9 German Law Journal No. 9
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The tax year generally is the calendar year. The return must be filed by 31 May of the following year. The final tax is assessed after filing of the tax return. If an individual receives income other than employment income, quarterly installments are assessed and must be paid. Corporate Income Tax Residents are taxed on worldwide income; nonresidents are taxed only on German-source income.
Branches are taxed the same as subsidiaries. Business expenses may be deducted in computing taxable income. Minimum shareholding requirements may apply.
Losses Losses may be carried back one year and carried forward indefinitely. However, minimum taxation applies: Tax Year The tax year is 12 months or the period for which accounts are prepared, if shorter. The tax accounting period may not exceed 12 months in total. No tax is levied on dividends qualifying under the EU parent- subsidiary directive. Certain transactions are exempt. The registration threshold is turnover of EUR 17, in the previous calendar year and estimated turnover of EUR 50, in the current calendar year.
Nonresidents that make taxable supplies of goods or services in Germany also must register. The entrepreneur must file an electronic quarterly preliminary VAT return by the 10th day of the following month and pay the tax due. A refund will be paid if the input tax exceeds the VAT. If the tax for the previous calendar year was more than EUR 7, monthly preliminary returns must be filed. Stamp Duty Stamp duty is not levied in Germany. Government Fee There are no government fees applicable.
Other Taxes and Duties Real property tax Tax is levied by the municipality in which real estate is located. The general rate is 0. Transfer tax A real estate transfer tax of 3. The rate depends on the federal state where the real estate is located.
Corporations are always deemed to carry on commercial enterprises trade or businessregardless of actual activities. The trade tax is based on taxable income as calculated for corporate income tax purposes, but several income adjustments apply.
9 German Law Journal No. 9
Social security contribution Employed individuals are required to make a contribution for pension, health and unemployment insurance. Anti-Avoidance Rules Transfer pricing: Business dealings between related persons must be in accordance with transactions that would have been agreed upon by independent third parties dealing at arm's length, whereby the underlying principle is the normal degree of commercial prudence shown by a sound and conscientious business manager.
Taxpayers are required to document all facts and evidence that support their positions. Specific transfer pricing rules apply to cross-border intragroup transfers of functions.
An exit tax will be imposed on the "profit potential" that is deemed to be transferred based on the discounted cash flow value of the subsidiary before and after the restructuring. The limitation does not apply where the annual net interest burden is less than EUR 3 million, where the taxpayer is not part of a group of companies or where it can demonstrate that the equity ratio of the German borrower is at least equal to the worldwide group's equity ratio there is a tolerance of two percentage points.
Excess interest may be carried forward indefinitely however, change-in-ownership rules apply. Disallowed interest expense will not trigger withholding tax. Passive income includes income from the rental of real estate, income from licensing or income from the lending of capital.
Credit for tax paid on attributed income can be granted upon application of the taxpayer. A taxpayer generally must disclose all facts relevant for taxation, especially regarding transactions with foreign related parties.
Double Tax Agreements Germany has exchange of information relationships with jurisdictions through: However, it may not exceed 12 months. The first fiscal year may be shortened curtailed fiscal year.
As a trading company, the GmbH is obliged to keep trading books. It is obliged to draw up a balance sheet annual balance sheet and a profit and loss account at the end of every fiscal year. In addition, the annual financial statements are to be extended by notes with explanations. They must be drawn up in the German language. The annual financial statements are to observe the principles of proper accounting and give a picture of the asset, finance and profit situation corresponding to the facts.
The directives are also applicable to trading companies general partnerships, oHG and limited commercial partnerships KGin which no natural entity is a personally liable partner. Audit Auditing of the annual financial statements is mandatory for large and medium-sized LLCs. The auditors have an extensive right to information and insight into books, cash in hand, stocks of securities and goods etc.
They are obliged to unconditional confidentiality. They are to make a neutral written audit report on their auditing. If no objections are to be raised, the auditors are to give an audit certificate. Annual Return There is a statutory requirement for GmbHs to prepare and file annual return. Annual return is publicly accessible. Tax Returns The tax year is 12 months or the period for which accounts are prepared, if shorter. The tax return generally must be filed by 31 May of the year following the tax year; extension of the filing deadline to 31 December of the year following the tax year typically is granted if a tax advisor is involved.
Quarterly advance payments of corporate tax are due in March, June, September and December. Findings in tax audits generally do not result in penalties.
Nordic Construction Company Baumanagement, E. Both sums were significantly reduced in This draft failed due to re-elections and heavy criticism from both scholars and practitioners. The following reform schedule was often delayed.
The first draft from ,20 followed by an official government draft in May ,21 was considered by the Bundesrat the representatives of the German state governments in legislative proceedings in July ,22 and then forwarded to parliamentary proceedings. After a first plenary discussion in Septemberthe Bundestag German parliament delegated the draft as is customary to parliamentary committees. The final plenary discussion and vote in the Bundestag took place on 26 June Unless something entirely unexpected happens, it will enter into force in November.
While US scholars are generally ignored by both legislators and judges, German professors tend to find the ears of elected representatives.
Of Traditions and Change The drafters of the reform bill faced a tough challenge: Opinions were wide and varied, comparable to the situation during the reform of the civil code Buergerliches Gesetzbuch in The goal of balancing these conflicting interests, to uphold the established principles, while introducing more or less radical changes, is evident in every single line of the draft.
While the most significant changes affect the financial structure and will be discussed in detail below, many other wellestablished features have been abolished and replaced by rules leaning in the opposite direction.
Formalities — Especially Formation Formation of a GmbH at least occasionally proves to be a long and tedious process. Mangelhafte Gesetzgebung be GmbH nicht hinnehmbar, available at http: Before registration, these documents require full review by the court keeping the register28 before registration may occur. This could take up to half a year in complex cases. In a modern society the requirement for limited liability might arise very early in business operations.
A radical change would eliminate the necessity for notarization and instead rely on online-registration. The government draft, however, did not dare to go that far.
As a compromise it provided model articles which were to be agreed upon in written form, but required verification of the identity of the signatories by a notary public.
Still, even that change did not pass scrutiny by the parliamentary committee. The final reform bill requires the notary to fully notarize the agreement i. Two simplifications passed parliamentary proceedings, however: Under the new law, no review of public licenses is necessary,31 and the review of asset provision by shareholders is limited to cases which appear suspicious to a reasonable person.
Some acceleration may also be attributed to the introduction of electronic registers in 28 In fact, a proposal shifting the burden of review upon the notaries was clearly declined at the meeting of legal professionals Deutscher Juristentag.
Still, a review with regards to form as well as to substance remains necessary, as does the involvement of a notary public. Thus, even though some requirements have been eased, formation of a GmbH is not as easy as formation of a corporation in most U. The costs of formation were also slightly reduced.
Since the traditional requirement to publish the registration in newspapers will finally be abandoned inno further costs apply. Formation within a day or less is still factually impossible. L 13 as regards disclosure requirements in respect of certain types of companies.
In the GmbH, on the other hand, share certificates may not be issued, but there is no share register in the traditional sense either. Even though that list is available online46 to anyone willing to pay 4.
Under the new law, only shareholders on the official list are recognized as possessing rights. This once again transfers an idea from the AG to the GmbH. Finally, the transfer of shares has been improved. Under both previous and reformed law, a notary public is required to create an obligation to transfer shares and to perform that transfer.
However, reliance is only considered reasonable if the shareholder list was incorrect for at least three years before the transactions, or if the erroneous list is somehow attributable to the true owner.
Finally, it is also possible to file an objection in advance to prevent a loss of rights.
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Internal Organization of the GmbH Matters of internal organization are left largely unchanged. This is easy to explain: Furthermore, the shareholders may exercise direct control over the management, as well as discharge them without cause.
Moving to a Better Place Finally, and perhaps most importantly, the reform bill seeks to open the GmbH to off-shore operations. The MoMiG eliminated these rules which were only added in and thereby separated the corporate seat from the place of registration. Getting Ready For Competition, available at http: Understanding the Fixed Capital System One of the most fundamental ideas in German corporate law is that unlike partnerships, corporations require 1 certain minimum funds, 2 to be provided in full by the incorporators, 3 with certain limits on distributions to the shareholders.
If these requirements are met, neither shareholders nor directors will generally be held liable for the debt of the corporation. Even under the old law, the directors had a duty to file for bankruptcy if the company was unable to meet its obligations, or its debts exceeded the available assets. If the directors do not act immediately they will become liable for any losses caused thereby. This system was codified on a European level in the second Company Law Directive for public corporations, while EU member states remain free to implement their own system of creditor protection for privately held businesses.
It might be useful to compare the German capital protection system to the system implemented in the corporate laws of most U. Some states74 have even abolished that last remainder of the fixed capital system. The payment of the shares by the founders, or later shareholders, is guaranteed in only a very limited manner. For shares with par value, any distribution below that value is prohibited.
The final requirement, the limitations on distribution to the shareholders, seems to present the largest differences. Unlike the German static system, most states base their limitations on an in solvency test — i.
Some states add a balance surplus test which is more comparable to the German system: California, on the other hand, follows a different limitation on distribution. Distributions may only be made out of retained earnings sect. It is noteworthy that the capital-system implemented for the GmbH differs in a number of important ways from the law for public corporations. The GmbH requires a lower minimum capital to be raised, which is half the amount necessary for a public corporation AG.
Directors are liable to the company and not to third parties or shareholders for breaches of their duties of care and duty of loyalty. Shareholders are liable to the GmbH if they do not pay the par value of their share82 or if they receive distributions causing the capital to drop below the stated 77 See Sect.
Furthermore, the other shareholders even if they were in good faith are liable according to Sect. If neither the director nor the recipient are able to return the withdrawn funds, all other shareholders will be held liable.
Similarly, circumventions of the required formalities for contributions in kind including an express agreement in the articles which will be published by the register and a report by the shareholders regarding the value of the item, which are all subject to full review by the courts is subject to nullity of the whole transaction. If a director continues to conduct business even though there is either an excess of debts over assets or the company is unable to pay its debts i.
However, even today, personal liability of shareholders or directors is an extreme exception under German law. The Reform All three elements of the fixed capital system were changed considerably under the reform bill. In addition, responsibility of management was strengthened by requiring higher qualifications and stricter liability rules.
The amount of 25, Reichsmark required in was sufficient to buy a luxury home or employ ten teachers for a whole year. The change was only intended to remove psychological disincentives. Strangely enough, the change that started it all does not appear in the final reform act, causing some critics to announce the failure of the whole reform project. However, keeping the amount the same is reasonable in light of the fact that these assets can be freely used in business-operations.
Cologne, Otto Schmidt There are indeed a few caveats: These may not be distributed to the shareholders, but instead will be accumulated. It is noteworthy that there are no specific liability rules or other precautions involved. By giving entrepreneurs a choice between the two forms and allowing a UG to eventually grow into a GmbH, German corporate law opens itself to a future freed of a minimum capital.
Contributions in kind require a special report regarding their value and must be published.
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Finally, those requirements are subject to full review by the courts before registration. This can lead to a considerable delay. If any assets are lost e. The reform bill will not completely eliminate those slowdowns in the registrationprocess; however, some simplifications were enforced: The guarantees required for the formation of single-person entities was abolished,98 insofar that the requirements were lowered to the minimum level allowed for by the Twelfth Directive.
A new rule allows for the immediate return of assets provided to the GmbH, as long as there is a legally and economically valid claim for their return. The actual form of assets is irrelevant as long as the GmbH receives a benefit of the agreed-upon value.
A claim is sufficient, as long as it is enforceable in the full amount. The idea that contributions in kind are an exception which have to be agreed upon, evaluated, published, and reviewed is preserved. As long as there is a valid counterclaim or a corporate group as defined by German Law, a director may distribute assets back to the shareholder. This allows the entire process to be cost neutral in theory. Nevertheless, the German Federal Supreme Court questioned such actions on the basis of the general prohibition of distribution to shareholders including the parent company or related persons if they lower the total amount of assets below the sum of the stated capital and obligations.
While the traditional capital maintenance system was only concerned with numbers on the balance sheet, the amended law also takes liquidity into consideration. If it is possible to return assets to shareholders as long as a valid claim remains, the whole process of raising and maintaining capital becomes merely an unnecessary formality. What happens behind the curtains of the seemingly intact traditional system is in fact the acceptance of capital provision by mere guarantee.
Put in simple words: As long as a shareholder is actually able to provide funds, his word should be deemed sufficient; and the shareholder will remain liable for and be able to provide the promised amount to the company.