Traditionally Germany’s economy is based on small and medium-sized enterprises. These companies employ over 60% of the German work force. And these companies have a fair share in Germany’s position as second biggest exporting country in the world. Enterprises of other countries who want to establish business relations with German enterprises should not only concentrate on the big multinational enterprises. In certain industry sectors medium-sized companies can be the better choice to find a suitable business partner.
Large German companies have the legal form of an Aktiengesellschaft (AG), the German equivalent to an Incorporation in the Anglo-American legal systems. Small and medium sized businesses often choose the form of a Gesellschaft mit beschränkter Haftung (GmbH), equivalent to a Limited liability company. Both legal forms are corporations with own legal identity.
But a lot of small and medium sized enterprises in Germany are legally organised in the form of a trading partnership (Personenhandelsgesellschaft). This very often confuses business partners especially from Anglo-Saxon countries since there partnerships are seldom used for business purposes. The translation of the term Personenhandelsgesellschaft is a little bit misleading. A better translation would be not-incorporated trading company with partners as shareholders.
The basic forms of partnerships are the offene Handelsgesellschaft (oHG) and the Kommanditgesellschaft (KG). These legal forms require the unlimited liability of all partners (oHG) or of at least one partner (KG). Because of the unlimited liability of partners these legal forms are seldom used.
But often used is a GmbH & Co. KG. This is a combination of a GmbH and a KG. The KG is the operating unit. The GmbH’s only purpose is to be unlimited liable partner of the KG. Shareholders of GmbH and KG are in general the same persons.
With this legal structure owners or investors can avoid unlimited liability but also use the less strict legal framework of partnerships.
The tax regime for corporations and partnerships is different.
Corporations (GmbH and AG) are subject to corporation income tax (Körperschaftsteuer / tax rate: 15%) and solidarity surplus charge (Solidaritätszuschlag / tax rate: 5.5% of corporation tax) and the municipal business tax. The combined tax rate on profits is between 28% and 32%. Dividends derived by individuals are taxed in general at a rate of 25% plus solidarity surplus charge. 95% of dividends to corporations are tax exempt. The latter applies also for foreign corporations.
Partnerships (oHG or KG) are treated for tax purposes as transparent entities. Consequently profits of partnerships are taxed as business income by individuals. Individual income is imposed at progressive income tax rates. Maximum income tax rate is 45% plus solidarity surplus charge. If partners are corporations their profit shares are taxed as regular income. The partnership itself is subject to business tax.
Business tax (Gewerbesteuer) is imposed by the municipalities. The taxable income for business tax is generally determined by the taxable income with certain adjustments. Municipalities can fix tax rates individually. This results in higher tax burdens in the big German cities and lower rates in surrounding areas. Sometime it might be suitable to situate own business activities outside of the big cities. The business tax rates vary from 13% to 17%.
Germany does not allow free choice of the tax regime for corporations and partnerships such as the US check-the-box-treatment.
|Limited liability company
||Gesellschaft mit beschränkter Haftung (GmbH)
||offene Handelsgesellschaft (oHG)
|(Partly) limited partnership
||GmbH & Co. KG
|Individual income tax
|Corporation income tax
|Solidarity surplus charge
Author: Peter Scheller, Somann & Scheller, www.somannscheller.de