Verdeckte Gewinnausschüttung

Hidden profit distribution: This leads to you or your company being liable to prosecution

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Are you aware of the threat of a so-called hidden profit distribution? Or to put it differently: Have you ever received funds or benefits from your GmbH that a third party would not have received?

If you have answered the second question with yes, you might have already committed a criminal offence.

Unplanned benefits, such as a hidden profit distribution, are in fact prohibited by law and will be penalized by the tax office.

It is therefore of paramount importance for companies as well as their owners to prevent such transactions from happening.

For this reason, I will explain in this post:

This article was updated on 28 July 2021.

What constitutes a hidden profit distribution?

The hidden profit distribution (verdeckte Gewinnausschüttung) is laid down in the Corporate Income Tax Act (KStG) and concerns extraordinary distributions of the company profit, to the benefit of the company’s shareholders.

In summary: If a shareholder receives benefits at the expense of the company (e.g. excessive rent or salary payments) that a third party would not receive (see section 8 (3) Corporate Income Tax Act (KStG)), this constitutes a hidden profit distribution.

In general, the responsibility for a hidden profit distribution lies with the managing director. Specifically, at least one of the following 3 criteria must be met:

  1. The company is prevented from building up assets.
  2. The company’s assets are unlawfully diminished.
  3. The payment or benefits are not based on a written agreement that has been concluded beforehand.

Admittedly, this definition might sound rather abstract to you. Let me therefore explain these rules with a few examples taken from everyday practice that make them easier to understand.

Hidden profit distribution: 6 common cases, simply explained

Most hidden profit distributions are not carried out intentionally. Many entrepreneurs are simply unaware that certain agreements are unlawful.

To help you avoid this, I have summarized below the six most common mistakes:

1. You are selling an asset to your company at an inflated price

Please note: If you transfer one of your assets to your GmbH, the price must correspond to the approximate market value.

Otherwise, the legislator will assume that you have enriched yourself at the expense of your GmbH.

My advice: If you have obtained an expert opinion on the price for such transactions, you are always on the safe side.

2. You are renting out a building or a warehouse to your GmbH and the rent is higher than the market price

Be very careful when you rent out an office to your company: as in the above-mentioned sale, this must also be governed by the arm’s length principle.

The rent must be in line with the market.

3. You are paying your private expenses from the bank account of the GmbH and do not reimburse the money

Quickly pay for your grocery shopping with your company card instead of your own bank card? Not a good idea!

To be on the safe side, you should always pay for all personal expenses from your personal bank account.

While this may entail a bit more work at times, it will save you a lot of discussions with the tax office.

4. You are paying yourself a high annual salary at the end of the year

You set yourself a low salary for the time being at the beginning of the financial year, because you do not know yet how the financial year will pan out? You believe that in case of an above-average year you are still able to adjust the salary afterwards anyway?

I must absolutely advise against this. Set a realistic salary right from the start. After all, a subsequent readjustment can very quickly become a hidden profit distribution.

5. You are using your company car privately without having concluded a prior agreement

If you want to use your company car privately, you must always conclude an agreement. At the end of the day, the private use of a company car is a so-called benefit in kind and therefore subject to taxation.

If you use the company car for private journeys without any agreement in place, you are guilty of a hidden profit distribution.

6. You grant a loan to your GmbH that is not in line with market conditions

Again, the same principle applies here as with the sale or rental: If you as a shareholder of your company grant a loan to your company, the interest rate must not significantly deviate in either direction from the average market rate.

Always bear in mind: How much interest would be earned or paid by a third party?

What legal penalties do you face in case of a hidden profit distribution?

A hidden profit distribution can have the following consequences for you as (majority) shareholder or managing director as well as your GmbH:

  1. Any unlawful business expenses (excessive rent, excessive salary, etc.) must be reversed. This will increase your company’s profit level. Hence, your company will have to pay back taxes for trade and corporate income taxes.
  2. The hidden profit distribution becomes an open distribution of profits. In other words: The money you received unlawfully from your company must be back-taxed at your personal income tax rate.

The worst case scenario: Legal proceedings because of attempted tax evasion

In addition to substantial back taxes, in serious cases the tax office may even file charges against you. The allegation: attempted tax evasion.

In the case of tax evasion (whether intentional or not), you as a managing director may face a prison sentence of up to 10 years. The reason behind this is the so-called GmbH managing director liability.

Within the scope of this liability, you as the managing director can be held personally responsible for misconduct such as tax evasion or understatement of tax.

This is how minority shareholders are harmed by a hidden profit distribution

While the managing director, or majority shareholder, is directly liable to prosecution, a hidden profit distribution has other economic consequences for minority shareholders.

In the event of a hidden profit distribution by the majority shareholder, the profit of the GmbH to be distributed is reduced. This also means that the profit share of a minority shareholder is reduced.

This means: As the majority shareholder has unlawfully enriched him- or herself, the minority shareholder’s share of profit has decreased.

However, if a hidden profit distribution is discovered, the minority shareholder can claim for damages.

If you are a minority shareholder and faced with such a case, you should always consult your lawyer on how to proceed further. As a tax consultant, I cannot provide you with legal advice on this.

The catch when it comes to claiming damages: It is not always possible to prove beyond doubt that this was a hidden profit distribution. If it cannot be proven beyond reasonable doubt that the majority shareholder has acted improperly, you will not receive any compensation.

It is therefore also important for you as a minority shareholder that you take precautions to prevent a hidden profit distribution from occurring in the first place. I will explain later in this blog post how to do this.

How can you prevent a hidden profit distribution from happening?

As an honorable managing director of your company, it goes without saying that you want to prevent expensive back payments or even a prison sentence.

The problem: Despite your newly acquired knowledge, without additional safeguards, the risk of unknowingly carrying out an unlawful hidden profit distribution remains high.

In order to make sure you do not step into this trap, I will introduce you to three proven ways that will greatly reduce your risk of carrying out a hidden profit distribution.

First way: The arm’s length principle

The arm’s length principle is a guideline with which to assess tax circumstances.

The term already states what is behind an arm’s length transaction: If you are carrying out a transaction with your company, the conditions must compare to those that would be awarded to a third party.

Let me remind you again of a similar example we discussed above: You are renting out a warehouse to your company and receive € 1,000 a month in rent. Would a third party who wants to rent a warehouse of the same size pay you the same amount?

If a third party would pay € 600 at the most, the transaction with your company does not comply with the arm’s length principle. To avoid a hidden profit distribution, you must adjust the rental agreement.

Second way: Compliance with formal requirements

Keeping track of formal requirements also helps prevent a hidden profit distribution. This means for you as the managing director:

  • Put down all agreements in writing
  • Only make a transaction when a transparent, verifiable agreement is in place
  • Formulate all content as clearly as possible

Third way: The Tax CMS

As a tax consultant, I recommend that every company uses an effective control system, such as a Tax CMS.

This system captures all processes within your company, which will substantiate your honorable intentions.

In the event of irregularities, the tax office can no longer assume a hidden profit distribution or an attempted tax evasion this way.

In another one of my blog posts, I have described in more detail what a Tax CMS is exactly and what advantages it creates for you as an entrepreneur.

Conclusion: Be very careful when it comes to transactions with your GmbH…

Your alarm bells should start ringing every time you conclude an agreement with your company or pay out any of its funds to yourself. This is exactly the situation in which many entrepreneurs slide (without knowing it) into a hidden profit distribution.

Even if the hidden profit distribution is carried out unintentionally, you are at risk of high back tax payments of several thousand euros.

On a positive note: Using simple means such as the arm’s length principle or the internal Tax CMS, you as the managing director of the company are able to prevent unlawful profit distributions.

If you would like to know how the three ways presented in the post are best implemented, or how else to protect yourself from a hidden profit distribution, please feel free to contact me.

You can reach me by telephone (+49 40 44 33 11), e-mail (anfrage@steuerberatung-breit.de) or via my contact form (click here).

Kind regards,

Thomas Breit

Photo: © Elnur – stock.adobe.com

Tod-des-Unternehmers

Death of a company owner: What happens to your business?

Have you ever wondered what will happen to your business in the event of your death? Will it be dissolved or will the shares be passed on to your heirs?

Again and again entrepreneurs come to me with these questions. When it comes to company succession in particular, there is a lot of uncertainty. Understandably, many entrepreneurs are worried that their life’s work may end up in the wrong hands.

With this blog post, I would like to answer the most common questions my clients have about this issue. You will learn about how the death of a company owner is handled in different legal forms (sole proprietor, KG and GmbH) and what the legal consequences are for their heirs.

In fact, it is the legal form that primarily determines whether a company is automatically dissolved or can seamlessly continue. In the next section, I will explain in detail what effect the death of the entrepreneur has on sole proprietorships, KGs and GmbHs.

What happens when an entrepreneur dies and has a…

…sole proprietorship?

Here one must distinguish between civil law and tax law.

Under civil law, it depends on whether the deceased entrepreneur was registered as a sole trader (eingetragenen Kaufmann e.K.) or not. If the deceased was not a registered sole trader, the business is “invisible” under civil law and is dissolved upon death.

If the entrepreneur was registered as sole trader the business always passes to the heirs.

Under tax law, it makes no difference whether one was a registered sole trader or not.

The heirs always have six months to decide whether they want to continue the business or not.

If the business is not continued, it is considered to be terminated retroactively as of the last day of life. Then a closing balance sheet must also be made as of this date for tax purposes. If the profit was not previously determined with a balance sheet, a reconciliation statement must also be made.

The business is then deemed to be dissolved. Possible tax liabilities are passed on to the estate and must be settled by the heirs. In the same way, any tax claims are also passed on to the estate. In this case, the heir(s) can benefit from a possible tax refund.

If they decide to continue running the company, they do not have to carry out these steps, they can simply continue the business.

…limited partnership KG?

In the case of a limited partnership (Kommanditgesellschaft KG), succession depends on the company’s articles of association. This is because company law takes precedence over inheritance law here.

There are three possible scenarios for limited partners:

  1. No succession provision in the articles of association:In this case, the shares pass to the persons already participating in the partnership. As an heir, however, you do not go away empty-handed, but are entitled to a capital settlement. In legal terms, this procedure is referred to as accrual (Anwachsung).
  2. Qualified succession:In this case, the person who succeeds you is named in the articles of association. Other legal heirs are entitled to a lump-sum settlement.
  3. Simple succession:It is stipulated in the articles of association that the legal heirs will receive the company shares. If there are several heirs, each one becomes a partner in the KG.

In the case of general partners, it depends on whether the general partner is a natural person or a legal entity.

If the deceased is a general partner as a natural person, the law of succession applies. This means that their shares are divided among the legal heirs.

However, in the case of a GmbH & Co. KG the situation is different. Here, the GmbH is the general partner. If the shares in the GmbH are in turn held by the KG itself, the deceased partner’s shares are distributed in the same way as in the case of limited partners.

…limited liability company GmbH?

Similar to the KG, the succession regulations for a GmbH depend on the articles of association of the company.

Here there are three possible situations:

  1. Redemption clause in the articles of association:If there is a redemption clause, the shares are transferred to shareholders who are already involved. The legal heirs of the deceased partner are entitled to a capital settlement, but do not become shareholders. This is comparable to “accrual (Anwachsung)” in a KG.
  2. Transfer clause in the articles of association:Here, the shares are bequeathed to a person designated in the articles of association. A transfer clause is therefore comparable to the qualified succession provision in KG.
  3. No succession provision in the articles of association:In this case, the shares go to the legal heirs. If there are several heirs, each of them becomes a shareholder in the GmbH.

Therefore, think carefully about what should happen to your shares in the event of your death and, if necessary, include a provision in the articles of association.

What does this mean for your heirs? Inheritance tax!

If your shares in the company pass to your legal heirs, they are liable for inheritance tax. If you and your company have not prepared for the transfer, your heirs can be burdened with thousands of euros in inheritance tax.

However, if you have planned ahead and optimized your business, you can pass on your shares without burdening your heirs with a high tax bill.

Conclusion: The legal form and articles of association are crucial in the event of death

The impact of an entrepreneur’s death depends primarily on the company’s legal form and the provisions enshrined (or not enshrined) in the articles of association. The articles of association can, for example, name a certain person as the successor.

However, it may also be stipulated that your shares go to your co-partners and that your heirs only receive a capital settlement.

To ensure that what you want to happen to your shares really does happen, it is therefore essential that you start company succession planning in good time. Because in order for the succession to be legally clear cut and optimized from a tax point of view, it must be planned several years in advance.

If you have any further questions on the subject or would you like to know how best to plan your company succession,

you are welcome to contact me with your questions. The initial telephone conversation is without any obligation. After all, you want to make sure that I am the right tax consultant for you.

You can contact me at any time by phone (+49 40 44 33 11), e-mail (anfrage@steuerberatung-breit.de), via my contact form or at my tax consultancy office in Hamburg.

Kind regards,

Thomas Breit

Photo: © Rawpixel.com – stock.adobe.com

Silent partner: A great way to get fresh capital or an expensive mistake?

Are you a business owner looking for more capital to grow your company? Perhaps you don’t want to take out a bank loan and are wondering if a silent partner would be a good alternative for you?

My personal opinion: Yes, getting a silent partner on board can be a good idea. But only if you know all the pros or cons of what you are getting into.

With this blog post I would like to give you the tools to make the decision. You will learn:

This article was updated on 29 July 2021.

What is a silent partner?

A silent partner is a shareholder of your company and participates with a contribution of assets (money, goods or services) (Section 230 (1) German Commercial Code (HGB)).

The amount of the contribution can be contractually agreed. In addition to this, the contract must contain an ordinary (with due notice) and extraordinary (without notice) cancellation provision.

Silent partner vs. “normal” partner: What are the differences?

Difference 1: The registration of the partnership

Unlike a “normal” partner or shareholder a silent partner is not documented anywhere.

They do not have to be listed in a public register or on the balance sheet.

Difference 2: Participation in the profits, losses and capital gains of the company

An ordinary partner shares in the profit, loss, and appreciation of the company.

silent partner normally only participates in the profit of the company. They do not run the risk of a loss in value of their equity due to company devaluation, but they also do not benefit from an increase in value either (Section 232 (2) German Commercial Code (HGB)).

Please note: It can also be agreed in the contract that the silent partner participates in the loss or increase in value. But then it is not a normal silent partnership, but a so-called atypical silent partnership.

Which situation this special form is suitable for is summarized in a separate blog post. Just click on the following link to get to the article: https://www.steuerberatung-breit.de/en/atypical-silent-partnership-with-a-limited-liability-company-gmbh-more-liquidity-less-taxes/

Difference 3: Monitoring and participation rights

In contrast to a normal shareholder, a silent partner usually has no say in the running of the company. Therefore, they cannot make any decisions themselves and have no voting rights at the assembly of shareholders.

silent partner is however entitled to audit the annual financial statements. But, they do not have the right to monitor ongoing activities and transactions (e.g., contracts). Only ordinary shareholders have these rights.

However, like with the second difference, the atypical silent partner is the exception to this rule. This type of silent partner has, in fact, comprehensive participation and monitoring rights.

Difference 4: Treatment in the event of insolvency

In the event of insolvency, a silent partner is a creditor of your company and can demand full repayment of their investment.

However, an ordinary shareholder does not have this right and loses their stake if the company goes bankrupt.

With a silent partner: you benefit from these seven advantages

1) More equity: Having a silent partner increases your equity. This is because the silent partner’s contributions must be reported as equity.

2) Financing without a bank loan: You can finance your business entirely without a loan from the bank. In the case of loan financing, interest would accrue regardless of what the profit of the company is. The silent partner, on the other hand, only receives a share of the profits if the operating result is positive.

3) Low repayment risk: The repayment risk for you is low because the silent partner bears the risk of total loss without compensation and without receiving collateral. But beware: Interest rates are higher here than with a straight loan.

4) A weak co-partner: A silent partner is a weak co-partner who has no say in the company, and you can part from them more easily.

5) Choice of participation: You can decide whether or not to give the silent partner a share in the value of the company.

6) Tax benefit for an atypical silent partnership: If the silent partner also participates in the value of the company, then the company will always be taxed like a partnership, regardless of its outward legal form. In other words:

  • The income taxis reduced by the trade tax burden.
  • Distributed profits are not taxed.
  • The taxation is up to 18% lessthan for a GmbH, although on the outside it may be a GmbH. (As the silent partner can be concealed, there is a separate commercial balance sheet and tax balance sheet).

7) Perfectly suited for succession planning: A silent partnership is especially suitable for succession planning. The heirs are initially only weak shareholders in the company, but can become strong shareholders at a predefined time.

In addition, you can save your tax-optimized “private” assets as part of a family solution and distribute them via the silent partnership or give them away or bequeath them via succession planning.

The three disadvantages of a silent partner: here’s what you need to watch out for

1) Be careful with an AG: The silent partner can be concealed within most companies. But be careful when it comes to stock corporations (Aktiengesellschaften AG). Here the silent partnership must be registered in the commercial register.

2) Put the procedure for determining the company value in writing: The procedure for determining the value of the company should be specified concretely in the partnership agreement with the silent partner.

This prevents disputes arising later about the procedure that was actually used. After all, there are at least 20 different methods, all of which can lead to a different value.

3) Preparation of two balance sheets: You must prepare two balance sheets for a silent partnership. First, the commercial balance sheet for the legal form under commercial law, e.g. GmbH.

Second, the tax balance sheet. In this case, the company is always taxed like a partnership, as mentioned above.

Silent partner: How to terminate the contract

Have you fallen out with your silent partner? Or do you want to sell your business and in order to find a buyer you need to “get rid” of the silent partner?

Unlike with other shareholders, you can get rid of a silent partner very quickly. You just have to terminate the contract.

But beware: If you terminate an atypical silent partner, this is classed as a corporate transformation under tax law!

The GmbH, which, due to the silent partner was classed as a partnership now reverts to a “normal” GmbH again for tax purposes.

My tip for termination: Only dissolve the contract if you no longer need the silent partner’s money. Otherwise, you will probably have to finance their share with a (short-term) bank loan and may have additional costs of thousands of euros.

Conclusion: Silent partnership makes financing possible without a bank

As you can see, silent partnership can bring more advantages than disadvantages: From increased equity to tax benefits. The biggest advantage, however, is probably the access to capital without a bank loan.

You only have to pay interest or profit shares to the silent partner if your company actually makes a profit.

Furthermore, a silent partnership can be an ideal solution for succession planning for the company: First, you involve your children as “weak” shareholders and can transfer more and more rights to them over time.

If you have any further questions about silent partnerships or would like to know how to proceed step-by-step with the implementation, please feel free to contact me.

You can reach me at any time via phone (+49 40 44 33 11), e-mail (anfrage@steuerberatung-breit.de) or my contact form.

Kind regards,

Thomas Breit

Photo: © franz massard – fotolia.com

GmbH laufende Kosten

Change of legal form: These recurring costs are to be expected in a GmbH limited liability company

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Are you a sole proprietor or the majority partner in a general (OHG) or limited partnership (KG)? Have you been considering changing the legal form of your business to a GmbH, but do not know what recurring costs to expect?

Does this raise doubts or concerns that all the advantages of a GmbH could be “eaten up” by the increased cost of preparing annual financial statements and tax returns?

As a tax consultant in Hamburg, I can tell you that this is one of the greatest concerns of my clients in connection with company transformation.

Entrepreneurs often know about the advantages of a GmbH, like the limitation of liability and the effect on the company image. However, most entrepreneurs do not know what recurring cost to expect after transforming their company into a GmbH.

This blog will explain in easy words how the recurring costs of a GmbH and sole proprietorships or partnerships differ and why a company transformation may be worth while for you despite the higher cost.

Why should I convert my business as a GmbH in the first place?

The liability is limited to the capital contribution: If the worst comes to the worst, you as a sole proprietor or partner in a partnership are liable to an unlimited extent with your private property. In a GmbH, in turn, you are only liable up to the amount of your capital contribution,

meaning that a corporate transformation will reduce your personal risk.

A GmbH allows for more efficient tax structuring: In contrast to partnerships and sole proprietorships, the GmbH itself is subject to tax, which means that you have more possibilities when it comes to tax structuring. Larger companies might even want to consider setting up a holding structure.

I have prepared a separate comprehensive blog that contains everything you need to know about holdings, which is available here: https://www.steuerberatung-breit.de/en/holdings-when-are-they-an-advantage-and-when-do-they-pose-a-risk-for-limited-liability-companies/

GmbHs have a better image than other legal forms: As you need a minimum share capital of EUR 25,000 to incorporate a GmbH, you are automatically considered more reputable than sole proprietors or partnerships that only require seed capital of EUR 1.

With a high equity base, you will be perceived as a “seasoned entrepreneur” and enjoy more trust with customers, suppliers and banks.

Company succession is easier to organize: A GmbH offers excellent possibilities if you want to pass your business on to your children or another successor. You can lay down all the issues that are relevant to the company succession in the articles of association.

This way, you are prepared and set to avoid disputes later on.

Comparison of recurring costs of sole proprietorships, KG limited partnerships and GmbHs

Rule of thumb: The recurring cost of a GmbH is about 30% higher than the cost of a sole proprietorship or a partnership like a KG.

The reason: GmbHs are subject to stricter bookkeeping and accounting regulations than sole proprietors or partnerships.

These obligations, including the obligation to prepare annual financial statements, incur more administrative work and higher costs.

Most likely, it will not be economical for you to do this work yourself. You will have to hire and pay a tax consultant.

The higher tax consultancy costs in a GmbH can roughly be broken down into the following three areas:

1. Tax returns (especially for freelancers)

A GmbH is subject to more legal requirements than a sole proprietorship or partnership. In a GmbH, you are obliged to file returns for the following taxes.

  • Trade tax
  • Corporation tax
  • VAT
  • Private income tax of the shareholders

If, however, your freelance activities take the form of a sole proprietorship (e.g. tax consultant, architect or lawyer), you do not need to consider trade tax or corporation tax.

In this case, you only prepare tax returns for VAT and income tax.

Therefore, for freelancers, a change of legal form to GmbH will entail a relatively steep cost increase in the cost of preparing tax returns.

2. Accounting

GmbHs are obliged to apply double-entry accounting.

This entails more work than the net income method applied by most sole proprietorships and partnerships.

Your tax consultant will need more time for double-entry accounting and therefore charge a higher fee.

3. Annual financial statements

In addition to preparing a balance sheet and profit and loss account, a GmbH needs to prepare notes to the financial statements that include more specific explanations regarding certain items in the balance sheet. The notes, for instance, detail which valuation methods were applied and how assets are amortized and depreciated.

Large GmbHs with annual revenue of at least EUR 40 million (as per Section 267 (2) German Commercial Code (HGB)) are additionally obliged to publish a management report. This report describes the current position of the company and its future risks and opportunities.

Note: In addition to these legal requirements, your annual revenue and total assets also influence the recurring cost,

as your tax consultant will use these two figures to determine your fee. The higher the balance sheet total and your annual revenue, the higher the fee.

Conclusion: GmbHs are more expensive than other legal forms, but offer many advantages

The recurring cost of a GmbH is about 30% higher than the cost of a sole proprietorship or a partnership. These higher costs are incurred by legal requirements in connection with annual financial statements, accounting and tax returns.

Your annual revenue and balance sheet total also play a role: the higher the two items, the higher the tax consultant’s fee.

However, these higher costs come with many advantages:

  • Image boost with customers, suppliers and other business partners
  • Your liability is limited to the capital contribution
  • You have more possibilities for tax structuring
  • It is easier to contractually organize company succession

In the end, it is up to you to decide whether these advantages justify the higher running costs.

If you are unsure, a tax consultant can help analyze your situation and tell whether transforming your business into a GmbH will pay off.

If you have additional questions on the recurring cost of a GmbH after reading this blog or if you would like to find out whether corporate transformation is the right option for you, please feel free to contact me.

You can contact me any time via my contact form.

I am specialized in corporate transformation and would be happy to help you.

Kind regards,

Thomas Breit

Photo: © Elnur – stock.adobe.com

GmbH oder UG - Unterschied

GmbH or UG: What is the difference?

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Are you a successful sole proprietor and are now ready to take the next step in your entrepreneurial career?

Are you thinking about changing the legal form of your company and would like to improve your image or limit your liability?

Then you are probably faced with the following decision: Should you convert your sole proprietorship into a GmbH or a UG?

Which legal form is better? What exactly is the difference?

But don’t worry: Many (young) entrepreneurs ask themselves exactly the same question.

In this article, I will present the six main differences between these two legal forms and also give a very clear recommendation at the end. The content of this article at a glance:

This post was updated on 2 August 2021.

What is a GmbH?

A GmbH (Gesellschaft mit beschränkter Haftung) is a limited liability company. Legally it is classified as a corporation.

Unlike, for example, a sole proprietorship or a partnership (KG, GbR or oHG), the focus is not on the people but on the capital share.

In other words: Whereas in partnerships the partners themselves are usually involved in the company and have unlimited liability (except for limited partners in the case of a KG), a GmbH is legally completely separated from the partners.

The partners are only liable with their capital contribution and do not necessarily have to work in the company. The management can even be taken over by someone who is not a partner.

The GmbH is therefore a distinct legal entity and is also taxed as such. In the case of partnerships, on the other hand, the partners are always taxed directly.

What is a UG?

Like the GmbH, the UG (Unternehmergesellschaft) or entrepreneurial company is also a limited liability company.

It is therefore subject to the same laws as a GmbH and offers you similar advantages (limitation of liability, access to company pension schemes, etc.).

One of the main differences between the UG and the GmbH, which I would like to point out at the outset, relates to the minimum capital needed: You can set up a UG with as little as €1, whereas a GmbH requires at least €25,000 in share capital.

This is why the UG is often called a “mini GmbH”.

The introduction of the UG was a direct response to the increasing popularity of the British Limited in Germany. This British legal form offers similar advantages to the UG, but has not been an alternative for German companies since Brexit.

GmbH or UG: What are the main differences?

Although in legal terms the UG is only a “small” version of the GmbH, in practice there are significant differences. I would like to explain the six most important to you there:

Difference 1: The minimum capital is lower with the UG

As I mentioned above, the biggest difference between the GmbH and the UG is the amount of capital needed to set up the company:

  • You have to pay in at least €25,000 in share capitalto form a GmbH.
  • Whereas theoretically you can form a UGwith as little as €1 share capital.

If you cannot (yet) raise the €25,000 share capital necessary for a GmbH, then this would make the UG a clear front runner for you.

Difference 2: A UG has a lower credit rating and a poorer image

The low share capital of the UG can affect your company’s credit rating. This is because, the lower your equity capital, the riskier a loan is from the bank‘s point of view.

This also comes into play when dealing with suppliers and other business partners: As a GmbH owner you are more respected and can usually negotiate better payment terms, thanks to the €25,000 in share capital behind you.

Therefore, compared to a GmbH, with a UG you are always at a disadvantage in this respect.

Difference 3: With a UG you are liable more quickly with your private assets

Although the liability of both the GmbH and the UG is usually limited to the capital contribution, you can still be liable with your private assets.

As managing director, you are still subject to the so-called piercing through the corporate veil (Durchgriffshaftung) liability risk. This means that you are personally liable as an individual for any damage incurred, even though your GmbH or UG has a limitation of liability.

This is the case in the event of:

  • Failure to file for insolvency in good time
  • Tax evasion
  • Understatement of tax
  • Personal guarantees to banks
  • Non-equitable use or distribution of liquid assets in the event of a crisis (Section 69 German Fiscal Code)

Difference 4: The formation costs for a UG are lower

In addition to the contract and notary costs, in the case of a conversion there are also consultancy costs (lawyer and tax consultant) to consider. The following costs are realistic here:

  • Formation costs for a UG: €400
  • Formation costs for a GmbH:more than €3,000

The reason for the difference is that the formation procedure for the UG is much simpler and often standard articles of association are used.

With the GmbH there are more procedural formalities and many points (inheritance, relationship between shareholders, etc.) are often individually enshrined in the articles of association.

Difference 5: A non-cash incorporation is not possible with a UG

When founding a GmbH, the entire share capital of €25,000 does not have to be paid in in cash. So called non-cash incorporation is possible.

A part of the (or, if desired, the entire) share capital can be replaced by property assets (real estate, cars, company shares, etc.).

This is not possible with a UG. The share capital can only be paid in in cash (see Section 5a German Limited Liability Companies Act (GmbHG)).

Difference 6: In the case of a UG, 25% of the profits must always be retained

As a UG owner you are obliged to leave at least 25% of your annual profits in the company in order to be able to save up an additional capital reserve more quickly.

This obligation does not exist with a GmbH and you could, in theory, pay yourself all the profits.

On a positive note: As soon as you have saved up €25,000 in your UG, you can convert it into a GmbH for a few hundred euros. Then the 25% savings obligation no longer applies.

Conclusion: UG? Yes! But only if you plan to convert it into a GmbH later

The bottom line is that a GmbH usually offers you more advantages than a UG:

  • You can form the company using assets
  • You enjoy a higher credit rating and a better image
  • You do not have to retain profits

Nevertheless, it is difficult for many founders to raise the required share capital (€25,000) on their own.

My experience has therefore shown: A UG is a good compromise and interim solution.

If you cannot raise enough share capital for a GmbH, then set up a UG first.

As soon as you have accumulated sufficient capital reserves, convert the UG into a GmbH at a reasonable price.

In this way you gradually acquire all the advantages: With the UG, you already benefit from access to the company pension scheme, better regulations for company succession and the limitation of liability.

After the conversion to a GmbH, there are additional advantages such as a higher credit rating or a better image.

If you have further questions about your corporate transformation, I will be happy to advise you.

You can reach me at any time via phone (+49 40 44 33 11), e-mail (anfrage@steuerberatung-breit.de) or my contact form.

Kind regards,

Thomas Breit

Photo: © Feodora – fotolia.com

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Tax structuring: The best options for large & small GmbHs

What tax structuring options do you have as a limited liability company (GmbH) owner? Does optimization only make sense for large companies with profits in the millions? Or can smaller GmbHs also reduce their tax burden?

After more than 15 years working as a tax consultant in Hamburg, I know the uncertainties that many entrepreneurs have about these and similar issues only too well.

Therefore, in this article, I would like to provide clear and simple answers to the questions my clients most frequently ask about tax structuring without cumbersome “legalese”.

One thing I can tell you right away: Tax structuring makes sense both for large GmbHs with profits in the millions and for smaller GmbHs whose profits are in the five- or six-figure range.

However, the concrete tax structuring measures for large & small GmbHs differ greatly. In this article I will explain why.

Here you will learn in detail:

This post was updated on 26 July 2021.

What is tax structuring?

In simple terms, tax structuring is an activity aimed at reducing your tax burden, without violating applicable laws (e.g. Income Tax Act, Corporate Income Tax ActTrade Tax Act or the Limited Liability Company Act).

It is essential here to have expert knowledge and a lot of experience, because the boundaries are often fluid between legal tax structuring and illegal tax fraud.

In order to know where to start with your tax structuring measures, you must first know how taxes are calculated for a GmbH.

How is the tax burden calculated for GmbHs?

For GmbHs, the profit in a fiscal year is always used as the basis for calculating taxes. Your profit is of course what is left after you subtract your costs and expenses from your income.

The tax on your profits consists of 15% corporate income tax and approximately 15% trade tax. Approximately 15% because the trade tax in Germany is not standardized and varies from state to state.

If the profit is paid out to the shareholders of the GmbH, an additional 25% in capital gains tax, solidarity surcharge and church tax are also due.

In total, you arrive at a tax rate of about 49% of distributed profits.

How can you reduce your tax burden with structuring measures?

The higher your profit, the higher your tax burden.

This is exactly where structuring measures come in: These methods aim to keep your taxable profit as low as possible.

Since large GmbHs generally report higher profits, there is also more potential for optimization with these companies. Here it can be worthwhile to set up an asset-managing GmbH or a holding company with the help of corporate transformation.

Proven strategies for small GmbHs are, for example, taking advantage of special regulations, such as an investment allowance (more on this below) or the clever “deferral” of expenses.

Through accounting measures, it is possible to claim a large part of the expenses for the storage of business documents in only one fiscal year, for example. I will also explain this in more detail in the following section.

 

These four tax structuring methods are suitable for all limited liability companies

1. Investment allowance (Investitionsabzugsbetrag)

The investment allowance allows you to already write off against tax 40% of the costs for planned purchases three years before the actual purchase. This means: If you plan to buy a company car in three years, you are allowed to use 40% of the anticipated purchase price to reduce your profits now.

What’s more: At the end of the three years, you can immediately deduct another 20% of the purchase price from your profit.

By using the investment allowance, you can therefore immediately claim 60% of the purchase costs against tax, even though these costs have not yet been incurred.

Please note, however: In order for you to actually be allowed to use the investment allowance, your GmbH must fulfil two conditions:

  1. Your equity must not be greater than €235,000
  2. Your profit must not exceed €100,000

In addition, you must then actually purchase the planned item. Merely planning and deducting the anticipated expenses without a purchase is not permitted.

2. Make provisions for the storage of business records

According to Section 6 German Income Tax Act (EStG), provisions may be made for costs incurred for the storage of business documents.

These deductible costs include, for example, expenses for scanning documents, rental costs for storage space, and also costs for a server, if needed.

Please note: This provision is usually set up for several years at once. It therefore gives you the opportunity to write off future expenses against profit now.

This type of provision is therefore excellent for “shifting” expenses from one period to the next.

3. Write off “slow sellers”

If you sell seasonal goods and the value of your products reduces significantly after some time, you can write off this loss in value against tax. To do so, however, you must be able to prove that the value of your merchandise has actually declined permanently.

If this requirement is met, you can enter a lower value of the goods for tax purposes and write off the loss.

This will reduce your profit and save you taxes.

4. Convert your “normal” GmbH into an atypical silent GmbH

With an atypical silent GmbH, you pay only 42% tax on profits of up to €260,533. Compared to the 49% for a “normal” GmbH thus saving you 7% in taxes.

However: An atypical silent partnership is only worthwhile if you get the right silent partner on board. “Atypical” in this case means that the silent partner profits from any growth in the value of the company and has co-entrepreneurial rights.

You should therefore consider this type of corporate transformation very carefully beforehand. Because, if you quarrel with your silent partner, they may interfere in the management of your company in an undesirable way. And this would probably cancel out any of the advantages.

I have written a separate blog post on the atypical silent GmbH, there you will find everything you need to know about this option, including all the golden rules and pitfalls.

Just click on the following link to get to the article: https://www.steuerberatung-breit.de/en/atypical-silent-partnership-with-a-limited-liability-company-gmbh-more-liquidity-less-taxes/

An easy-to-follow video with two bonus tips!

In addition to the tips from this post, would you like to know some more ways that you can structure taxes as a business owner? Then my video on tax structuring is for you.

In this video, I explain my Top 6 ways to structure taxes for limited liability companies. So, in addition to the four methods explained in this article, you’ll get two bonus tips to boot!

Interested? Then just press play!

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These two restructurings methods are particularly suitable for larger GmbHs

1. Transfer real estate, investments, and other assets to an asset-managing GmbH

Are your rental properties, houses, shares or other assets in your private assets or in your operating GmbH? Then you could benefit from restructuring.

Because if you transfer your assets to a so-called asset-managing GmbH, you can reduce your tax rate on profits from these assets by 20-40%.

Because, with this particular form of corporation, you benefit from trade tax and corporate tax reductions. Only when the profits are distributed is 25% corporate income tax payable. As long as the profits remain in the business, then all income is in fact completely tax-free.

However, since establishing and running an asset-managing GmbH is costly, it is only worthwhile with assets of over €500,000.

2. Bundle all your businesses together with the help of a holding structure

As the owner of multiple businesses, it may be worthwhile from a tax point of view to create a holding company. This holding company (also known as a parent) becomes the owner of your existing businesses, forming an umbrella, so to speak, under which all your companies are combined.

From now on, all your existing companies will be subsidiaries of the holding company.

This has the following advantages:

  • Combined taxation of all profits and losses
  • Tax-free distributions from subsidiaries to the parent company
  • Enhanced public image
  • Prevention of hidden profit distribution
  • Prevention of fragmentation of the corporate group in the event of death

As with the asset-managing GmbH, however, the establishment and ongoing accounting of a holding company is also associated with high costs. Therefore, setting one up is only recommended with profits of at least €200,000.

In addition to the profit, there is another point to consider with “parent-subsidiary dependency”.

What exactly is meant by this and the details you have to consider when establishing a holding company are summarized for you in a separate article: https://www.steuerberatung-breit.de/en/holdings-when-are-they-an-advantage-and-when-do-they-pose-a-risk-for-limited-liability-companies/

Tax structuring methods I would advise against

Using your private car as a company car: If you use your private car in the course of your work as a managing director of your GmbH, you can deduct all of the costs for these journeys from your profits.

To do this, however, you must keep a logbook and document all trips in detail.

The problem: The driver’s logbook is almost always contested by the tax office. You will always have to justify which trip was actually for business and be queried on where you might have cheated. In the worst case, the logbook can even be rejected by the tax office and you lose all your tax benefits.

Then you are forced to take 1% of the original new price of the car as income every month and thus increase your taxable profit.

Renting your own office at home to the GmbH: Here, you would rent a room in your private house or apartment as an office to your GmbH. Your company then pays you rent for that room and that lowers your company’s taxable profit.

The problem: This makes your personal property subject to tax for the portion rented to the GmbH. If you sell your apartment or house, this part of the proceeds must be taxed. In the end, this approach often cancels itself out and you don’t really save anything.

Relocating your company abroad for purely tax reasons: If you move the registered office of your GmbH abroad, you are liable to pay taxes in that country and can benefit from lower taxes.

The problem: In order to really only have to pay taxes in this new country and not also in Germany, you are only allowed to stay in Germany for a maximum of 183 days per year. The German tax office takes a very close look at this and in the worst case you will have to prove every time you entered or left the country.

In addition to this, of course, you have to factor in moving expenses and an enormous amount of time to organize the entire relocation.

I explain moving your business abroad and the tax consequences in more detail in a separate video, and highlight when it actually makes sense to relocate your company headquarters. Then just press play!

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The two biggest mistakes entrepreneurs make when it comes to tax structuring

Mistake 1: Your planning is too short term

Do you think that your assets are too small to actually benefit from an asset-managing limited liability company or a holding structure? That’s probably true for your current situation. But what about the future?

If you expect strong growth in your assets in the next few years, it may be worthwhile for you to create tax-saving structures now.

This is because you will immediately benefit from all the advantages, and your asset growth will be perfectly optimized for tax purposes going forward.

Mistake 2: You implement too many measures too quickly

The biggest mistake you can make after reading this post is to carry out too many of my suggestions immediately.

This is because if you restructure, use the investment allowance, set up provisions and write off slow-moving items all within a short space of time, the tax office will assume that you have a so-called “overall plan”.

And according to Section 42 German Fiscal Code having an overall plan is not permissible and represents an abuse of tax structuring methods. In this case you would be liable for prosecution for tax fraud.

This is why you must always proceed with caution when it comes to tax structuring. Create a precise plan with your tax consultant, which you work through step-by-step over a period of at least two years.

Conclusion: Tax structuring is possible for all profitable GmbHs

That only large companies benefit from tax structuring measures is a myth. The only thing that is absolutely necessary for tax structuring is that your company makes a profit. Otherwise, you cannot optimize your tax.

One thing is clear, however: The more elaborate restructuring measures, such as setting up a holding company or dividing the business into different legal forms (asset-managing GmbH), only pay off when profits are in the millions.

If your profits are in the five- or six-figure range, these tips are better for you:

  • Use the investment allowance and thus write off planned expenses in advance
  • Build provisions for future costs for document storage (rental, heating, or server costs, etc.)
  • Write off goods that permanently lose value after the season
  • Convert your “normal” GmbH into an atypical silent GmbH and thus reduce your tax rate from 49% to 42%

Which of these methods is in fact the right one for you, however, can only be determined by an experienced tax consultant after detailed analysis of your company. This article is only intended to serve as a guide for you.

If you have any further questions about the methods I have presented here or if you need help with the implementation, I will be happy to assist you.

For a personal consultation you can reach me anytime by phone (+49 40 44 33 11), e-mail (anfrage@steuerberatung-breit.de) or via my contact form (click here).

Kind regards,

Thomas Breit

Photo: © contrastwerkstatt – stock.adobe.com

 

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Tax fraud: How quickly overly aggressive tax structuring measures can land you in jail

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Do you really know which tax structuring measures are permissible and at what point they become tax fraud? Are there any precise regulations regarding this, or is much of it left to the discretion of the tax officials?

Are you uncertain about these questions and have therefore been reluctant to introduce tax structuring measures?

I can certainly understand that.

For you as an entrepreneur, these laws and regulations are probably obscured by an indecipherable web of legalese.

You probably don’t have time to unravel the mystery and think you’ll never get to grips with it.

This is exactly where I would like to start with this post: I will explain everything you as an entrepreneur need to know about tax fraud and how to avoid it in an easy-to-understand way using practical examples.

In less than ten minutes you will learn:

This post was updated on 27 July 2021.

Where does tax fraud begin for lawmakers?

Strictly speaking, any incorrect balance sheet entry is already classed as tax fraud. In criminal tax law, there is no clear line here. Any unjustified tax advantage is seen as tax evasion.

In practice, however, this principle is not so strictly applied. If an error is discovered during a tax audit, an incorrect balance sheet entry is often simply corrected.

That is, you receive a new tax assessment and simply make an additional payment. This would normally settle the case and there would be no criminal proceedings.

The situation is different if you deliberately abuse tax structuring methods (pursuant to Section 42 German Fiscal Code (AO)). Unfortunately, in Germany one cannot generalize about exactly which tax structuring measures are classed as fraud and which not.

Here it always depends on the individual case in question how the investigating officials judge the particular tax structuring methods used. I will explain below how this could look in practice with an easy to understand case study.

In the case of cross-border structuring, however, new laws (Sections 138a – 138k AO) were passed on January 1, 2020 and “popular” structuring measures were specifically named.

Cross-border structuring measures, such as the “shifting” of profits to low-tax countries, must now be reported to the tax office. The tax officials then decide whether the measures are permissible or indeed constitute tax fraud.

Depending on how successful these new laws are, it is quite possible that a reporting requirement for domestic tax structuring will also be introduced in the future.

Watch out for director liability: What penalties do you face for tax fraud?

As a managing director, you are legally obliged to conduct all business “with the care of a prudent businessperson” (Section 43 German Limited Liability Companies Act (GmbHG)).

In other words: If you violate your duty of care, you are personally liable for possible damages and even if you are “only” an employed managing director, the GmbH can claim compensation from you.

Which penalties you face depends primarily on the exact facts of the case. Among other things, two scenarios are possible here:

Scenario 1: Tax evasion

If investigations are initiated against you on suspicion of fraud, the tax office will always first assume that tax evasion has been carried out. This is because, as explained above, every incorrect balance sheet entry is initially classed as attempted tax evasion.

If you do not pay your taxes in full or pay them too late, you are also committing tax evasion.

If the accusations are substantiated and you are unable to produce information that exonerates you, a conviction is very often the result in practice.

Possible penalties for tax evasion: Fines of up to €50,000. In the case of serious evasion, you can be sent to prison for up to 10 years.

Scenario 2: Understatement of tax

Understating taxes is a more minor form of tax evasion. If it turns out in the investigation that you were only slightly negligent, then you can be only convicted of understatement of tax (Section 378 German Fiscal Code (AO)).

Some more good news: Understatement of tax is “only” an administrative offense and not a criminal offense. While you will most likely have to pay a fine, the judgement will not be recorded in your criminal record.

Possible penalties for understating taxes: Fines of up to €50,000.

Too fast and too much: This is how companies often unintentionally commit tax fraud (with a case study)

Basically, tax structuring is always a balancing act. Ideally, you take advantage of legal grey zones without crossing the line into illegality. Therefore, one must proceed with great caution here.

In my opinion, this is precisely where the most common mistake in tax structuring occurs: Many entrepreneurs simply structure their tax using far too many different measures far too quickly.

Then the tax office assumes that you have a so-called “overall plan”. Here it is assumed that the individual structuring measures were taken as part of an overall plan for tax savings.

The best way to explain this “overall plan” ruling is by means of a practical case study:

Assume you are a sole proprietor and would like to convert your business into a GmbH & Co. KG.

As a sole proprietor, you own commercial real estate and upon termination of your sole proprietorship, these buildings would be taxed as hidden reserves.

To avoid this taxation, you transfer your commercial real estate to your new GmbH & Co. KG.

Then you close your sole proprietorship and have avoided the taxation of the hidden reserves.

You do all this in a period of a few months.

Due to the swift succession of many measures (transfer of the real estate, closing of the sole proprietorship, etc.) within this short period of time, the legislator will almost certainly rule that there was an overall plan here.

Then you will be in for criminal tax proceedings.

In order for this not to be seen as an overall plan, the structuring measures in this case would probably have to be spread over a two-year period.

As a rule of thumb with regard to the “overall plan”, please remember the following: The higher the amount of tax you save as a result of the measures, the longer the individual steps must be spaced out over time.

Internal control system and Tax CMS: how to protect yourself and your company from criminal proceedings

As explained above, you make yourself liable for prosecution by abusing structuring measures.

However, there is one exception here: If you have an Internal Control System (ICS for short) or a Tax CMS, you can make tax adjustments without criminal proceedings.

This security is a great incentive for companies to implement these systems.

Because the advantage is obvious: If your structuring measures violate the law, with a Tax CMS or ICS you will probably get away with a simple back tax payment.

Without control systems, on the other hand, you will have criminal proceedings on your hands. If convicted, you will face heavy fines and, in the worst case, even a jail sentence.

My recommendation: If you want to protect yourself and your company in the best possible way, you definitely need an ICS or a Tax CMS in your company.

Conclusion: Digital control systems reduce your risk of tax fraud

You need a lot of expertise, experience and intuition for proper tax structuring. If you proceed carelessly, you will quickly commit criminal tax fraud.

It is especially important that you do not implement too many structuring measures in too short a time. Because then the legislator will rule that you had an illegal overall plan and you will be faced with criminal proceedings.

As well as carefully planning your structuring measures, you should introduce an Internal Control System (ICS) or a Tax CMS in your company. Because once your structuring measures are actually deemed to be an abuse of the system, control systems will probably help you get away with just paying back taxes.

Otherwise, you will be prosecuted.

Finally, I would like to leave you with the following: Never carry out tax structuring measures by yourself. Always bring an experienced tax consultant on board.

Because only an experienced tax consultant knows which measures are really suitable for your company and what to look out for when implementing them.

If you have any further questions about tax structuring measures, or if you would like to introduce control systems into your company, I would be happy to advise you.

You can contact me any time via my contact form.

Among other things, I specialize in the implementation of Tax CMS and Internal Control Systems and will be happy to help you with them.

Kind regards,

Thomas Breit

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Business wills: Four cornerstones to get it right

Are you a company owner and considering whether you should draw up a business will to protect your partners and heirs in the event of your death? Is this really worthwhile or is drawing up a business will an unnecessary expense?

My short answer: Yes, every company owner needs a business will. This is the only way to ensure the continuity of your business when you are not around anymore.

In my consultations, however, I often feel that many entrepreneurs are uncertain or totally unaware of this necessity. What points do you have to include? What happens if you don’t have a business will?

In this article, I will explain these and other questions you may have about business wills. You will learn:

This post was updated on 18 August 2021.

What is a business will?

From a purely legal point of view, a business will is the same as an ordinary will that private individuals use to regulate the inheritance of their property (see Section 1922 German Civil Code (BGB)).

In a business will, however, you determine who should inherit your assets (real estate, company shares, cash, etc.). However, you can almost never exclude close relatives (your children, spouse and, if you have no children, your parents) from inheriting.

These family members are in fact entitled to a so-called compulsory share (Pflichtteil). The compulsory share must amount to at least 50% of the legal entitlement to the inheritance.

Disinheriting your closest relatives is only possible in extreme situations (relative threatens you with murder or has been sentenced to a prison term of at least one year in the past). (See also Section 2333 German Civil Code (BGB) and Section 2338 BGB).

How does a company owner’s will differ from an employee’s will?

There is, in essence one significant difference here: As a business owner, you must ensure in your will that the succession of your business is in accordance with your wishes. In addition to this, you also determine how your private assets are to be divided up.

In the case of a “normal” will for an employee, company succession is not an issue. In this case the will is all about the distribution of private assets.

These four points must be included in every business will

  1. Safeguard the existence of the business:In your will, you must designate a successor who can continue to run your business. This means: This person must have enough experience and knowledge to run the business effectively.

If you make a mistake here and appoint the wrong heir as your successor, the continued existence of your business could be at risk.

  1. Protect your heir financially:Check in advance whether your company is burdened by direct provisions for pensions, severance claims or similar obligations. These payments can put your successor at risk, especially in the first phase after the handover.

Therefore, try to reduce or completely exclude these obligations.

  1. Compensate other heirs properly:To prevent family disputes, heirs who do not receive a share in the business must be compensated.

Failure to do so can result in years of litigation and distract your successor from their real work.

  1. Minimize the tax burden with clever asset transfer:Asset transfers are subject to inheritance tax in Germany. Without tax-optimized planning, your heir will be liable for thousands or even tens of thousands of euros in inheritance tax. With skillful optimizations, however, you can greatly reduce this tax burden.

The catch: To fully exploit the potential savings, you need to start planning years in advance. My recommendation is to start as early as ten years before anything could possibly happen.

Of course, you never really know when this day will come. To be on the safe side, you should therefore start succession planning as early as possible.

Inheritance tax not considered: This is the biggest mistake with wills

The biggest mistake, in my opinion, is that business owners only prepare for the distribution of assets and not for the consequences of an inheritance.

Inheritance is in fact taxable in Germany. In other words: Depending on the degree of relationship and the amount of the inheritance, 7 to 50% can go directly to the tax authorities.

This also applies if your children do not inherit cash but real estate, for example. If the inherited property is worth €1,000,000, your children may have to pay several hundred thousand euros in taxes.

If they do not have sufficient financial means, they may be forced to hastily sell the property just to be able to pay the inheritance tax.

The same thing can happen with company shares.

The result: Your legacy disintegrates. The heirs lose control of the company and the real estate is sold. Then there is not much left of your life’s work.

As part of your succession planning, you must definitely prepare yourself and your heirs for this inheritance tax.

What happens if you don’t have a business will?

If you don’t have a business will, your legacy will be governed by legal succession (see Sections 1924 – 1936 German Civil Code (BGB)).

In short, this means for you: You do not determine your successor yourself, instead each heir gets a share in your business. In practice, this often leads to conflicts.

Some heirs want to actively participate in the company, while others want to sell their shares quickly. In this case it is difficult to keep control of the company and in order to end family disputes, the company is sold to an external investor after a lot of legal wrangling.

If you want your company to continue to be run as you intended, you must specify your successor in a will.

But don’t worry: The other heirs will not go away empty-handed here, as they must receive financial compensation.

The business will therefore kill two birds with one stone: You regulate your company succession according to your wishes and prevent inheritance disputes.

Conclusion: A business will is an important but often neglected part of succession planning

If you want to safeguard the continuation of your company, a business will is absolutely essential. This is because without a will, you cannot choose your own successor and your business will be divided up among all your heirs.

Specifically, in your will you must…

…appoint a suitable person as your successor and prepare them to run your business

… relieve your successor of obligations such as severance entitlements or direct provisions for pensions

…properly compensate your other heirs to prevent family disputes

…plan the transfer of assets decades in advance and thus reduce taxes

For the most part, my clients agree with these recommendations and they are relatively easy to put into practice.

Nevertheless, only about 1 in 100 company owners in Germany have implemented these steps in a legally “clear cut” way.

The result: Company succession is chaotic, disputes arise between the heirs and, in the worst case, the company goes bankrupt a few years after the handover.

Therefore, my advice to you is: Do not keep putting off making your will. It will cost money, but this investment will save your heirs taxes and result in fewer family disputes.

The bottom line is that making a will (almost) always pays off.

Do you have further questions about business wills?

If you have further questions about these issues, you are welcome to visit me in my tax consultancy office.

As a tax consultant in Hamburg with many years’ experience, I can help you draft your will and show you what you need to pay attention to so that it complies with your wishes and safeguards your legacy for your heirs.

For a personal consultation you can reach me anytime via phone (+49 40 443311), e-mail (anfrage@stb-breit.de) or my contact form (click here!).

Kind regards,

Thomas Breit

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Knowledge for owners of limited liability companies (GmbH): What you have to watch out for when considering cars

You have just founded a GmbH and are wondering whether you should transfer your private car to your GmbH? Are there any tax benefits you can claim here or is this a “tax trap” that you need to avoid?

My short answer: When transferring your own car to the GmbH, the disadvantages usually outweigh the advantages.

Let me explain why this is the case in this post.

I will also explain how you can optimize and really save money and why, from a tax perspective, your next company car should be an electric car.

This article was updated on 29 July 2021.

Transferring a private car to a GmbH: Why should you avoid doing this?

Contributing your private assets to the GmbH is taxed at around 50 %. You have to pay corporate income tax, trade tax, final withholding tax and the solidarity surcharge.

Because of this high taxation, you should only ever contribute private assets to your GmbH if you really benefit from them in the long term.

With more than 15 years’ experience as a tax consultant I can tell you: This is never the case with cars (but there is one single exception).

Incorporating a non-cash GmbH: In this exceptional situation, it may make sense to contribute assets

With a so-called non-cash incorporation, you can form a GmbH without having to pay in the required share capital of EUR 25,000 in cash.

Instead, you can contribute an asset (for example, your car) to the GmbH.

But beware: If, in the event of insolvency, it turns out that your car does not correspond to the value stated in the balance sheet, you are liable with your private assets for the difference between the valuation and the actual selling price.

In other words: If your car is valued at EUR 25,000 in the balance sheet and the administrator can only sell it for EUR 15,000 in the course of insolvency proceedings, you are personally liable for the difference of EUR 10,000.

Whether you use your car as an asset for incorporating a GmbH therefore depends on your own willingness to take risks.

In a separate blog post, I have summarized the situations where a non-cash incorporation may make sense: https://www.steuerberatung-breit.de/en/knowledge-for-entrepreneurs-what-is-a-gmbh-sachgruendung-risk-or-opportunity/

Tax advantages when buying a company car: What is the investment allowance?

The investment allowance allows you to depreciate 60% of your company car before you buy it:

  • In the so-called planning phase (a maximum of 3 years before the purchase), you can depreciate 40% of the expected investment amount.
  • If you buy the car within these 3 years, you can immediately depreciate another 20% of the purchase price.

However, in order to actually be able to use the investment allowance, you must abide by 2 rules:

  • You must use the car at least 90% for business purposes
  • The car must remain in your company for at least one year

In addition, your company must meet one of the following conditions:

  • Your equity must not exceed EUR 235,000 (when drawing up a balance sheet).
  • Your profit must not be more than EUR 100,000 (in case you use the cash method of accounting).

Private use of a company car: Do you have to keep a logbook?

As a managing director of a GmbH, you do not have to keep a logbook in order to be able to use the investment allowance. Your company car is always considered a 100% business asset.

The same applies to your employees’ company cars. Here, too, you can always claim the investment allowance amount without having to keep a logbook.

You only have to use a logbook to prove that you use the car at least 90% for business purposes if you are a sole proprietor or a partner in a partnership (KG, oHG or GbR).

These 3 tax advantages say your next company car should be an electric car

1st advantage: You receive a purchase premium of up to EUR 9,000 per electric car

When you buy an electric car, you receive an environmental bonus of up to EUR 6,000 and an innovation premium of up to EUR 3,000.

You can easily apply online.

Note: You also receive both payments if you lease the vehicle.

2nd advantage: You pay no road tax for up to 10 years

Road tax is calculated on the basis of the engine capacity and the emission values of the car. For the three most popular (combustion) company cars in Germany, you can expect the following annual costs:

  • VW Passat:EUR 100 to 300 (depending on the model)
  • VW Golf:EUR 100 to 220 (depending on the model)
  • Audi A4:EUR 90 to 300 (depending on the model)

These costs are completely eliminated for an electric car.

3rd advantage: Your employees pay 75% less tax if they use the car privately

If your employees also use the company car privately, 1% of the purchase price of a car with a combustion engine is added to their salary each month and must therefore be taxed.

With an electric car, on the other hand, only 0.25% of the purchase price is added to the salary and taxed.

In addition to these tax advantages, you also benefit from all the other advantages of modern electric cars, such as low running costs.

Conclusion: There is a lot of tax-saving potential for GmbH owners when it comes to cars

Contributing your private car to the GmbH is usually not a good idea from a tax point of view. You have to pay tax on this contribution at a rate of approx. 50%.

There are much better options for optimizing tax:

  • Buy a company car via the GmbH and make the most of the investment allowance
  • Buy an electric car and secure up to EUR 9,000 purchase premium and other tax advantages

Do you have any further questions about company cars after reading this article? Or would you like to know the exact sum of how you can benefit from the investment allowance for your next company car purchase?

I will be happy to answer all these questions in a personal meeting at my tax office.

You can reach me at any time via telephone (+49 40 44 33 11), e-mail (anfrage@steuerberatung-breit.de) or my contact form (click here!).

Kind regards,

Thomas Breit

Photo: © pathdoc – Fotolia.com

 

Legal forms for freelancers: Sole proprietorship or GmbH?

What legal form is preferable for freelancers: a limited liability company (GmbH) or a sole proprietorship? What are the arguments for and against the respective legal forms?

Let me tell you in advance: Unfortunately, there is no one-size-fits-all answer for everybody.

It actually depends on your personal requirements: Do you want to minimize your administrative burden, or is limiting your personal liability your first priority?

Depending on how you answer these and other questions, the legal form best suited to your needs may differ.

In this post, I am offering a comparison of the two legal forms “sole proprietorship” and “GmbH”. You will learn:

This post was updated on 18 August 2021.

What constitutes a freelancer?

According to the law (Section 18 German Income Tax Act (EStG)), the freelance professions comprise self-employed activities in the following areas:

  • Science
  • Arts
  • Writing
  • Education
  • Teaching

In detail, this applies to: medical doctors, dentists, veterinarians, lawyers, notaries, patent attorneys, architects, tax consultants, non-medical practitioners, journalists, translators and similar professions. These are freelancers (Freiberufler) under German tax law.

Legal form for freelancers #1: Sole proprietorship

What are the advantages of a sole proprietorship?

  • No legal accounting requirements:Sole proprietors are not required to record business profits using double-entry accounting principles.
  • VAT not due until payment is received:As a sole proprietor, you must pay VAT once you receive payment, rather than when issuing your invoice. This is independent from how much revenue you generate.
  • No disclosure obligation:Sole proprietorships do not need to publish asset or income figures in the form of annual financial statements electronically with the German Federal Gazette.
  • Private withdrawals are possible:As a sole proprietor, you can withdraw money from your business on an ongoing basis without having to pay tax on these withdrawals.
  • No minimum capital required:Theoretically, you can set up a sole proprietorship with as little as one euro.

When does the sole proprietorship not make sense?

  • Risk of claims exceeding business liability insurance:If the risk of claims is too high and your insurance company will not pay, you should decide in favor of another legal form. Otherwise, you might be liable for damages with your private assets.

Legal form for freelancers #2: Limited liability company (GmbH)

Under what circumstances may the GmbH be a sensible option for freelancers?

  • Business liability insurance insufficient:This could be the case if your business liability insurance does not cover enough damages in which case you as a freelancer would have to be liable with your private assets. This concern affects mainly: engineers, architects, lawyers, and tax consultants.
  • Better options for pension provisions:You would like to improve your pension provisions? Then a GmbH would be the best option for you as a freelancer. It allows for the 5 different types of company pensions.
  • Better image and higher creditworthiness:Due to the minimum capital of € 25,000 and the general prestige of the GmbH, your reputation with banks and business partners is enhanced.

Under what circumstances does the GmbH not makes sense?

  • No desire for double-entry accounting:If you are reluctant to comply with bookkeeping or accounting requirements, a one-person limited liability company does not make sense for you.
  • No desire for even more administration:A GmbH entails a higher administrative workload (annual reports, accounting, shareholder meetings, etc.). If you do not want this, a one-person GmbH is not recommended.
  • No desire to disclose all information:If you do not wish to publish your business assets or business income, it is not advisable to set up a GmbH.
  • If you want to make personal withdrawals:In the case of a GmbH, you cannot simply withdraw money or change your salary all the time.
  • If you cannot afford the minimum capital:If you want to form a GmbH, you need minimum capital of € 25,000.

The UG is not a recommended legal form for freelancers

You might ask yourself, why I have not included the German entrepreneurial company (Unternehmergesellschaft, UG) in my comparison?

As a matter of fact, I have deliberately left out this legal form as it has a bad reputation and is therefore not a good alternative for freelancers.

While the establishment of a limited liability company with only € 1 of capital may very well sound tempting, in fact the UG has many drawbacks:

  • Higher administrative workload: Comparable to the GmbH, the administrative workload for an UG is also very high. You have to expect increased formalism (=double-entry accounting), higher expenses for tax consultancy, own payroll (=additional costs for payroll accountant), etc.
  • Higher tax rate: The tax rate for a full distribution is 48%(corporation, trade, and income tax). For a sole proprietorship, the tax rate is 45% at the most. This means: even if your profits are low, in the case of an UG you have to pay the highest possible tax rate!
  • Low creditworthiness and bad reputation: The low level of capitalcan affect your company’s creditworthiness. It might affect your reputation and cause mistrust with banks and contractual partners.
  • No absolute limited liability: Limited liability can be disregarded by tax offices or bank guarantees.
  • 25% of profits must be retained:Other than with a GmbH, you cannot pay out the entire profit, but must leave at least 25% in the company to increase the capital base.

As you can see: In addition to the disadvantages of the GmbH already mentioned above, the UG has even more downsides. Due to the low level of capital the reputation of your company is usually not as strong and, in addition, you are forced to retain a certain portion of your earnings.

Conclusion: GmbH and sole proprietorship are both viable options for freelancers, UG – never a good idea

Whether a GmbH or a sole proprietorship are the better option for you depends primarily on your individual situation:

  • If you want to keep the administrative workload as low as possible and accept the lack of limited liability, a sole proprietorship can make sense as a freelancer.
  • If, however, you do not want to be liable with your private assets, while benefitting from better pension schemes, the formation of a GmbH is recommended.

I would advise against the formation of an UG, as it does not provide fully limited liability and has an inferior image compared with the GmbH.

I hope that this post has given you a brief overview of the legal forms suitable for freelancers and has provided you with a good basis for your decision.

Please feel free to contact me for more information about these legal forms or further advice. You can reach me by phone (+49 40 44 33 11), e-mail (anfrage@steuerberatung-breit.de) or via my contact form.

Kind regards,

Thomas Breit

Photo: © Elnur – fotolia.com