Taxation of a GmbH
A GmbH is a corporation and is therefore subject to taxation itself with its profit as a legal entity. In contrast, a partnership is not itself subject to taxation but only its shareholders.
In addition to the GmbH, its managing director is personally liable for the fulfilment of the tax obligations. This also applies if he is not a shareholder in the company. This is not only a material liability with the private property of the manager, but also a possible criminal sanction.
The profit of a GmbH is subject uniformly to a corporation tax rate of 15 percent, irrespective of the withholding of the profit in the company or the distribution to the shareholders. The basis of assessment for corporation tax is the taxable income. Taxable income is determined in accordance with the provisions of the Income Tax Act and the special provisions of the Corporation Tax Act (§ 8 KStG to § 19 KStG). The commercial balance sheet, of which the profit and loss account also forms an integral part, serves as the basis. It determines the profit that the GmbH must tax.
If, on the other hand, the GmbH generates a loss in a fiscal year and there are no legally regulated special items, this loss cannot be offset against other income of the shareholder in order to reduce taxes in the year of origin, but remains in the tax area of the GmbH, i.e. the GmbH can only offset this loss with its own profits of the previous year or of future years in order to reduce taxes. Since 2004, a base tax-free allowance of one million euros has applied to losses carried forward, but only 60 per cent of any losses in excess of this amount can be offset against tax.
A GmbH must submit an annual corporate income tax return to the tax office together with the annual financial statements of the company by electronic transmission. Quarterly advance payments of corporation tax are payable after determination by the competent tax office (payment on 10 March, 10 June, 10 September, 10 December of each year) and are offset against the annual tax liability.
All domestic and foreign profit distributions to shareholders who are themselves joint stock companies are taken into account with 5% of the remuneration received in the taxation of the receiving company and are subject to corporation tax. This taxation takes place at every level. According to § 8b para. 3 KStG, profits from the disposal of investments are fictitiously and in a lump-sum manner fictitious with 5 % of the profit as non-deductible business expenses and are added back to income within the scope of determining taxable income. This applies even if no expenses have been incurred in connection with the sale. In fact, this results in a tax exemption of only 95 % for the profit on disposal.
Capital gains tax
If the profit of a limited liability company is passed on to natural persons, the latter is in principle obliged to withhold a capital gains tax of 25% (plus 5.5% solidarity surcharge) on this amount and to pay it to the tax office. This tax deduction is made for the account of the recipient (e.g. shareholder) and does not burden the GmbH; only the remaining net amount is paid to the shareholder. The limited liability company issues the shareholder with a tax certificate according to the model.
This tax deduction generally compensates the shareholder for the income tax burden, the so-called final withholding tax. If necessary, however, the shareholder can apply for taxation at his individual and thus possibly also low income tax rate. In this case, the capital gains tax is offset against his income tax.
Special regulations apply to capital gains tax for foreign shareholders. In Germany, the profit distributed is subject to a kind of withholding tax, which is offset against the corresponding tax of the other state. The provisions of the relevant double taxation agreements must be observed.
Shares in private property
If shares in corporations are held privately by an investor, dividends/payments are also subject to withholding tax at a rate of 25 percent plus solidarity surcharge. If the taxpayer's personal income tax rate is less than 25 percent, the taxpayer can choose a corresponding assessment. However, advertising expenses such as custodian fees are no longer deductible even then. A lump sum of 801 euros can be deducted from taxable income from capital assets for individual investors.
Shares in the operating assets of a partnership
In the case of disqualifications of shareholders who are themselves partnerships, however, the so-called "partial integration procedure" is applied. Received payments are exempt from tax by 40 percent. The remaining 60 percent of the dividends are thus fully taxable and are taxed at the individual income tax rate of the respective shareholder. Proportionate (i.e. 60 percent) tax deductions can be made for income-related expenses in connection with the dividend gain.
Profit distributions are made both in the form of an open profit distribution (i.e. with a resolution on the appropriation of profits by the shareholders) and a hidden profit distribution (i.e. when operating expenses are qualified for tax purposes as profit distributions). The latter also generates income from capital assets on the shareholder's side and is thus subject to capital gains tax, while on the company's side it is added to retained earnings and thus increases its tax base. The capital gains tax arises at the point in time at which the shareholders receive the profit distribution and is to be paid together with a capital gains tax declaration by the 10th of the following month by electronic transmission to the tax office.
Tax Problem: Hidden Profit Distribution
According to the case law of the tax courts, a “hidden profit committee“ within the meaning of the corporation tax law exists when a shareholder or a person close to him is enriched by an inappropriate payment or by other advantages granted, which leads to a reduction in the assets of a corporation (GmbH). An inappropriate payment is equivalent to a prevented increase in assets. A further prerequisite for a hidden profit distribution is that this process is caused by the company's relationship (for example on the instructions of the shareholder), has an effect on the amount of income and is not connected with an open, i.e. in accordance with the statutory provisions by the shareholders decided and carried out profit distribution.
A hidden profit distribution is usually determined in the course of an audit by the tax office, resulting in a profit and tax increase at the company and an additional tax credit;In the event of an inflow of the hidden profit distribution to a shareholder who is a private individual and whose lump-sum savings amount is no longer available for income from capital assets in the relevant entity. For shareholders who are also a corporation, however, this additional profit distribution is tax-free up to 5 percent (to avoid double taxation).
The shareholder cannot make the hidden profit distribution by granting the advantage back for a long time, even if the company has contractually obligated the shareholder to a profit. If in this case the company waives the agreed compensation, there is even another hidden profit distribution.
There are two groups of hidden profit estimates:
A proper and conscientious manager would not have granted such a donation to a non-partner, i.e. it is a transaction which was not concluded at market conditions. For this purpose, an arm's length comparison must be made for each individual case.
There are no clear, unambiguous and legally effective agreements concluded in advance between the corporation and its (controlling) shareholder, which are actually carried out in accordance with the agreements. Thus, for example, the violation of formal requirements under commercial law may lead to the assumption of a hidden profit distribution in the area of tax law. Subsequent agreements have no tax effect.
Examples for a hidden payout:
- The remuneration of the controlling shareholder-manager has not been clearly and unambiguously defined in advance in the written employment contract. The employment contract is not effective under civil law; the shareholder resolution to conclude the employment contract with the controlling shareholder manager is missing. (Any &change in the provisions of the employment contract also requires a new shareholders' resolution.) Violation of the prohibition of self-contracting. An exemption from the provisions of § 181 BGB (German Civil Code) was not agreed or the exemption from the prohibition of self-contracting was not entered in the Commercial Register. The remuneration, bonus agreement or pension commitment was agreed with the controlling shareholder in an unreasonable amount. Payment of an overtime compensation to the managing director. (A “ordinary“ partner-manager dedicates his entire work force to the company according to the jurisprudence. This applies even if non-shareholders receive overtime compensation as managing directors or if the managing partner does not have a bonus agreement.)
- No payment of remuneration to the shareholder. (The employment contract is not actually carried out in accordance with the agreements).
- There is no effective exemption from the non-compete obligation. The use of the company car by the shareholder for business and private journeys was not effectively agreed under civil law.
- The managing partner grants the company a loan on overdue terms.
- The company grants the shareholder a loan with low conditions or without the usual credit protection.
- The company assumes expenses for the managing director, which mainly concern his private life (for example expenses for a birthday party or the memorial service after the death of the managing director, even if business friends and executive employees are invited).
The most common hidden profits concern the entire area of remuneration regulations, i.e. not only the directors' fees, but also any pension and bonus regulations, use of company cars and the like. Before any such regulation is agreed, it should be checked whether and to what extent the planned regulation is enforceable from a tax and legal point of view on the basis of generally available studies - such as the fee-based remuneration studies at www.kienbaum.de - or with the help of a tax consultant or lawyer.
A hidden profit distribution not only has tax consequences for the company and its shareholders, but can also have an effect on a managing director of the GmbH, even if he is not a shareholder in it. On the one hand, the managing director may be personally liable for the outstanding tax liabilities, and on the other hand, culpable participation in the concealed loss of profits may result in criminal law consequences due to tax evasion.
For the aforementioned reasons, the aim of both the legal representatives of a limited liability company and its (controlling) shareholders should be to recognize in good time the dangers of a hidden loss of profits, to avoid their negative consequences through appropriate action and to inform themselves promptly about the latest developments in this field of law.
Irrespective of the nature of its activities, a limited liability company is always a business enterprise by virtue of its legal form and is therefore subject to trade tax. In contrast to sole proprietorships or partnerships, the GmbH has extended possibilities for the tax deduction of operating expenses (e.g. deduction of managerial salaries); however, the trade tax relief such as trade tax exemption or offsetting of trade tax against the income tax liability does not apply to it.
The trade tax is levied on the so-called “trade income“ (derived from the profit) of the GmbH. The trade tax burden is no longer deductible as a business expense when determining profits as a result of the corporate tax reform as of 2008.
For the calculation of “trade income“, the taxable profit or loss resulting from the provisions of the corporation tax or income tax law must be assumed. Under the Trade Tax Act, additions (§ 8 GewStG; for example 25 percent of interest on permanent debt) and reductions (§ 9 GewStG; for example 1.2 percent of the standard value of real estate belonging to business assets and not exempt from property tax) are still made. Thereafter, trade losses from previous years can still be deducted. Trade losses are not deductible; they can therefore only be offset against the trade earnings of the same company (with the exception of the fiscal unity) in subsequent years. Since January 2004, only 100 percent of commercial losses of up to one million euros have been taken into account, and only 60 percent beyond that. The calculated amount is then rounded up to a full hundred. While an exemption of 24,500 euros is granted to natural persons or partnerships, which means that trade tax only applies to an amount in excess of this, there is no such exemption for the GmbH.
The calculated trade income must then be multiplied by a basic tax index. This amounts to a uniform 3.5 percent. The result of this multiplication is the so-called tax base. In the end, this must be multiplied by the local tax rate of the municipality in which the GmbH has its registered office. If the municipality has not determined a rate of assessment, it has been at least 200 percent since 2004.
This results in the following trade tax burden:
Trade income x basic tax rate x assessment rate = Trade tax liability
100 x 3.5 percent x 490 percent = 17.15 percent
For a limited liability company with more than one company, the share of each municipality in the trade tax measurement amount of the limited liability company is determined according to legally determined criteria; the proportionate trade tax is then assessed by each municipality at its applicable assessment rate. In principle, the wage totals incurred for the respective operating hours are used as the decomposition yardstick.
A GmbH must submit an annual trade tax return to the relevant tax office. Quarterly advance payments of trade tax are payable on the basis of the last assessment (payment on 15 February, 15 May, 15 August, 15 November of each year) and are offset against the annual tax liability.
The trade tax payments are due to the municipalities (in the case of several companies also several municipalities) and are assessed by these on the basis of the trade tax measurement certificate (this certificate is always issued by the responsible tax office).
The solidarity surcharge is levied on both legal entities (GmbH) and natural persons (employees of the GmbH, in this case also managers). The tax rate currently amounts to 5.5 percent of the corporation tax, capital gains tax and wage tax and must be paid at the same time as these taxes.
As a rule, a limited liability company also employs employees, even if it is only the (shareholder) manager. This is in principle – for tax purposes and thus often deviates from social security law – to qualify as an employee.
Like any employer, the GmbH is obliged to withhold income tax and other deductions (solidarity surcharge, church tax) from the contractually agreed and tax-recognised salary and to pay them to the tax office. These withheld tax deductions for the employee's account are offset against his income tax.
The B.V. shall, in the person of the managing director, comply with the provisions for the management of wage accounts and shall be liable for the correct payment of wage tax and social security contributions.
VAT Every delivery of goods and services, the import and withdrawal of goods and services from the company for non-entrepreneurial purposes must be subject to VAT, unless special exemption provisions apply. The standard tax rate is currently 19 percent and is to be calculated on the net invoice amount. The current rate of 7% applies to virtually all food – except beverages and catering –, most agricultural and forestry products, newspapers, brochures, art objects and a number of other goods and certain services.
If taxable supplies or services are provided for another entrepreneur in Germany, an invoice must be issued which must contain the following information:
If taxable supplies or services are provided for another entrepreneur in Germany, the following information must be provided
- full name and address of the performing contractor and the service recipient,
- Tax number or sales tax identification number,
- Date of issue,
- Consecutive invoice number,
- the quantity and the commercial description of the subject of delivery or
- the time of delivery or service,
- the net remuneration (value of goods without sales tax),
- previous remuneration after tax and exemptions,
- pre-agreed reductions of the fee,
- For settlement by credit memo, the term „Credit“,
- the gross remuneration (value of goods plus value-added tax) and the amount of tax payable on it or an indication of any tax exemption or tax liability of the service recipient.
For small amount invoices up to 150 Euro (gross), however, only the following information must be included:
- full name and address of the providing entrepreneur,
- Date of issue,
- quantity and commercial description of the object of delivery or
- the remuneration and the tax amount attributable to it in one total and the
- the applicable tax rate or, if applicable, the indication of tax exemption or tax liability of the beneficiary.
The entrepreneur can deduct the sales tax amounts invoiced to him by other entrepreneurs from his own sales tax liability as so-called input tax if he meets the requirements for the input tax deduction.
The entrepreneur has to calculate the sales tax amount to be paid to the tax office (tax payable) himself and submit a sales tax advance declaration to the tax office by the 10th day of the following month and settle the resulting additional payment. If, however, a refund is made, the tax office is not bound by this period.
According to the amount of tax due, the following declaration and payment deadlines apply:
For newly founded companies the following rule applies:
In the first two calendar years, advance sales tax returns must be submitted monthly and settled by payment. For example, entrepreneurs who set up their business between January and December 2016 must submit monthly pre-registrations up to and including December 2017.
The refund of input tax surpluses, on the other hand, is at the discretion of the tax authorities, which may examine the facts of the case and require a security before payment is made. However, if the entrepreneur is entitled to reimbursement, he has the option of applying in writing to the relevant tax authority for offsetting against other subsequent tax payments, together with an application for interest-free deferral until the tax office has decided on the offsetting.
On request, the tax office can grant a permanent extension of one month for the submission of monthly and quarterly pre-registrations. In the case of the monthly (but not quarterly) extension of the deadline, a special advance payment is to be made, which is offset annually against the turnover tax liability.
After the end of the calendar year, a sales tax annual declaration must be submitted to the responsible tax office, also by self-calculation. A value added tax back payment is to be paid up to one month after receipt of the tax return to the tax office. A sales tax refund is only payable after a sales tax assessment by the tax office.
Current records must be kept for VAT purposes. Especially for trade in goods and services with EU countries and third countries (i.e. non-EU countries), numerous special regulations must be observed, also with regard to export documents and delivery thresholds.
The value added tax identification number (VAT number) required for trade in goods and services with EU countries is issued by the Federal Central Tax Office (Internet www.bzst.de). Prerequisites for the granting are an informal written application as well as the VAT registration at the responsible German tax office. Company founders can already apply for the VAT identification number when registering with the tax authorities. Whoever has a VAT number can deliver to other EU member states without having to pay German VAT, provided that the purchaser there is also an entrepreneur and has a valid VAT number.
Small entrepreneurs whose turnover did not exceed EUR 17,500 in the previous year and who are not expected to exceed EUR 50,000 in the current calendar year are generally exempt from VAT and are not required to state a VAT number in their invoices. On the other hand, they may not claim any input tax deduction. Small entrepreneurs can opt vis-à-vis the tax office for their VAT liability with all the resulting advantages and disadvantages, but are bound by this for at least five calendar years. Such a waiver can be particularly useful if the customers themselves are predominantly entrepreneurs who demand invoices with value added tax identification, or if the input tax deduction is to be used due to substantial reasoning investments.
If the limited liability company owns real estate (e.g. developed and undeveloped land), it is subject to property tax. The land tax is levied by the municipality on whose territory the land is located. The basis for calculating land tax is the standard value of the land, multiplied by 3.5 per thousand. The resulting property tax amount is multiplied by the municipal property tax levy rate, resulting in the property tax liability, which is usually determined by the municipality in quarterly advance payments. The property tax rate varies from municipality to municipality. As with trade tax, the amount of the assessment rate can be a criterion for determining the location; however, the burden of property tax is usually much lower than the burden of trade tax. A quarter of the property tax is payable on 15 February, 15 May, 15 August and 15 November each year. On request, it can be paid in one amount on 1 July of the year.
Land transfer tax
If a limited liability company acquires real estate, land transfer tax is charged once. The basis for assessment is the purchase price paid or the consideration rendered multiplied by 6.5 percent (valid for NRW).
In particular in cases of the acquisition, transformation, merger or division of companies with real estate, the levying of real estate transfer tax should be examined in advance. It is advisable to consult a tax advisor.