GERMANY Law and Practice Contributed by: Michael Best, Gerald Herrmann and Jannis Lührs, POELLATH
POELLATH Hofstatt 1 80331 Munich Germany Tel: +49 89 24240 0 Fax: +49 89 24240 999 Email: muc@pplaw.com Web: www.pplaw.com
1. Corporate Structures, Residence and Tax Treatment 1.1 Corporate Forms and Their Tax Treatment Businesses generally adopt the form of a limited liabil - ity company (GmbH) or a joint-stock company (AG). These corporations are taxed as separate legal enti - ties. The key differences between the two relate to the treatment each receives under commercial law. Under a GmbH, the shareholders are authorised to give instructions to a managing director, there is a low degree of fungibility of shares and there is a wide range of possibilities for the design of the articles of association. Under an AG, a supervisory board and a management board are mandatory, with both operating indepen - dently from the shareholders regarding the business decisions. There is personal liability for the man - agement and supervisory board, and there is a high degree of fungibility of shares. 1.2 Use and Taxation of Transparent Business Structures The type of partnership most commonly used for transparent entities is the Kommanditgesellschaft (KG), which is most commonly adopted for invest - ment purposes due to its limitation of liability. Only one shareholder ( Komplementär ) is unlimitedly liable as the general partner (GP), while the liability of the other shareholders ( Kommanditist ) is limited to their compulsory contribution. It is also possible to choose a GmbH as the GP; this means that no individual is subject to unlimited liability. This kind of partnership
is referred to as a GmbH & Co. KG, and is usually chosen for private equity structures. 1.3 Tests for Determining Tax Residence According to German tax law, the residence of incor - porated businesses depends on where the following are situated:
• the place of management; and • the statutory/registered seat.
Usually, double taxation treaties (DTTs) regulate that the place of effective management is decisive in the case of a double residence of a corporation (the “tie- breaker rule”). 1.4 Applicable Corporate and Individual Tax Rates Taxation of Corporations in Germany Corporations with a registered seat or place of man - agement in Germany are subject to unlimited tax liability in Germany, while non-resident corporations are only taxed on their German-sourced income. The income of a corporation is qualified as business income that is subject to corporate tax and municipal trade tax at an approximate total rate of 30%. The corporate tax rate (including a solidarity sur - charge) stands at 15.825%. A special tax rate applies for shares held in other corporations. Dividends received (as of 1 March 2013, only where the share - holding exceeds 10%) and capital gains recognised from the disposal of shares are tax exempt, although 5% of the proceeds are deemed non-deductible expenses, resulting in an effective corporate tax bur - den of approximately 0.7%. From 2028, the corporate
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