE DECLARATION
The period for the advance declaration according to para 18 sec 2 cl 1 UStG is,
in principle, the calendar quarter. If the tax for the preceding calendar year has
been higher than 7.500 EUR, the period for the advance declaration is the
calendar month according to para 18 sec 2 sentence 2 UStG.
In the case of starting up, i.e., in cases where the entrepreneurial or professional
occupation is taken up for the first time, there is an obligation to monthly
Cf. Axel Leonard in Bunjes Umsatzsteuergesetz Kommentar (13th edn CH Beck 2014) para
18 m. n. 3.
Cf. German Federal Finance Court (BFH), decision of 24.7.2013, Ref.: XI R 14/11, BStBl. II
2014, 210; small-scale entrepreneurs do not have to provide advance VATdeclarations, c.f.
A 18.7. sec 1 p., 4 Circular on the Application of the VAT (UStAE).
6 This would be the case if the non-entrepreneurial l.e.p.l. purchases goods
exception of new vehicles in the sense of para 1b sec 2 and 3 UStG or excisable goods in
the sense of para 1a sec 5 p. 2 UStG - from other member states of the EU exceeding a
netamount of 12.500 EUR or if the l.e.p.l. opted for sales taxation by indicating a German
A relocation of the tax liability towards the beneficiary of the good can be contemplated
if other goods or services are purchased from foreign companies, cf. para 13b sec 1 and 2
no 1 in conjunction with sec 5 UStG. Especially if construction work is purchased from
foreign companies, there is a general relocation of tax liability towards the beneficiary of
the good, if the beneficiary is an entrepreneur or a legal entity.
advance declarations for VAT in the year of starting up and the following year
according to para 18 sec 2 cl 4 UStG. In those cases where, in conjunction with
para 2b UStG, there is an entrepreneurial status of the l.e.p.l. for the first time,
this is, in my opinion, not a case of a start-up in the sense of para 18 sec 2 cl 4
UStG. What is new is only the legal classification of its tasks.
To realise a prompt reimbursement of the advance-tax, para 18 sec 2a UStG
allows the entrepreneur a monthly advance declaration if the surplus in favour of
the entrepreneur in the last calendar year exceeded 7.500 EUR. In this case, the
entrepreneur has the right to choose, which he executes by handing in the
advance declaration for the calendar month January no later than February 10
of the current year.
If the VAT to be paid in the last calendar year was less than 1.000 EUR, the fiscal
authority can release the entrepreneur of his obligation to an advance
declaration for the VAT according to para 18 sec 2 cl 3 UStG. If the l.e.p.l. is
obliged to pay VAT for the first time due to the change of the regulations in para
2b UStG, I believe it would be helpful to focus on whether the VAT to be paid in
the running calendar year is not more than 1.000 EUR. In this case, the l.e.p.l.
should apply for a dispensation by explaining this case.
PERIODS OF DECLARATION
The advance declaration for VAT has to be handed in no later than the 10
after the end of the time period of the declaration, i.e., at the 10
following calendar month or calendar quarter, at the latest. If the deadline is on
a Saturday, Sunday or a holiday, the period of declaration is extended until the
next working day according to para 108 sec 3 AO.
PERMANENT EXTENSIONS OF DECLARATION PERIODS
According to para 18 sec 6 UStG in conjunction with para 46 UStDV the fiscal
authority can grant a so-called permanent extension of the period of declaration
and prolong the period of declaration by one month.
In this case, according to para 48 sec 1 cl 2 UStDV the entrepreneur must apply
for the prolongation with official mandatory data set
by electronic data
Cf. the model form (Vordruckmuster) USt 1 H published for 2016 by the federal ministry
for finances (BMF) 2.10.2015, BStBl. I 2015, p. 773; cf. Leonard (n 4), para 18 m. n. 22;
transmission according to the regulation for the transmission of tax data (StDÜV)
at his local fiscal authority. Since 01.01.2013, only an authenticated
transmission, where the entrepreneur has to register in advance at the Elster-
Online-Portal of the fiscal authorities, is allowed. On application, there is an
option to avoid this electronic transmission if undue hardship must be avoided;
in the case of l.e.p.l. it is highly unlikely that this can be justified, though.
If the entrepreneur has to provide a monthly advance declaration, granting the
prolongation according to para 47 UStDV is only possible if the entrepreneur
pays a special advance amounting to 1/11 of the sum of advance payments of
the last calendar year. This special advance must be calculated, announced and
paid by the entrepreneur. If the l.e.p.l. is obliged to pay VAT for the first time due
to the change of the regulations in para 2b UStG, the focus should be on the
expected VAT for the running calendar year according to para 47 sec 3 UStDV.
FORM AND CONTENT OF THE ADVANCE DECLARATION
According to para 18 sec 1 cl 1 UStG advance declarations for VAT have to be
transmitted to the fiscal authority with the official mandatory data set
electronic data transmission according to the regulation for the transmission of
tax data (StDÜV) at his local fiscal authority.
Every entrepreneur has to provide only one advance declaration for every
advance period, which has to include all required information
. This is also the
case if the company consists of a number of firms or, in case of l.e.p.l. of a
number of commercial enterprises. If applicable, integrated controlled companies
must be included
In reality, most entrepreneurs only have to fill in a few parts of the official
mandatory data set, especially information about the company, taxable sales,
deductible input tax and the resulting tax. The DATENSATZ contains a large
Josef Heß in Rüdiger Weimann, Fritz Lang (eds), Umsatzsteuer - national und international
(4th edn Schäffer-Poeschel Verlag 2015) para 18 m. n. 35 ff. for the process of application
for the permanent extension of declaration periods.
Cf. the model forms (Vordruckmuster) USt 1 A and instruction USt 1 E published for 2016
by the Federal Ministry for Finances (BMF) on 2.10.2015, BStBl. I 2015, 773.
Otto-Gerd Lippross, Umsatzsteuer (23th edn Erich Fleischer Verlag 2012) 1224.
Cf. Pierre Frotscher,
Heiko Schröder ‘Die Organschaft im
Körperschaft-, Gewerbe- und
Umsatzsteuerrecht bei juristischen Personen des öffentlichen Rechts’ (2014) 5
Sachsenlandkurier 239 for the requirements and legal consequences of the integrated
number of further items, which an entrepreneur can hardly understand and fill in
without legal support
EFFECT OF THE ADVANCE DECLARATION
The receipt of an advance declaration with a payment charge for the
entrepreneur has the effect of a tax assessment with the reservation of reaudit
para 164 sec 1 cl 2 in conjunction with para 168 sec 1 AO. Therefore, the tax
calculated and paid by the entrepreneur is an advance payment that is due by
day after the end of the period of the advance declaration, cf. para 18
sec 1 p. 1 and 4 UStG. If the deadline is on a Saturday, Sunday or a holiday, in
this case as well, the period of declaration is extended until the next working day
according to para 108 sec 3 AO
. If the tax is not paid in due time, there is a
charge for delayed payment according to para 240 sec 1 point 1 AO
. If the tax
is paid by transfer order, para 240 sec 3 cl 1 AO grants a three-day grace period.
If, according to the advance declaration for the VAT, there is a surplus in favour
of the entrepreneur, the declaration of this tax refund only is on par with a tax
assessment with the reservation of re-audit, if the fiscal authority agrees, para
168 cl 1 AO. Usually, this happens implicitly with the payment of the declared
tax refund. If the fiscal authority has doubts, though, it can evaluate more
thoroughly or even do an audit on-site.
If the tax assessment is under the reservation of re-audit, and the appointment
is not expired yet, it can be adjusted according to para 164 sec 2 cl 1
Explicitly in Martin
Kemper, ‘Erklärungspflichten des Umsatzsteuergesetzes’ (2015)
Umsatzsteuer- Rundschau 374.
Hans-Georg Janzen in Otto Gerd Lippross, Wolfgang Seibel (eds), Basiskommentar
Steuerrecht (Verlag Dr. Otto Schmidt 2010) para 18 UStG m. n. 78.
The charge for delayed payment is roughly 1% of the overdue tax per commenced month
delayed. If, for example, an advance VAT-payment of 14.133 EUR is due on 10.2. and is
paid on 12.3., the charges for delayed payment are imposed for two months for the
rounded down amount of 14.100 EUR, and therefore amount to 282 EUR.
The appointment period for the VAT is, in principle, 4 years according to para 169 sec 2 no
2 AO and generally starts with the end of the calendar year in which the tax was
generated (para 170 para 1 cl 1 UStG. The elements of the statutory period regulated in
para 170 sec 2 AO routinely delay the commencement of the term.
2.1.2 ANNUAL SALES TAX RETURN
In addition to the advance declaration of the VAT, the entrepreneur has to
provide an annual sales tax return for the whole calendar year according to para
18 sec 3 UStG. The filing of the annual tax return is independent of, and parallel
to, the advance declaration. Filing the annual tax return does not lead to a
dispensation from the advance declarations
TERM OF DECLARATION
The annual sales tax return has to be submitted by March 31st of the following
year in principle, according to para 149 sec 2 cl 1 AO. If the tax return mentioned
above is prepared by tax consultants, the time period is extended until 31.12. of
the following year according to para 109 AO
The law for the modernisation of the system of taxation
stipulates a general
filing deadline of 7 months, starting from 2017. In case of tax consulting, the
deadline is extended to 14 months until 28.2. of the second year after the year
declared. In those cases, the financial authority can request an earlier declaration
under certain circumstances, but must observe a grace period of 4 months when
FORM AND CONTENT OF THE ANNUAL SALES TAX RETURN
According to para 18 sec 3 cl 1 UStG, the annual sales tax return has to be
transmitted to the fiscal authority with the official mandatory data set
electronic data transmission according to the regulation for the transmission of
tax data (StDÜV) at the competent fiscal authority.
EFFECT OF THE ANNUAL DECLARATION
If the tax to be paid according to the calculations of the annual sales tax return
is different from the sum of the advance payments, a difference in favour of the
Leonard (n 4) para 18 m. n. 23.
Cf. identical decrees of the supreme fiscal authorities of the federal states, 4.1.2016 on
periods for tax returns, BStBl. I 2016, p. 38.
Cf. BT-Drs. 18/7457, 3.2.2016 and BT-Drs. 18.8434, 11.5.2016
cf. also Jörg Schwenker,
‘Das Gesetz zur
Modernisierung des Besteuerungsverfahrens
ein Meilenstein auf dem
Weg der weiteren Digitalisierung im Steuerrecht’ (2016) Der Betrieb 375 et seq.
Cf. the model form for the annual sales tax return 2015 published by the federal ministry
for finances 1.10.2015, BStBl. I 2015, 758.
fiscal authority must be paid one month after submission of the annual sales tax
return according to para 18 sec 4 cl 1 UStG.
If there is a surplus for the entrepreneur, because the sum of the advance
payments, especially the sales tax prepayment according to para 47 UStDV, was
higher than the actual annual tax, the refund is only due with the approval of
the fiscal authority, para 168 cl 2 AO.
2.1.3 CONSEQUENCES IN THE CASE OF A DELAYED SUBMISSION OR NON-
If an advance declaration for VAT or the annual sales tax return is not handed in,
the fiscal authority can impose a charge for delayed payment according to para
152 sec 1 cl 1 AO. This charge can be up to 10% of the tax due. The law for the
modernisation of the system of taxation will presumably lead to considerable
changes with regard to the charge for delayed payment, starting in 2017.
Especially in the case of a delayed submission, there is a mandatory charge for
delayed submission of at least 25 EUR per month, or part thereof, delayed.
In addition, the fiscal authority can estimate the tax base according to para 162
AO in case of non-submission.
Negligence, in terms of non-submission contrary to duty or submission of
incorrect or incomplete tax returns, can be considered as tax fraud, and therefore
an offence according to para 370 AO, or a tax evasion, and therefore an
administrative offence according to para 378 AO.
If an entrepreneur does not fulfil his fiscal duties, the fiscal authorities are, under
certain circumstances, entitled to withdraw beneficial administrative acts, e.g.,
the permanent extension of the declaration period for the submission of the
advance declarations for VAT according to para 47 UStDV.
FURTHER MANDATORY DECLARATIONS
In addition to the obligation to a sales tax return, in some cases there may be
other mandatory declarations
Cf. also Kemper (n 12) 375 et seq.
2.2.1 THE SUMMARY STATEMENT OF TURNOVER ACCORDING TO PARA 18A
The summary statement of turnover (SST) is used by the fiscal authorities to
secure the tax revenue of the European Single Market and to trace cross-border
deliveries and services within the territory of the community. Accordingly, an
entrepreneur exporting a good or service to another member state of the EU
must state these sales in a SST.
The SST is a legal obligation in the taxation system and the entrepreneur must
declare those turnovers monthly in case of exports within the EU according to
para 18a sec 1 UStG, or quarterly in case of special exports
according to para
18a sec 2 UStG. The SST has to be submitted to the Federal Central Tax Office
‘(BZSt) until the 25
day after expiration of the relevant notification period.
The content of the SST to be submitted with the official mandatory data set by
electronic data transmission according to the regulation for the transmission of
tax data (StDÜV) is regulated in para 18a sec 7 UStG and includes, e.g., the VAT
identification number (USt-IdNr.) of the customers and the assessment basis for
the goods or services delivered.
For l.e.p.l., the submission of a SST is usually of little importance. But if, e.g.,
there is an advertisement of a Czech company in a community newspaper in
Germany, this would be a case for a SST, because the municipality acts as an
entrepreneur in this case
and is no small-scale entrepreneur within the
meaning of para 19 UStG
This only includes goods and services with turnover in regions in the further regions of the
community according to para 3a sec 2 UStG where the receiving entrepreneur is obliged
to pay the tax.
Under the regulations of the previous para 2 sec 3 UStG, the entrepreneurial status is
precluded for those with an annual revenue of less than 35.000 EUR; under the new
regulations of para 2b UStG, a structure under public law and an estimated annual
revenue of less than 17.500 EUR for those activities are necessary to preclude the
The SST, according to para 18a sec 4 UStG, does not have to be submitted by smallscale
enterprises according to para 19 UStG. The regulation for small-scale enterprises
according to para 19 UStG assumes that the gross turnover of the previous year was less
than 17.500 EUR and does not exceed 50.000 EUR in the current calendar year.
If there is an obligation to submit a SST, the submission of an incorrect or
delayed SST or the non-submission are an administrative offence according to
para 26a sec 1 no 5 UStG.
2.2.2 SPECIAL DECLARATION OF INTRA-COMMUNITY EXPORTS AND
SPECIAL OTHER SERVICES AND GOODS ACCORDING TO PARA 18B
In addition to para 18a UStG, para 18b UStG states that the entrepreneur must
declare intra-community exports as well as certain exports within the further
regions of the community
to the fiscal authorities.
Para 18a UStG is expected to ensure that data transmitted for the SST to the
Federal Central Tax Office concurs with data submitted to the fiscal authorities
and can be compared.
The official forms for the advance declaration for VAT and the annual sales tax
return are complemented by corresponding spaces, so that declarations can be
made together with the regular advance declaration or annual sales tax return.
2.2.3 THE OBLIGATION TO REGISTER THE DELIVERY OF NEW VEHICLES
ACCORDING TO PARA 18C USTG
If new vehicles are delivered to a buyer from another member state within the
community, and this buyer does not use a VAT identification number
obligation to register according to para 18c UStG in conjunction with the
regulation for obligatory registration of delivery of vehicles (Fahrzeuglieferungs-
Meldepflichtverordnung = FzgLiefgMeldV) must be observed.
It is important to note, for example, that a vehicle is considered new according
to para 1b sec 3 UStG, if it has not been driven for more than 6.000 km or if has
been brought into service less than six months ago.
The regulation also includes the declaration of deliveries according to para 25b sec 2
UStG. para 25b UStG regulates the intra-community triangular trade. It assumes that
three entrepreneurs from different member states carry out turnover transactions and the
goods are directly delivered from the first entrepreneur to the final buyer. This is likely not
relevant for l.e.p.l.
If the entrepreneur uses a VAT identification number, the transaction is considered a
regular intra-community transaction that has to be declared according to para 18a and
para 18b UStG.
In addition, if new vehicles are sold, even non-entrepreneurial suppliers are
treated as entrepreneurs according to para 2a UStG and have to observe the
If, e.g., a municipality sells a car that has been driven for less than 6.000 km to a
Polish private individual, then it has to observe the registration requirements
according to para 18c UStG in conjunction with the FzgLiefgMeldV, irrespective
of the former use for public administration or for entrepreneurial purposes.
In case of obligatory registration, a large amount of information has to be
transmitted to the BZSt by the 10
day after the end of the calendar quarter of
Entrepreneurs have to submit their registration by the official mandatory data
set by electronic data transmission according to the StDÜV. Non-entrepreneurial
suppliers are allowed to submit their registration on paper, using the official
The incorrect, omitted or delayed registration is considered an administrative
offense according to para 26a cl 1 no 6 UStG.
MANDATORY RECORD-KEEPING FOR ENTITIES
SUBJECT TO VAT
In addition to mandatory declarations for entities subject to VAT, the
entrepreneur has to observe a number of obligations for record-keeping.
According to para 22 sec 1 cl 1 UStG, the entrepreneur has to provide records for
the determination of the tax and the basis for its calculation
. Generally, the
entrepreneur fulfils his mandatory recordkeeping with regard to VAT by standard
accounting. According to para 22 sec 2 no 1 UStG the records must include the
payments for services and goods provided by the entrepreneur, observing the
differentiation between taxable turnover (separated by tax rate) and tax-exempt
The content of the registration is specified in para 2 FzgLiefgMeldV and A 18c.1 sec 4
Cf. A 18c.1 sec 2 and 3 UStAE and the information on
Cf. general UStAE on para 22 UStG; Lippross (n 10) 1268 et seq; Hans-Hermann Heidner
in Bunjes Umsatzsteuergesetz Kommentar (13th edn CH Beck 2014) para 22 m. n. 1 et
turnover. For the deduction of input tax, the remuneration for taxable goods and
services paid to the entrepreneur for the company have to be recorded according
to para 22 sec 2 no 5 UStG.
According to para 63 sec 1 UStDV, the records must be provided in a form that
enables an expert third party to get an overview of the turnover of the
entrepreneur and the deductible input tax within a reasonable period. The sales
receipts indispensable elements of the records.
According to para 146 sec 2 cl 1 AO, the records have to be made basically in the
In case of missing or incomplete records, the fiscal authority is entitled to
estimate the tax base according to para 162 AO, and uncertainties connected
with the estimation are at the expense of the entrepreneur
. Culpable violations
of the record requirements constitute an administrative offense according to
para 379 AO.
In addition to the mandatory record-keeping according to para 22 UStG, there
are special obligations to provide evidence for the entitlement to certain tax
exemptions. Non-taxable export-deliveries or nontaxable intra-community
deliveries, for example, must be proved by accounting and the provision of
receipts. If the proof is missing, the tax exemption is not granted.
OBLIGATION TO ISSUE AND STORE INVOICES
According to para 14 UStG, the entrepreneur is obliged to issue a qualified
invoice to the recipients of goods and services in a large number of cases.
In addition, he is obliged to keep a duplicate of all invoices issued and received
according to para 14b UStG.
Lippross (n 10) 1269.
OBLIGATION TO ISSUE AN INVOICE
An entrepreneur is obliged to issue an invoice for certain propertyrelated
services, especially construction services, but also property development,
gardening and cleaning services
according to para 14 sec 2 no 1 UStG.
In addition to this specific obligation to issue invoices, para 14 sec 2 no 2 UStG
regulates a general obligation to issue invoices if the entrepreneur provides
services or goods to another entrepreneur for his company or to a non-
entrepreneurial legal entity, and the turnover is not taxexempt according to para
4 nos 8 to 29 UStG.
In all other cases, i.e. non-property-related services to nonentrepreneurs, the
entrepreneur is not obliged to issue an invoice with regard to VAT. Voluntarily or
based on contractual agreements, an invoice can be issued in these cases as well.
FORM OF THE INVOICE
According to para 14 sec 1 cl 1 UStG, an invoice is every document used to
charge for a service or good. It can be issued in paper form or, since 1.7.2011,
The authenticity of the origin, i.e. the identity of the issuer of the invoice, the
integrity of the content and the legibility of the invoice must be ensured
this is realised is for the entrepreneur to decide.
CONTENT OF A QUALIFIED INVOICE
The requirements for the contents of an invoice are stated in para 14 sec 4 nos 1
to 10 UStG. The entrepreneur has to state in particular:
The complete name and address of entrepreneur and the recipient of goods or
services (no 1).
His tax identification number or VAT identification number
Lippross (n 10) 883; Fritz Lang in Rüdiger Weimann, Fritz Lang (eds), Umsatzsteuer -
national und international (4th edn Schäffer-Poeschel Verlag 2015) para 14 m. n. 37 et
(n 10) 880 et seq; Ronny Langer, Robert Hammerl, ‘Rechnungen im
Umsatzsteuerrecht’ (2013) Neue WirtschaftsBriefe für
Steuer- und Wirtschaftsrecht 1280
The date of issue (no 3).
An invoice number (no 4).
A description of the good or service (no 5).
The date of the delivery or the date of receipt of the remuneration (no 6).
The net remuneration (no 7).
The tax rate and the amount of tax or a reference to the tax exemption (no
Reference to record retention, if applicable (no 9).
Specification "credit“, if applicable (no 10)
Further mandatory contents are found in para 14a UStG. Especially in cases of
reverse charging of tax, the invoice must include the specification “tax
the recipient of services“.
For invoices for small amounts of less than 150 EUR (from 2017, expected to be
less than 200 EUR) and tickets, the special regulations of paras 33, 34 UStDV
MANDATORY RETENTION AND FILING
According to para 14b sec 1 cl 1 UStG, every entrepreneur is obliged to retain all
invoices issued or received by him.
The period of retention begins with the end of the calendar year where the
invoice was issued and lasts 10 years. The period is prolonged in cases where the
invoices are still relevant for taxes where the appointment period has not yet run
out. If the period is not over yet, the authenticity of the origin, the integrity of
the content and the legibility of the invoice must be ensured. Invoices issued on
thermal paper may have to be copied to ensure legibility.
Invoices on paper may be scanned and digitally archived under certain
A credit exists in cases where the recipient of the service instead of the providing
entrepreneur bills the service, cf. para 14 sec 2 cl 2 and 3 UStG.
Cf. Langer, Hammerl (n 31) 1292.
The repository is generally the German territory. Electronically stored invoices
can be deposited in Community territory, if an immediate on-line access of the
authorities is guaranteed.
CONSEQUENCES IN CASE OF BREACH OF THE REGULATIONS
If an invoice is not issued or not issued in time due to a culpable breach of the
entrepreneur, this is considered an administrative offence due to para 26a sec 1
no 1 UStG.
If the VAT stated on the invoice is too high, the issuer of the invoice owes the
excess amount according to para 14c sec 1 UStG.
If the supplying entrepreneur does not issue the invoice properly or not on time,
this may justify claims for compensation by the recipient of the goods or
services, because the deduction of his input tax depends on the invoices.
Culpable breaches of the mandatory retention of invoices are considered an
administrative offence according to para 26a sec 1 no 2 UStG.
If the entrepreneur cannot provide proper purchase invoices, the fiscal
authorities will not grant him the deduction of input tax according to para 15
sec 1 cl 1 no 1 UStG.
An entrepreneur's obligations for declaration and record-keeping as well as
mandatory issuing, retention and filing of invoices connected with the VAT alone
are manifold and comprehensive. Without expert advice, the entrepreneur will
unlikely be able to fulfil all of the obligations. The efforts and expenses of
compliance must not be underestimated.
The taxation of turnover according to previous law that exempted comparably
large fields of activity of l.e.p.l. from taxation, and thereby from compliance with
further additional obligations in conjunction with taxation, is generally less
complex and therefore more beneficial for many l.e.p.l. Taking this into
consideration, it will be advantageous for many l.e.p.l. to exercise their option
right and opt for the regulation of para 2 sec 3 UStG by declaring to their fiscal
authority that they want to observe the previous regulations.
The transitional period until 31.12.2020 granted by the legislator should be used
to examine activities according to the new regulations and to prepare for the
new legislation according to the new para 2b UStG.
Rahmenbedingungen in der EU und im nationalen Recht sowie aktuelle
Entwicklungen in der Rechtsprechung (2013) 4 Sachsenlandkurier
Frotscher Pierre, Schröder Heiko, ‘Die Organschaft im
und Umsatzsteuerrecht bei juristischen Personen des öffentlichen Rechts’ (2014)
Heidner Hans-Hermann in Bunjes Umsatzsteuergesetz Kommentar (13th edn CH
Heß Josef in Weimann Rüdiger, Lang Fritz (eds), Umsatzsteuer - national und
international (4th edn Schäffer-Poeschel Verlag 2015)
Basiskommentar Steuerrecht (Verlag Dr. Otto Schmidt 2010)
Kemper Martin, ‘Erklärungspflichten des Umsatzsteuergesetzes’ (2015)
Lang Fritz in Rüdiger Weimann, Lang Fritz (eds), Umsatzsteuer - national und
international (4th edn Schäffer-Poeschel Verlag 2015)
Lang Fritz, ‘Taxation of the public sector in Germany – an introduction’, in this
Langer Ronny, Hammerl Robert, ‘Rechnungen im Umsatzsteuerrecht’ (2013) Neue
WirtschaftsBriefe für Steuer- und Wirtschaftsrecht
Leonard Axel in Bunjes Umsatzsteuergesetz Kommentar (13th edn CH Beck 2014)
Lippross Otto-Gerd, Umsatzsteuer (23th edn Erich Fleischer Verlag 2012)
Schwenker Jörg, ‘Das Gesetz zur Modernisierung des Besteuerungsverfahrens –
ein Meilenstein auf dem Weg der weiteren Digitalisierung im Steuerrecht’ (2016)
The public sector is one of the most important employers
worldwide. Within many OECD countries, public sector
employment amounts to more than 20% (e.g., Sweden, Poland,
Great Britain) or even 30% (Norway, Denmark) of the total
labour force. The OECD average is over 19%; only in Japan and
Korea public sector employment is responsible for less than
10% of total employment.
In Germany, more than 5.8 million
persons, i.e., roughly 13% of the total labour force, is employed
in the public sector
. The annual budget of the German public
sector in 2016 is estimated at 316 billion EUR
, and it is
virtually impossible to not be in contact with any public
authorities as a German citizen
the same goes, possibly to a
higher or lesser extent, for many other countries. At the same
time, surveys among citizens aimed at analyzing their
satisfaction with the public sector in general, and civil servants
in particular, show a continuing or, in some cases, even an
increasing, dissatisfaction with the contact between the public
and the administration. Data for Germany showing that in
2016, 74% of the citizens answering a questionnaire agreed
OECD, Government at a Glance 2015 (OECD Publishing 2015) 85.
Statistisches Bundesamt, ‘Finanzen und Steuern.
Öffentlichen Dienstes 2015‘ 2016, data of the German Bureau of
Statistics; this includes civil servants in the core administration on
the federal, state and communal level, employees in public
foundations etc., as well as employees in public enterprises.
Bundesregierung, ‘Bundeshaushalt’ 2016
(German Federal Budget) accessed 9 Dec 2016.
INFORMATION ASYMMETRIES IN
THE COMMUNICATION BETWEEN
BUREAUCRACY AND CITIZENS
(WRLAE, Vol. 7,
No. 1 (2017),
php/wrlae) and De
that civil servants are conscientious (2009: 79%) and 65% consider them to be
competent or rather competent (2009: 64%), implies that 26% resp. 35% of the
citizens do not share the positive impression. In addition, civil servants are often
considered corrupt, arrogant, and even superfluous. The specific assessment
varies among the occupational groups among the civil servants, though. While
firemen and medical personnel as well as (to a slightly smaller degree) teachers
and professors are highly estimated (75-90% of those surveyed stated a high
regard for those professions), civil servants of the fiscal authorities, e.g., are only
regarded highly by 29%
As the contact between citizens and the administration is highly relevant for a
utilisation of public offers by citizens, the effectiveness of measures depends to
no small amount on this contact. In addition, for many citizens, the
administration is equivalent to the government. Citizens tend to attribute the
(perceived) failures of public services to politicians
making a good image and
effective functioning of the administration important with regards to democracy
To explain communication between citizens and bureaucracy, and to improve
their interaction and thereby the efficiency and effectiveness of their interaction,
economic theory offers various insights. In cases where governments take action
to reduce information asymmetries or to correct problems occurring due to
information asymmetries, economic theory is still somewhat restricted in
explaining the utility of such interventions. Public choice theory discusses
interactions between the public sector and stakeholders with the assumption of
rational agents and does not focus on information asymmetries. Institutional
Economics, on the other hand, may prove helpful in analyzing the necessity and
possible success of such actions; another field of applicable research is likely the
study of cultural and behavioural economics.
E.g., the principal-agent model and
the corresponding aspects of information asymmetries may be useful in
Erwartungen (dbb verlag 2016) 7-11.
Oliver James, Sebastian R Jilke, Carolyn Petersen, Steven Van de Walle, ’Citizens’ Blame of
Politicians for Public Service Failure: Experimental Evidence about Blame Reduction
through Delegation and Contracting’ (2015)
76(1) Public Administration Review 83.
Hans-Ulrich Derlien, Doris Böhme, Markus Heindl, Bürokratietheorie: Einführung in eine
Theorie der Verwaltung (VS Verlag für Sozialwissenschaften 2011) 190.
Stefan Mann, Henry Wüstemann, ‘Public Governance of
Gap Between Reality and Economic Theory’ (2010) 39 The Journal of
explaining friction between the stakeholders and lead to a better understanding
of possible solutions to the problem.
In the following text, bureaucracy and (public) administration shall be used
synonymously, i.e., civil servants and employees of the public administration in
general are synonymously described as bureaucrats.
Stemming from the words bureau (for desk, i.e., the working place of the
administration) and kratein (Greek for ruling, controlling), the first use of the
word is attributed to the French economist Vincent de Gournay who coined it in
the middle of the 18
Since then, a large number of scientists, mostly
sociologists, but also economists and political scientists, have analysed the public
sector and its employees, and developed extensive theories. While some of their
findings still influence today’s
management of the administration and have an
effect on the image of the civil servants in the eyes of the public, newer theories
need to deal with a changing reality, more complex regional and global
requirements, changed demands of the citizens and, last but not least, the
The classical image of a bureaucrat is strongly influenced by Max Weber’s theory
of bureaucracy. He describes the characteristics necessary in a bureaucrat as
follows: they must be impartial, base their actions solely on rules, be objective,
assessable, and be able to separate the incumbent and the resources. In short,
Weber considered bureaucracy as an impartial agent to the legislative.
Ludwig von Mises expanded the theory by stating that as bureaus supply services
where the value cannot be calculated in monetary unit prices, and economic
calculation cannot be used as a guiding principle, bureaus must therefore be
centrally managed by regulation and monitoring.
His widely acknowledged
work stressed that the perception of bureaucracy is negative and goes on to
analyse the shortcomings of the bureaucratic system.
Nathalie Behnke, ‘Bürokratie und Verwaltung‘, in Steffen Mau, Nadine M. Schöneck (eds),
Handwörterbuch zur Gesellschaft Deutschlands (Springer Fachmedien 2013) 130.
On the impact of the demographic change on the administration in the Freestate of
Saxony cf., e.g., Frank Nolden in this volume.
Max Weber, Grundriß der Sozialökonomik: III. Abteilung Wirtschaft und Gesellschaft (J C B
Mohr Paul Siebeck 1922) 650 et seq.
Ludwig von Mises, Bureaucracy (Yale University Press) 1944.
A few decades later, William A. Niskanen was the first to discuss bureaucracy
based on the theory of the firm and analysed the characteristics of bureaus, the
relation between bureaus and their environment and the aspects that
bureaucrats aim to maximise. He defines bureaus as non-profit organisations
which are at least partly financed not by selling output at a unit price, but rather
by a budget.
He defines the variables the bureaucrat aims to maximise as the
follows: “salary, perquisites of the office, public reputation, power, patronage,
ease of managing the bureau, and ease of making changes”
, i.e., in general,
they are maximising their budget.
With his theory, Niskanen contradicts Weber’s theory, as in his analysis, the
bureaucrat has his own subjective interests, causing frictional losses in the
process of the administration. Thus, the bureaucrat is no longer a mere servant
following the rules, but rather an agent with own interests. The field of New
Institutional Economics addresses such interactions with the help of the so-
called principal-agent model. The model is used to describe interactions of a
principal who employs an agent to act in his interest. Due to information
asymmetries, i.e., one party possessing information the other does not, the
principal cannot monitor or judge the quality of the agent's actions, and the
agent acts under the aspect of maximising his own utility
. Typical examples for
information asymmetries are hidden characteristics (often leading to adverse
), hidden action, hidden information, both often connected with moral
hazard, and hidden intentions
The German basic law states in art
20 sec 1 cl 2 that “all state authority is
derived from the people. It shall be exercised by the people through elections and
other votes and through specific legislative, executive and judicial bodies”
William A Niskanen, Ein Ökonomisches Modell der Bürokratie. Aus dem Englischen
übersetzt und leicht gekürzt von Charles B Blankart, in Werner W. Pommerehne, Bruno S
Frey (eds), Ökonomische Theorie der Politik (Springer 1979).
William A Niskanen,
‘The Peculiar Economics of Bureaucracy’ (1968) 58(2) The American
Economic Review 293.
The origins of the principal-agent models are mainly attributed to Michael C. Jensen,
William H. Meckling, (1976).
George Akerlof, ‘The Market for "Lemons":
Quality Uncertainty and the Market
Mechanism’ (1976) 89 Quarterly Journal of Economics 488.
Cf. the work of Agnieszka Chrisidu-Budnik and Justyna Przedańska in this volume.
Basic law for the FRG, translated by Christian Tomuschat and Donald P Kommers, cf.
in the democratic reality, leads to a multilayered chain of democratic delegation.
Considering the typical connections between citizens, the government and the
administration, one finds a multistep process. Citizens will elect their members of
parliaments (or, on other levels of government, local representatives, etc.)
according to their preferences, thereby acting as principals authorising the
agents to act in their interest. The members of parliament in turn elect the head
of government who then has the right to appoint ministers, which again act as
agents to the head of government as the agent. The legislature, consisting of the
parliaments and the head of government with the ministers, passes bills and
regulations which are then passed on to the administration (as the agent to the
legislature principal) to realise their implementation. In the administration itself,
there are various hierarchical levels, again leading to various steps of principal-
agent relationships. The citizen is not able to monitor the process of political
decisions and implementation completely, but only sees the outcome. In this
multi-layered principal-agent model, there are all kinds of information
asymmetries, divergences of interests and monitoring problems, and the citizen
does not know whether the outcome is in spite or because of the efforts of the
elected agents. Considering that there are information asymmetries on every step
of the model, the whole process becomes a highly complex structure where the
outcome can only partly be influenced on every level. Therefore, the citizen sees
an outcome in which he tends to contribute to the civil servants actions, but
which may well be determined by the many decision levels above. At the same
time, the civil servant with his own interests such as those defined by Niskanen
or an interest in minimising his workload and therefore, e.g., offering only limited
advice, can influence the final outcome of a measure.
THE INTERACTION BETWEEN CITIZEN AND
As mentioned above, the citizen’s direct contact with the political and
administrative system is mainly through interaction with the administration.
The expectations regarding the services provided by the public administration are
shaped not only by prior experiences, but also in comparison to the private
The high quality of services, the promptitude and the importance placed
Robert Knappe, Die Eignung von New Public Management zur Steuerung Öffentlicher
Kulturbetriebe (Gabler Verlag 2010).
on the customer and his wishes in commercial transactions lead to
corresponding demands in the public sector.
Surveys on the satisfaction of citizens with public services show the following
results: on a scale from +2 (very satisfied) to -2 (very dissatisfied), German
citizens rate their overall satisfaction with the public administration at 1.06,
which is a rather positive result. It has to be stated though, that the satisfaction
clearly varies between the services used. The highest satisfaction rate can be
seen regarding marriage-related services (satisfaction: 1.46), whereas the
satisfaction with services and consultations concerning unemployment and
financial problems is considerably lower, if still positive, at a satisfaction average
The most important aspects for citizens as customers of the public
administration are trust, non-discrimination, incorruptible civil servants and
expertise in the field of consultation. The least satisfaction was indicated with
the understandability of the laws and regulations as well as the
comprehensibility of the forms and applications. In this case as well, there are
considerable differences in the various fields of service; e.g., when applying for
drivers licences, the satisfaction with the comprehensibility of regulations and
forms is 1.22, whereas the satisfaction regarding situations where citizens face
financial problems is at only -0.08.
Another survey showed that the points that were mostly criticised on the
communal level were suboptimal opening hours, to long timeframes for the
processing of applications, a lack of clarity regarding the appropriate contact
person, and services that are not customer-, i.e., citizen-oriented.
aspect must be discussed with the background that the equal treatment and the
strict following of rules is also intended to protect the citizens by providing
services without regard to the person, with legal certainty and predictability of
Statistisches Bundesamt, Bürger sind mit ihrer Öffentlichen Verwaltung Überwiegend
Zufrieden: PM 298/15 (2015) 1.
Claus Stickler, Veränderungsprozesse in der Kommunalverwaltung: Ziele, Inhalte und
Methoden (Deutscher Universitätsverlag 2000) 17-18.
Derlien, Böhme, Heindl (n 6) 199.
At the same time, the civil servants have to deal with a heterogeneous clientele
with heterogeneous demands, while observing the precept of non-discrimination.
An analysis of citizens classifies them into the following groups: the “helpless
subject”, the “competent pragmatic”, the “identified technocrat”, the blind
bureaucrat, the insecure frustrated citizen, the estranged citizen, and the
competent critic of the system.
While this classification may be clichéd and
simplified, it contains a number of characteristics that civil servants have to
observe. The level of information of the citizens before a consultation varies
highly, as do the understanding of administrative processes, the self-confidence
and the demands on the administration. In all cases, the administrative staff has
to consult to the best of their knowledge
while observing the non-
CHALLENGES FOR THE ADMINISTRATION
The citizen’s wishes regarding personalized consultations,
problem- and service-
oriented civil servants, direct communication and simplified forms are in stark
contrast with the bureaucrat’s preferences for impersonal counselling that is
governed by an obedience of rules to avoid mistakes and ensure equal treatment.
In addition to those differences in preferences, the public administration faces
three important challenges: the financial gap, an acceptance gap and a
The financial gap describes the situation especially on the community level,
where the budgets are insufficient to cover the current spending. Therefore,
many communes are indebted, which in turn leads to an even more restricted
scope of action and a possible limitation especially of the optional task, but also
to a limited quality of the provision of the mandatory tasks. The reasons for the
discrepancy between budget and spending are mainly high investments and
deficits in the budgets for the administration itself. These deficits are caused by
additional tasks such as the increased demands on quality and quantity of
Pippig Gerhard, Die Verwaltung und ihr Publikum: Psycho-Strukturelle Bedingungen und
Klientenorientierung der Öffentlichen Verwaltung (Beiträge zur sozialwissenschaftlichen
Forschung 107, VS Verlag für Sozialwissenschaften 1988) 157.
On the citizen’s
rights to consultation cf. Matthias Thum in this volume.
Stickler (n 21) 7 et seq.
Generally, the consequences of the financial gap are either a growing debt,
decreased spending or efforts to modernise the administration
The acceptance gap consists mainly of an attractiveness gap, i.e., a low
satisfaction of the citizens with the administration as well as a low satisfaction
of companies with the bureaucracy and the decreasing interest of potential
applicants for the civil service; and a legitimisation gap, i.e. the perceived
suboptimal quality, efficiency and effectiveness of public services. The latter
aspect is usually addressed by increasing transparency of the decision processes,
the scope of services and the evaluation of measures
The modernisation gap addresses the underlying structural problems of the
public administration. These structural deficits are especially noticeable in
comparison with structures in the private sector. The structure of the
bureaucracy has not changed in parallel to the increasing complexity and
dynamic. A transformation and modernisation is complicated by the size of the
administration and the established structures. The typical approaches to lessen
this gap were the outsourcing of tasks as well as the consolidation of
households, i.e., increasing revenues and decreasing expenses
Institutional economics offers a number of solutions for the various information
asymmetries. The standard solutions are signalling
(i.e., the agent makes efforts
to increase the information of the principal) and screening (i.e., the principal
makes efforts to decrease the information asymmetries).
Administrative theory has developed several new concepts in the last decades
which address the challenges mentioned above.
The New Public Management is based on an economisation of the administration
and focuses on performance orientation, innovation, pragmatic solutions, quality
orientation and concentration on the outcome. This may contradict the equal
On Signalling, cf., e.g., Michael Spence, ‘Job Market Signaling’ (1973) 87(3) Quarterly
Journal of Economics 355, who explained the theory using the example of the labour
treatment stipulation, though
. This theory is criticised because public services
cannot always be provided with private business methods, for example because,
as mentioned in section 2, the public sector often offers services whose value
cannot be measured in monetary unit prices, e.g., because they are public goods
or merit goods. In addition, the realisation of some of the aspects led to unclear
responsibilities , higher risks of failure on the side of the bureaucrats due to
increased scopes of discretion, and possibly a higher susceptibility to
Public Governance, another approach to a modernisation of the public
administration, states the importance of a stronger active participation of
citizens and expects the public sector to initiate and moderate the commitment
of the citizens
Ethical management is based on an OECD recommendation and contains hard
measures such as regulations, laws and sanctioning, as well as soft instruments
such as education, raising awareness, sensitisation to the risk of corruption and
conflicts of interests.
There is also the general approach of increasing transparency. This would not
only include explaining public decisions, but also the reduction of bureaucratese
(“Amtsdeutsch”), the simplification of forms
and applications, educating civil
servants not only on technical aspects, but also in soft skills. The introduction of
e-Government aspects can reduce time for processing requests and waiting
times. There are also ombudsmen on several levels that can offer citizens a
comparably unbureaucratic possibility to control the administration
Most of the reforms proposed are only implemented selectively, though.
Transformations such as the introduction of e-Government or a reorganisation of
the administration hierarchy is costly, which increases the financial gap. In
addition, the acceptance of transformations both with the citizens as well as the
bureaucrats is not necessarily high. In addition, a number of studies find that
public management reform was often conducted suboptimally, with politicians
Knappe (n 18) 53-55.
Kurt Kippels, Demokratie und Exekutive in Edwin Czerwick, Wolfgang H Lorig Erhard
Treutner (eds), Die öffentliche Verwaltung in der Demokratie der Bundesrepublik
Deutschland (VS Verlag für Sozialwissenschaften 2009) 17-19.
Knappe (n 18) 92-93.
OECD, ‘Managing Ethics: An OECD Recommendation’ (1998) Public Management Gazette.
Derlien, Böhme, Heindl (n 6) 34.
and top-level civil servants choosing their preferred reform areas and measures
while neglecting others
The satisfaction of citizens with the public administration needs to be improved.
Institutional economics and especially the theory of information asymmetries
can be used to explain several aspects of the legitimacy gap and, in parts, the
modernisation gap. Considering the financial situation on the communal level as
well as the demands of the citizens, but also the expected demographic changes,
a modernisation and transformation of the administration is inevitable. Such a
change must also include civil servants who do not only fulfil Max Weber’s
requirements for bureaucrats, but are also educated to react flexibly to changes
and individual situations of the citizens and who possess the skills to
communicate and consult in a way that decreases the gap between citizens and
the bureaucracy. The increased demands on bureaucrats’ skills are a special
challenge taking into consideration the demographic situation in Germany.
Akerlof George, ‘The Market for "Lemons": Quality Uncertainty and the Market
Mechanism’ (1976) 89 Quarterly Journal of Economics
Behnke Nathalie, ‘Bürokratie und Verwaltung‘, in Mau Steffen, Schöneck Nadine
M. (eds), Handwörterbuch zur Gesellschaft Deutschlands (Springer Fachmedien
Derlien Hans-Ulrich, Böhme Doris, Heindl Markus, Bürokratietheorie: Einführung
in eine Theorie der Verwaltung (VS Verlag für Sozialwissenschaften 2011)
James Oliver, Jilke Sebastian R, Petersen Carolyn, Van de Walle
Blame of Politicians for Public Service Failure: Experimental Evidence about
Blame Reduction through Delegation and Contracting’ (2015) 76(1) Public
Sjors Overman, Marieke Van Genugten, Sandra
Van Thiel, ’Accountability After Structural
Disaggregation: Comparing Agency Accountability Arrangements’ (2015) 93(04) Public
Kippels Kurt, Demokratie und Exekutive in Czerwick Edwin, Lorig Wolfgang H,
Treutner Erhard (eds), Die öffentliche Verwaltung in der Demokratie der
Bundesrepublik Deutschland (VS Verlag für Sozialwissenschaften 2009)
Knappe Robert, Die Eignung von New Public Management zur Steuerung
Öffentlicher Kulturbetriebe (Gabler Verlag 2010)
Mann Stefan, Wüstemann Henry, ‘Public Governance of Information Asymmetries
– The Gap Between Reality and Economic Theory’ (2010) 39 The Journal of
Mau Steffen, Schöneck Nadine M. (eds), Handwörterbuch zur Gesellschaft
Deutschlands (Springer Fachmedien 2013)
Mises Ludwig von, Bureaucracy (Yale University Press)
Niskanen William A, Ein Ökonomisches Modell der Bürokratie. Aus dem
Englischen übersetzt und leicht gekürzt von Charles B Blankart, in Pommerehne
Werner W., Frey Bruno S (eds), Ökonomische Theorie der Politik (Springer 1979)
Niskanen William A, ‘The Peculiar Economics of Bureaucracy’ (1968) 58(2) The
American Economic Review
Pippig Gerhard, Die Verwaltung und ihr Publikum: Psycho-Strukturelle
Bedingungen und Klientenorientierung der Öffentlichen Verwaltung (Beiträge zur
sozialwissenschaftlichen Forschung 107, VS Verlag für Sozialwissenschaften
Spence Michael, ‘Job Market Signaling’ (1973) 87(3) Quarterly Journal of
Stickler Claus, Veränderungsprozesse in der Kommunalverwaltung: Ziele, Inhalte
und Methoden (Deutscher Universitätsverlag 2000) Overman Sjors, Van Genugten
Marieke, Van Thiel Sandra, ’Accountability After Structural Disaggregation:
Comparing Agency Accountability Arrangements’ (2015)
Weber Max, Grundriß der Sozialökonomik: III. Abteilung Wirtschaft und
Gesellschaft (J C B Mohr Paul Siebeck 1922)
ASSUMPTIONS TO THE AGENCY THEORY
The literature on the subject states that the agency relationship
is “one of the oldest and commonest codified modes of social
. At the foundation of the agency theory is the
assumption that there is an asymmetry of information between
the two parties to a relationship in a given decision-making
situation when one of the parties, referred to as the agent, acts
on behalf of or represents the other party, referred to as the
principal. The analysis of the agency theory helps identify the
relativity and mutability of the subject matter of the cognition.
The entity participating in the principal–agent relationship can
be an individual person, entire groups of people, the state
administration or an enterprise. Each party may have different
(more precise, fuller) information on the subject of the
The agency theory has opened up new research perspectives,
illustrating the relativity and mutability of the subject matter
of the cognition. The subjects of the cognition are the
relationships that typically assume the form of formalized
contracts in various areas of the economy, such as on the
insurance market, in the process of corporate governance, in
the human resources management process in the organization,
in the process of creating strategic alliances, in public-private
Stephen Ross, ‘The economic theory of agency: the principal’s
problem’ (1973) 62 (2) American
Economic Review 134.
THE AGENCY THEORY
APPROACH TO THE PUBLIC
PhD in Economics,
at the Institute of
of Law, Adminis-
tration and Eco-
PhD in Law, Assis-
tant Professor at
the Institute of
of Law, Adminis-
tration and Eco-
of Law, Admini-
stration and Eco-
Vol. 7, No.1(2017),
php/wrlae) and De
partnerships, as well as in contracting for public services and tasks. The agency
relationship appears whenever one of the parties must rely on the acts of the
other. The agency relationship is a contract, under which the principal engages
another person (the agent) to perform specific projects on its behalf, delegating
. Three further assumptions are made in the agency
(a) the efficiency of the principal’s operations depends on the agent’s acts and
decisions; (b) decisions are made by the parties to the relationship under
conditions of uncertainty and risk
; (c) the principal and the agent have
conflicting objectives to some extent
. The pluralism of the assumptions
constituting the central part of the agency theory leads to the focusing of
attention on issues of monitoring the activities of one of the parties to the
relationship. It is assumed in the classic mainstream of the agency theory that
the agent operating on behalf of the principal has the information advantage.
The information advantage and the assumption of the existence of a conflict of
interests between the principal and the agent can generate opportunistic
behaviour on the part of the agent. The term “opportunism” has exactly the same
meaning as Olivier E. Williamson assigned to it. He understood opportunism as
the desire to implement one’s personal interests. Williamson claimed that even
the more blatant forms, such as lying, stealing and cheating are included in this.
Opportunism is typically based on more subtle forms, involving action, as well as
inaction taken up ex ante
even before the conclusion of the contract, in tractu
during the performance of the provisions of the contract, as well as ex post–
after the end of the contract
From the economic point of view, the agency relationship is a strictly optimizing
issue, involving the appropriate selection of legal and organizational solutions
that reduce the asymmetry of information and/or encourage the agent’s
activities to be consistent with the principal’s
expectations. The problem of
optimization in the literature on the subject is viewed in the context of the
assumption that this asymmetry of information exists, as does a conflict of
interests between the principal and the agent
to some extent, each party
Michael C Jensen, William H Meckling, ‘Theory of the firm: managerial behavior, agency
cost and ownership structure’ (1976) 3 (4) Journal of Financial Economics
Kathleen M Eisenhardt, ‘Agency theory: an assessment and review’ (1989) 14 (1) Academy
of Management Review 57–74.
Hounaida Daly, ‘Conflicts of interest in agency theory: a theoretical overview’ (2015) 15
(1) Global Journal of Human-Social Science: E Economics 17–22.
Olivier E Williamson, The economic institution of capitalism (The Free Press 1985) 47.
pursues its own individual objective
. This is because, if the agent has a different
function, but does not have an information advantage, the principal could create
a complete contract
encompassing claims in unpredictable conditions. A
complete contract is a utopian structure, which falls into the category of the
first-best outcome, namely a result of the collaboration of the principal and the
agent, such as which would only be achievable in an unreal world of full and/or
symmetrical information. The objective of optimization is to form the agency
relationship in such a way as to achieve the second-best outcome, which is a
result that is as close as possible to the first-best outcome
. The problem of
optimization also focuses on looking for ways to minimize agency costs, which
are higher as the principal’s and agent’s interests, objectives and values are more
divergent. Three categories of agency costs are distinguished:
1. The costs borne by the principal in order to control the agent.
2. The costs borne by the agent in order to build his own credibility and incite
the principal’s confidence.
3. Opportunity costs, meaning a loss of efficiency by the principal because of the
divergence of the objectives of the parties and the difficulty in controlling the
The acceptance of the above view of the phenomenon of opportunism justifies
focusing on three aspects of asymmetry of information. The first, adverse
selection, appears before the contract is concluded and refers to actions taken by
the agent, the objective of which is to encourage the principal to enter into a
contract with him. Adverse selection encompasses the phenomenon of hidden
the agent has knowledge of environmental variables which are not
available to the principal. The variables describing the environment can therefore
be random, regardless of the agent’s actions (e.g., rate of return on an
investment project). The agent has an information advantage and can also claim
that he has the know-how and resources needed for performing the contract,
while the principal does not have the instruments to verify the agent’s
Jean-Jacques Laffont, David Martimort, The theory of incentives. The Principal-Agent
Model (Princeton University Press 2002) 20.
John W Pratt, Richard J Zeckhauser, Principal and agents: the structure of Business
(Harvard Business School Press 1985) 3; Patrick W Schmitz, ‘On the interplay of hidden
action and hidden information in simple bilateral trading problems’ (2002) 1103 (2)
Journal of Economic Theory 444–460.
. The phenomenon of hidden information creates a situation in which
the principal can observe the activities, but is unable to identify and verify the
external factors affecting the agent’s choice of actions
The second, moral hazard, appears during the performance of the contract and
applies to actions taken by the agent, which are difficult for the principal to
. Moral hazard involves the phenomenon of hidden action
takes action which cannot be observed by the principal (e.g., the level of effort in
implementing an investment project) due to the costs of obtaining the
information. Therefore, the principal is unable to identify the relationship
between the agent’s effort and the result he achieves. The phenomenon of
hidden activity creates a situation in which the principal cannot see the agent’s
actions, only their outcome
The third, non-verifiability, can take place at the stage of entering into and
performing the transaction, or after its completion. It arises when the principal
has information about the agent’s inappropriate activities, but is unable to
validate them and, in this sense, prove them. It is therefore useless, or, in other
words, not available to the stakeholders, courts or the public
CONTRACTING OUT. RESTRICTIONS OF THE AGENCY
A trend is noticed in the functioning of the public sector regarding the increasing
importance of contracts as forms of operation of this sector. This kind of form of
fulfilment of public tasks and services has intensified in Europe and the United
States under the influence of institutional reforms initiated by U.S. President
Ronald Reagan and British Prime Minister Margaret Thatcher. These reforms led
to the development of discipline, as well as a set of practices, which are
Caroline Nyman, Fredrik Nilsson, Birger Rapp, ‘Accountability in local government: a
perspective’ (2005) 9 (2) Journal of Human Resource Costing and
‘Relacja agencji w teorii
(2005) 164 (4) Gospodarka
Narodowa 3; Andrzej Paliński,
‘Kosztowna weryfikacja jako element relacji bank–
kredytobiorca’ (2009) 40 (3) Bank i Kredyt 94.
Trevor L Brown, Matthew Potoski, David M Slyke, ‘Managing public service
aligning values, institutions, and markets’ (2006) 66 (3) Public Administration Review
Miroński, Paliński (n 9).
Jean-Jacques Laffont, David Martimort, The theory of incentives. The Principal-Agent
Model (Princeton University Press 2002) 3.
considered a paradigm of New Public Management (NPM), namely, a certain
unity of the starting assumptions and methods of discipline, a unity determining
its claims and hypotheses. The NPM paradigm is a special and impressive
phenomenon. The rate of development of research taken up within different,
individual academic disciplines (economics, law, the science of administration,
management science, politics and sociology), which identify the advantages and
limitations of NPM as a public sector practices, is especially noteworthy
Regardless of the discussions taking place between the representatives of the
various academic disciplines, the common denominator of all older and newer
theoretical propositions is the focus of attention on the issue of contracting out
public tasks and services. The process for contracting out tasks between the
public awarding entity and the private entity, which is a contractor, currently
assumes the form of a transaction which can be analysed from the point of view
of the agency theory.
The analysis of the institution of public contracts from the point of view of the
agency theory implies the need to note its limitations. The most comprehensive
critical assessment was made by Nilakanta and Rao
. Certain limitations of the
application attributes of the agency theory arise from the specifics of the public
procurement system as one of the forms of contracting out. There is no doubt
that there is asymmetry of information on the public procurement market, which
can lead to:
1. An increase in agency costs.
2. Problems with the fulfilment of the subject matter of the contract.
3. The cancellation of the public procurement proceedings.
A characteristic element of the public procurement system is the double-sided
asymmetry of information. Both the principal (the awarding entity) and the
agent (the contractor) can be affected by asymmetry of information. The
awarding entity knows which services it needs, but does not always know how to
obtain the service on the market to make the contract effective. This especially
Van R Johnston, Paul Seidenstat, ‘Contracting out government services: privatization at
the millennium’ (2007) 30 (3) International Journal of Public Administration
Graeme A Hodge, ‘Competitive tendering and contracting out: rhetoric or reality?’
Venkataraman Nilakant, Hayagreeva Rao, ‘Agency theory and uncertainty in organization.
An evaluation’ (1994) 15 (5) Organization Studies
applies to the lack of knowledge on how to articulate expectations and needs in
the terms of reference. Regardless of how the asymmetry of information is
distributed among the parties to the transaction, the adverse consequences of
the asymmetry of information will affect the awarding entity to a greater extent.
Therefore, the awarding entity should be motivated to gain knowledge to enable
it to effectively prepare a description of the subject matter of the procurement.
Public procurement is not only a legal, but also an economic instrument. The
decisions made by the awarding entity determine the conduct of the contractors
and the effects of fulfilling the contract as early as at the start of the process of
awarding the public contract. The analysis of the mechanisms on which the
relationships between entities in the public procurement system are based
enables a certain, particular feature to be captured. The classic mainstream
agency theory assumes that the principal has to rely on the actions of the
contractor. From the point of view of effectiveness of public procurement, it is of
particular importance that the contractor (agent) first has to rely on the actions
of the awarding entity (principal), namely its substantive qualifications. When
introducing legal regulations on the method of preparing the description of the
subject matter of the contract and the organizational/legal solutions intended to
eliminate the asymmetry of information, the lawmakers noted the significance of
quality and transparency of the actions taken by the awarding entity at the stage
of preparation of the procurement. And it is here where the strict optimizing
function of the law mentioned above appears, involving a reduction in the
asymmetry of information between the awarding entity and the contractor. The
optimizing function of the law at the stage of preparation of the procurement
should be considered on two levels.
First, optimization can be considered at the level of the awarding entity’s
activities, where it is important to formulate its expectations holistically,
transparently and objectively for each of the potential contractors. If the
awarding entity arrives at the conclusion that its knowledge is insufficient, it
may benefit from the services of experts or, for example, take advantage of the
institution of the technical dialogue, recognizing that the contractor has an
information advantage regarding the subject matter of the procurement.
Second, optimization can be considered at the level of action taken by the
contractor if it concludes that it does not have sufficient knowledge regarding
the terms of reference. Contractors who have experience and are therefore
familiar with the public procurement market, who can anticipate potential
problems arising from the vague provisions in the tender documents, for
example, the deadline for fulfilling the contract, primarily take advantage of this
opportunity. If the contractor arrives at the conclusion that the information
contained in the tender documents is insufficient, using its substantive skills and
assuming that the awarding entity has an information advantage with regard to
its expectations and needs, it can take advantage of the optimization instrument
of asking questions. Given that the contractor’s substantive skills can determine
the success of performing the public contract, the importance and the need for
the awarding entity to take account of the comments and reservations raised by
the contractors is noticeable in practice.
It should be added that these two levels of analysis regarding the optimization of
the functions of the law constitute a part of the mainstream of research, in
which the agency theory is perceived from the point of view of the theory of
authority in any organizational structure
in relational terms
interpreted as the ability to exert an influence. Taking into account the so-called
authority of the contractor’s expert, which enables him to exert an influence on
the awarding entity’s acts and, simultaneously, benefit from the institution of
the awarding entity asking questions, shows that the contractor can modify the
awarding entity’s behaviour. Similarly, the theory of authority enables the
analysis of the agency relationship in public procurement from the point of view
of dynamic reciprocity, where the actions taken by the awarding entity and the
contractor can be mutually modified under the influence of the impulses coming
from each of the parties to the transaction. The launch of this dynamic
reciprocity simultaneously enables the reduction of the three types of agency
costs mentioned above. At the same time, it should be pointed out that the
analysis of the functioning of the Polish public procurement system in practice
leads to the conclusion that the awarding entity and the contractor often
deliberately do not take advantage of these optional legal instruments, which
enable the asymmetry of information between them to be eliminated. There are
cases where contractors, being aware of the low level of precision of the
provisions of the tender documentation, deliberately do not exercise the right to
ask so as to interpret their doubts to their own advantage. This means that some
contractors are willing to take the risk, when they estimate that the potential
gains can outweigh the potential losses. The awarding entity, which is required
to accurately describe the subject matter of the contract, may deliberately not
John W Pratt, Richard J. Zeckhauser, Principal and agents: The structure of business
(Harvard Business School Press 1985).
make any efforts to satisfy the obligation of applying the diligence understood in
this way, thereby providing potential contractors with the opportunity to
reinforce the adverse selection and take advantage of the moral hazard; the
latter can be analysed in the context of “possessing” or “not possessing” the
appropriate knowledge for the performance of the subject matter of the
The ability to substitute clarity and precision through the multiplicity of
interpretations in an area optimizing the function of the law clearly reduces and
frequently eliminates the effectiveness of the implementation of the public
procurement process at the tendering stage, as well as and the stage of fulfilling
the contract. The perspective assumed by the awarding entity and the contractor
with regard to the asymmetry of information in the public procurement process
could give rise to two types of effects. Firstly, positive, when both parties are
aware of the possibility of asymmetry of information arising and are willing to
take steps to eliminate it. Information asymmetry is treated as the ambiguity of
information, which creates the possibility of the same message being interpreted
differently. The instrument used to eliminate such situations is, for instance, the
said asking of questions. This means the submission of an application to clarify
the terms of reference resulting in the awarding entity’s
obligation to respond
within specified deadlines. Both the questions and the answers that are
published by the awarding entity create equal access to information on the part
of entities applying for the contract, reducing the asymmetry between the
contractors themselves and between the contractor and the awarding entity.
Secondly, negative, when the awarding entity and the contractor, despite being
aware of the presence of asymmetry of information do not take any steps to
eliminate it. They treat the ambiguity of the message as the opportunity to
maximize the utility of their own objectives. The principle of buying as cheaply as
possible becomes consolidated instead of making the principle of achieving the
optimum price in specific conditions of the provision of the service comes about.
Therefore, they are not aiming to make use of the instruments of the law, such as
competitive dialogue, the procedure of announcement and negotiation, which
would enable the asymmetry of information to be reduced.
HIDDEN INFORMATION. HIDDEN ACTION
Taking into account the specificities of the public procurement system justifies
drawing attention to its subjective aspect. Most of the literature on the subject
interactions (one principal, one agent).
In practice, the
public procurement situation is relatively rare (e.g. in the case of
natural monopolies); in the majority of cases, there are developed relationships,
namely one principal, namely the awarding entity, and many potential agents, or
contractors. Several contractors take part in the tendering process, trying to
influence the decisions made by the awarding entity. From the point of view of
the effectiveness of the public procurement system, of key importance is that the
multiplicity of contractors can intensify the phenomenon of the asymmetry of
information and weaken the incentives which should affect the awarding entity’s
decisions. This has the objective of, inter alia, countering the principle of fair
competition, which is one of the fundamental rules in force in Polish public
procurement law. In accordance with its wording, the awarding entity must
prepare and conduct the public procurement proceedings in a manner which
assures fair competition and equal treatment of contractors. Therefore, the
awarding entity is responsible for compliance with this principle. The protection
of competition has the objective of achieving the said optimization of the
transaction between the awarding entity and the contractor, as well as the
optimization of the allocation of resources, to ensure the effectiveness of the
contract and the protection of the awarding entity’s interests. The literature on
the subject notes that the assurance of the appropriate level of competitiveness
and transparency of the public procurement system leads to: (a) a reduction in
the agency costs and (b) an increase in the probability of choosing the agent
with the greatest potential. However, the public procurement system has a
clearly focused nature; both the knowledge gathered by other academic
disciplines and some of their interpretations are initially eliminated. This
particularly applies to the phenomenon of ties, informal attitudes, which are out
of the control of the contracting authority and which generate the effect of
The intensity of the phenomenon of negative selection in the Polish public
procurement system up to 2014 was compounded by the so-called price criteria
for the selection of the proposal. The contractors offering the most competitive
prices and, therefore, the contractors who are most inclined to bear a high risk
won the tenders. Furthermore, the lowest price offered by the contractor does
not mean that he is able to guarantee a high quality of fulfilment of the subject
matter of the contract within the set deadline. Contractors, who were careful in
their exposure to risk, namely those wishing to ensure that the task is completed
within the deadline and at a satisfactory level of workmanship, offered higher
prices and lost tenders. Recognizing this problem, the lawmakers strengthened
the non-price criteria in the assessment of bids. When awarding a public
contract, the awarding entity was required to pay more attention to the quality
of the goods, services or works.
An example has been presented below of the phenomenon of hidden information
and hidden action in a specific public procurement procedure. A public sector
unit organized a tender for the purchase of furniture for a monumental building
that it manages. Open tendering was applied five times. In each tender, in
accordance with the amendment to the public procurement law, alongside the
price criterion for the selection of the bid, a criterion was applied in the form of
a guarantee provided by the contractor on the furniture, whereas, in the last
tender, one more criterion was applied, namely the timing of the fulfilment of
the contract. The course of the whole of the public procurement process is
presented in the following table.
Process of fulfilling the public contract
OPEN TENDER NO 1
Guarantee Timing of
10018.35 24 months
Price=(C lowest /C analysed) * 90
Guarantee = (G analysed
/G longest) * 10
Total l. points = C + G
6322.20 36 months
OPEN TENDER NO 2
Guarantee Timing of
24600.00 48 months
23370.00 60 months
OPEN TENDER NO 3
Guarantee Timing of
23141.22 48 months
OPEN TENDER NO 4
Guarantee Timing of
46236.68 24 months
Price=(C lowest /C analysed) * 80
Guarantee = (G analysed
/G longest) * 20
Total l. points = C + G
52484.10 60 months
26691.00 60 months
OPEN TENDER NO 5
21979.49 37 months
Timing of completion (T)
Price=(C lowest /C analysed) * 60
Guarantee = 0 or 10 or 20
Timing of completion =
0 or 10 or 20
Total l. points = C + G + T
22841.10 48 months
19948.14 48 months
Source: own study.
In spite of the mechanisms used, such as a tender deposit, the requirement for
contractors to submit appropriate statements/certificates and non-price criteria
for assessing bids, which should eliminate the problem of asymmetry of
information, the awarding entity was unable to identify any hidden information
or hidden actions of contractors. The question of whether the contractors had
entered into any price collusion in this case has become justified. In analysing
the bids that were submitted, the awarding entity was only able to notice that
contractors T and M conduct the same business which is registered in two
different towns in Poland. In each tender in which contractor M took part, it was
accompanied by contractor T. The bids were submitted separately, whereby, in
every case, the bids submitted by contractor M were received later than
contractor T’s bid. Contractor T was selected as the best bidder in tender
numbers 3 and 5. However, it did not sign the contract, which resulted in its
forfeiture of the tender deposit. The contract was awarded to bidder M in tender
5, whereas the awarding entity was forced to open another tender as a result of
tender 3. Contractor M was selected in tender 4, in which contractor A failed to
provide explanations on the abnormally low prices within the prescribed period.
In tenders 1 and 2, contractor T was “respectively” worse than contractor M. It
seems that contractor T was a “figurehead” which agrees to lose the tender
deposit, as long as M is chosen as the contractor in the procurement.
The simulation of the contract that was awarded in the open tender procedure
justifies the assertion that, despite observing the principles of fair competition
and using mechanisms to increase transparency and objectivity of the choice of a
specific contractor, the awarding entity was unable to reduce the said agency
costs, primarily the opportunity costs. As a result of tender 5, the public contract
is being fulfilled by contractor M, who offered the highest price. This outcome of
the tender procedure was
affected by contractor T’s conduct, who withdrew from
signing the contract, thereby forcing the awarding entity to prepare and conduct
the next tender. From this point of view, the lack of verifiability, as an element of
the asymmetry of information in the public procurement system is compounded
by the particular situation where several potential contractors are trying to win
the contract, between whom there are informal relations, which may distort the
results of the tender procedure and affect the quality of performance of the
The agency theory is an attractive cognitive research tool. Only selected aspects
of asymmetry of information in the public procurement system have been
mentioned in this article. The acceptance of the specificities of the institutional
environment, as well as the new mechanisms introduced into the public
procurement system, justify the assumption that it will develop faster. The Polish
Government passed an Act in 2016 adjusting the public procurement system to
the requirements of the EU directives. The amendment to the Public Procurement
Law that was introduced has the purpose of directly contributing to the
elimination of many negative aspects of the public procurement system in
Poland and, indirectly, makes it possible to eliminate the asymmetry of
information between the awarding entity and the contractor. The promoters of
the bill primarily indicate the decided reduction in the excessive use of price as
the sole criterion for evaluating bids, as well as the solution to the problem of a
lack of legal grounds for selecting a bid using cost accounting on the basis of the
criterion of the most economically advantageous bid using life-cycle cost
accounts (encompassing the costs related to acquisition, use, withdrawal from
operation and the environmental cost related to the life cycle of the product,
service or work). In addition, the need to apply rigid premises for applying
negotiating procedures preceded by the contract notice, namely the competitive
procedure with negotiations and the competitive dialogue will change to ensure
the ability to select solutions that better match their expectations, which are
more economic, more innovative, tailored to the needs of the awarding entity
and the users of the subject matter of the contract. In the light of the proposed
provisions, a very interesting field of research in this area arises from the
awarding of rights to the awarding entities to audit the entities declaring that
they will be benefiting from the potential of third parties in the fulfilment of the
contract (the awarding entity will be able to demand of the contractor that the
entity providing the potential takes part to the maximum possible extent in the
fulfilment of the contract).
Boyne George A.,
‘Bureaucratic theory meets reality: public choice and service
contracting in U.S. local government’ (1998) 58 (6) Public Administration and
Brown Trevor L., Potoski Matthew, Slyke David M., ‘Managing public service
contracts: aligning values, institutions,
and markets’ (2006) 66 (3) Public
Daly Hounaida, ‘Conflicts of interest in agency theory: a theoretical
overview’(2015) 15 (1) Global Journal of
Human-Social Science: E Economics
Eisenhardt Kathleen M., ‘Agency theory: an assessment and review’ (1989) 14 (1)
Academy of Management Review
Hodge Graeme A., ‘Competitive tendering and contracting out: rhetoric or
reality?’ (1999) 22 (4) Public Productivity and Management Review
Jensen Michael C., Meckling
William H., ‘Theory of the firm: managerial behavior,
agency cost and ownership structure’ (1976) 3 (4) Journal of Financial Economics
Johnston Van R., Seidenstat Paul, ‘Contracting out government services:
privatization at the millennium’ (2007) 30 (3)
International Journal of Public
Laffont Jean-Jacques, Martimort David, The theory of incentives. The Principal-
Agent Model (Princeton University Press 2002)
Jacek, ‘Relacja agencji w teorii przedsiębiorstwa’ (2005) 164 (4)
Nilakant Venkataraman, Rao Havagreeva, ‘Agency theory and uncertainty in
An evaluation’ (1994) 15 (5) Organization Studies
Nyman Caroline, Nilsson Fredrik, Rapp Birger, ‘Accountability in local
government: a principal-agent perspective’
(2005) 9 (2) Journal of Human
Resource Costing and Accounting
Andrzej, ‘Kosztowna weryfikacja jako element relacji bank–
kredytobiorca’ (2009) 40 (3) Bank i Kredyt
Pratt John W., Zeckhauser Richard J., Principal and agents: The structure of
business (Harvard Business School Press 1985)
Ross Stephen, ‘The economic theory of agency: the principal’s problem’ (1973) 62
(2) American Economic Review
Schmitz Patrick W., ‘On the interplay of hidden action and hidden information in
trading problems’ (2002) 1103 (2) Journal of Economic Theory
Williamson Olivier E., The economic institution of capitalism (The Free Press
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