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2024-02-16 07:16:28 Benefits of a German company formation vs. German branch

Benefits of a German company formation vs. German branch

Kategorie: General | Lesedauer: 4 Minuten

What is the essential difference and what are the benefits from a tax treaty perspective?

Benefits of a German company formation vs. German branch

Kategorie: General | Lesedauer: 4 Minuten

What is the essential difference and what are the benefits from a tax treaty perspective?

(c) jro-grafik, Adobe Stock

Benefits of a German company (UG, AG, or GmbH) over a German Branch

With the separate entity approach, you can benefit as follows by forming a new German company:

  1. Shielding effect for profits and losses generated in Germany

  2. The new German company is eligible for benefits according to tax treaties

  3. If you already have a foreign parent company, futher beneifts apply:

    a) In the case your foreign entity is an EU based company, you can make a German company a wholly owned subsidiary of your European parent company.
    Net dividends can be disbursed tax free in Germany according to the EU regulation 2011/96/EU (mother-daughter directive).

    b) In such cases where your foreign entity is located outside of the EU, you can benefit from tax treaties which oftentimes reduce the tax on net dividends to a low amount of on average 5%. The only requirement will be that your foreign parent company needs to hold a minimum of stakes in the new German company you're forming. We'll discuss the tax treaty applicable to you in a free, initial tax consultation. Contact us today!

  4. At your parent company, you can treat the setup cost towards forming your new German company as an investment

  5. Tax-effective lease, loan and employment agreements are possible, even with the shareholders

Transfer prices between related companies must be agreed at arm’s length.

How does taxation of a German Branch vs. German UG or German GmbH work?

The taxation of a German Branch is usually the same as when forming a German UG or GmbH (around 30% including trade tax) if the foreign company type resembles the such of a corporation that files and pays tax on its own for the income generated. We refer to this as an intransparent unit regarded for tax purposes, meaning taxation of income is not directly passed onto the shareholder level.

However, in case the foreign parent company is qualified as a transparent unit, it's mostly disregarded for tax purposes as income is taxed on a shareholder level. In such cases, the German tax rates will vary between 15% up to 45%. Should the shareholders be non-residents of Germany, there is no tax free base in the German Income Tax Act. The shareholders would personally have tax nexus in Germany. In a scenario where the income type is classified as being additionally subjected to trade taxation, a free base for trade tax purposes could apply for partnerships (24.500 EUR annually, shared by all shareholders).

How do you know how the German branch will be taxed in my case?

A two-step comparison is required to classify the foreign company type into transparent or intransparent taxation.

In the first step, the foreign company structure needs to be examined to understand the legal form of the parent company abroad according to foreign law. Typically, the basis for this is the foreign shareholder agreement or corporate by-laws.

The next step is to categorize this foreign entity into the two thinkable company forms (transparent or intransparent taxation) according to German national law.

Over the years, the following criteria has emerged to distinguish between the two company types:

Transparently Taxed Partnership
(may file a tax return, but tax mostly paid by shareholders)
Intransparently Taxed Corporation
(files its own tax return as legal entity and pays tax)
Self-governance (shareholders manage company) Third-party directorship (including shareholders as officers)
Limited purpose-driven lifetime Typically, unlimited lifetime
Vinculation of shares (transfer restrictions) No/little restrictions on share transfers
Transparent asset management Intransparent asset management
Shareholder capital surplus account model generally without fixed share capital or requirement to pay in the capital Fixed share capital, with minimum share capital and (partial) payment of share capital required by law
Profit appropriation to shareholders according to the shareholder or partnership agreement Disbursement of dividends to shareholders as per shareholder resolution following shareholder meeting, keeping of corporate minutes
Unlimited liability* Limited liability*

*Combination of limited liability with partnerships is possible (i.e. C-Corp. Inc. & Co. KG, GmbH & Co. KG, Partnerschaftsgesellschaft mit beschränkter Berufshaftung, short: PartG mbB; English: Partnership Firm with limited professional liability).

We highly recommend a custom review by a German Certified Tax Advisor to correctly rank your foreign company type if you have intentions of forming a German Branch. The Federal Tax Administration's popular brief classifying most foreign entity types must be taken into account during this review (confer to BMF publication December 24, 1999, German Federal Tax Gazette Vol. I of 1999, pg. 1076, Tables 1 and 2).

Under scrutiny: United States Limited Liability Company (LLC)

For a U.S. LLC, a separate review is required. The Federal Tax Administration has published an extensive brief about ranking a U.S. LLC (confer to BMF publication March 19, 2004, German Federal Tax Gazette Vol. I of 2004, pg. 411). Recently, the German Fiscal Supreme Court (Bundesfinanzhof, short BFH) has ruled that a Single-Member LLC may be qualified as a partnership (BFH decisions from May 18, 2021, case docket numbers I B 75/20 and I B 76/20). Custom advisory is required, and an individual binding opinion from the tax authority in charge should be sought according to § 89 Section 2 German Fiscal Code. This will be a necessary investment to avoid later surprises.

What is the major difference if I form a German Branch of my foreign company?

The major difference of a German branch is that dealings between the German branch and headquarters need to be recorded even if not invoiced as the German branch and its head office form two separate tax subjects. This requires more extensive recording to abide by the at arm’s length principle.

A German branch doesn't have any attraction for your global sales. If the German branch supports your sales activities, this will however result in German tax nexus of such activities.

Free initial tax consultation!

We'll explain the differences in a free, initial consultation. Contact us today!

von Patrick Rizzo

Veröffentlicht: 16.02.2024

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