I. Introduction

The incorporation of companies in Germany may pose several hindrances to foreign investors. First, the investor has to determine the proper legal form of the company that he is going to establish, that is, determine which legal form corresponds best to the intended business and then take into account the appropriate taxation regime applicable to the company. Furthermore, the incorporation of companies in Germany is characterized by a rigid formalism, insofar as the legal existence of certain companies requires the accomplishment of registration procedures (registration of the company in the Commercial Register) that is to be carefully prepared.

The following essay shall give a brief overview of the incorporation and taxation of companies in Germany. Nevertheless, the author hereby underlines that in view of the very intricate German Company and Tax Law, this essay covers only the basic principles therefor, but cannot replace legal and taxation consulting services that can provide tailor-made solutions meeting the needs of the investor. Therefore, the following essay concentrates on examining the two most commonly used legal forms for companies in Germany, which are the Limited Liability Company (German: “Gesellschaft mit beschränkter Haftung”, hereinafter referred to as “GmbH”) and the Joint Stock Company (German: “Aktiengesellschaft”, hereinafter referred to as “AG”)

II. Incorporation of Companies in Germany

First of all, the basic legal attributes of the GmbH and the AG shall be described in a few brief words.

Both companies can be characterized by a distinctive company organization structure. The decisions on the most important issues (e. g. profit distribution) are made in the company meeting (GmbH) or the annual general meeting (AG). The executive board of the GmbH or the AG is represented by the “Geschäftsführer” or the “Vorstand” consisting of at least one person, although it is clear that the most executive boards of the AG consist of three or more persons. Both “Geschäftsführer” and “Vorstand” (who can be translated as chief executive officer) are controlled by the company meeting (of the GmbH) or the supervisory board (of the AG). Both Geschäftsführer and Vorstand are entitled to an unrestricted and unrestrictable power of representation in terms of the German Limited Liability Company Act or the German Stock Company Act, which means that the power of representation cannot be limited toward third parties. The nominal capital (“Stammkapital”) of the GmbH must amount to at least 25,000.00 Euro, the capital stock (“Grundkapital”) of the AG to at least 50,000.00 Euro.
 
The main legal advantage of both companies is that the civil liabilities towards third parties are limited to the capital of the companies. The shareholders of both company forms can therefore not be directly held liable for obligations of the company by third parties.

The two basic requirements for the incorporation of the GmbH or the AG are (i) the adoption of the articles of association (“Satzung”) by notarization and (ii) the registration of the company in the Commercial Register (“Handelsregister”).

Besides the legal requirements for the articles of association and the imperatively applicable legal provisions, the shareholders are free to stipulate all the clauses that they deem appropriate according to their own interests. Consequently, the content of the articles of association depends evidently on the needs and goals of the investment.

The articles of association must be adopted by notarization and submitted by the notary public – along with other necessary documents – to the Commercial Register of the competent local court (Amtsgericht), where all the entries shall be examined for their legal admissibility (e. g. regarding the trade name – so-called “Firma” – of the company). After the successful examination, the company is registered and comes into legal existence as GmbH or AG thereby.
 
Although there are no legal provisions for the duration of the registration procedure, the registration may take several weeks from the notarization to the registration notice of the Commercial Register, albeit a systematic and thorough preparation may shorten the registration procedure. Finally, the author wants to emphasize that the incorporation of GmbH and AG shall be made known to several other administrative bodies such as to the Trade Office (“Gewerbeamt”). The compliance with these obligations is to be strictly monitored and sanctioned.

III. Taxation of Companies in Germany

Far more important for a successful investment in Germany is of course the tax planning of the intended business. The German Tax Law distinguishes between the taxation of the company on one hand and the taxation of the shareholder on the other hand. Besides, it should only be noted at this point that many legal particularities exist for national and international corporate groups with affiliates in Germany and other countries.

The taxation of a GmbH or an AG with foreign shareholders follows basically the same legal provisions that apply to companies with German shareholders. GmbH and AG are therefore taxable subjects irrespective of the shareholder’s nationality.

In Germany, profits of the GmbH and the AG are subject to the German Corporate Income Tax (“Körperschaftsteuer”) and Business Tax (“Gewerbesteuer”). The Corporate Income Tax rate is actually 15% (25% for fiscal years ending in 2007) on all taxable earnings of the corporation and applies to all retained and distributed profits. The Business Taxis levied on all business operations in Germany. The Trade tax is actually calculated in the following way: (taxable trade profit) x (tax assessment rate of 3,5 %) x (municipal collection rate, at least 200%). Finally, all companies must add the Value-Added Tax (VAT, “Umsatzsteuer”) to their prices of goods and services. The VAT rate is actually 19% (or 7%) of the VAT tax base, which consists of the total value received or receivable from the supply of goods or services. GmbH and AG also have to pay VAT when purchasing goods or services, though this tax will be generally returned to the companies as input VAT (“Vorsteuer”).

Regarding the salaries and wages paid to the executive board and the other employees of GmbH and AG, the board members and the employees have to pay the German Income Tax (also referred to as Wage Tax, that is “Lohnsteuer”). The Wage Tax is deducted from the wage by the company and paid to the tax office. In case the board members or employees have either their fiscal domicile or habitual abode in Germany, German Wage Tax/Income Tax is levied on the total worldwide income of the individual, irrespective of the individual’s nationality.

Foreign companies that (only) have a permanent business establishment (“Betriebsstätte”) in Germany are taxable in accordance with the applicable Agreements for the Avoidance of Double Taxation between Germany and the foreign country. In terms of the Agreement for the Avoidance of Double Taxation between Germany and China, Chinese companies are subject to German Corporate Income Tax and Business Tax in case they have a permanent business establishment in Germany. Notwithstanding this fact, the German tax payable in Germany in accordance with this agreement on profits, income or gains arising in Germany is deductible from Chinese taxes payable in respect of such profits, income or gains. Finally, capital gains arising from the permanent establishment are also taxable in Germany (Withholding Tax, in German “Kapitalertragsteuer” or from 2008 onwards Compensation Tax for private capital, in German “Abgeltungssteuer”). However, the tax so charged shall not exceed 10% of the gross amount of the dividends in case the recipient is the beneficial owner of the dividends.

IV. Conclusion

The incorporation of companies in Germany does not pose any hindrances that cannot be overcome by means of a systematic and thorough legal and tax planning.

In this way, the close cooperation of foreign and German (legal) consultants is without any doubt one keystone to the success of the investment in Germany.