Synopsis
Germany is situated in the centre of Europe with excellent connections throughout the world. After the horrors of two wars it became the leading economy of Europe and is fully integrated into the EC and has great relations with all neighbouring countries. Germany is a parliamentary democracy with elections held every four years and governed by the strongest party which nominates the Chancellor as the head of the Government.
Because of the fact that Germany is a federation, the 16 states of which it comprises have their own legislation and Government and some also have their specific own history so that investors have to plan in advance where to go to Germany. For historic reasons, the cities have also a strong and partly independent position according to the role they played in medieval times.
Germany is a co-founder of the European Union and also of the EURO-zone. It is a party to the Schengen treaty like most other mainland European countries so there are no border controls between Germany and most of its neighbours.
USING GERMAN COMPANIES FOR TAX PLANNING
Changes were introduced to the corporation tax system on 31st December 2001 which included a clause in the German corporation tax code which allows Germany to be used as a tax haven in international tax planning structures. The former tax system was based on the idea that the shareholder should only be taxed on his personal rate, so the tax levied on the corporation was treated like a withholding tax giving a tax credit to the receiver of dividends.
The new corporation tax system has changed this so as to tax like most other tax systems in the EU (harmonization of the legal provisions within the EU was the main reason for the change) so that the income of the corporation is taxed now at a lower rate and the dividends received by the shareholder are also taxed at a lower rate without any tax credits. This means that opposed to the situation with the old system, all holding structures would be discriminated as there is now no crediting of the corporation tax paid at a lower stage. To avoid this obvious double, triple or more taxation of holding structures the legislation was obliged to leave dividend income within a holding structure taxfree. Only the revenues and earnings of the basic company will be taxed as usual while all dividends paid to the shareholding companies, regardless of their number, are no longer taxed.
Section 8b of chapter 1 of the German corporation tax code states:
Earnings according to section 20 chapter 1 numbers 1, 2, 9, 10 personal income tax code will not be regarded within the determination of the income.
Section 20, chapter 1, number 1 of the personal income tax code relates to all kinds of dividends.
There is no distinction between dividends received from other German corporations or from foreign companies so dividends of worldwide origin will be received by a German holding company tax free. Only banks and financial institutions which receive a lot of dividend income by quickly traded loans or shares are not allowed to benefit from this grant (section 8b chapter 7 of the corporation tax code).
There is an exemption which was brought into the law to give the local communities another source of income. Where there is a holding less than 10% of the shares the dividends paid to the holding company will be charged a municipal tax ("Gewerbesteuer") ranging between 12 to 18% depending on the community where the company is registered.
The German tax department has attempted to expand this legal exemption and also the forementioned section 8b chapter 7 of the corporation tax code by existing and expected rulings to make all dividends taxable if the holding company holds less than 10% of the shares or sells them within a period of one year after purchase. Notwithstanding the illegality of this opinion we would recommend a minimum holding of not less than 25% shares of the basic entity - according to the international double tax treaty exemption will avoid future problems.
The holding structure also brings advantages in the form of capital gains tax savings. Section 8b of chapter 2 of the German corporation tax code stipulates:
When determining income, profits resulting from the sale of shares of a corporation or a personal company will not be regarded.
If the shareholder of the German GmbH is as a natural person tax resident in Germany, all distributed dividends would be taxed at his personal rate. A withholding tax on the dividends would be credited automatically. However if the shareholder of the German GmbH is not tax resident in Germany, regardless of whether it is a natural or a juridical person, a withholding tax of 20% would be levied on these dividends paid outside Germany (section 43, chapter 1, number 1 personal income tax code). There are though some exemptions to this rule:
- Where payment is being made to a country which has a double tax treaty with Germany, the withholding tax is usually reduced to a rate of 15% (or in some cases to 10% or even 5%);
- Using a company domiciled in a EU member state as the shareholder of the German holding company would prevent the imposition of withholding taxes as long as the mother company holds more than 25% of the shares of the German structure (in some cases 10% would be enough - EU directive 90/435 transformed into German law by section 43b personal income code).
The German company must apply for the foresaid reduction or for the non-payment of the withholding tax to a special division of the German Tax department which will check each case thoroughly (section 50d, chapter 2 of the personal income code). Where it is established that the persons who benefit from the EU shareholding company would not get this exemption if they were shareholders of the German company directly, the request for exemption from the withholding tax would be denied (section 50d, chapter 3 of the personal income code).
For example:
CLIENT DOMICILED AND RESIDENT IN HONG KONG
HOLDING 100% OF A UK LIMITED COMPANY
WHICH IN TURN HOLDS 100% OF A GERMAN GMBH
WHICH HOLDS 100% OF BOTH A
GIBRALTAR COMPANY AND A HONG KONG COMPANY
In these circumstances, the German authorities would look through the UK company to find the HK owner and would then deny relief under the UK/German tax treaty. However if the HK owner of the UK company were to use a Mauritius company to hold the shares in the UK company, the withholding tax could be reduced to 5% by the means of the German/Mauritius double tax treaty. In every case. advice on personal circumstances is essential.
GERMAN COMPANIES
The German GmbH is the most usual form of corporate vehicle. This type of corporate vehicle is similar in form to the UK limited liability company and therefore must impose restrictions on share transfers. GmbH's are registered and any change in their structure must be made by a notary public who is obliged by law to send all documentation to the tax authorities. For greater confidentiality, an AG can be used - these are also founded by a notary public and the initial papers are registered but most of the further changes, especially transfers of shares can be made by a private contract. However AGs do bring additional costs and bureaucracy due to the need to have a 3-man supervisory board.
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Last reviewed: Wednesday, May 26, 2010
Whilst every effort has been made to ensure that the details contained herein are correct and up-to-date, it does not constitute legal or other professional advice. We do not accept any responsibility, legal or otherwise, for any error or omission.
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