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Germany – Business and Taxation Guide

Business and Taxation

Guide to

Germany

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Preface This guide was prepared by Falk GmbH & Co. KG in 2011. Here is a complete list of Praxity participating firms in Germany: Falk GmbH & Co. KG Contact: Gerhard Meyer ([email protected]) Website: www.falk-co.de FIDES Treuhand GmbH & Co. KG Contact: Dr. Christoph Löffler ([email protected]) Website: www.fides-treuhand.de Mazars GmbH Contact: Uwe Wolf ([email protected]) Website: www.mazars.de

© Praxity 2011 This guide is intended as a general guide only and should not be acted upon without further advice.

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Contents Page 1. General information 5

1.1 Opportunities and possible obstacles for foreign investors 1.2 Area and population 1.3 Government and law 1.4 Key economic indicators 1.5 Financial status 1.6 Currency

2. Regulation of foreign investment 8 3. Government incentives 9

3.1 Cash grants 3.2 Interest-reduced loans 3.3 Research & Development project incentives

4. Business organisations available to foreigners 11 4.1 Joint Stock Corporation (AG) 4.2 European Company (SE) 4.3 Limited Liability Company (GmbH) 4.4 Partnership (OHG or KG) 4.5 Limited Liability Partnership (GmbH & Co.KG) 4.6 Sole proprietorship 4.7 Permanent establishment or branch 4.8 Joint venture 4.9 Silent partnership 4.10 Commercial register

5. Setting up and running business organisations 17 5.1 Business environments 5.2 Permanent establishment or branch 5.3 Work and residency permits 5.4 Labour law 5.5 Acquisition of German enterprises

6. Corporate taxes and social charges 21 6.1 General information 6.2 Domestic corporations and corporate income tax 6.3 Calculating taxable profit 6.4 Service charges and inter-company transactions 6.5 Losses 6.6 Foreign income 6.7 Inter-company dividends 6.8 Group taxation 6.9 Taxation of non-resident corporation 6.10 Taxation for a branch of a foreign corporation 6.11 Trade tax

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6.12 Dates for tax declarations, tax payments and refunds 6.13 Social security contributions

7. Personal taxation 31 7.1 Income tax 7.2 Personal income tax rates 7.3 Assessment and filing 7.4 Taxation of non-residents 7.5 Inheritance and gift tax

8. Double taxation agreements 36 9. Sales tax – Value Added Tax 38

9.1 VAT rate 9.2 Input VAT deduction 9.3 International VAT considerations

10. Portfolio investment for foreigners 40 11. Trusts 41 12. Practical information 42

12.1 Transport 12.2 Language 12.3 Time relative to Greenwich Mean Time (GMT) 12.4 Business hours 12.5 Public holidays 12.6 Useful links

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1. General information 1.1 Opportunities and possible obstacles for foreign investors

The Federal Republic of Germany welcomes investment from abroad. Many foreign companies are active here, conducting business either as a subsidiary of a foreign parent corporation or as a branch office. Germany is one of the most attractive locations for setting up business enterprises in Europe. Some of the key attractions for foreign investors include:

Excellent sales opportunities Access to a significant world market Attractive terms of finance and a low inflation rate A favourable competitive environment.

Investing in Germany means investing in the economic core of the European Union. The single European market has the potential to reach 500 million consumers.

1.2 Area and population

The Federal Republic of Germany lies in the heart of Europe. It borders nine countries: Denmark to the north, Netherlands, Belgium, Luxembourg and France to the west, Switzerland and Austria to the south and the Czech Republic and Poland to the east. The reunification of Germany in 1990 made its central geographic position even clearer. Germany is a member of the European Union (EU) and a member of the North Atlantic Treaty Organization (NATO), providing a political bridge to the Middle East and Eastern European nations.

The Federal Republic of Germany covers an area of 357,000 km² stretching 876 km from north to south and 640 km from east to west. The German borders measure a total of 3,767 km.

Germany has a total of 23 international airports, with major airports in Berlin, Bremen, Cologne, Düsseldorf, Frankfurt, Hamburg, Hannover, Leipzig, Munich and Stuttgart. Germany’s harbours give access to both the North Sea and the Baltic Sea. The passenger and freight railway network, as well as excellent motorways, complete a sophisticated transportation system.

With a population of nearly 82 million, Germany is the country with the second largest population in Europe, behind Russia. Nevertheless, Germany is smaller in size than France (552,000 km²) and Spain (505,000 km²).

The population density of Germany is 230 persons per km², compared to the European average of 116 persons per km². Of the 82 million inhabitants, approximately 7 million persons are of another nationality. The most significant of these international communities located in Germany include Turkish (1.7 million), Italians (500,000), Polish (400,000) and Greeks (280,000).

Over 95% of the country speaks Standard German, although most people in Germany speak one or two foreign languages, in particular English, French, Italian, Spanish and Russian.

The climate of Germany is influenced by the moderately cool westerly Atlantic Ocean winds and the continental climate of Eastern Europe. Temperatures are generally not subject to rapid or significant variations. There is precipitation at all times throughout the year. The average winter temperature is between 2 °C and - 6 °C. In the summer months, the average temperature is between 18 °C and 20 °C.

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1.3 Government and law

The Federal Republic of Germany is a constitutional democracy established on the basis of the constitution of 1949 (basic law). Since reunification in 1990, Germany comprises 16 Federal States (Länder). Each level of administration (federal, state, municipal) is governed by an elected body. These official bodies undertake decisions on all matters assigned to them by the constitution. The political centre and capital is Berlin.

The federal parliament comprises two chambers:

The lower chamber (Bundestag) is elected by the population for a four-year term. The government is formed by a coalition of parties, which have a majority of seats. The Government of Germany is headed by the Chancellor. Since November 2005, the Chancellor has been Angela Merkel.

The upper chamber (Bundesrat) consists of members appointed by the state governments. These members represent the respective governing parties of each state. The number of delegates for each state more or less reflects its proportion of the overall German population.

The German legal system follows the constitution. All legislative acts of the parliaments have to conform to the constitution.

The German legal system is based on detailed codes and is principle based. Initial Acts of Parliament are regularly proposed and debated in the parliament (Bundestag). Legislation is enacted by the Bundestag and, if necessary, approved by the representatives of the German states (Bundesrat).

The German court system is a decentralised, multi-tier system. There are different jurisdictions for certain areas of law, such as civil law, tax law or labour law. Consequently, there are separate courts for each area of law.

The judgements of the supreme courts of each area of law are only binding for the involved litigants. However, they are seen as a guiding line for other courts, especially the lower courts.

1.4 Key economic indicators

The Federal Republic of Germany is an export country, with a GDP of €2.5 trillion in 2010. Every third job depends directly or indirectly on the export industry. Germany is the third largest exporting nation in the world, exceeded only by China and the USA. In 2010, goods and services with a value of nearly €960 billion were exported and €806 billion were imported. In the immediate future, exports are anticipated to become even more critical to economic growth and stability. The eastern expansion of the EU, the increasing acceptance of the Euro as an international commercial currency and the development of new markets, such as China and India, will increase the importance of exports for the German economy.

While the EU nations are traditionally the most important trading partners, exports to other countries have increased above average, for example to China and South East Asia. Also, the U.S. has constantly been Germany’s second most important export partner.

In addition, Germany hosts some of the largest and most successful trade fairs in the world, and has traditionally done so for centuries. This makes Germany the place where the world meets to present their products.

Investors in Germany can rely on stable political, legal and social conditions as well as stable costs of living.

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1.5 Financial status

Germany is one of the founders of the EU (formerly the European Community) and participates in the European Monetary System. It is also a member of the General Agreement on Tariffs and Trade (GATT) and the International Monetary Fund (IMF).

Germany has a highly sophisticated banking system, including publicly-owned as well as private banks. These provide all of the customary business banking services, including financial and commercial services. The most important international retail, wholesale and investment banks have branch offices in Frankfurt, Düsseldorf, Hamburg, Munich or Berlin.

Most short-term financing of business is done through overdraft facilities and short-term loans. Although short-term lending is subject to fluctuations in the interest rate, this kind of financing is common practice, often over extended periods.

Medium and long-term loans are usually secured by mortgages or guarantees issued by parent or group companies, or by third parties. Larger companies often cover their long-term financing needs by issuing bonds.

All financing services are available to German and foreign investors under the same conditions.

1.6 Currency

The unit of currency is the Euro, represented by €. A single Euro is divided into 100 cent. The International Standards Organization (ISO) currency code is EUR.

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2. Regulation of foreign investment There are no currency control restrictions governing the transfer of funds into and out of Germany. In addition, there is no limitation on foreign ownership of German businesses.

General regulations for several industries and professions exist, but they do not apply especially to foreign investors. For example, banks, insurance companies and stock brokers are subject to close supervision by the Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht - BaFin).

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3. Government incentives European Law (European Commission) imposes general restrictions on state subsidies. Government incentives may take the form of cash grants, low-interest loans or export guarantees. These incentives are, however, often limited to certain industry sectors and services or to a particular group of investors.

The available tax incentives are mainly special depreciation allowances for small or medium-sized companies, and a rollover relief for certain capital gains.

3.1 Cash grants

Production or service location development is supported by investment incentives programmes, providing support in the form of cash grants. The distribution of these grants is steered by two key programmes:

Gemeinschaftsaufgabe “Verbesserung der regionalen Wirtschaftsstruktur” (GRW)

Investitionszulage (IZ).

GRW cash grants

The GRW is a national incentive programme which steers the distribution of direct subsidies for investment projects throughout Germany in specified areas. The maximum level of support that is permitted varies within Germany. In general, it depends on a region’s level of economic development. In the so-called maximum support areas, predominantly located in Eastern Germany, eligible investment costs may be reimbursed, up to:

30% for large companies

40% for medium-sized companies

50% for small companies.

In certain regions of Western Germany and Berlin, support is also available through the GRW, albeit at a lower level. Here, large companies can obtain up to 15% of their investment costs (eligible for support) reimbursed, medium-sized companies up to 25%, and small companies up to 35%.

Eastern Germany’s IZ

The IZ is a special incentives programme created to promote investment activities in Eastern Germany. The IZ scheme supports investment projects in the federal states of Berlin, Brandenburg, Mecklenburg-Vorpommern, Saxony, Saxony-Anhalt and Thuringia only. The IZ is granted tax-free. This programme is based on the Investment Allowance Act 2010. Investors automatically receive IZ funding (subject to all eligibility criteria being satisfied) when investing in Eastern Germany.

To qualify for the IZ incentives, an application has to be submitted to the relevant tax authority (not later than four years after the end of the calendar year for which the IZ incentive is applied for). Investment projects in Eastern Germany can combine the IZ with support from the GRW. However, the level of support from both programmes may not exceed the maximum level of support permitted in the respective region.

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Labour related incentives

Under the Social Security Code, entrepreneurs creating new jobs for long-term unemployed qualify for a non-repayable taxable grant of typically 50% of the wages and salaries and social security contributions. This subsidy is granted up to 12 months. Apart from this wage subsidy, other labour-related incentives may be available under certain conditions. These subsidies concern costs regarding recruitment support, pre-hiring training and on-the-job-training.

3.2 Interest-reduced loans

The KfW Bankengruppe (KfW) is the development bank of the Federal Republic of Germany. The KfW offers a wide range of financing instruments including loans, mezzanine financing (a hybrid of debt and equity financing) products and equity capital. These financial instruments are all available for investors through different programmes.

The most important KfW products for the financing of investment projects are the KfW Entrepreneur Loan (Unternehmerkredit) and the KfW Entrepreneur Capital (ERP-Unternehmerkapital). These are available in three versions, tailored to the requirements of start-ups, new companies and established companies. KfW programmes are applied for via a company’s bank.

State development bank loan programmes

In addition to the KfW, each of the 16 federal states also has their own development bank that finances investment projects in their respective state. These development banks also offer loan programmes with attractive grace periods. Interest-reduced loans constitute a subsidy and can usually be combined with other public funding, for instance, GRW subsidy support. However, when calculating the maximum level of financial support for investment projects, the equivalent value of the subsidy of the loans from development banks must also be taken into consideration.

3.3 Research & Development (R&D) project incentives

R&D projects in Germany can access numerous forms of financial support. There are many programmes allocating R&D grants, interest-reduced loans and special partnership programmes. Many of the programmes are offered by the federal government. However, the federal states also offer special R&D programmes. These R&D incentive programmes generally provide money to cover personnel expenditure for R&D projects. Other costs for instruments and equipment may also be eligible, if they can be clearly assigned to the relevant R&D project.

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4. Business organisations available to foreigners

There are several different approaches available to a foreign investor seeking to initiate commercial activities in Germany.

Business can be conducted in a variety of incorporated or unincorporated organisational forms:

Through an independent agent or distributor Via a branch which is not a legal entity under German law By establishing a subsidiary By acquiring a controlling interest in an existing German company.

Business organisations

The main legal forms of business organisations in Germany are:

4.1 Joint stock corporation (AG)

An AG is an incorporated legal entity in which shareholder liability for debts of the corporation is limited to the amount of the subscribed share capital. The AG is governed by the Joint Stock Corporations Act (Aktiengesetz - AktG).

To establish an AG, at least five subscribers are required to sign the notarised Articles of Association. The Articles must specify:

The corporate name Corporate purpose Number of shares authorised Address of the corporation's initial registered office and The name of each incorporator.

Since 1994, the forming of ‘small joint stock corporations’ has been simplified. Up to a specific scale, an AG can be formed by a single shareholder, and the statutory requirements are in many regards less burdensome.

The minimum issued share capital is €50,000. The minimum par value per share is €1. Shares may also be issued without par value, but allocable value of the total capital must be at least €1. A minimum of 25 % must be paid up on each share, with the remaining balance to be settled on demand. Par value shares must be sold at least at par; if they are sold for a higher amount, this share premium must also be paid in. Unless restricted by its articles, an AG enjoys the benefit of unrestricted transfer of its shares and, therefore, may raise capital freely. The AG is typically used when capital is to be raised from the general public. The shares can be traded on a stock exchange, if certain regulatory requirements are fulfilled.

In general, it takes about six weeks after the signing of the Articles of Association to register an AG. Formation expenses comprise, in particular, legal, registration and notary fees. The initial subscribers are responsible for appointing the first Supervisory Board.

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An AG has a Supervisory Board (Aufsichtsrat), Management Board (Vorstand) and General Meeting of Shareholders (Hauptversammlung).

The Management Board is responsible for the day-to-day running of the company and is authorised to decide all matters relating to operational conduct of the business. The Management Board is appointed and controlled by the Supervisory Board.

Some of the most important functions exercised by the General Meeting of Shareholders are to:

Decide on the distribution of profits Elect new members of the Supervisory Board Amend articles or bylaws.

Shareholders can act only in meetings duly called by the Management Board, and in which a quorum (minimum number of members) is present. An annual meeting is required by statute, and special meetings are authorised when called by the holders with a designated percentage of voting rights.

For tax purposes, a corporation is treated as an entity and is therefore taxed on its own income. If the corporation pays a dividend to its shareholders, the shareholders are subject to taxation. However, if the shareholder is a corporation, the dividend is tax-free except for 5%.

4.2 European Company (SE)

The SE is also an incorporated legal entity in which shareholder liability for debts of the corporation is limited to the amount of the subscribed share capital. The EU Council order on the Societas Europaea (SE) was implemented into German national law through two statutes, the SE Implementation Act and the SE Participation Act. The SE is governed by the Joint Stock Corporations Act (Aktiengesetz - AktG).

There are four ways to form an SE:

1 Merger 2 Formation of a holding company 3 Formation of a joint subsidiary 4 Conversion of a public limited company previously formed under national law.

The SE must have a minimum share capital of €120,000. Statutes require the registered office of the SE be its place of central administration. Unlike the AG and GmbH, the SE can easily transfer its registered office within the European Community to another Member State without dissolving the company.

In terms of corporate governance, the shareholders of an SE can choose between a monistic and a dualistic board system. The dualistic system basically works like the corporate governance system of an AG with a Supervisory Board, a Management Board and the General Meeting of Shareholders.

In a monistic system, however, there is only a Board of Directors and the General Meeting of Shareholders. So-called non-executive directors who form the Board of Directors appoint and control the so-called managing directors. These managing directors are responsible for the day-to-day running of the company and are authorised to decide all matters relating to the conduct of the business. The managing directors may also belong to the Board of Directors. Therefore, unlike in the dualistic system, there is no strict separation between managing and non-executive (controlling) directors. The functions exercised by the General Meeting of Shareholders are basically the same as for the AG, since almost all of them are governed by the German AktG.

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For tax purposes, it is the same as the AG. An SE corporation is treated as an entity and is therefore taxed on its own income. If the corporation pays a dividend to its shareholders, the shareholders are subject to taxation. However, if the shareholder is a corporation, the dividend is tax-free except for 5%.

4.3 Limited liability company (Gesellschaft mit beschränkter Haftung - GmbH)

A GmbH is an incorporated legal entity, in which shareholder liability for debts of the corporation is limited to the amount of the subscribed share capital. The GmbH is governed by the Limited Liability Companies Act (Gesetz betreffend die Gesellschaften mit beschränkter Haftung - GmbHG).

To establish a GmbH, subscribers are required to appear before a notary in order to have the Articles of Association notarised. The minimum capital required is €25,000. The nominal value of a share must be at least €1.

In total, the shareholders must put up at least 50% of the capital. If the company is established solely by one individual, the registration is made only after the shareholder has paid in the above minimum portion of the capital and provided security for the balance. Generally, profits are allocated in proportion to each shareholder's interest. The shares of a GmbH cannot be traded on a stock exchange.

The formalities for establishing and operating a GmbH are much simpler and considerably less expensive in comparison to an AG. Most foreign-owned businesses in Germany operate as GmbHs. It is the preferred form of incorporated business organisation.

A GmbH is managed and represented by one or more registered managers appointed by the shareholders. Shareholders themselves may be active in operational management, which is often the case. These managers are legally authorised to conduct all business affairs, although they may be subject to certain internal limitations stipulated by the shareholders. Fundamental decisions affecting the future of the GmbH, which are typically outlined in the bylaws, require shareholder approval.

For tax purposes, a GmbH is no different to an AG or SE corporation. A GmbH is treated as an entity and is therefore taxed on its own income. If the corporation pays a dividend to its shareholders, the shareholders are subject to taxation. However, if the shareholder is a corporation, the dividend is tax-free except for 5%.

4.4 Partnership (OHG or KG)

In contrast to a corporation, a partnership is not a legal entity. Instead, it’s a grouping of two or more individuals (or partnerships/corporations) who are engaged in business as co-owners. If strictly interpreted, saying a partnership is not an entity could be considered impracticable. As a result, certain sections of the German Commercial Code treat a partnership as if it were a legal entity. For example, property titles may be held in the name of the partnership, but the property is owned by individual partners as joint tenants.

In contrast to shares of a corporation, which are freely transferable unless limited by contract, a partner cannot transfer his or her partnership interest freely to a recipient and make them a member of the partnership. In order for such a transfer to take place, the partner needs the consent of all remaining partners.

In the absence of a contrary agreement, every general partner has the right to participate equally in partnership management.

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For tax purposes, partnerships are treated as a conduit, and consequently are not subject to direct taxation. This means whatever the partnership earns, whether in the form of ordinary income or loss, capital gain or loss, is passed to each partner in that form of income. Each partner is individually responsible for reporting and paying tax on his or her share of profits, via their personal income tax return. The partnership may, however, be subject to trade tax.

General Partnership (Offene Handelsgesellschaft - OHG)

An OHG is a commercial general partnership comprising at least two persons (individuals or legal entities) and conducts a business under a firm’s name. It is established by an agreement between two or more individuals (or corporations/partnerships) to place their money, effects, labour and skill, whether it’s one aspect or a combination of them all, in lawful commerce or business, with the understanding that there shall be a proportional sharing of the profits and losses between the partners. The OHG must file for registration with the Commercial Register.

An OHG, in itself, does not have its own legal character, but it can sue or be sued, acquire rights and incur liabilities under the firm’s name. An OHG is governed by the German Commercial Code (Handelsgesetzbuch - HGB).

In contrast to a corporation, where the risk for shareholders is limited to their investment, every partner of a general partnership is subject to unlimited personal liability for all debts of the partnership. The consequence of this unlimited personal liability means an OHG is not a very common choice for organisations.

Certain professions, such as lawyers and medical professionals/physicians, may be organised in a special type of partnership, similar to the OHG.

Limited Partnership (Kommanditgesellschaft - KG)

A KG is a limited partnership comprising at least two persons for the purpose of conducting a commercial enterprise under a common firm name. This is a partnership consisting of two classes of partners:

• General partners, who essentially have the rights and obligations of partners in an ordinary partnership

• Limited partners, who do not participate in the management of the partnership's business and are subject to only limited liability.

A KG does not have its own legal character, but it can sue or be sued, acquire rights, and incur liabilities under the firm’s name. A KG is also governed by the German Commercial Code.

The partnership agreement must specify which partners are general and which partners are limited. Subject to the provisions of the partnership agreement, only general partners have management authority and the power to represent the partnership. Limited partners are excluded from such functions.

The limited partnership must file for registration with the Commercial Register. Limited partners are liable for their partnership’s debts until their limited liability is recorded in the Commercial Register. In order to protect the limited partners from additional liability, the final formation of the partnership should be conditioned on the completion of the registration. Like an OHG, the possibility of general partners being exposed to unlimited liability, means a KG is not a very common business organisation in Germany.

4.5 Limited Liability Partnership (GmbH & Co. KG)

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A GmbH & Co. KG is a limited partnership, where the general partner is a corporation (GmbH). In this case, only the GmbH is fully liable for the debts of the partnership, while the limited partners are liable only to the extent of their contribution to the partnership capital. The general partner’s (GmbH) liability for obligations of the GmbH & Co KG is limited to its subscribed capital. Meaning, if a corporation is the sole general partner, no individual will have unlimited liability.

The GmbH & Co. KG is the most popular partnership in Germany due to tax reasons and the limited liability. Primarily, a GmbH & Co. KG is used by small and medium-sized businesses.

In order to establish a GmbH & Co. KG, the formation of a GmbH is needed. Generally, the shareholders of the GmbH will be limited partners in the GmbH & Co. KG. The partnership agreement will be signed by the registered managing director of the GmbH and the limited partners.

For tax purposes, the GmbH & Co. KG is basically treated like a partnership. This means whatever the GmbH & Co. KG earns, whether in the form of ordinary income or loss, capital gain or loss, is passed to each partner in that form of income. Each partner is individually responsible for reporting and paying tax on his or her share of profits, via their personal income tax return. The partnership may, however, be subject to trade tax.

4.6 Sole proprietorship

A sole proprietorship is the basic form of business activity in Germany. It is a business, with an individual operating under a specified firm name. This individual faces unlimited liability in relation to the firm's creditors. As a general rule, an individual sole proprietor must register his business with the Commercial Register. The income of the proprietorship qualifies as the individual’s personal income, meaning it’s not subject to a separate tax. The individual is responsible for reporting and paying tax on their personal income tax return.

4.7 Permanent establishment or branch

Business may be conducted by opening a branch rather than setting up a separate German company. In general, there are no specific legal requirements for a foreign enterprise to establish and operate a branch in Germany.

4.8 Joint venture

Joint venture partnerships are set up to manage certain projects. These terminate with the completion of the project. In general, joint ventures are organised as a partnership (Gesellschaft bürgerlichen Rechts - BGB-Gesellschaft). Such a partnership can be founded by concluding a partnership agreement for which no special requirements have to be observed. Notary certification, however, is required if real estate transactions are involved.

4.9 Silent partnership (Stille Gesellschaft)

A silent partnership is a special partnership, established purely on a contractual basis with the owner of an enterprise. It may be used to conceal participation and/or to structure participation for tax reporting purposes taking into account tax aspects.

4.10 Commercial register

Germany’s commercial register (Handelsregister) provides information about all legally relevant relationships between merchants and commercial companies. The information is public and can be viewed by other companies. The commercial register contains information about:

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A firm’s name and legal form of the business The name of the partner and/or the personally liable partner The managing director or the executive of corporations The company’s capital stock Liability limitations of partners Issuing and revoking the power of attorney Opening of insolvency proceedings The dissolution and termination of a company.

The commercial register is managed by the district court, where it is open to public viewing at no cost. In addition, the companies’ register can also be consulted online, via the common register portal of the German federal states (Gemeinsames Registerportal der Länder, www.handelsregister.de). Some of the company data stored in the commercial register is also available electronically through the commercial register of the Federal Gazette (Bundesanzeiger, www.unternehmensregister.de).

Companies are required to register if they carry out a commercial business operation. This is determined by various criteria, including:

Use of financial accounting Annual turnover Capital resources Total number of employees.

As a general benchmark, a business with an annual turnover of over €500,000 and a profit of €50,000 can be assumed a commercial business operation. In each case, the registration requirements should be determined by qualified counsel.

The application for registration in the commercial register is electronically filed in publicly certified form, by a notary, to the appropriate commercial register. As a rule, company types that are required to file an entry on the commercial register in order to establish the organisation, the possible liability limitations for the partner(s) takes effect after the entry on the commercial register has been made. If business was conducted prior to this registration, the partners would be liable for any company losses, using their personal private assets.

The total costs for entry onto the commercial register vary depending on the type of company being registered. Costs incurred cover the notary certification and the fees charged by the district court for entry and publication in the Federal Gazette (Bundesanzeiger). The costs and fees are not levied on an arbitrary basis, but are regulated by law. They largely depend on the number of partners and the share capital. If additional legal advice is sought, further costs may be incurred.

http://www.handelsregister.de/

http://www.unternehmensregister.de/

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5. Setting up and running business organisations

5.1 Business environments

A foreign investor may conduct business in Germany in a variety of incorporated or unincorporated organisational forms. For details on the different legal forms (incorporated or unincorporated) available to foreign investors in Germany, please see section 4.

5.2 Permanent establishment or branch

Foreign companies may establish branches without prior governmental approval for the establishment of a business. However, the operation of the business may require the approval of the appropriate government authority. Also, it is essential for investors in any business activity to notify the appropriate trade office (Gewerbe- oder Ordnungsamt).

A branch is not able to independently participate in general head office business transactions. The foreign parent is responsible for financing its branch, in addition to covering its debts. As a result, no minimum capital is required for the branch. Invoices must be issued on behalf of the head office. An individual company name for the branch may not be used. For these reasons, a branch establishment does not have to register and be listed on the commercial register.

5.3 Work and residency permits

EU citizens and citizens of Norway, Iceland, Liechtenstein and Switzerland do not require any form of visa, residence or settlement permit to legally live or work in Germany. They may enter the country with a valid passport or photo identity card. They only have to apply for a certificate stating the right of residence. This can be done at the same time as completing the police registration procedure. The right of residency certificate has an unlimited validity and does not need to be renewed unless the holder's passport or ID number changes in the future.

If the proposed stay of non-EU citizens exceeds 90 days, they are required to obtain a work and a residence permit, prior to moving to Germany. The applications are filed with the German Consulate General at the foreigner's place of residence.

Work permits are not required for General Managers (Geschäftsführer) registered in the Commercial Register or scientific research staff. Exceptions also apply to citizens from Australia, Israel, Canada, Japan, New Zealand, USA and South Korea. It is still necessary to obtain an authorisation and priority check from the Federal Employment Agency. However, citizens of these countries do not have to belong to a specific professional group in order to obtain a corresponding residency permit.

Foreigners considered as ’highly qualified foreign employees’ can be granted a settlement permit from the outset.

Upon moving to Germany, all foreigners have to register with the local registration office (Einwohnermeldeamt) at their place of residence.

5.4 Labour law

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Germany has different models of employment. There are fixed-term contracts, temporary employment and mini or midi jobs. Mini jobs (with a monthly wage not exceeding €400) and midi jobs (with a monthly wage not exceeding €800) benefit from reduced social security contributions.

The legally permitted working time totals eight-hours per day and 48-hours per week. Saturday is considered to be a normal working day. An extension of the working time, to a maximum of 60 hours per week (or ten hours per day), is possible in certain conditions. Employees have the legal right to claim at least four weeks of paid vacation in a calendar year. The number of public holidays in Germany varies from one federal state to another.

German labour law does not discriminate against foreign employees working in Germany.

An employment contract has to be terminated in writing (paper form). Electronic termination, for example via email, is not legally accepted. A termination can only take legal effect, if a specific reason for the termination exists. This may be for personal, conduct-related or business reasons. The termination may, upon the employee's request, be reviewed by a Labour Court. The Court examines whether the termination was based on a cause defined in the labour laws. A collective dismissal is subject to notification to and approval by the workers’ council and may require a ‘social plan’, which prescribes severance pay schemes.

Under German Co-Determination Acts, if the number of company employees exceeds certain thresholds the Supervisory Board must include worker and shareholder representatives. If a corporation (AG, GmbH or SE) has more than 500 employees, one third of the members of the Supervisory Board must be employee representatives. For companies with more than 2,000 employees, half of the Supervisory Board members are elected by the company’s employees.

Law of Contract

German law of contract offers investors a reliable framework for action. The principle of contractual freedom enables the conclusion of contracts with freely selectable contractual partners and the free determination of the subject matter of the contract, as long as the current law is not infringed. The basic structures of the key types of contract are governed by the German Civil Code (BGB). Contractual conditions are standardised to a high degree.

Contracts completed according to German law are normally short and simple in structure. Existing legal regulations apply unless agreed otherwise in the contract.

Purchase law

The purchase contract is the type of contract completed most frequently. The concise legal regulation of purchase law considerably simplifies the completion of contracts on a day-to-day basis. The United Nations Convention on Contracts for the International Sale of Goods applies to international delivery of goods contracts in Germany.

Commercial law

German commercial law corresponds with international standards. Global trading practices and standard trading contractual clauses such as Incoterms (International Commercial Terms) are recognised. Global financing mechanisms for international trade such as letters of credit and payment guarantees also apply in Germany.

Basic information on litigation

There is no case law in Germany. This means that decisions made by courts are only binding for the litigants and not other courts of law. Even so, the decisions made by the superior courts are used as guidelines.

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In Germany, there are no so-called ‘pre-trials’, such as those recognised by American law. If the court orders a hearing of evidence, it is, as a rule, up to each party to prove the facts of their specific case.

Litigations costs in Germany are low as they are calculated based on the court costs and lawyer’s fees. In general, the costs are paid by the party who loses the legal case. The costs are shared in the event of partial success for each party.

5.5 Acquisition of German enterprises

Asset deals versus share deals

There are different tax implications for asset deals and share deals.

An asset deal gives the buyer the opportunity to depreciate the assets acquired, but the seller has to pay capital gains tax on the purchase price (see section 7). Each single asset has to be sold individually and each contract with third parties must be assigned, which may require the consent of the third party.

A share deal simply involves the sale of shares representing assets. Under current German tax law, there may be a tax advantage for the seller, if he or she is able to sell their equity interest, whereas the foreign investor would most likely want to buy depreciable assets, rather than shares.

However, a distinction should be made between interests in partnerships and interests in companies.

Interest in a partnership - In acquiring an interest in a partnership, there is no difference between a share deal and an asset deal from the tax point of view. In either case, the seller may enjoy a preferential tax rate, and the purchaser may depreciate the hidden reserves (amount in excess of book value) and deduct his or her financing costs. Most notably, the purchaser may depreciate the acquired (pro-rata) good will.

Interest in a company - When acquiring an interest in a company, there are different tax consequences for the buyer and seller, depending on whether the acquisition is an asset or share deal. Under German tax law, for a corporate shareholder, the capital gain is tax exempt; an individual shareholder receives a preferential tax rate when selling shares. As a result, both corporate and individual shareholders generally prefer share deals. However, as a general rule, purchasers can only depreciate acquired assets. In particular, the purchaser is not allowed to depreciate the acquired (pro-rata) good will in case of a share deal. Consequently, buyers of German companies prefer asset deals.

If the essential assets of a business are transferred, the liabilities follow the assets. This includes the tax liabilities of the past two years, liabilities to the employees (pension schemes, collective bargaining agreements etc.) and creditor liabilities.

Due diligence

The legal and tax history of the company being acquired must be thoroughly investigated prior to the actual acquisition. The recent annual financial statements and reports of the tax and social security submitted to the authorities should be examined closely. This includes reviewing their latest audits relating to income tax, salary and wage tax, value added tax and social security contributions.

Also, the bylaws of the company being acquired should be reviewed. Recently, environmental regulations have become increasingly important in acquisition decisions.

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Prior to any acquisition, investors should analyse:

The bylaws of the company German and EU anti-trust regulations Trademarks and other intellectual property rights Regulations on the use of real estate Contingent contractual liabilities Individual and collective labour law situation etc.

Notarisation of legal transactions

For certain transactions to be legally valid, they must be notarised. This includes the formation of a GmbH or AG, amendment of its bylaws and real estate transactions.

The transfer of shares of a GmbH or a GmbH & Co. KG must be notarised as well. The transfer of shares in an AG, an SE or in a partnership does not require notarisation.

The signature of the managing director must be notarised on applications for registration in the Commercial Register. Notaries are not obliged to give tax advice.

If a foreign party has to sign a notary deed (or certification), the person representing the foreign company/investor has to prove his or her power of attorney, according to the foreign company law.

Change of legal form

All changes of the legal form are regulated by the Re-Organisation Act (Umwandlungsgesetz - UmwG). In many cases, these conversions can be done free of tax. The main condition for a tax-free conversion is that the German right of taxation is not restricted or reduced. In any case, conversions need detailed and careful planning.

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6. Corporate taxes and social charges 6.1 General information

Federal, state and local governments levy taxes. The most important taxes are the corporate income tax (Körperschaftsteuer) and the trade tax (Gewerbesteuer).

Companies in Germany are usually taxed on two levels. On the first level, corporations – such as the stock corporation (AG or SE) and limited liability company (GmbH) – are subject to corporate income tax. On the second level, corporations are subject to the trade tax, which is imposed by local municipalities (for example, the German town or city where the company does business).

Partnerships, however, are not taxed themselves (as is the case with corporations), but their partners are taxed. The taxable profit is determined by the company and allocated to the partners according to their shares. As a result, the income of an individual partner is subject to personal income tax (Einkommensteuer), and the income of a corporate partner is subject to corporate income tax (Körperschaftsteuer). The partnership itself is, however, subject to trade tax, if it generates trade income.

Regardless of how a commercial transaction is structured, German tax authorities examine businesses carefully for assessment purposes. Inter-company transactions must be on arms' length terms (as if between independent parties). Sham transactions, backdating and trustee relationships are disregarded for tax purposes, and the actual ownership of property prevails (substance rather than form).

Business tax audits are conducted every three to five years. Larger companies are usually audited on a regular basis.

6.2 Domestic corporations and corporate income tax

As a rule, resident corporations are subject to tax on their world-wide income. Foreign corporations are taxable only on German source income. Resident corporations are corporations having their place of management or their statutory seat within Germany. This also includes foreign corporations having their statutory seat or place of management in Germany.

Corporation tax is regulated by the Corporate Tax Act (KStG) and the Corporate Tax Ordinance (KStDV). It governs the general income tax for corporations (especially AG, SE and GmbH).

Since 2008, the tax rate has been 15% on the taxable profit of the company. Corporate income tax is payable on retained and distributed profits. The so-called solidarity surcharge (Solidaritätszuschlag) of 5.5% is added to the corporate income tax. The corporate income tax and solidarity surcharge combined amount to a total 15.825% of tax.

Distributed income is subject to a withholding tax on dividends of 25% (plus a solidarity surcharge of 5.5 % of the tax due) for the account of the shareholder. This is unless a reduced rate applies under a double taxation agreement. Almost all German tax treaties reduce this rate to between 5% and 15% on dividends paid to foreign corporate shareholders with at least a 25% holding of ownership in the German company. Within the EU, dividend payments between a corporate domestic subsidiary company and a corporate foreign parent company are tax-free over and above a 10% stake. Irrespective of the existence of a tax treaty, corporate recipients of dividends may apply for a refund of the withholding tax if it exceeds the corporate tax rate of 15%.

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Corporate tax is assessed annually. The tax assessment period is the calendar year, unless otherwise agreed.

6.3 Calculating taxable profit

The tax base is the general taxable income. It is calculated using the annual net income/net loss according to the corporation’s commercial balance sheet, with adjustments according to the tax accounting rules. Furthermore, certain adjustments, outside of the balance sheet, have to be made. For example:

corporate income tax trade tax half the remuneration received by members of the Supervisory Board during the year.

6.4 Service charges and inter-company transactions

Like all other operating expenses, remuneration for services etc. rendered by shareholders is deductible, providing:

the remuneration is in line with the arm’s length principle, and

the services, performance and remuneration are evidenced and documented in writing, in advance.

These principles are of particular importance for a German subsidiary of a foreign parent company. If the above requirements are not met, the payment or remuneration is treated as a deemed profit distribution. Once a deemed profit distribution is recognised, it cannot be reversed and may lead to retroactive taxation for past years.

The Federal Minister of Finance has published circulars with administrative principles for the examination of:

income allocation in the case of multinational associated enterprises (Transfer Pricing Circular), and

income allocation through cost contribution arrangements between multi-national associated enterprises (Cost Contribution Agreement Circular).

German tax law requires documentation of international transfer pricing and cost contribution arrangements. The company has to prove that inter-company transactions have been carried out at arm’s length terms. Violations of these documentation regulations are subject to financial penalties.

6.5 Losses

Income tax losses of up to €511,500 can be carried back and offset against taxable profits of the previous tax period. Additional losses may be carried forward and offset against taxable profits in future years without any limit of time. However, losses carried forward can be offset against profits only up to €1 million unrestrictedly. The exceeding amount (loss of more than €1 million) is only deductible at a rate of 60% of the remaining taxable profits. Therefore, a company with a loss carry forward of more than €1 million pays taxes, if the subsequent profit is not high enough, even though the amount of losses could absorb the profit. This is called ’minimum taxation’.

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The carry-back rule of losses is not allowed for trade tax purposes. The loss carry forward rule, however, is applicable to both trade and corporation tax.

The right of a loss carry forward, and therefore the sum of losses from the previous years, is lost if more than 50% of the shares of a company are sold to one person or a group of persons with common interests within a five-year period. If a holding of more than 25% but not more than 50% is acquired, the loss carry forward will be lost according to the percentage of the acquired shares. Acquisitions of up to 25% do not lead to an expiration of the loss carry forward. Exemptions from this loss penalty rule exist, for example for internal group restructurings. Also, the loss carry forward is not forfeited if hidden reserves exist in the company’s assets.

Losses incurred by subsidiaries as a result of inter-company pricing for products of the parent company may be disregarded by the tax authorities, if the transfer prices do not conform with the arm’s length principle.

Basically, losses of foreign permanent establishments from active businesses can be tax-effective for a German (corporate) owner. In tax treaty cases, however, the exemption method for foreign income applies (for example in relation to all EU states and to the USA). Therefore, foreign losses cannot be claimed in Germany. However, due to the case law of the Court of Justice of the European Union (ECJ), it is possible to claim losses from a foreign permanent establishment located in the EU/EEA under certain conditions.

6.6 Foreign income

Foreign income of a German resident company earned by a foreign branch is subject to German corporate tax. In the case of a tax treaty, very often the exemption method applies, for example in relation to all other EU states and the USA. Therefore, foreign branch profits and losses are not included in the German taxable income. Otherwise, relief for foreign taxes paid on foreign branch profits is available, and withholding taxes are credited against German corporation tax on the branch profit.

Foreign income of a company based in Germany earned from its overseas subsidiaries is generally not subject to German tax, since these subsidiaries are their own legal entity. There are exceptions to this rule, e.g. CFC legislation.

6.7 Inter-company dividends

Domestic and foreign inter-company dividends received directly or via an interposed partnership are generally tax-exempt, regardless of the amount of the investment or the length of time the shares were held. Dividends of resident corporations are subject to a withholding tax of 25%, plus solidarity surcharge of 5.5% on this amount. Shareholders are granted a tax credit for the same amount of the withholding tax.

Even so, 5% of the received dividend is deemed to be a non-deductible expense and is therefore taxed. Foreign withholding tax on foreign dividends cannot be credited against the corporate income tax.

6.8 Group taxation

Each company has to file its own tax returns as an independent legal entity and has to calculate its own taxable income. For tax purposes, it is possible to pool profits and losses by establishing a group taxation scheme called ‘Organschaft’. Currently, the Organschaft is only open to domestic companies. However, due to ECJ law, there are plans to extend the scope to at least EU companies.

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Separate legal entities may form an Organschaft group for tax purposes. Future profits or losses of the subsidiary can be transferred to the parent company, providing:

the subsidiary is integrated financially into the parent company from the beginning of the tax year, through direct or indirect majority voting and

the two companies complete a profit and loss pooling agreement of at least five years’ duration and file this agreement in the Commercial Register.

Group taxation is effective from the beginning of the year of registration of the pooling arrangement in the Commercial Register.

Group taxation is available for corporate and trade tax purposes. What’s more, group taxation is available for the purpose of value added tax (VAT), although other requirements have to be fulfilled.

Controlled foreign company legislation

There is detailed legislation regarding the allocation of foreign passive income to German tax residents and for extended limited tax liability for residents leaving Germany (Außensteuergesetz - AStG).

Holdings in foreign corporations

Based on domestic law, capital gains realised on the sale of both domestic and foreign shares by German companies are tax-free, irrespective of the percentage of shareholding. Correspondingly, capital losses or write-downs are not tax deductible.

However, 5% of the realised capital gain is considered as non-deductible expense and is therefore taxed.

Parent subsidiary directive

The German implementation of this EU directive bans withholding taxes on dividends distributed by a subsidiary in Germany to a parent company in another EU member state. In addition, it offers tax relief with respect to received dividends from the parent company.

The reduced tax rate in Germany applies only if the foreign holding company:

Has a specific legal form (usually corporation) Is resident for tax purposes in another EU country and Is subject to corporate tax.

The directive applies to shareholdings with a minimum participation of 10% and grants EU member states an option to demand that the shareholding must have been held continuously for a period of two years. In Germany, this minimum period is one year.

The zero tax rate only applies if a certificate of exemption issued by the tax authorities is presented beforehand. If withholding tax has already been paid, it can be refunded upon application.

Germany introduced a general anti-directive and anti-treaty shopping provision into its national tax code to protect against the abuse of these benefits by non-EU residents (see section 7).

Interest and royalties directive

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The German implementation of this EU directive bans the withholding of taxes on interest and royalties paid by a group company in Germany to another group company in another EU member state.

The reduced tax rate in Germany applies only if the foreign holding company:

Has a specific legal form (usually corporation) Is resident for tax purposes in another EU country and Is subject to corporate tax.

This directive applies to shareholdings with a minimum participation of 25 % and grants EU member states an option to demand that the shareholding must have been held continuously for a period of two years. In Germany, no minimum period applies.

The zero tax rate only applies if a certificate of exemption issued by the tax authorities is presented beforehand. If withholding tax has already been paid, it can be refunded upon application.

Based on this directive, Germany also introduced a general anti-abuse provision to protect against the abuse of the above benefits for non-privileged companies.

Mergers directive

The mergers directive enables a company or several companies within the EU to reorganise and benefit from tax neutrality. However, the directive permits taxation of capital gains, if the taxation right of the former residence/source country is restricted after the reorganisation. This directive was amended in 2006 to extend the scope, for example, to an SE (European Company).

Germany has implemented pursuant (compatible) regulations, corresponding to the amended EU directive, to ensure cross-border mergers, spin-offs, transfer of assets and exchanges of shares involving companies from at least two member states of the EU are tax neutral. Effectively, as of the end of 2006, it has been possible to conduct tax-neutral cross-border reorganisations in Germany, providing the taxation right of Germany is not restricted.

6.9 Taxation of non-resident corporations

Tax rate

Non-resident corporations are corporations that have neither a statutory seat nor their place of management in Germany. They are subject to limited corporate tax liability on specific categories of German source income. The most important are:

Income from trade or business through a permanent establishment or through a permanent representative

Income derived from domestic real estate Other income from German sources detailed in section 49 of the German Income Tax Act.

The corporate tax rate for non-resident foreign corporations generating income from German sources has been 15% since 2008. The same rate applies to domestic corporations.

Thin capitalisation rules

As of 2008, the former thin capitalisation rules were replaced by a general interest stripping rule. This rule restricts the deductibility of all interest expenses of a company, irrespective of the seat of the parent company. This regulation states that interest payments may not be deducted from

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income if the difference between interest expenses and interest income (negative interest) of a company exceeds 30% of the EBITDA (earnings before interest, taxes, depreciation and amortisation). Interest expenses also include interest costs arising from third party financing, for example, financing from banks.

There is a threshold for the interest limitation. If the negative interest amounts to less than €3 million, full deductibility is given. Also, national groups are exempt from this rule regarding their intra-group financing. For international groups, proving that the amount of interest expenses is not abuse can only be done by using a complex equity ratio test.

Interest expenses that are not deductible from taxable income (if negative interest exceeds the amount of €3 million and exceeds 30% of the EBITDA), may be carried forward to future years, without time restrictions. However, the rules for forfeiture of loss carry forwards apply correspondingly. Therefore, an interest carry forward is completely eradicated, if more than 50% of the company shares are acquired. If more than 25% but not more than 50% of the shares are acquired, the carry forward is forfeited proportionally.

6.10 Taxation for a branch of a foreign corporation

If a foreign corporation operates a permanent establishment (PE) in Germany, corporate income tax is levied on all income attributed to operations and activities of the PE in Germany. The applicable tax rate is 15% (plus solidarity surcharge). In addition, a PE has to pay trade tax, like any other domestic corporation.

Transactions between the foreign parent and the PE have to be on arm’s length terms, most notably if purchases of goods and services from a parent by a PE are to be tax-deductible. Losses may be deducted, providing an effective connection between the loss and the domestic income can be demonstrated.

As a PE is not a legal entity and therefore cannot distribute profits, no withholding tax is levied on transferred income. If, however, the PE receives income which has been subject to withholding tax, this withholding tax can be credited against tax due or (if preferred) deducted from income.

In December 1999, Germany’s Federal Ministry of Finance issued a comprehensive circular regarding administrative principles relating to the allocation of income in the case of PEs of multinational enterprises.

6.11 Trade tax

All commercial business operations in Germany are subject to trade tax (Gewerbesteuer), irrespective of their legal form. Trade tax is based on the Federal Trade Tax Act and is levied by municipalities (Gewerbesteuergesetz – GewStG).

Trade tax is based on taxable corporate income, subject to a number of positive and negative adjustments. In particular, one fourth of interest paid on loans is disallowed and must be added back. Other ’financing costs’, such as rent expenses for movable and non-movable assets, must also be added back at certain percentages, for example 5% of rent expenses for movable fixed assets or 12.5% of rent expenses for non-movable fixed assets.

Trade tax rates depend on the municipality within Germany, as the tax rate is set by local authorities. The rates for trade tax range from between 7 % and 17 %. Usually, the larger cities have higher trade tax rates than smaller towns and communities.

The amount of payable trade tax is neither deductible from income for corporate income tax, nor for trade tax purposes.

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Partnerships and sole traders have an annual tax-free allowance of €24,500 for trade tax purposes.

The solidarity surcharge is not levied on the trade tax.

6.12 Dates for tax declarations, tax payments and refunds

Every taxpayer has to submit an annual tax return to their appropriate tax office (Finanzamt). Also, an employer is obliged to withhold wage tax for their employees and, as a result, has to file wage tax returns. Tax returns for the wage tax and the value added tax (VAT) can easily be submitted to the tax office electronically. From 2014 for the tax period of 2013, corporate tax and trade tax returns will also be submitted electronically. The tax office where each respective company has its (German) head office will be their relevant tax authority.

The most important types of tax (corporate income, personal income, trade, and VAT) are collected via advance payments (normally monthly or quarterly). These are then offset against the actual tax liability in the annual tax declaration.

Quarterly advance payments for income tax (on 10 March, 10 June, 10 September and 10 December) have to be made in accordance with the estimated tax liability for the year.

Other dates for advance payments are:

Trade tax on the 15th of February, May, August and November; VAT, wage taxes and withholding taxes are due by the 10th day of the month, following the

month which has been declared in the tax return. Income and corporate tax returns should be filed by 31 May of the following year. However,

if the services of a tax consultant are employed, tax returns may be filed until 31 December.

Interest is 0.5 % per month on both tax claims by the tax office and tax refunds claimed by the taxpayer. The interest period starts 15 months after the end of the tax year. Interest on tax claims of the tax authorities is never deductible. However, interest on tax refunds claimed by the taxpayer is always taxable for individual and corporate income tax purposes.

Appeals

Appeals against tax assessments must be made within one month after the receipt of the tax assessment notice. This deadline is strict, and late appeals are not accepted.

An appeal against a tax assessment is possible at three levels. First of all, an appeal to the appropriate tax office can be filed. The next step is to appeal to the competent tax court and finally to the Federal Tax Court (Bundesfinanzhof).

It may also be possible to contend that European law is breached by German tax law. However, the taxpayer may not directly appeal to the Court of Justice of the European Union (ECJ). The Taxpayer can only request the (federal) tax court to refer the case to the ECJ in a preliminary ruling procedure. The judgement of the ECJ is binding for all tax courts and can overrule national tax rules.

Corporate tax and individual income tax

As of 2009, the half-income system has been replaced in Germany by the part-income system for dividends of shares allocated to the business assets and by the final withholding tax of 25% (Abgeltungsteuer) for dividends of shares allocated to the private assets, respectively. Still, it remains a shareholder relief system.

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Regarding taxes paid on the corporate level, there is no credit available for the shareholder. In order to individual shareholders to mitigate double taxation of distributed corporate income, only 60% of the income is taken into account for the individual income tax (business assets). Also, the dividend recipient is allowed a full credit for any dividend withholding tax. However, only 60% of income-related business expenses that are attributable to the dividend income are tax deductible.

For shares that form part of the private assets, a preferential rate of 25% (plus solidarity surcharge) on 100% of the dividend applies, compared to the maximum personal income tax rate of 45% (see section 7). The 25% tax is withheld upon payment and basically becomes final, i.e. no more tax is due on the dividend. The system for private assets is illustrated on the table below.

Corporate taxable income €10,000

Deduct: Trade tax, e.g. at a rate of 14% (1,400)

Deduct: Corporate income tax at 15% (1,500)

Deduct: Solidarity surcharge on corporate income tax at 5.5% (82.50)

Remaining balance €7,017.50

Net amount for dividend recipient €7,017.50

Taxation of shareholder

Final withholding tax at 25% plus solidarity surcharge: 26.375%

€1,851

Net Income €5,166.50

6.13 Social security contributions

In contrast to some other developed countries, the core social security in Germany is collectively financed by means of a process of redistribution. The current costs for social security are paid directly from contributions by employees and employers alike.

The German social security system comprises:

pension insurance, unemployment insurance, health insurance, nursing care insurance, accident insurance.

Employees may be exempt from the mandatory German social security system if they are sent to Germany by a foreign employer and if their terms of employment in Germany are limited from the beginning.

Generally speaking, social security contributions are shared equally by the employer and the employee, with the exception of accident insurance costs, which are solely covered by the employer. The employer is responsible for withholding and remitting the full amount of social security contributions (employee’s share and employer’s share) to the relevant authorities. Deductions made from an employee's salary are calculated on a sliding scale, according to the income threshold.

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Health insurance

Employees earning a gross wage of less than €4,125.00 per month receive mandatory insurance from one of the public health insurance providers. Employees whose earnings are above this income threshold can select a public or private insurance company. Employees and employers also share the premiums for private health insurance plans.

The basic flat health insurance contribution rate amounts to 15.5% of the employee’s gross income. 0.9% of the health insurance rate is paid by the employee only. The remaining 14.6% of the health insurance rate is equally shared between the employer and the employee.

Nursing care insurance

Nursing care insurance is organised in more or less the same way as health insurance, with a contribution rate of 1.95% of the gross wage. The employer and employee both pay half of the contribution rate, with childless employees paying an extra 0.25 % on top of their contribution. Slightly different rates, in favour of the employer, apply in the federal state of Saxony. The premiums are deducted through payroll accounts and are transferred to the nursing care insurance company via the health insurance company.

Pension insurance

Pension insurance is compulsory for employees. The premium is 19.9 % of the gross wage and is divided equally between employee and employer. Contributions are collected by the employee’s health insurance company.

Unemployment insurance

The premium for the mandatory unemployment insurance was recently reduced to 3.0 % of the gross wage, and is shared equally by the employer and employee. Contributions for unemployment insurance are collected by the employee’s health insurance company, which transfers the money to the Federal Employment Agency (Bundesagentur für Arbeit).

Accident insurance

Statutory accident insurance provides cover if an employee suffers an accident at the workplace or on the way to work. In contrast to the other four mandatory insurances (health, nursing, pension, and unemployment), the costs for accident insurance are exclusively paid for by the employer.

Every employer is responsible for informing the relevant professional association about the establishment of his or her business and must register with this organisation. The accident insurance rate is determined based on the company’s total remuneration sum and the hazard category of the employee’s work (the hazard category is determined by the relevant employers' liability insurance association). According to DGUV (the German umbrella association of employers' liability insurances), the apportioned quota levied in 2010 was 1.32%.

The monthly rates for these insurances in the Western and Eastern States in 2011 (for employees and employers) were:

Income threshold

Employer Employee Western States

Eastern States

Percentage Percentage € €

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Pension insurance 9.95% 9.95% 5,500 4,800

Unemployment insurance 1.5% 1.5% 5,500 4,800

Health insurance 7.30% 8.20% 3,712.5 3,712.5

Nursing insurance 0.975% 0.975% 1.225% (childless)

3,712.5 3,712.5

Total 19.725% 20.625% 20.875% (childless)

Example:

The employer's deductions for a married man without children in 2011, based on an annual salary of €30,000 in the Western States would have been:

Employee €

Monthly gross salary 2,500

Deduction

Wage withholding tax (13.68 %, Steuerklasse IV)

342

(Solidarity Surcharge: 5.5 % of wage tax) 19

Employee's share of social security

(20.875 % of monthly gross salary)

Total deductions

522

883

Monthly net salary 1,617

Employer €

Total cost for employer

- monthly gross salary 2,500

- employer's share of social security 493 (19.725 % of monthly gross salary)

Total costs: 3,021

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7. Personal taxation 7.1 Income tax

Individuals who are German residents, or are foreign nationals legally recognised as German residents, are subject to unlimited taxation, unless a tax treaty assigns the right to impose tax on income in favour of another country. Individuals who are not resident in Germany will be subject to limited taxation only, on income from German sources that are listed in section 49 in the German Income Tax Act.

An individual is a resident of Germany, if his or her residence or habitual abode is in Germany. Meaning, an individual may be subject to unlimited taxation in Germany from the very first day of his or her stay.

What is regarded as taxable income?

The German Income Tax Act (§ 2 para. 2 EStG) sets out seven categories of taxable income. Income that does not fall within one of these categories is not taxable:

Income from agriculture and forestry Income from business Income from independent personal services (doctors, notaries, lawyers, consultants,

architects etc.) Income from employment (salaries and wages) Income from capital investment (dividends, interest, capital gains) Income from rents and royalties Other income, including annuities, pensions and private, short-term capital gains (especially

from the sale of real estate).

Withholding tax is levied on wages, dividends, interest, capital gains, income from a silent partnership or from a participation loan, royalties and income from securities (§ 43 para. 1 EStG). This tax can be credited against the personal income tax liability, unless the withholding tax on private capital income is final (see the next paragraph on Abgeltungsteuer).

Capital gains derived by an individual within the first three categories of income, are included in the respective category of income. Private capital gains of securities are taxed as capital income, the rest only in the event of a private, short-term transaction. Only in case of a substantial shareholding in a corporation, the income is qualified as trade income.

A private short-term transaction occurs when the holding period for real estate was not more than 10 years, or for other property (e.g. cars, but not securities) was not more than one year. Such gains are regarded as ordinary income and taxed at regular rates.

Gains arising from the sale of substantial shareholdings in corporations and of partnership interests, qualify as business profits. A substantial shareholding in a corporation is given, if the participation amounts to 1% of the share capital at any time throughout the five years preceding the transfer. Capital gains arising from the disposal of a sole proprietorship or partnership may be subject to a preferential tax rate under certain conditions. Such capital gains are not subject to trade tax.

The net income of each of the categories of income listed above is calculated separately and - after deducting operating expenses and other income-related expenses – added to obtain the total income. The only exception is the category for capital income (see the next paragraph on

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Abgeltungsteuer). Losses from previous years, or the subsequent year, may be deducted. The rules and limitations on the loss carry back and loss carry forward (see section 6) are also applicable to individuals.

The total amount of income, reduced by special expenses and allowances for extraordinary hardship, result in the taxable income.

Wage tax

Employees have to pay wage tax (Lohnsteuer) on their wage income. Wage tax is a special form of the income tax paid by employees. The employer is obliged to withhold the wage tax due from their employee’s salary, and pay it directly to the tax office on a monthly basis.

The withheld wage tax is an advance payment for the personal income tax of the employee. As a result, employees who do not generate earnings from non-wage incomes are not obliged to submit an annual tax declaration. Even so, it can be more favourable for employees to file a tax return.

Special taxation of capital income – final withholding tax (Abgeltungsteuer)

Capital income, i.e. dividends, interest and capital gains from the sale of securities purchased after 31st December 2008, is no longer part of the overall taxable income. Capital income is taxable at a flat rate of 25% (plus solidarity surcharge: 26.675%). The final withholding tax is retained by the domestic debtor of the dividend or interest, or by the domestic institution managing the deposit (for instance a domestic bank), and then paid to the appropriate tax office. No more taxes are due on dividends paid out to private shareholders. However, costs attributed to capital income may no longer be deducted.

If the capital income is paid out by a foreign institution, e.g. a foreign bank, the individual taxpayer must report this income in his or her income tax return. The flat-rate of 25% is then levied by way of assessment.

Please note that the capital income is not subject to the flat tax if the corresponding security forms part of the business assets. Under certain circumstances, a taxpayer may also opt for the part-income taxation (as opposed to the flat rate), even though the shares are part of the private assets. This option can be advantageous, if the taxpayer incurs costs associated with the shares (e.g. interest on a loan). This is because these costs are deductible to the amount of 60% (part-income system), whereas no costs at all may be deducted under the flat tax regime.

Personal income tax for partnerships

Partnerships are not managed as independent legal entities in the same way as corporations. The individual partners carry all of the rights and tax obligations. So, it is not the partnership itself which is taxed (as is the case with corporations), but the individual partners - with the personal income tax rate for the corresponding partner being the deciding factor.

The taxable profit is determined at company level and allocated to individual partners according to their ownership shares. As a rule, both the retained and distributed profits of a partnership are liable for personal income tax.

Offsetting trade tax against personal income tax

Sole traders or individual partners of partnerships can offset some of the trade tax sole traders or the partnerships pay, against personal income tax – to the total of 3.8 times the trade tax base amount. This means that there is in effect no trade tax burden for sole traders/partnerships in municipalities with a multiplier of a maximum 400.9% (taking into account the additional effect of

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offsetting against the solidarity surcharge of 5.5%). Trade tax still has to be paid to the municipality. However, it can be offset against the personal income tax of the respective sole trader/partner.

7.2 Personal income tax rates

Income tax is levied at progressive rates, except for private capital income which is subject to the flat tax. In the case of married individuals, both of whom are resident in Germany and filing a joint return, the advantage of tax splitting is applied. This means income is divided equally between husband and wife. In general, splitting leads to a lowering of the progressive rates applied.

The individual tax rates for a single person are as follows (for married persons filing their return jointly, the amounts are doubled):

Year 2009 2010 2011

Basic allowance (€) 7,834 8,004 8,004

Minimum tax rate 14.0% 14.0% 14.0%

Maximum tax rate 42.0% 42.0% 42.0%

in excess of € 52,552 52,882 52,882

The special maximum tax rate of 45% is imposed on income in excess of:

Income

2009 2010 2011

Single (€ ) 250,401 250,731 250,731

Considering the additional solidarity surcharge of 5.5% on the individual income tax, the effective marginal rates amount to 44.3% (47.5% for the special maximum rate).

7.3 Assessment and filing

The tax assessment period for individuals is the calendar year. Individual income tax returns must be submitted by 31 May, following the end of the calendar year. An extension can be obtained upon application. If the services of a tax consultant are employed, tax returns may be filed until 31 December.

The tax authorities assess quarterly advance payments for the estimated income tax. The assessment is based on the preceding tax year’s income tax liability. Wage tax of an employee must be withheld and remitted by the employer every month.

7.4 Taxation of non-residents

Individuals who do not reside in Germany are subject to limited taxation, only on income from German sources that are listed in § 49 of the German Income Tax Act. These include income from:

domestic agriculture and forestry trade or business derived through a permanent establishment or a permanent

representative in Germany independent personal services performed within Germany

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dependent employment performed in Germany specific capital investments rent and leasing of German real estate certain other income, including gain on the sale of German real estate or domestic rights.

Methods of taxation

Non-resident individuals are taxed on their German source income either through a withholding tax or a tax assessment.

Withholding tax

Withholding taxes imposed on non-residents include:

Wage tax on income from employment, taxed at a progressive rate of between 14% and 45%.

Capital income from dividends and certain interest, generally subject to a withholding tax of 25%.

Income from use of royalties, generally subject to a withholding tax of 15%. Income for services provided by artists, sports people, actors, writers, journalists and

photographers, performed or used in Germany. These activities are subject to a withholding tax of up to 15%.

Remuneration of supervisory board members, subject to a 30% withholding tax.

In addition, the solidarity surcharge of 5.5 % is levied on the withholding tax.

Withholding tax on dividends, interest and royalties is often limited by double taxation treaties. Nevertheless, the German payer basically has to withhold tax at the higher rate. Withholding at a lower rate or zero rate may only take place if a certificate of exemption issued by the tax office is provided in advance. If withholding tax has already been deducted, the individual taxpayer may apply for a refund of the tax withheld in excess of the withholding tax applicable, using the relevant double taxation treaty.

Irrespective of the existence of a tax treaty, corporate recipients of dividends and interest may apply for a refund of the withholding tax which exceeds the corporate tax rate of 15%.

The anti-treaty and anti-EU directive shopping provision says:

‘A foreign company is not entitled to claim withholding tax relief, if and insofar as there are shareholders of the company who would not otherwise have been entitled to such tax relief, if they received the income directly, and where no sound economic or other reasons exist which justify the use of such a company or the company does not conduct business activities of its own which generate at least 10% of all revenues or the company does not have adequate facilities to generally participate in the market.’

Assessed taxes

Tax assessments for non-residents are conducted, if they generate income derived from:

Agriculture and forestry Trade and business through a permanent establishment or a permanent representative in

Germany Independent personal services through a permanent establishment in Germany Dependent employment upon application (only available for EU/EEA residents)

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Supervisory board members and for services provided by artists etc. upon application (only available for EU/EEA residents)

The tax base is the general taxable income. The progressive tax rate schedule for single persons applies. The general tax-free amount of €8,004 (as part of this tax rate schedule) is only applicable to income from dependent employment. The tax assessment period is the calendar year.

Application for more favourable taxation

Non-resident individuals, who derive at least 90% of their taxable income from German sources or whose non-German income does not exceed €8,004, may apply for more favourable taxation in Germany. In this case, they are basically taxed like German residents.

EU citizens may alternatively apply for preferential taxation for married couples, which is not available to non-resident individuals.

In addition, special agreements exist with France, Switzerland, Austria and Luxembourg for daily cross-border workers.

7.5 Inheritance and gift tax

Inheritance or gift tax applies to

The acquisition of property by virtue of death The acquisition of property as a gift A family foundation (Familienstiftung) every 30 years Transfer of property to specific foreign trusts.

Unlimited inheritance and gift tax liability is applicable, if the decedent or donor or the recipient has German residency. Limited inheritance or gift tax liability applies only with regard to certain German property defined in § 121 of the Valuation Act (Bewertungsgesetz - BewG). Extended limited tax liability may exist within the rules of the Foreign Transaction Tax Act (Außensteuergesetz - AStG).

The valuation of the transferred property is assessed according to the provisions of the Valuation Act. All property is basically valued according to their current market value. However, certain privileges exist for agriculture and forestry, for shares (holding of more than 25%), for sole proprietorships and for participations in trade partnerships. These types of property may be passed on either tax-free or 85% tax-exempt. However, several conditions and deadlines have to be considered.

Smaller gifts or inheritances are exempt from tax by deducting a personal allowance from the value of the assets. Personal allowances are granted, for example to spouses (€500,000) and to children (€400,000).

The applicable inheritance and gift tax rate depends on the value of the beneficiary’s gain and what the relationship is between the beneficiary and the decedent or donor. For example, for children or the spouse of a decedent, the applicable rates range from 7% to 30%, whereas the applicable rates range from 30% to 50% for persons who are not related to the decedent.

Six double taxation treaties on inheritance and gift taxes exist. These include Denmark, France, Greece, Sweden, Switzerland and the United States.

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8. Double taxation agreements As of 2011, the Federal Republic of Germany has in place 91 double taxation treaties with other countries, with respect to income taxes. These treaties specify:

Whether the right to tax particular income is exercised by the country of residence or the country of source

To what extent tax credits will be granted by one country for taxes paid in another country Whether income is fully tax-exempt in one country or the other.

The following schedule summarises regular withholding tax rates for double taxation treaties, in relation to income taxes:

Recipient of German-source income

Dividends Dividends Royalties Interest

Holding Holding

Less than 10 % 10 % or more

less than 25% 25 % or more

% % % % % %

Australia - - 15 15 10 25

Austria 15 5 (E) - - 0 (I) 0 (I)

Belgium - - 15 15 (E) 0 (I) 25/0 (I)

Bulgaria 15 5 (E) - - 5 (I) 5 (I)

Canada 15 5 - - 10/0 10/0

Cyprus - - 15 10 (E) 0/5 (I) 10 (I)

Czech Republic - - 15 5 (E) 5 (I) 0 (I)

Denmark 15 5 (E) - - 0 (I) 25 (I)

Egypt - - 15 15 15 25

Estonia - - 15 5 (E) 10 (I) 25 (I)

Finland - - 15 10 (E) 5 (I) 0 (I)

France - - 15 5 (E) 0 (I) 0 (I)

Greece - - 25 25 (E) 0 (I) 10 (I)

Hungary - - 15 5 (E) 0 (I) 0 (I)

India - - 10 10 10 10

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Iran - - 20 15 10 15

Ireland - - 10 10 (E) 0 (I) 0 (I)

Israel - - 25 25 0/5 15

Italy - - 15 15 (E) 5/0 (I) 25 (I)

Japan - - 15 15 10 10

Latvia - - 15 5 (E) 10 (I) 25 (I)

Lithuania - - 15 5 (E) 10 (I) 25 (I)

Luxembourg - - 15 10 (E) 5 (I) 0 (I)

Malta 15 5 (E) - - 0 (I) 25 (I)

Netherlands - - 15 10 (E) 0 (I) 0 (I)

New Zealand - - 15 15 10 25

Norway - - 15 0 0 25

Poland - - 15 5 (E) 5 (I) 25 (I)

Portugal - - 15 15 (E) 10 (I) 25 (I)

Romania 15 5 (E) - - 3 (I) 25 (I)

Russian Fed. 15 5 - - 0 25

Singapore - - 15 5 8 25

Slovak Republic - - 15 5 (E) 5 (I) 0 (I)

Slovenia - - 15 5 (E) 5 (I) 25 (I)

South Africa - - 15 7.5 0 10

Spain - - 15 10 (E) 5 (I) 10 (I)

Sweden - - 15 0 (E) 0 (I) 25 (I)

Switzerland - - 15 5* 0 25

United Kingdom - - 15 15 (E) 0 (I) 0 (I)

United States 15 5/0 - - 0 25

(E): see Part 6, EU Parent Subsidiary Directive. (I): see Part 6, EU Interest and Royalties Directive. *) 20 % or more

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9. Sales tax – Value Added Tax (VAT) Value added tax (VAT) is a tax on the exchange of goods and services. Companies are obliged to add VAT to the prices of their goods or services and to invoice their customers accordingly. The German VAT system is based on an EU directive and therefore follows common principles of the EU VAT system.

VAT is imposed indirectly. The tax is passed on through all transaction levels (for example producers to wholesalers to retailers) and is ultimately paid for by the ultimate consumer. Companies are, therefore, not regularly burdened with VAT.

However, VAT is a strictly controlled and supervised tax. Therefore, the administrative burden is high and the compliance requirements are strict. Apart from these administrative costs, it is important to note that failure to conform to the detailed compliance rules results in a higher tax burden. A prominent example for this is that tax-exempt intra-EU sales become fully taxable with no possibility to pass the tax on to the customer.

9.1 VAT rate

The current regular VAT rate in Germany is 19%, which is below the European average. A reduced rate of 7% applies to certain consumer goods and everyday services (such as foods, newspapers, local public transport and hotel accommodation). Some services (such as banking, insurance premiums and health services) are completely VAT-exempt.

Collected VAT has to be paid to the appropriate tax office on a monthly, quarterly or annual basis, depending on the company’s level of sales.

9.2 Input VAT deduction

Upon purchasing goods or making use of services, companies regularly have to pay VAT themselves. The taxes collected and paid can be offset in the VAT return as input VAT deduction (Vorsteuerabzug). For companies, VAT tax represents a transitional item only.

9.3 International VAT considerations

Intra-EU sales are exempt from VAT. Any related input tax is still fully deductible from the VAT liability. Goods traded between different EU member states are, however, subject to the so-called acquisition tax (Erwerbsteuer). Special provisions apply to airlines and to the carriage of goods and passengers to or from other EU countries.

Exports outside the EU are also exempt from VAT. However, any related input tax may still be fully deducted from the VAT liability. Imports to Germany from non-EU countries are subject to an import VAT upon entry. The import VAT is levied at the VAT rate of 19 % and 7 %, respectively. A company importing goods may deduct the import VAT under the general terms for input VAT. A non-EU business is required to register with the tax authorities in the country where its goods and services first enter the EU, and the import-VAT is assessed accordingly.

EU businesses and non-EU businesses that are not obliged to register, or did not register on a voluntary basis for VAT purposes, may apply for a refund of VAT charged to them in Germany. A refund application is subject to formal requirements (see www.bzst.de; information hotline in English: +49 (228) 406 1212, email: [email protected]) and a strict deadline. While non-EU

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businesses have to contact the German tax authorities (Bundeszentralamt für Steuern), EU businesses have to file their refund application via their appropriate national tax agency.

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10. Portfolio investment for foreigners There are no restrictions on foreign investment in German securities or in other property. Neither are there any restrictions on the transfer of profits derived from German investments.

If an investor acquires or increases shareholdings in German corporations publicly listed on the German Stock Exchange above certain thresholds, the investor is legally obliged to notify the corporation itself and the Federal Financial Supervisory Authority (BaFin) of his participation. The thresholds are 3%, 5%, 10%, 15%, 20%, 25%, 30%, 50% and 75%.

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11. Trusts The Anglo-American concept of trusts does not have an equivalent concept in German law. The closest German concept is the foundation (Stiftung). Foundations, however, are rarely used for business purposes in Germany.

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12. Practical information 12.1 Transport

Transportation systems in Germany - by air, rail or motorway - are excellent. International airports exist in Berlin, Bremen, Cologne, Düsseldorf, Frankfurt, Hamburg, Hannover, Leipzig, Munich and Stuttgart. The vast numbers of motorways provide fast connections between all parts of Germany.

12.2 Language

German. Foreign languages are widely spoken, especially English.

12.3 Time relative to Greenwich Mean Time (GMT)

Germany is one hour ahead of GMT between the end of October and the end of March and two hours ahead between the end of March and the end of October.

12.4 Business hours

Office working hours are usually between 8am and 5pm, with one hour for lunch.

Factories start earlier, and banking hours are generally 9am until 4pm, Monday to Friday, and until 6pm on Tuesdays and Thursdays.

The opening hours of shops are regulated differently by the law of each state. Typically, shops are open from 10am until 8pm, Monday to Saturday.

12.5 Public holidays The holidays observed by most businesses and government offices are:

New Year's Day - 1 January Epiphany (in some states only) - 6 January Good Friday (Friday before Easter Sunday) Easter Monday (Monday after Easter Sunday) Labour Day - 1 May Ascension Day (second last Thursday before Pentecost) Pentecost Monday (Monday after Pentecost Sunday) Corpus Christi (second Thursday after Pentecost, in some states only) Assumption Day (in Saarland and parts of Bavaria only) - 15 August Unification Day - 3 October Reformation Day (in all Eastern states) - 31 October All Saints' Day (in some states only) - 1 November Day of Repentance (in Saxony only) Christmas Day - 25 December Boxing Day - 26 December

12.6 Useful links http://www.gtai.com: Basic information and contact for foreign investors in Germany.

http://www.germantaxes.info: Foreign investors’ help desk of the Federal Central Tax Office (Bundeszentralamt für Steuern)

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