Definition and legal classification of profit
Profit is a central economic and legal concept that refers to the surplus remaining after deducting expenses from revenues earned. In the legal context, the term “profit” regularly refers to the gain achieved in the course of entrepreneurial or self-employed activities. Profit constitutes a fundamental figure for assessing the economic viability and success of a company and is relevant in various areas of law, such as accounting, tax, commercial, corporate, and capital market law.
Distinction from other terms
While everyday language often refers to profit, surplus, or revenue, legal scholars and especially legislators differentiate between various forms and calculation methods of profit generation. For example, in commercial law, a distinction is made between balance sheet profit and ongoing business profit, while tax law provides specific regulations concerning profit determination and taxation.
Legal basis for profit generation
Commercial law principles
The determination of profit is centrally regulated in the German Commercial Code (HGB). According to section 242 HGB, merchants are required to prepare a balance sheet and a profit and loss statement at the beginning and end of each fiscal year. Profit results as the balance between income and expenses and is decisive for determining distributions to shareholders and stakeholders.
Corporate law aspects
Profit generated is a key factor in profit distribution within a company under corporate law. In a GmbH (limited liability company), stock corporation, or partnership, participation in profits is generally determined by the articles of association or bylaws. The GmbH Act (GmbHG) and the Stock Corporation Act (AktG) contain detailed provisions in this regard, particularly with respect to distribution restrictions, creation of reserves, and shareholders’ rights.
Tax law perspective
Under tax law, the profit of a natural or legal person is generally subject to income tax, corporation tax, and trade tax. The Income Tax Act (EStG) and the Corporation Tax Act (KStG) regulate taxable income from agriculture and forestry, commercial operations, self-employment, and capital assets. The precise determination of taxable profit is carried out in accordance with the principles of proper accounting and is subject to extensive regulations.
Determining taxable profit
Profit can be determined in various ways. Notably, the following methods apply:
- Comparison of business assets (section 4 (1) EStG, section 5 EStG): Here, the business assets at the end of the financial year are compared with those at the beginning, taking into account withdrawals and contributions.
- Cash basis accounting (EÜR, section 4 (3) EStG): For certain taxpayers, particularly smaller businesses and freelancers, a simpler method is available—by offsetting business income and business expenses.
Relevance in capital market law
In capital market law, correct determination and disclosure of profit is essential for the information obligations of listed companies. Market participants must be able to make well-informed investment decisions based on reported profits. Incorrect or late disclosures may result in liability consequences.
Profit generation and its legal limits
Antitrust and competition law
Not every form of profit generation is legally permitted. Antitrust law, in particular, prohibits anti-competitive agreements or the abuse of a dominant market position to maximize profit at the expense of competition. The Act Against Unfair Competition (UWG) also protects market participants from unfair methods of profit generation, such as deception, aggressive advertising, or imitation.
Criminal law aspects
Illegally obtained profit is a core issue in economic crimes. Offenses such as breach of trust (section 266 StGB), fraud (section 263 StGB), tax evasion (section 370 AO), and insider trading (section 119 WpHG) frequently involve illegal profit generation. In such cases, confiscation of the profit obtained from the offense (section 73 StGB) and other sanctions may be imposed.
International and European perspectives on profit
International Financial Reporting Standards (IFRS)
International accounting, especially under the International Financial Reporting Standards (IFRS), imposes special requirements on the definition and determination of profit. Multinational companies are often required to report their profits according to IFRS requirements in order to ensure transparency and comparability on global capital markets.
European requirements
The European Union establishes binding requirements for profit determination and reporting through its accounting and transparency directives, such as the Accounting Directive (2013/34/EU). The aim is to create uniform conditions for the disclosure of profits and economic data by German and European companies.
Importance of profit in insolvency and restructuring cases
In insolvency law, profit is at the forefront when assessing insolvency maturity and enforcing creditor claims. For creditors, the ability to realize claims for repayment or dividend payments is closely linked to the presence of profitability and available assets. The Insolvency Code (InsO) contains strict rules for profit distribution and allocation of assets during and after the onset of insolvency.
Profit, responsibility, and corporate governance
Today, the pursuit of profit is also to be viewed in light of corporate responsibility. Responsible corporate governance requires management to pursue profit in compliance with legal regulations and considering the interests of employees, shareholders, and other stakeholders.
Summary
From a legal perspective, profit is more than just a company’s or person’s economic gain. Legally secure determination, publication, use, and taxation of profit are governed by a wide range of legal frameworks in commercial, tax, corporate, capital market, antitrust, and criminal law. Compliance with these regulations is essential for functional markets, sustainable corporate management, and protecting the public from unlawful profit generation.
Frequently asked questions
Which legal regulations govern the determination of profit in Germany?
The determination of profit, i.e., earnings, in Germany is subject to numerous legal requirements, particularly those set out in the German Commercial Code (HGB) and tax laws such as the Income Tax Act (EStG) and the Corporation Tax Act (KStG). For merchants and corporations, commercial-law profit determination according to sections 238 et seq. HGB is decisive and includes the obligation to keep proper accounts and prepare annual financial statements. For tax purposes, profit is generally determined by comparison of assets under section 4 (1) EStG, or by cash basis accounting under section 4 (3) EStG. In addition, certain sectors and company sizes may be subject to other special rules and, where applicable, accounting standards (such as IFRS for capital market-oriented companies under the HGB). Due to differing regulations, taxable profit may differ from commercial profit, such as through special tax depreciation, provisions, or non-deductible business expenses. Compliance with these requirements is monitored by tax audits of the tax authorities.
Is profit subject to publication requirements?
Depending on the company form and size, different legal requirements apply regarding the obligation to publish profits. Corporations (GmbH, AG) are obliged under sections 325 et seq. HGB to publish their annual financial statements, from which the annual profit or loss—central to the determination of profit—is derived, electronically in the Bundesanzeiger (Federal Gazette). Micro-entities can file a shortened balance sheet, while sole traders with low turnover may be exempt from preparing and publishing financial statements if certain thresholds under section 241a HGB are met. Partnerships are generally not required to publish annual accounts unless they are limited liability partnerships (e.g., GmbH & Co. KG). Violations of the publishing obligation may result in administrative fines under section 335 HGB.
To what extent is profit generation legally permissible or limited?
In principle, profit-making—that is, the pursuit of profit—is legally permitted and a legitimate objective of economic activity. However, restrictions arise from special statutory regulations, e.g., in antitrust law or public price law. The Act against Restraints of Competition (GWB) prohibits abusive pricing or profit skimming in the case of market dominance. Statutory profit limitations may also apply in the context of social regulation, such as in tenancy law or certain public services (e.g., rent control, electricity price caps). In tax law, the intention to make a profit is a prerequisite for recognition of a source of income; if this is absent, the activity is classified as a hobby.
What tax consequences arise from generating profit?
Generating profit leads to tax obligations. Profits generated by companies or self-employed individuals are subject to different types of taxation, depending on the legal form: for natural persons, income tax (EStG); for corporations, corporate income tax (KStG) and trade tax (GewStG). Profits must be determined and declared on time as part of profit determination. Infringements of tax declaration and payment obligations may result in late payment surcharges, penalties, or criminal proceedings for tax evasion (section 370 AO). The tax burden can be reduced legally, e.g., through investment deduction amounts, provisions, depreciation, or loss carryforwards, but this must always comply with statutory requirements.
Are there industry-specific legal restrictions on profit?
Yes, in certain industries, special statutory regulations exist that may affect the level or distribution of profit. Examples include energy supply, telecommunications, banking and insurance sectors, where authorized price and profit caps commonly apply (regulation by the Federal Network Agency, BaFin, etc.). Public enterprises, utilities, or those with monopoly characteristics are monitored by supervisory authorities regarding pricing and permitted profit margins. Violations of industry-specific regulations may result in regulatory sanctions or financial repayment claims.
What legal requirements apply in the case of negative profit (loss)?
If a company incurs losses instead of profit, special legal requirements and actions apply. Under section 49 InsO, management is obliged to file for insolvency without delay in the event of over-indebtedness or insolvency. Commercial law imposes specific reporting requirements on corporations in cases of losses that endanger equity (section 92 GmbHG, section 49 AktG). For tax purposes, losses may be offset against profits from other years or income types under certain conditions (loss carryforward, loss carryback according to section 10d EStG; section 8 KStG in conjunction with section 10d EStG). Deliberately causing or hiding losses may have criminal and civil consequences.
What obligations exist regarding the use of profit?
Legal obligations regarding the use of profit depend significantly on the legal form. In corporations, the decision regarding profit utilization, particularly the distribution of dividends (section 29 GmbHG, section 174 AktG), is usually made by the shareholders’ meeting or annual general meeting. There are capital maintenance rules and distribution restrictions to prevent endangering the company’s existence (section 57 AktG, section 30 GmbHG). In partnerships, profit distribution is usually governed by the partnership agreement, otherwise statutory provisions apply (section 121 HGB). In addition, collectively bargained or statutory profit participation (e.g., for employees) or special provisions in socially bound organizations may apply. Violations of prescribed use may result in management liability and repayment claims.
