Berlin, Germany

Germany: An Overview

The German tax authorities operate one of Europe's most restrictive taxation systems. In particular, indigenous based companies do not benefit from either the territorial tax system of countries like France or the general flexibility of the British or Irish fiscal regimes. However, it should be noted that the German corporate tax burden has reduced considerably since 2006 when it averaged 38.34% to a much more normal European level of 29.58% in 2014. The country's anti-avoidance provisions often employ a reverse burden of proof and limit the use of tax planning vehicles unless there has been careful planning. Nevertheless, there is still much scope for German firms involved in international business to establish foreign subsidiaries, provided they can show both genuine local management and control and a bona fide commercial reason with a country like Ireland therefore appearing very attractive to German firms since:

  1. It has no stigma and;
  2. The establishment of a genuine non-tax related commercial reason will be relatively easy given the existence of a highly skilled workforce and competitive salaries and;
  3. Ireland is a full member of the EU making it difficult for the German fiscal authorities to imply any tax transgressions even accepting that Ireland has a low corporate tax rate and an attractive tax regime for non-nationals
  4. The German/Irish Tax Treaty provides that an Irish subsidiary of a German firm can repatriate dividends back to Germany free from further taxation in Germany, even if the subsidiary was only liable to the Irish 12.5% Corporate Tax Rate.

Country Facts

  • Location & Size: South of Denmark, north-east of France and west of Poland. Landmass, 138,000 sq. miles or 364,320 sq. kilometres approximately the same size as Italy.
  • Population: Germany has a population of 80,996,685 (2014) making it by far the most populated country in Western Europe but an aging population would seem to suggest both future demographic problems and even depopulation within the coming decades.
  • Development: Germany is Europe's greatest industrial and exporting power with a total Gross National Product in 2013 of US$3.6 Trillion considerably higher than that of the United Kingdom at US$2.38 Trillion (2013) and making it the World’s 4th largest economy and largest exporter. In addition German companies have considerable foreign investments including in the UK (Bentley, Rolls-Royce and Mini), in Spain (Seat), in the Czech Republic (Skoda).
  • Capital city: Berlin – Population of 3,502,000 in 2012
  • Currency: The Euro (€)
  • Education level: Highly educated population

Major Legal Entities

Companies: GmbH and AG's:

In Germany there are two principle corporate vehicles, the Gesellschaft mit beschrSnkter Haftung (a GmbH) and the Aktiengesellschaft (an AG). The former being a private company limited by shares whilst the latter is a public company limited by shares, which can theoretically be listed on a public stock exchange. Unlike France where 'public' société anonymes (SA’s) constitute the favoured corporate bodies in Germany GmbH's, or private companies, are far more popular. The governing law in both cases derives from the German Commercial Code.

  1. GmbH's: In structure these are very similar to a French société à responsabilité limitée (Sàrl) To register a GmbH there need be only one shareholder and director who may, as in the case of a UK limited company, be the same entity. The minimum capitalisation required to establish a GmbH is €50,000.00 of which 50% must be paid up on registration. For companies requiring more than the minimum capitalization the basic rule is that in no circumstances must the paid up share capital be less than 25% of the total issued share capital. The liability of the shareholder/ s is strictly limited to his/their investment, though in the case of partly paid shares creditors on liquidation can demand the balance. The liability of the company director (geschaftsfϋrher) is personally restricted save in circumstances where there has been an unauthorised or ultra vires act. If such an act has occurred then an innocent third party can normally enforce the agreement against the company. The company in turn being able to sue or claim damages against the director. Of course, all this becomes academic if the director and shareholder are one of the same. The formation procedure for a GmbH is relatively simple but the company's bylaws must be pre-notarised before being filed with the applicable local court. In most cases share certificates are not issued to the shareholders with equity stakes normally being internally recorded. All GmbH's must maintain full accountancy records and medium to large GmbH's also have to submit annual audits to the fiscal authorities. In the case of companies employing more than 500 people, it is also necessary to appoint a supervisory board (an aufsichtsrat) which is basically responsible to ensure that the company director/s adequately perform their duties;
  2. AG’s: Like a GmbH, an AG only requires a sole subscriber but is generally subject to greater disclosure and bureaucracy. The minimum capitalisation required is €80,000.00 with at least 25% being fully paid up at the time of registration. Unlike most GmbH's it is not only necessary to have a board of directors (which in the case of an AG is called the vorstan which, despite its name may only have one member) but also a supervisory board (an aufsichtsrat) having at least 3 members. The purpose of the vorstan is to perform all normal management and control functions whilst the aufsichtsrat is effectively a representative body acting on behalf of the subscribers. The modis operandi of the aufsichtsrat being to monitor and assist the board in carrying out its functions and in particular to prevent any ultra vires activities. Where ultra vires activities are found, the aufsichtsrat has the authority to dismiss the board of directors. In respect to the shareholders of an AG it is normal that bearer shares are issued and that any dispositions are notarised to confirm the veracity of the process. All AG's must maintain full accountancy records and submit to an annual audit. The process of initial registration is basically the same as for a GmbH save that before the submission of the notarised by-laws the initial shareholder/s must appoint the directors and the supervisory board. These boards confining to the court that all capitalization requirements have been satisfied

Types of Companies

GmbH & Co. KG (FISCALLY TRANSPARENT) - The AG GmbH & Co. KG (a Gesellschaft mit beschrSnkter Hafhmg und Kommanditgesellschaf) is a cross between a company and limited partnership. In effect, the GmbH is appointed the general Partner with the other partners enjoying limited Partner status. However, as the limited partners are mostly the owners of the general partner, GmbH full limited liability is normally secured. The reason this structure is generally employed is that it is fiscally transparent and need not submit annual audited accounts. Both these factors producing potential and often substantial savings. Of course, the GmbH part of the entity is subject to all the normal rules appertaining thereto as is the kommanditgesellschaf.

TYPES OF PARTNERSHIPS

OHG's & KG's - German partnerships adhere to the European norm and can be divided into unlimited partnerships (offene handelgesellschaft or OHG's) and limited partnerships (kommanditgesellschaft or KG's). In respect to the OHG's, all partners are equally liable for partnership debts and will or should have two or more active participants. In respect to KG's this is a classic limited partnership with only the general or managing partner being liable beyond his or initial investment (for a full explanation see 'Basic Legal Entities' pages 4 to 6). The formation process OHG's and KG's is relatively straightforward and only requires the registration of the applicable partnership agreement with the local court. OHG and KG partnerships must keep accurate records but are fiscally transparent and subject to little bureaucracy.

Branch of a Foreign Company

The registration procedure for a branch of a foreign company in Germany (a zweignniederlassung) is very similar to that required for a succursale in France. In both cases, there can be negative tax consequences for a registered permanent establishment unless there exists a suitable double taxation treaty. In the case of Germany, such a branch can be established by merely supplying a certified translation of the mother company's by-laws and certificate of incorporation together with a notarised application by the its directors (confirmed by the applicable German consulate) together with confirmation of its manager/representative in Germany to the local court. The benefits of a branch include low registration costs, no or minimal separate capitalisation and no annual auditing requirements.

For more information on the German Tax System please contact one of our tax planning consultants.