This paper gives an insight into the tax aspects of doing business in Germany. When foreign companies operate in Germany, they either prefer to start through a representative office, a branch or a subsidiary company.
Representative office: Whilst under German law, there is no such thing as a representation office, one can operate either by an external self-employed person (eg a commercial representative) or as a part of the foreign company's own business organisation in Germany.
The German tax authorities will decide whether the activity is a permanent establishment within the meaning of the German general tax code or the applicable Double Taxation Agreement (DTA), or not. A permanent establishment is a fixed place of business or plant. It must have a certain degree of organisational and effective independence and must have more than merely a temporary purpose.
Should they determine that there is no permanent establishment, the office will not be liable to taxes on income in Germany. Profits and losses will be included in the books and financial statements of the foreign entity in its home country. Nevertheless, the German activities might be liable to value-added tax (VAT), payroll tax, social security contributions (for employers) or income tax (for employees) working in Germany.
Branch: A branch can take the form of a business branch (dependent branch office) or an autonomous registered branch office. A business branch can be settled without establishing a new legal entity in Germany and without having to be entered in the commercial register. An autonomous branch office is not an independent legal entity but has to be entered in the commercial register. It should be noted that a corporation has unlimited liability for all actions of its branch.
If the branch is registered in the German trade register or the operational decisions (eg closing contracts with customers) are usually made in Germany, a permanent establishment will almost always be assumed by the fiscal authorities. This means that it is liable to taxes on income earned in Germany. Profits have to be calculated according to German tax law, which requires bookkeeping according to German standards.
If there is a DTA, profits taxed in Germany can be exempt from taxation in the parent company's home country or are subject to tax there and the tax paid in Germany can be offset against the amount of tax imposed by the home country. If no DTA has been concluded, taxes paid in another country often can be deducted as costs from the taxable income. It is of particular importance that all inter-company activities are made at arm's length because this is very often a major subject in tax field audits.
Should taxable services be rendered by the branch, VAT must be remitted to the German tax office. Only in this case, German input tax for contracted services and goods bought can be refunded.
Foreign employees, working in Germany, are not subject to German payroll tax and social security contributions if the employment with the foreign parent company continues and if the employees are seconded to the German branch under this employment contract for a very limited period of time, which is often 183 days.
If these requirements are not complied with, the branch is obligated to withhold payroll tax and social security contributions from the gross monthly cash salary and any other non-cash taxable benefits (eg company car, company flat, insurance contributions, stock options, free meals), and to report and remit this tax to the German tax office, starting from the first day of activity in Germany. In this case, the employees of the branch are normally also treated as being resident in Germany for income taxation purposes whilst they work in Germany.
Subsidiary company: For companies, which may like to use the German stock market or for which size is important, an AG (public company) might be the best solution. An AG requires a share capital of 50,000 euros and is subject to many formal obligations.
The type of corporation favoured most by foreign investors is the GmbH (private limited company) because it is much easier to handle than an AG. The minimum share capital of a GmbH is 25,000 euros.
In order to establish a GmbH, today various documents from the parent company are needed. A German notary has to notarize the articles of association (normally prepared by a lawyer) and the registration to the commercial register. After establishment but before final registration a German bank account has to be opened and at least half of the share capital has to be paid in. The share capital can be used to buy fixed assets after registration of the company. Registration with the local trade office and fiscal authorities of the municipality where the company is located is necessary in a special format.
The establishment of a GmbH up to registration can be done in one or two weeks. When foreign shareholders are involved, it usually takes much longer because of the time needed to get all necessary documents from abroad translated, certified or apostilled and to satisfy the client identification procedures when opening the bank account. Fees for the notary, court and legal and tax consulting will normally amount to several thousand euros.
As an alternative to individualised articles of association one-page standard minutes ('Musterprotokoll'), which cannot be changed at all, can be used if a company does not have more than one managing director and not more than three shareholders. We recommend not to use standard minutes if there is more than one shareholder because they do not cover a number of important topics that can normally be found in individualised articles of association and, therefore, will probably be very unpredictable when shareholders disagree or sell their shares.
For those investors who have a problem with raising the minimum share capital and for whom it is not important to have a good reputation in Germany an "Unternehmergesellschaft (haftungsbeschränkt)" or short "UG (haftungsbeschränkt)" which means "entrepreneur-company with limited liability" may be an alternative. The UG is a kind of small GmbH with a minimum share capital of just 1 euro, which has to be paid in cash. The shareholders are obliged to allocate 25% of their annual profits to retained earnings. As soon as 25,000 € are reached, the company can be turned into a normal GmbH.
The company will be granted a German tax ID number after the fiscal authorities have checked documents including the fiscal questionnaire, opening balance sheet according to German GAAP, notarised articles of association in German, rental agreement for the office premises in Germany and detailed information on the foreign shareholder(s).
An ID number will sometimes be refused if none of the executive directors is located in Germany because, for tax purposes, operational decisions have to be made at the registered office of the company inside Germany. All tax relevant data that is computerised has to be in a format electronically accessible for the German tax authorities upon demand. It may cause problems if such records are only stored abroad.
(The writer is an advocate and is currently working as an associate with Azim ud Din Law Associates Karachi.)
Comments
Comments are closed.