How to set up a company

Beyond a doubt, Germany has always been and still is a most promising economic environment. As one of the world´s largest economies smacked in the middle of the new Europe and as the main engine of the EU´s single market Germany provides a huge and prosperous domestic market; a highly trained work force and an exemplary infrastructure. After having carried out some preliminary surveillance work about the feasibilty of the project and after having decided to realize ones business plans in Germany the first legal questions quickly arise ...

Setting up a company

The thing to start with would be to found a legal entity. The most common corporate structure in Germany is the GmbH (limited liability company). The procedure for setting up as a GmbH is less lumbered with regulations than it is with many other countries, principally those operating under the scope of common law jurisdictions. The drafting of the corporate charter can be framed in relatively simple general language, without any need for lengthy purpose clauses defining all possible corporate activities. There are no nationality requirements for shareholders or company heads and no compulsory boards.

At present the minimum capital is 25.000,00 EURO. A quarter of the nominal capital but at least 12.500,00 € has to be paid in at the time when the company is founded and before the application for the entry in the commercial registry is filed. If the GmbH has only one partner/ shareholder who shall also act as director he will have to provide a security for the outstanding residual amount. According to a bill which shall enter into force in August 2008 the capital requirement shall be reduced to 10.000,00 EURO. Moreover, it is planned to introduce a special type of the GmbH operating with a capital of only 1,00 EURO at the beginning. However, the partners of such company shall be obliged to invest a share of the future profits in the company´s capital reserves until the statuary minimum capital is reached.

By now, the company agreement is subject to a notarial recording. The notary manages for the partners also the application for the registration of the company in the Commercial Register. In the future, it is planned to abolish the requirement of the notarial recording if the partners choose a standard for their articles of association provided by the law.

GmbHs have to maintain an adequate and orderly accounting (double entry book keeping) irrespective of their size. Furthermore they have to prepare annual statements consisting of a balance sheet and a an income and loss statement at least.

Taxation of the GmbH

The German government offers a variety of tax advantages as well as funding supports to starting businesses.

The GmbH is liable to corporate income tax including the solidarity surcharge and to business income tax. The corporation tax rate has been reduced from 25 % at present to 15 % in order to realize the main policy of the government to reduce the tax burden for corporations to 30 % and less.

If profits of the company are paid out to the shareholders such payments are liable to capital gains taxes which however can be set off against the final income tax debt of the shareholder arising of this source. As of 01.01.2009 the half-income taxation system will be replaced by a final withholding tax and a partial income system if the profits are kept in the GmbH. Under the present half-income system, an individual shareholder is entitled to a dividends-received exclusion from taxable income in an amount of 50% of the gross amount paid. Foreign shareholders/ partners have to observe the taxation rules as stipulated in the double taxation agreements between Germany and their respective home country. As of 2009, withholding tax rate will be 25 % plus solidarity surcharge.

If the GmbH incurs losses from its operations its shareholders/ partners cannot set off such losses with their income resulting from other sources. As a self-contained legal entity the GmbH´s taxation is independent of the taxation of its shareholders. Although the losses are locked in the GmbH it is possible to carry such losses further or backwards which may reduce the tax burden of the GmbH in earlier or later tax assessment periods.

Labour relations

A foreign employer will have to observe that labour contracts had better concluded in writing. This also applies to notices of termination of a work contract. Employees benefit from several rights which cannot be deviated from by mutual agreement to their disadvantage, e.g. in regard to the vacation which are stipulated in the Federal Vacation Act.

Employers are required to pay half of their workers´ health, unemployment, pension and old-age care insurance. They also have to pay for the statutory accident insurance. Moreover, he is responsible that his and the employee´s share of the insurance contributions are paid to the Employers` Liability Insurance Association and health insurance fund that is in charge for collecting the contributions for all other insurances.

Report to public authorities

Each business must be reported to the local office of trade and industry. It will inform the tax office immediately which will send a questionnaire to the owner of the business in order to acquire data which are neccessary for the taxation. The questions concern gereral information such as the type of business, its address, banking data and so on but also data which are important for the determination whether the business is liable to VAT due to ist size or whether the tax office will assess advance payments in regard to the income taxes. If cross border business is planned the business owner can apply for a trade ID. The questionnaire has to be filled in and sent back to the tax office within a month.

top