Tax & Legal Framework in Germany

Transcription

1 Chris Schmidt - istockphoto Tax & Legal Framework in Germany Heiko Stumpf Manager Tax & Legal Services Germany Trade & Invest

2 Overview I. Germany as Business Location for Korean Companies II. Company Forms and Company Establishment III. Company Taxation in Germany IV. Incentives in Germany V. Employment and Social Insurance System VI. Residence Law

3 I. Germany as Business Location Germany is the geographic center and largest market of Europe. Share of Total GDP and Population in the European Union (2010) GDP (in EUR bn) Share of Total GDP (EU 27) Population in m Share of Total Population (EU 27) Germany 2,477 20% 82 16% France 1,933 16% 65 13% UK 1,697 14% 62 12% Spain 1,063 9% 46 9% Netherlands 588 5% 17 3% Poland 354 3% 38 8% Czech Republic 149 1% 11 2% Slovak Republic 66 1% 5 1% USA 10, Japan 4, EU 27 12, EU member states Eurozone 9, Non-EU member states Note: EU-27 s center: 42 km east of Frankfurt/Main in Meerholz, Hessen, Source: Eurostat 2011,, US Census Bureau 2011, Japanese Statistics Bureau 2011

4 Overview I. Germany as Business Location for Japanese Companies II. Company Forms and Company Establishment III. Company Taxation in Germany IV. Incentives in Germany V. Employment and Social Insurance System VI. Residence Law

5 II. Company Forms and Establishment There are several ways to take up commercial activities in Germany: German Market Subsidiary with separate legal personality Autonomous Branch Office Dependent Branch Office Different legal forms are available (i.e. GmbH / UG) No restriction for foreigners to found companies. No separate legal entity but fully part of the foreign company. Constitution governed by foreign law. No restrictions for foreigners to open a branch office.

6 II. Company Forms and Establishment Characteristics of the dependent branch office: Business objective Focus on maintaining contacts and initiating business in Germany. Support and implementation tasks without any own business discretion. Suitable for Internal organization Foreign companies wanting to enter the market without having to bring up new share capital. No separate legal personality; cannot use a name affix. Displays no autonomy from the foreign company regarding management and accounting. Invoices are issued in the name of the headquarter. Foreign law may be applicable. Liability Share capital Representative The foreign company is liable under the conditions of its constitution for the debts of the branch office Not necessary; financial support by the foreign company. A domestic representative is required who needs not be based in Germany permanently.

7 II. Company Forms and Establishment A dependent branch office comes into existence upon the commencement of business. Only registration with the trade office is required Decision to set up a branch office Notification of the local trade office Commencement of business Step Specific Activity Costs Decision to set up a dependent branch office Notification of the Local Trade Office Corporate decision of the managing directors of the foreign company to establish a branch office. A dependent branch office must be registered with the local trade office where the domestic representative is located. A domestic address is required. Commencement of business Can be started after registration is completed None Generally no costs accrued EUR 20-40

8 II. Company Forms and Establishment Characteristics of the autonomous branch office: Business objective Suitable for Internal organization Fulfills tasks that exceed mere implementation and support tasks. Has its own business discretion that is limited by the scope of the business objective of the foreign company. Foreign commercial enterprises wanting to enter the market without having to bring up new share capital. No separate legal personality. Can use a name affix (i.e. XYZ Company-Zweigniederlassung Berlin ). Has its own management with executive powers, a separate bank account and accounting as well as independent business assets. Can issue invoices in its own name. Relations with German customers are usually subject to German law. Liability Share capital Representative The foreign company is liable under the conditions of its constitution for the debts of the branch office Own capital resources required but no minimum share capital prescribed. A domestic representative is required who needs not be based in Germany permanently.

9 II. Company Forms and Establishment Setting up an autonomous branch office only takes a few steps: 1-2 weeks Decision to set up a branch office Commercial register application Entry in the Commercial Register Notification of the local trade office Step Specific Activity Costs 1 Decision Corporate decision of the foreign company to establish a branch office. Generally no costs accrued 2 Notary Is required to notarize the signatures of the founders on the application for entry in the commercial register. Should be contacted at an early stage in order to find out what documentation about the foreign company is necessary. Notary fees depend on to the goodwill of the foreign company. EUR can be expected. 3 Entry in the Commercial Register Is required by law but only of declaratory nature. If several autonomous branch offices are set up one commercial register can be chosen as main register for all. Registration: EUR Publication in the Federal Gazette: EUR Notification of the Local Trade Office The autonomous branch offices must be registered with the Local Trade Office at the location of the branch office. A domestic address is required. EUR Total: EUR

10 II. Company forms and establishment Characteristics of the Private Limited Liability Company (GmbH): Type of business Natural or legal persons as well as partnerships may participate in a GmbH. Internal organization The managing director(s) (Geschäftsführer) represent(s) and manage(s) the company. The shareholders general meeting (Gesellschafterversammlung) is sovereign and can issue directions that bind the management. Liability The liability of the shareholders is limited to their contribution (cash or kind). Once the company is registered in the commercial register, only the company itself is liable for its debts with its assets (including the share capital). Minimum share capital Number of shareholders EUR 25,000; at least EUR12,500 in total and ¼ of every share must be contributed at the time of registration. At least one shareholder is required. The GmbH is the most widely used form for corporations as it combines high flexibility in the internal organization with relatively few obligations.

11 II. Company Forms and Establishment Setting up a GmbH / UG only takes a few steps: Ideally done within 1-2 weeks Procurement of capital & partners Drafting of articles of association Notarization of articles of association Payment of share capital into bank account Commercial register application Entry in the Commercial Register Registration with the local trade office Performed in one session by a German notary (unless individually drafted articles of association desired) With the notarized articles of association a bank account can be opened Performed by the notary once a bank statement has been handed in confirming the payment of the share capital The total costs for the establishment of a GmbH amounts to EUR 800 1,000. If a lawyer is engaged to draft the articles of association, higher expenses will occur. There also is the possibility to buy a so called shelf company, which is an already established but completely new GmbH. This allows to set up a GmbH within less than 24 hours.

12 Overview I. Germany as Business Location for Japanese Companies II. Company Forms and Company Establishment III. Company Taxation in Germany IV. Incentives in Germany V. Employment and Social Insurance System VI. Residence Law

13 III. Company Taxation A significantly lower corporate tax burden since 2008 The 2008 reform of German company tax law has reduced the average tax burden for corporations from 38.7 % to 29.8 % Slovak Rep. Poland Czech Rep. Hungary Germany (minimum) Netherlands UK Germany (average) India Spain Canada (Ontario) Italy Belgium France Japan USA (New York) 19.00% 19.00% 19.00% 20.62% % 25.50% % 29.83% % % % 31.40% 33.99% % % 39.62% % 5.00% 10.00% 15.00% 20.00% 25.00% 30.00% 35.00% 40.00% 45.00% 1 National German average. Lower overall tax rates in certain areas are possible, e.g. only 22.83% in certain municipalities. 2 Top corporate income taxation rate incl. local taxes; lower starting rates or other special tax rates available. Example USA: progressive rate for the federal corporate income tax from 15 % to 35 %. 3 A surcharge of 5% is levied on taxable income exceeds INR 1 mio. Source: Federal Ministry of Finance (BMF), GTAI

14 III. Company Taxation Taxation of corporate companies consists of three taxation components: Corporate Income Tax (Körperschaftsteuer) Solidarity Surcharge (Solidaritätszuschlag) Trade Tax (Gewerbesteuer) Tax Liability Corporations (GmbH, AG) Every company or person liable to personal or corporate income tax. All business enterprises (excluding farming and forestry businesses; no freelance professionals) Tax Base Taxable corporate income Corporate income tax Business profits ( taxable income) 1 + certain statutory additions and allowances 2 Tax Rate Flat: 15% (regardless of whether profits are distributed or not) 0.825% all over Germany Solidarity surcharge consists of 5.5% of the corporate income tax rate of 15% (not of the income as such) Trade tax is set by each municipality individually Trade tax must at least be 7% but there is no statutory ceiling Trade tax is therefore differing from city to city

15 III. Company Taxation The overall tax burden of a corporation depends on the municipal multiplier within the trade tax. Minimal Municipal Multiplier Maximal Municipal Multiplier German Average Taxable Corporate Income (EUR) 1,000,000 1,000,000 1,000,000 Trade Tax (3,5% x municipal multiplier) -70,000 (mun. multiplier: 200%) Trade Tax Rate 7% -171,500 (mun. multiplier: 490%) Trade Tax Rate 17.15% -140,000 (mun. multiplier: 400 %) Trade Tax Rate 14% Corporate Income Tax (Tax Rate 15%) -150,000 Corporate Income Tax 15% -150,000 Corporate Income Tax 15% -150,000 Corporate Income Tax 15% Solidarity Surcharge (5,5% of the Corporate Income Tax) -8,250 Solidarity Surcharge 0.825% -8,250 Solidarity Surcharge 0.825% -8,250 Solidarity Surcharge 0.825% Net Income (EUR) 771, , ,700 Overall Tax Burden % % 29.83%

16 III. Company Taxation Korea and Germany have signed a modern Double Taxation Agreement (DTA) to foster trade relations. Subsidiary company (Germany) Dividend payments Parent company (Korea) Dividend payments Shareholder (Korea) Three-tier taxation of corporate income On the subsidiary company level(germany) Mitigation of double taxation according to provisions settled in the DTA Corporate Income Taxation: Corporate Income Tax + Solidarity Surcharge + Trade Tax 29,8% (average) Withholding Tax: When dividends are transferred from the German subsidiary company to the Korean parent company, generally a 25% withholding tax is due. On the corporate parent company (Korea) The current DTA between Korea and Germany reduces the withholding tax to 5%, if the Korean parent company holds at least 25% of the shares of the dividend paying German subsidiary. In all other cases the withholding tax is reduced to 15%. The Korean parent company can then offset the withholding tax paid in Germany against the tax liability in Korea. On the shareholder level (Korea) Foreign Tax Regime: Taxation depends on Korean tax law.

17 Overview I. Germany as Business Location for Japanese Companies II. Company Forms and Company Establishment III. Company Taxation in Germany IV. Incentives in Germany V. Employment and Social Insurance System VI. Residence Law

18 Investment Incentives Package To reduce capital expenditures, Germany offers Investment Grants of up to 50 percent, depending on the region and the company size. Small companies 1 Medium-sized companies 2 Large companies A Region 50% 40% 30% A Region in transition 40% 30% 20% C Region 35% 25% 15% D Region 20% 10% max. EUR 200,000 3 C/D Region 35% / 20% 25% / 10% 15% / max. EUR 200,000 3 The bonus of 20% for a small company and of 10% for a medium-sized enterprise is not granted to large investment projects with eligible investment costs above EUR 50 million. Source: 36th GA Framework Plan Improving the Regional Economic Structure Notes: 1 Includes a bonus of 20%, 2 Includes a bonus of 10%, 3 De-minimis-rule

19 IV. Investment Incentives Package A wide range of incentives is geared towards reducing investment expenditures. Incentives Investment Incentives Package Cash Incentives Interest Reduced Loans Public Guarantees + + Operational Incentives Package Labor-Related Incentives R&D Incentives Investment Grant KfW Loans (National Level) State Recruitment Grants Investment Allowance 1 State Development Bank Loans Combined State/Federal Training Loans Wage Subsidies Silent/Direct Partnership Note: 1 only in Eastern Germany

20 Overview I. Germany as Business Location for Japanese Companies II. Company Forms and Company Establishment III. Company Taxation in Germany IV. Incentives in Germany V. Employment and Social Insurance System VI. Residence Law

21 V. Employment and Social Insurance Germany has the most stable labor costs in Europe. Growth of Labor Costs in Total Economy 1 ( , yr. Average Growth in %) Germany 1.6 France 2.1 Netherlands 3.4 Spain 3.6 UK 4.1 Poland 6.3 Czech Republic 6.8 Slovak Republic 7.7 Hungary Source: Eurostat 2011 Note: Earliest available data for Spain refers to 2007, earliest available data for France refers to 2009, 1) Total Economy includes NACE Rev. 2, B-S

22 V. Employment and Social Insurance Thanks to stable labor relations, German workers rarely go on strike. Working Days Lost Due to Strikes (Yearly Average per 1000 Employees) Source: European countries: Eurostat 2010; USA & Japan: ILO 2010 Note: Data not available for Czech Republic; Data for EU-27, France, Hungary only available until 2007

23 V. Employment and Social Insurance In Germany social security contributions are shared roughly 50/50 by employer and employee. Calculation sample per month Employer s share of social contribution EUR 3, % 7.00% 1.5% 0.975% 1.32% 1 approx. 21% of gross salary Employee s share of social contribution EUR 2, % 20.23% of gross 7.9% ² 1.5% salary 0.975% German Social Security Insurance Components (% of gross salary) Pension Insurance 19.9 % Health Insurance, % ² Unemployment Insurance 3.0 % Payroll accounting pattern Nursing Care Insurance 1.95 % 3 Gross salary = 100% Accident Insurance 1.32% 1 Employer s total labor costs Employee s gross salary 1 Apportionment quota levied for 2010 according to DGUV (the association of workers compensation boards) ²Employee pays an extra 0.9% on health insurance ( 241a SGB V) ³Childless employees pay an extra 0.25 % on top of their nursing care contributions Note: The employer withholds the employee s share of social security contributions from salary and pays it together with his/her own share to health insurance.

24 Labor Costs In terms of indirect labor costs, Germany ranks below the European average. Indirect Labor Costs per 100 EUR Gross Wage (in EUR, 2010) Note: * 2009 data; Indirect labor costs comprise all labor costs other than gross wages and salaries, e.g. social contributions share of the employer, training costs, corporate pension plans; Source: Federal Statistical Office calculations based on Eurostat 2011

25 V. Employment and Social Insurance Korea and Germany have signed a social insurance agreement facilitating the exchange of employees. Seoul Employees are sent to German subsidiary company Pension Fund Health Insurance Nursing Care Unemployment Insurance Accident Insurance The Social Insurance Agreement is applying: Korean employees send to Germany must not become part of the German pension fund if the transfer of the employee does not exceed 24 months. Transferred employees need a certificate of coverage of the Korean social insurance office. German Social Insurance Law is applying: Korean employees must not become part of the German social insurance system if they are send to Germany and the transfer is temporary (initial time restriction in the contract) the employees still have an employment contract with the Korean parent company the employees are paid by the Korean parent company

26 Overview I. Germany as Business Location for Japanese Companies II. Company Forms and Company Establishment III. Company Taxation in Germany IV. Incentives in Germany V. Employment and Social Insurance System VI. Residence Law

27 VI. Residence Law German residence law provides good possibilities for Japanese investors to dispatch Japanese employees to Germany. Residence Regulations Short term business visits of up to 90 days within a period of 6 months Japanese citizens are exempt from any visa requirement. Business travelers can enter Germany with a valid passport only. This also applies for investors coming to Germany for establishing a company. Permanent residence for employed managing directors, senior executives, highly qualified employees, engineers, doctors A permanent residence permit is issued under simplified conditions. As a result, managing directors, senior executives, highly qualified employees, mechanical and electronic engineers and doctors can be dispatched to German subsidiary company without complex residence procedures. The application can be filled both with the German embassy or in Germany directly. Permanent residence for regular employees Regular employees can be permanently dispatched to Germany, if they have special skills that can not be found on the local job market. Personnel exchange Permanent residence for selfemployed investors Japanese employees can be send to Germany within personnel exchange for a period of up to three years. Japanese investors coming to Germany to run a business as self-employed entrepreneur get a residence permit if they provide documents about their investment project such as business plan, financing concept, company profile etc.

28 Contacts Germany Trade and Invest GmbH Chief Executives: Dr. Jürgen Friedrich, Michael Pfeiffer Friedrichstraße Berlin Germany T F Villemombler Str Bonn Germany T F Tax & Legal Services Mr. Heiko Stumpf Manager T F Tax & Legal Services Ms. Christina Schoen Manager T F Germany Trade & Invest GmbH All information provided by Germany Trade & Invest has been put together with the utmost care. However, we assume no liability for the accuracy of the information provided.