Company Formation In Germany – Understanding The Various Aspects Of Taxation At Shareholder Level

Germany has become a preferred destination for entrepreneurs looking to set up a business in Europe. Like most other nations, the country also has its unique taxation laws, which the individuals intent on forming a GmbH in Germany need to abide by.  The taxation is done mainly at two levels, namely the company level and the shareholder level. While most overseas entrepreneurs are aware of the former level taxation, they possess little or no knowledge about the latter one. This problem can be overcome by learning about the various aspects of taxation at shareholder level as explained below.

Taxation On Profit Distribution

The profits earned by a GmbH are distributed amongst its shareholders who are liable to pay income tax for the same as it represents income from capital. In such cases, a flat rate, withholding the tax rate is applicable, according to which the profit distributions from shares in the company being held as personal assets by the shareholders are subject to a flat tax rate of 25%. In case of shares being held as working capital, the partial income method of taxation is applied. According to this method, 60% of the profit distribution is to be included in the tax assessment basis, while the remaining 40% is exempted from taxation.

Taxation Of Salaries Of Managing Directors

Appointing managing directors is a common practice while setting up a GmbH in Germany, who in most cases are chosen from amongst the shareholders. These shareholders receive a salary, which is often referred to as operating expenses and is deducted from their share of profit. Thus it is only natural that these managing directors are required to pay taxes on the salary received since it represents income received through employment. The taxes applicable depend on the salary received by the managing directors and are subject to the existing rates levid on amounts falling within that corresponding slab. The important thing to remember here is that due to the tax deductions on salary payments, the transfer of any such assets to the shareholders by the GmbH is not considered to be in tandem with profit distributions and hence is not subject to trade tax.

VAT Liability

In addition to the taxes applicable to the profits made by it, a GmbH also needs to consider VAT liability that it is subjected to. Given that the purpose of GmbH company formation Germany is to render specific services and offer goods, a GmbH has to shoulder the VAT liability,which is currently set a 19%. In case of certain services and goods provided by the company, it is liable to pay a reduced VAT of only 7%. Similarly, services and goods distributed for community upliftment along with some export distributions are completely exempted from VAT. However, it is advisable for the GmbH shareholders to verify such goods from the local authorities to avoid penalties.