Taxation of the GmbH

BGB | Civil Code

DTA | Double Taxation Agreement

EStG | Income Tax Act

GmbH | Company with limited liability

GmbHG | Act concerning limited liability companies

KStG | Corporate Tax Act

SEStEG | Law on tax accompanying measures for the introduction of the European

Company and amending further tax legislation

vGA | hidden distribution of profits

VZ | assessment period

Gehrmann, Reinald | GmbH-Liquidation

NWB Infocenter Online

NWB BAAAB-54645, 2023

Gehrmann, Reinald | Disguised profit distribution

NWB Infocenter Online

NWB QAAAA-88453, 2023

Geiermann, Holm | hidden distribution of profits

Tax Office Gold – Haufe Online

artikel, 2023, pp. HI12592 ff.

Keidl, Theodor

Schmatz, Hans

(recommendation) | Handbook of legal practice

Registration right

Edition, Munich 2024

Length, yokes

Sistermann, Christian

Michalski, Lutz

(gr.) | Corporate tax law

Edition, Munich 2018

Commentary on the law concerning limited companies

Liability (GmbH Act), Volume 1: Systematic Representations, §§ 1-34

GmbHG, 4th edition, Munich 2023

Rocco, Julia | GmbH: Pre-founding company

Steuer Office Gold – Haufe Onlineartikel, 2023, p. HI9158172 ff.

Römermann, Volker | Munich Lawyers’ Handbook

GmbH law, 5th edition

Munich 2023

Volkelt, Lothar | GmbH: share purchase, share sale

Rocco, Julia | Steuer Office Gold – Haufe Onlineartikel, 2019, pp. HI9148143 ff.

Weber, Klaus | Legal Dictionary

Edition, Munich 2023

The taxation of the GmbH is characterized by many factors. Here we inform you about the most important aspects starting with the details of the establishment of a GmbH, its tax liability and the determination of profits, the hidden distribution of profits, the tax peculiarities of the sale as well as liquidation as an alternative to the sale.

List of abbreviations

Introduction

The present work deals with the taxation of the GmbH, which is defined from the ground up and commented on various aspects. The aim of this work is to obtain and understand an overview of the taxation possibilities and its regulations of the limited liability company.

Corporate taxation is fundamentally a complex and multifaceted issue that plays a central role in the business reality. Among the various legal forms, the limited liability company occupies an important position in the corporate landscape. The tax aspects associated with the establishment, ongoing business operations and even the possible dissolution of a GmbH must be carefully planned and advised, also in order to use design possibilities.

The taxation of the GmbH is subject to constant change, it is influenced by national legislation and international developments in the economy.

Starting with chapter A., the term GmbH is defined, prerequisites for foundation are presented, and basics for taxation of the GmbH and the shareholders are discussed. Chapter B. deals with the liability of the GmbH and the taxable income according to the Corporate Tax Act.

In the following chapter C., the sale of shareholdings is presented in various variants and its tax effects are listed.

Chapter D. deals with hidden profit distribution. It clarifies the constituent elements and the impact on the taxation of corporations and shareholders.

Furthermore, the following chapter E. deals with taxation in various foundation stages of the GmbH. A distinction is made between the pre-founding stage and the

GmbH-Vorgesellschaft.

In the penultimate chapter F. the topic of liquidation taxation is taken up, which deals with taxation and the tax periods during the liquidation.

The last chapter gives a summary of the topic with the conclusion, sometimes taking up tax advantages of the GmbH.

A. Definition

The limited liability company is a corporation that is also always a commercial company – and thus a merchant. As a rule, the foundation takes place in notarial form according to § 2 (1) GmbHG. Since 01.08.2022, the foundation is also possible online, which means without the presence of the notary.1 Furthermore, the GmbH must have a share capital of at least 25 000 EUR. A start-up with a smaller share capital is possible, (min. 1 EUR) then it must be described as an “entrepreneur company (haftungsbeschränkt)”. The creation of the GmbH also requires deposits of at least one quarter of the nominal amount of each shareholder, in total half of the share capital must be paid up.2 At least one managing director and the shareholders’ meeting act as organs in the GmbH – as a whole of the shareholders. Furthermore, from an employee number of 500, another body, the Supervisory Board, is required. Optional bodies, such as an advisory board, are also possible. The legal representative of the GmbH is the managing director according to § 35 GmbHG. The power of representation cannot be restricted externally. The appointment of the Managing Director shall be made by the Articles of Association or the Shareholder Resolution; if no Managing Director has been appointed, the representation shall be made by:

the shareholders. Each shareholder is to be kept in the list of shareholders, if there is a change, this is to be noted in the list and filed in the commercial register. Only who according to § 16 Abs. 1 GmbHG is registered in the list of shareholders, is deemed to be the owner of the shareholding. Should a shareholder transfer his share in the GmbH, he can thus leave the GmbH. A further reason for elimination would be amortization, or by the existence of an important reason by withdrawal or exclusion from the GmbH.

A dissolution of the entire GmbH is possible for several reasons. On the one hand, due to legal reasons, such as a court judgment or the opening of insolvency proceedings. On the other hand, there are possible grounds for dissolution, which were provided for in the social contract. 3

I. Basis of taxation of GmbH and shareholders

In the context of the taxation of the GmbH, the separation principle must be followed. This means that a distinction must be made between taxation at company level and at shareholder level.4

First, the result of the corporation is subject to taxation. Deviating from the taxation principles of the partnership companies, the inflow principle applies at the shareholder level of the GmbH. This means that the result is only recognised for tax purposes by the shareholders at the time of distribution of profits or other transfers.

Due to the separation principle, it is not possible to offset profits and losses at company and shareholder level. Furthermore, the separation principle results in a double burden of profits at both levels. The double burden is partially mitigated by tax exemptions on profit distributions and capital gains at shareholder level.5

Basically, the GmbH is subject to corporate tax and trade tax with its taxable income. The tax burden is effectively around 22.8 – 47.3%. As a result, corporation tax accounts for 15,8 % and for business tax (depending on the local lift tax rate) 7-31,5 %.6

B. Tax liability and taxable income according to the KStG

I. Tax liability

Since the foundation of the GmbH goes through three different phases, it is necessary to distinguish when the GmbH can be assessed as a corporate tax entity. The taxation of the GmbH in various foundation stages is discussed in more detail in chapter E.

The GmbH is a corporate tax entity acc. § 1 Abs. 1 KStG at the time of the pre-company. A prerequisite here is, after conclusion of the company contract, the entry in the commercial register within a reasonable period.7 Furthermore, a GmbH with management and / or registered office in Germany is valid. § 1 No. 1 KStG is subject to unlimited corporate tax in Germany.8

As a result, you are subject to all income according to § 1 Abs. 2 KStG of corporation tax. If the GmbH receives foreign income, these can be exempted from German taxation on the basis of a double taxation agreement (DTA). If the GmbH already receives foreign income and has paid taxes abroad on it, the crediting of foreign taxes to the German corporate tax can be considered.9

A GmbH is subject to limited corporate tax if the criterion of the management/head office in Germany is omitted, but domestic income is generated.10

II. Taxable income according to KStG

The profit of the GmbH is determined according to the financial year for which it regularly makes financial statements acc. § 7 Abs. 4 p. 1 KStG. Since corporation tax is an annual tax, the basis for determining it should be determined for each calendar year.11

The income from business operations corresponds to am. § 2 Abs. 2 S. 1 No. 1 EStG the profit. The profit is determined in accordance with the principles of §§ 4 para. 1, 5 EStG. To determine the taxable income, the tax result must first be derived from the trade balance result. The derivation must be based on the relevance of the trade balance for the tax balance acc. § 5 Abs. 1 EStG. Accordingly, the annual surplus resulting from commercial law rules is to be used for taxation, unless different recognition rules apply or it has to be deviated from commercial law valuation rules. This means that when the result of the tax balance is spoken of, the profit determined in accordance with commercial law regulations is meant by the changes that must be made by tax law.12 Furthermore, before determining the taxable income, the income must be determined. The income and how this is to be determined is determined according to § 8 Abs. 1 S.1 KStG according to the provisions of the EStG and KStG.

First of all, in the calculation of income, following the annual profit or deficit determined according to tax regulations, changes in assets at the corporate level of the GmbH must be corrected.13

Furthermore, the result is determined by certain expenses or expenses defined by law as non-deductible. to modify income, as well as tax-free income and the resulting expenses. Expenditure expressly declared deductible under the KStG shall be deducted in accordance with § 9 KStG if this has not already been done in the trade balance. If expenses pursuant to § 10 KStG have reduced the profit of the company, this is to be increased again accordingly. When determining income, the supplementary provisions of §§ 9, 10 KStG are to be observed beyond the norms of the EStG.14

Once the income has been determined in compliance with all applicable regulations, it is now decisive for determining the taxable income. After deductions of allowances according to §§ 24, 25 KStG, the income corresponds to the taxable income according to § 7 Abs. 1 KStG. The taxable income forms the basis for the collective income tax.15

C. Change of shareholders and tax implications

In principle, a change of shareholder does not affect the GmbH’s tax situation. This follows on the basis of the principle of separation, which was dealt with in more detail in chapter A. However, a change of shareholder can have consequences for the usability of loss carry forward and interest carry forward and therefore trigger real estate transfer tax.16

I. Sale of holdings in corporations by corporations

If a shareholding of a domestic or foreign corporation is sold, the profit from the sale remains out of recognition in the determination of income acc. § 8b Abs. 2 KStG. This means that in principle such holdings can be sold tax-free, the same applies to a limited company liable to corporate tax, which sells shares in a domestic company. For the tax exemption of capital gains, there are no requirements that require a minimum shareholding ratio or a holding period. However, 5 % of the capital gains are subject to taxation as non-deductible operating expenses acc. § 8b Abs. 3 p. 1 KStG17

In the current application, the operating expense deduction in connection with the participation remains possible. This results in a total tax exemption of 95 %.18

II. Sale of holdings by natural persons

Decisive for the taxation of the sale of shares by a natural person is the participation rate. If the participation of the shareholder is at least 1 % in the last 5 years, the taxation according to m. § 17 Abs. 1 EStG; is taxed at the personal tax rate according to the Parts Income Procedure; 40% are tax-free and 60% are taxable. If the shareholder’s participation has amounted to less than 1% within the last 5 years, the taxation is carried out in accordance with § 20 para. 2 EStG. Consequently, with 25 % withholding tax or on request with the personal tax rate below 25 %. Most often, case 1 (at least 1% participation) occurs in practice. Here an additional allowance can be claimed acc. § 17 Abs. 3 EStG19

III. Sale of holdings in the assets of a partnership

If the sale of the shareholding is a GmbH share from the operating assets of a partnership, the taxation takes place according to the partial income procedure. Accordingly, 40 % of the capital gains are tax-free, 60 % are taxed at the personal tax rate of the partner of the partnership. In addition, 60 % of the expenses of the sale are recognised in taxation.20 In addition, the taxable part of the capital gains is subject to business tax. This taxable share is also acc. § 35 EStG in the amount of 3.8 times the pro rata trade tax measurement amount, maximum in the amount of the trade tax actually payable, to the tariff income tax.21

D. Hidden distribution of profits

A hidden distribution of profits exists when a corporation provides a shareholder or a related party with benefits from the company’s assets without equivalent consideration. Furthermore, the hidden distribution of profits takes place outside the formal distribution of profits.22 It must not reduce income and must be added back outside the balance sheet. The beneficiary shareholder must record the vGA as income from capital assets.

A corresponding taxation of the vGA has been ensured by the annual tax law in 2007. Accordingly, insofar as a tax notice is issued, amended or revoked vis-à-vis the GmbH with regard to the consideration of a vGA, a tax notice vis-à-vis the shareholder to whom the hidden profit distribution is attributable can be revoked, remitted or amended.23

I. Incident

In order to assume that there is a hidden distribution of profits, various factual characteristics must be present. First of all, a vGA requires an impact on the assets of the GmbH. This can be achieved by a concrete asset reduction, but also by preventing an increase in assets. It should be noted here whether a reduction in assets/prevented increase in assets leads to an income correction. This depends on whether a reduction in tax profit has occurred. A contribution to the shareholder, without affecting the balance sheet profit, does not lead to a hidden distribution of profits.24 Furthermore, a vGA must be caused by a company relationship. This means that the asset reduction/prevented asset increase has its real cause in the company relationship if a conscientious manager would not have accepted it in otherwise identical circumstances to an uninvolved third party. In addition, a vGA can also exist if the increase in assets or prevented increase in assets is based on an error of the shareholder-managing director, and this would not have been committed by a conscientious director.25

As already mentioned above, a vGA only exists if the loss of assets or the avoided increase in assets affects the balance sheet assets of the corporation. There is no effect on the assets, the payment of cash to shareholders at the expense of taxed reserves, the free assignment of a right to investment allowance or other tax-free income, as well as the transfer of a shareholding acc. § 8b KStG on a shareholder for remuneration below partial value.26

II. Effects of a hidden distribution of profits on the taxation of corporations and shareholders

First of all, a vGA must check whether the income of the GmbH is to be increased. Because according to § 8 Abs. 3 sentence 2 KStG, no reduction of the income of the GmbH by a vGA may exist.

If there is a reduction, an addition must be made outside the tax balance.27 This necessary correction must be made at the time and in the amount at which the profit and, consequently, income has been reduced by the operation. The half-income procedure (from VZ 2001) or the part-income procedure (from VZ 2009) must be observed. Under the semi-income or partial income procedure, the vGA leads the shareholders to income from capital assets and is subject to the withholding tax. If the shareholders are natural persons, the vGA only has to be taxed at 60%.

If the shareholder is a corporation, the vGA remains with him in principle tax-free. 5 % of the vGA have been considered non-deductible operating expenses for corporations since the 2004 assessment period.

Furthermore, there are effects in the context of trade tax. At the level of the distributor, the VGA is subject to business tax. At the level of the shareholder, a distinction must be made as to who is the recipient of the vGA. If the recipient of the vGA is a corporation, the vGA remains tax-free with it, also in the context of business tax. It should be noted here that tax-free profit shares are to be added to the business income again. The addition does not apply if the corporation holds at least 10 % of the distribution body.28

However, if the recipient is a natural person and holds the shares of the distributing entity in the business assets, the vGA with its taxable part belongs to the business income, while the tax-free part is to be added to the business income.

Just as at the level of the corporation, here again the principle applies that the addition is omitted if the participation in the distributing corporation is at least 10 %.29

E. Taxation in various foundation stages of the GmbH

pursuant to § 11 Abs. 1 GmbHG, the GmbH does not exist before entry into the commercial register. Consequently, taxation only begins with registration. According to § 11 GmbHG, however, it cannot be deduced from the negative definition of the wording that no tax-relevant companies exist in the preliminary stage even before registration. For this reason, a distinction is made between taxation at the pre-establishment stage and taxation of the GmbH-Vorgesellschaft.30

I. Taxation at the pre-establishment stage

The pre-founding company is created in the founding process of a GmbH by express or implied agreement of several persons with the purpose of establishing a GmbH. This agreement is also known as the Pre-Foundation Agreement. If the notarial establishment is to be mandatory, the pre-foundation contract must also be notarized, form freedom is excluded in this case. If the shareholders want to keep open whether you actually want to found a GmbH, this also eliminates the stage of the pre-founding company, there is no willingness to legally bind.

According to the legal status, the pre-foundation company forms a company under civil law acc. §§ 705 ff. BGB, if the agreed purpose is limited to the GmbH founding. If the shareholders have operated a commercial trade before signing the notarial contract, the regulations on the open commercial company according to §§ 105 ff apply. HGB. Consequently, the pre-foundation company is not treated as a capital company for tax purposes; the taxation takes place only at the shareholder level, irrespective of the later registration of the GmbH.31

The pre-foundation company only becomes a tax subject for the company-related taxes if you carry out business-related activities. The pre-foundation company stage ends as soon as the social contract has been notarized.32

II. Taxation of the GmbH Vorgesellschaft

The GmbH-Vorgesellschaft is created upon conclusion of the notarial social contract, but before registration in the commercial register. The Vorgesellschaft is largely subject to the provisions of the GmbHG. There is an identity between the GmbH-Vorgesellschaft and the GmbH registered in the commercial register.33 The case law understands the Vorgesellschaft as a company of its own kind ("sui generis"), so it can be a tax subject.

Despite lack of legal capacity, the company is considered a corporation under tax law if it is entered in the commercial register within a reasonable time after conclusion of the articles of association. The application of the Corporate Tax Act must be carried out accordingly. The assessment period of corporation tax corresponds to the period from the conclusion of the articles of association until the end of the marketing year. The combined result of Vorgesellschaft and the following GmbH is assessed. Through the identity theory, the losses of the pre-company can be compensated with later earned profits of the GmbH. The result of the pre-company in the hull marketing year can also be assessed on its own if the GmbH does not yet exist at the end of the marketing year.

Furthermore, the Vorgesellschaft is an entrepreneur within the meaning of the VAT Act and is subject to the provisions of this Act with its services.34

F. Liquidation taxation

In the event of a dissolution of the GmbH, liquidation, which is also referred to as liquidation, usually takes place. (§ 66 para.) 1 GmbHG In the event of insolvency, no winding-up must be carried out at the dissolution of the GmbH, as the insolvency proceedings replace the liquidation proceedings. At the time of dissolution, liquidation is carried out by the managing directors, who are also referred to as “born liquidators”.

Other persons can be determined in the social contract. A change of the liquidator is also possible by shareholder resolution (“correct liquidators”) 35

I. Tax periods during liquidation

During the liquidation phase, the GmbH remains subject to corporate tax, trade tax, and sales tax.

A final taxation for corporate tax purposes must additionally take place in order to detect the existing hidden reserves and subject them to taxation. Contrary to the principle that in taxation the calendar year or the different marketing year is taxed as a profit determination period, the uniform taxation period of the company tax must be based on the entire winding-up period from the dissolution to the termination of the GmbH.36 The winding-up period is determined by the actual circumstances and must be distinguished from the taxation area. § 11 Abs. 1 S. 2 KStG, the taxation period may not exceed three years. The three-year period is measured by years of the year, not by marketing years.

If the settlement time is shorter, an assessment must be made at the end of the settlement. If the three-year period is insignificantly exceeded, there is no substantial reason for limiting the tax period to three years and the assessment must therefore be carried out for a longer period. If, however, the period is significantly exceeded, the taxation of liquidation is initially free of discretionary errors for the three-year period.37 The taxation periods beginning thereafter are therefore again limited to one year.38

According to the Commercial Code, liquidators have to draw up a balance sheet each year of the winding-up period, while according to the tax laws, a balance sheet has to be drawn up only at the end of each taxation period.

The above special scheme applies only to corporate tax, not to business tax. In the case of business tax, the business income of the entire settlement period is to be distributed according to calendar months among the individual assessment periods.39

II. Taxation during liquidation

For the determination of the liquidation profit, the final liquidation assets shall be compared with the initial assets. The final assets must be reduced by tax-free capital gains received during the tax period and the initial assets must be reduced by the profit of the previous marketing year, which was distributed during the liquidation period. If the final assets consist of tangible assets and intangible assets, the common value shall be recognised. An original goodwill should not be taken into account. Allowed discounts to the shareholders of the GmbH are to be included in the liquidation rates during the winding up of the liquidation assets. Moreover, the general rules governing the determination of liquidation assets apply.

Hidden or open profit distributions can no longer be made for periods after dissolution.

If the assets of the GmbH are distributed during the liquidation, then the corporation tax was consequently reduced or increased before the entry into force of the new regulation on the treatment of the corporate tax credit by SEStEG by the amount which would have resulted therefrom under §§ 37-38 of the KStG if the assets had been considered as used for a distribution at the time of distribution. If this was the case, the company tax could possibly be re-taxed.

If the dissolved GmbH is an organ company, the profit achieved in the liquidation period is no longer subject to the contractual profit transfer obligation and must therefore be taxed by the GmbH itself.40

Not only the corporate income tax is subject to the liquidation profit, but the entire income generated during the winding-up is included in the taxation. Consequently, deductible losses are to be reduced pursuant to § 10d EStG and non-deductible expenses are to be added to the liquidation profit.

The corporate tax liability ends with the actual end of the distribution of the final settlement assets.

The payment of liquidation installments to the shareholders of the GmbH is treated, under the semi-income procedure, either as a non-taxable capital repayment or as a taxable distribution. In this context, distributions are grants, insofar as profit that can be distributed is used in the payment, or a part of the nominal capital is used for the payment, which is used as a special ID according to § 28 para. 1 S. 3 KStG is shown as a conversion of reserves arising share capital.

Capital repayment (disbursement of liquidation instalments) is only possible if amounts from the tax deposit account are used for this purpose.41

Conclusion

The aim of this work was to obtain an overview of the taxation of the GmbH and to consider it in full, taking into account various aspects. By considering the basics of the GmbH, beyond the tax liability and the taxable income, further aspects of the taxation of the GmbH were dealt with, such as the sale of shares and its tax effects. Furthermore, it was about the treatment of hidden profit distributions, various founding stages of the GmbH and its tax treatment. Finally, the topic was closed with the liquidation taxation.

In addition, this work provides an overview of various tax benefits that have been presented neutrally – without critical consideration. This concerned, for example, the tax rate for corporations, which is taken up in Chapter A. I. It is often lower than the individual income tax rate of natural persons. It was also about the sale of shareholdings; If a corporation sells shares to another corporation, this is generally tax-free. In addition, Chapter E. dealt with taxation in various foundation stages of the GmbH. Here it is necessary to distinguish whether the GmbH has already concluded a notarial partnership agreement or not. If the contract has already been concluded, the GmbH is at the pre-company stage and is liable for corporate tax in principle – taking into account further requirements. The last topic, the liquidation taxation, rounds off the housework on the subject of taxation of the GmbH.

Overall, the GmbH offers a number of tax advantages, which makes it a popular legal form for companies. The combination of limitation of liability and tax benefits makes the GmbH a strong choice for entrepreneurs who want a stable and tax-advantageous company construct.

In summary, this housework provides an overview of the taxation of the GmbH and highlights the complexity and variety of tax aspects that must be taken into account by the corporation and its shareholders in connection with this legal form. It illustrates the importance of careful tax planning and consulting for limited liability companies in order to minimize tax risks and to use design possibilities.