Anyone in Germany, who wishes to open a business, will inevitably raise the question of which legal form will be the proper one. An important consideration in this context is the taxation of the company to be founded. Ideally, the founders will be able to optimize their tax burden by choosing the proper legal form.
Other aspects influencing the selection of the legal form are the company’s liability statute, the accounting and administrative expenses (at the foundation and as a going concern), the company’s internal organization and its structural flexibility. A decision based solely on tax aspects will in many cases fall short of the mark. In addition, the specific circumstances of the individual case will always have to be taken into account: Residence and legal form of the foreign investor, distribution policies, profit appropriation strategies to mention but a few.
Generally speaking, the following applies with respect to the taxation of corporations and partnerships in Germany:
Taxation of a GmbH
The German limited liability company “Gesellschaft mit beschränkter Haftung (GmbH)” itself is the taxpayer. It is subject to unlimited tax liability if its residence or management are located in Germany. Unless otherwise provided in a double taxation agreement or other bilateral convention, any and all taxable domestic and foreign revenues are subject to taxation according to the German Corporate Tax Act (so-called “world income principle”). Corporate tax in the amount of 15 percent will be levied on the taxable income. In addition, companies have to pay a solidarity surcharge (5.5 percent of the assessed corporate tax). In addition, a GmbH earning revenues from commercial activities is liable to pay trade tax (amounting to around 14 percent).
Profits will be taxable again at the shareholder level in case of distributions or sales of shareholdings in the corporation. The amount payable will depend on the shareholder’s personal tax rate. Distributions are generally exempt from tax if the shareholder is a corporation.
Taxation of German Partnerships
The decisive difference compared to the taxation of corporations: The taxpayer is not the partnership but the partner/s. The profit is calculated at the company level, but will then be attributed to the partners according to the respective contractual arrangement and be taxed at that level (so-called “transparency principle”). The taxation depends on the financial circumstances of the partner concerned. Partnerships engaging in commercial activities, however, are themselves taxpayers for trade tax purposes.
Our attorneys at law will be pleased to assist you in selecting the suitable legal form for your enterprise and in founding it. Please do not hesitate to contact us.