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17. June 2021 | separation principle vs. transparency principle Consequences & designs (this article)

12. November 2020 | Founding a company: Which legal form is the right one? – Gbr / KG or GmbH

14. January 2020 | GmbH & Co. KG Taxation: 5 advantages of income tax & business tax

11. November 2018 | Save the loss carry forwards at the GmbH: the new § 8d KStG helps!

8 September 2017 | GmbH & Co. KG Taxation: 5 Benefits of Income Tax & Business Tax

An enterprise may be structured either as a corporation or as a partnership or as a sole proprietorship as an incident of the partnership. In this context, company tax law makes a fundamental distinction between the different legal forms, so that company taxation is therefore dependent on the legal form. Therefore, corporate and income tax stand independently side by side. The main difference is that the principle of transparency applies to partnerships. In the case of limited liability companies, on the other hand, the strict principle of separation applies. The separation principle and the transparency principle are clarified below. In addition, the decisive consequences are presented on the basis of a calculation example and basic designs are considered with which the control load can be reduced.

Founding of GmbH or GmbH & Co. KG? Pay less taxes with the right legal form!

We compare the tax burden of the GmbH with that of the GmbH and Co. KG.

1 Relevant legal forms in the principle of separation and transparency

In order to understand the consequences of separation principle and transparency principle, it is first necessary to work out what partnerships and corporations are. The civil differences of the individual legal forms must also be considered.

1.1. partnerships

The assets of a partnership are to the shareholders for the entire hand (§ 719 BGB). Therefore, partnerships under civil law are regarded as so-called collective partnerships. Although they are not legal persons, they are nevertheless legally competent. Comprehensive hand communities are those in which the property is jointly due to all partners, but the individual cannot dispose of the property alone (§ 719 I BGB). The principle therefore applies: everything belongs to everyone, but nothing belongs to anyone alone. Therefore, even a private creditor of a shareholder cannot resort to the total assets. Furthermore, the insolvency of a shareholder does not affect the total assets. Partnerships are the company civil law (GbR), the open commercial company (OHG), the limited partnership (KG) and the partnership company (PartG). The decisive characteristics of a partnership are the social contract, the joint pursuit of the purpose and the promotion of this purpose through contributions. In addition, the shareholders are liable without restriction with the personal assets (§ 105 I HGB). In the case of partnerships, the principle of transparency applies.

1.2. Corporations

By contrast, corporations are companies with their own legal personality, which consist of one or more members, have share capital divided into shares and can be set up for any purpose permitted by law. They are therefore legal entities governed by civil law and can therefore carry rights and obligations. In principle, corporations can also be regarded as economic associations. The corporations include the Aktiengesellschaft (AG), the Gesellschaft mit beschränkter Haftung (GmbH), the Unternehmergesellschaft (UG), the registered cooperative (eG) and the limited partnership on shares (KGaA).

For corporations, the majority principle applies to decisions to be made within the company. Furthermore, the continued existence of the company is in principle independent of the death or withdrawal of a shareholder. In contrast to the partnership, the corporation is therefore characterized by the fact that its goal is achieved independently of the founders or other persons. In addition, the principle of foreign organization is permitted for corporations (§ 26 BGB, § 76 AktG). It is therefore possible to appoint a third party outside the company to the management body. In the case of partnerships, however, this is not possible. Rather, the principle of self-organization is applied there. Another decisive feature is that the corporation is liable in principle. Only in exceptional cases is the partner of a GmbH personally liable. In the case of limited liability companies, the principle of separation shall apply.

2. Background of the transparency principle and separation principle

In national law, the principle of transparency and separation applies. Profits earned are therefore taxed differently depending on the legal form of the company obtaining them. Partnerships are not subject to income tax or corporate tax. Rather, the profits of partnerships are considered transparent by means of the principle of transparency. For this reason, the profit is distributed among the individual co-entrepreneurs for tax purposes. In this context, § 15 I No. 2 S. 1 EStG, which regulates co-entrepreneurship, is decisive. Consequently, the tax entity in the partnership is the sole proprietor or joint proprietor of a partnership (§ 1 I EStG). The profit is therefore subject to income tax at the shareholder.

The corporation is, on the other hand, within the framework of the legal form-dependent corporate taxation as a legal person tax subject of corporate tax within the meaning of § 1 KStG. This also applies insofar as the corporation is a partner of a partnership. The principle of separation therefore applies here. The result is that the profit of the corporation is first subject to corporate tax and then subject to the shareholder's income tax when it is distributed. The shareholder must therefore be qualified as an investor within the meaning of § 20 I No. 1 EStG.

The result of the transparency principle and separation principle is therefore that in the case of a partnership, the profit is taxed at the shareholders in the year of creation, regardless of whether it was taken or remains in the company. In the case of a corporation, profits are first subject to business tax and corporate tax (plus solidarity surcharge). At the level of shareholders, further taxation takes place only if the profits are distributed.

Nevertheless, it still seems questionable how the principle of transparency and separation came about. The principle of transparency and separation is fundamentally based on the division of natural and legal persons in tax law. Accordingly, the tax subject should be either a natural person, i.e. the sole proprietor or joint proprietor or the legal person. The legislature did not classify the partnership as a tax-legal person. The reason for this is that the partnership is actually not a legal entity. The corporation tax had a supplementary function in view of the history of its introduction. Its purpose was to allow provisional taxation of accrued profits before distribution to shareholders, thus preventing distortions of competition.

2.2 Criticism of separation principle and transparency principle

Currently, many have considerable criticism of the legal form-dependent corporate taxation and the distinction between separation principle and transparency principle. In addition, the differentiation should lead to an unnecessary complication of taxation. Furthermore, the principle of separation also applies to partnerships under civil law (§ 124 HGB). Ultimately, the different legal forms alone do not lead to a different capacity, since the performance indicators, such as profit and loss, are civilly attributed to the company in both cases. Therefore, the shareholders of a partnership have no direct right to the assets of the company. Therefore, the capacity does not oblige a legally dependent corporate taxation.

That is why some are calling for a reform that leads to the uniform taxation of corporate profits. The legislator complied with this and subsequently developed various drafts. In future, these are intended to ensure that limited liability companies and partnerships are treated more equally and that there are no longer serious differences between the legal forms. In order to achieve this, the partnership is to be brought closer and closer to a corporation. It also proposes an option model for partnerships.

3. Examples of the separation principle and transparency principle

In order to better understand the separation and transparency principle within the framework of legally dependent corporate taxation, we consider the following examples:

3.1. Capital company and separation principle

First, we look at the taxation of a corporation. A GmbH generates a profit of 100 units. The general meeting decides to distribute 70 units to the sole shareholder and pays out the 70 units.

Corporate income tax is 15% (§ 23 I KStG). The business tax is also 15% in simplified terms. (The average municipal lifting rate of 428 % is assumed here). The trade tax measure should therefore be multiplied by 438 %.

After taxes, the GmbH thus makes a profit of 70 units.

When distributed to the shareholder, the profit is then still subject to the shareholder’s income tax. For him, the distributed profits are income within the meaning of § 20 I No. 1 EStG. If the withholding tax is applied, the 70 units will be subject to a further capital gains tax of 25 % (§ 32d I EStG). (Alternatively, the partial income procedure and the income tax rate of the shareholder can also apply here (§ 32d II no. 3 lit. a) EStG).

After taxes, the sole shareholder still has 52.50 units. 47,50 units must be used to pay the tax. If a distribution is not decided, the 25 % withholding tax does not apply due to the separation of shareholder and company by the separation principle. So that only 30 units of tax must be applied.

3.2 Partnership and transparency principle

In another case, an OHG generates a profit of 100 units. The shareholders of this partnership are 50 % each of A and B. Both are subject to the maximum tax rate of 45 %.

The profit is initially the business tax. According to § 4 Vb EStG, trade tax is not considered as an operating expense and therefore burdens the shareholders. The profit of the company is distributed to the shareholders on the basis of § 4 Vb EStG without taking into account the trade tax paid, so that 50 units are attributable to them each. On these 50 units, the income tax for each shareholder falls to a percentage of 45%. Therefore, 22,50 units are to be deducted from the profits of the shareholders. It is also important to see that § 35 EStG regulates the possibility of applying business tax. Accordingly, only a maximum of 14% trade tax can be charged. For each shareholder, 7 units are therefore added.

The remaining profit for each shareholder is therefore 27 units. A partnership must therefore pay a tax of 46 units on the basis of the principle of transparency. It is irrelevant whether the shareholders take the profit or whether they are allowed to do so.

4th Conclusion

Under this example, it can be seen that the principle of transparency means that the partnership pays minimally less tax. However, the disadvantage is that the profits are always taxed at a high tax rate, even if it is not actually taken. Although it is possible under § 34a to favor non-extracted profits, so-called thesaurierungsbegünstigung. However, the process is generally complicated.

In the case of a corporation, on the other hand, the principle of separation requires more tax to be paid than in the case of the partnership. In addition, profit is taxed on two levels and thus doubled economically. However, the corporation can be interesting if the distributions are designed in such a way that no withholding tax is incurred. It is possible, for example, to design the profit distribution as a purchase price claim and thus save capital gains tax. In addition, corporate tax, which depends on the legal form, offers a wide range of tax options by cleverly combining the tax characteristics of companies composed of different legal forms.