- The profits of a GmbH
- Appropriation of profits
- Profit distribution & capital gains tax
- Partial income procedure
- Example of profit distribution taxation
- Creation of reserves
- Hidden profit distribution
- Trade tax
- Wage tax
- Land tax & land transfer tax
- Want to know more about tax in Germany?
Every GmbH is known in Germany as a Kapitalgesellschaft – a limited liability company. The profits of a GmbH are calculated using the Bilanz (balance sheet). Alternatively, profits are also known as a company’s Einkommen (income).
As a legal entity under private law, the GmbH must pay the following tax:
- Körperschaftsteuer (corporation tax), and
- Gewerbesteuer (trade tax)
And, thus, is particularly relevant for correctly determining the profit distribution of your company.
Let’s start with the corporation tax, called Körperschaftsteuer in Germany. You need to determine the total taxable corporate income (aka profits) to calculate the correct amount of Körperschaftsteuer. The Gewinn- und Verlustrechnung (profit and loss account) part of the Handelsbilanz (commercial balance sheet) is how to figure this out.
Corporation tax & the profit & loss account
The GmbH may carry forward losses from previous years up to a certain amount to cut its taxable profit. Thus, if a loss was incurred in the previous year and a profit in the current year, this loss can be offset to reduce tax. The calculation also includes profits and losses that have not yet been received or paid, such as outstanding invoices.
Risks such as overtime not yet paid out or holiday entitlements are also taken into account in the Gewinn- und Verlustrechnung (profit and loss account). Stocks, on the other hand, don’t impact profit or loss as long as there is no reduction of goods in stock or the value of the stock changes due to a new purchase price. The profit calculated this way is taxed at the corporation tax rate of 15%.
Publishing profits & losses
Every GmbH has to prepare annual accounts called the Jahresabschluss in German. Depending on the size of the GmbH, this must be completed three to six months after the end of the business year and then given to the Unternehmensregister (company register) for publication.
In addition to the Bilanz (balance sheet), and the Gewinn- und Verlustrechnung (profit and loss account), the Jahresabschluss must also include an Anlagenspiegel (statement of changes in assets) and the Lagebericht (management report) of the GmbH.
The data that a GmbH submits can be accessed by anyone (for a small fee) in the Company Register. It provides potential customers, business partners, banks and creditors with an overview of the current situation of the GmbH. Thus, the assets and finances of a GmbH are thereby transparent to the public.
Do you know all the taxes you must pay as an entrepreneur in Germany?
The shareholders decide together how the profits are to be used once they have been determined. Typically, the use of profits is settled by a resolution on the use of profits at the Gesellschafterversammlung (shareholder meeting or AGM). Profits can be used in the following ways:
- Open distribution of profits
- Profit carried forward for the next business year
- Allocation as revenue reserves
Depending on which options the GmbH owners choose, different types of tax apply.
If the shareholders decide to distribute profits, this happens after taxation. Normally, profits are distributed in proportion to the company’s shares. If the articles of association mandate a different way to distribute profits, these company statutes must be followed.
Capital gains tax
The taxation of GmbH profits is part of the Einkommensteuer (income tax), which, however, is broken down into different types of tax. In addition to Lohnsteuer (wage tax) and Körperschaftsteuer (corporation tax), there is also Kapitalertragsteuer (capital gains tax).
All these different taxes affect the profits of the GmbH in different ways. Corporation tax applies to the profits of the GmbH, regardless of how they are used. In contrast, capital gains tax only applies to the distribution of profits. Thus, it is to be understood as the taxation of the dividends of a GmbH. Sometimes capital gains tax is also called Abgeltungsteuer (final withholding tax).
Capital gains tax aims to target income from capital assets and thus make tax evasion more difficult when money flows from business assets to the shareholders. All the regulations on this are set out in §§ 44 ff. Einkommensteuergesetz (income tax act).
Solidarity surcharge & church tax
The Solidaritätszuschlag (solidarity surcharge) (5.5%) and the Kirchensteuer (church tax) (8 or 9%) will continue to be added to the capital gains tax rate of 25%. The new exemption limits for the “Soli”, which have been in force since 2021, don’t apply to capital income. Overall, this results in different total tax rates:
26.375% (plus solidarity surcharge, without church tax)
27.8186% (plus solidarity surcharge and 8% church tax)
27.9951% (plus solidarity surcharge and 9% church tax)
Profit distributions to shareholders are the norm and are always taxable. In some special cases, however, exemption from capital gains tax is an option. One possible special case is employee participation in profits: Employees can benefit from a Sparerpauschbetrag (savers’ allowance) of up to €801 or €1,602 for married persons, which remains untaxed. To use the allowance, an exemption order must be issued by the employer.
Since 2009, the Finanzamt (tax office) has classified profit distributions as income from capital assets (Kapitalvermögen). Unlike before, GmbH shareholders cannot deduct income-related expenses or debt interest from the profit distribution.
Another variant for taxing profit distributions is the Teileinkünfteverfahren or TEV (partial income procedure) as per § 32 of the EStG (German income tax act). However, the use of the TEV is dependent on certain conditions.
If one of the shareholders is also the managing director of the GmbH, a share of 1% is sufficient as a prerequisite. Note: The procedure must be applied by the competent tax office.
Using the partial income procedure means the profit distribution is not subject to capital gains tax but to the shareholder’s personal income tax rate. However, the tax office will only tax 60% of the distribution, the remaining share is tax-exempt. Furthermore, Werbungskosten (income-related expenses) can be accounted for under the partial income system. This frequently further lowers taxes.
An additional method to save taxes is the Günstigerprüfung (favourability test). It compares the tax burden of the partial income procedure with that of the capital gains tax. On your behalf, the tax office checks which type of taxation is more profitable for you. Afterwards, you as the taxpayer can decide which tax procedure you would like to apply.
In this example, two shareholders of a GmbH receive a profit distribution of €50,000 each.
Shareholder A is unmarried and can use the Sparerpauschbetrag (lump-sum savings allowance) for herself. She pays capital gains tax on the profit.
Shareholder B uses the Teileinkünfteverfahren (partial income procedure). His private income tax rate is 30%. He also plans to offset €3,000 tax as income-related expenses.
|Capital gains tax
|Partial income procedure
|– 801,00 €
|– 1.800,00 €
(Capital gains tax rate + solidarity surcharge)
(Personal income tax rate)
Of course, the tax advantages and disadvantages depend on the individual income tax rate. The tax saving also changes proportionally to the amount of the profit distribution. Which method offers more tax advantages for your GmbH must therefore always be assessed on a case-by-case basis. A Steuerberater (tax adviser) can help you with an assessment.
Please note that you cannot switch between the two methods from year to year. If you apply for the partial income procedure, it will be applied until you revoke your application.
Exceptions to the rule
If the managing directors of a GmbH are Fremdgeschäftsführer (external managing directors), they receive a salary. They are therefore not self-employed but employed. As with any other employee, the salary is taxed and offset via the Einkommensteuererklärung (income tax return). Therefore, the managing director’s salary reduces the profits of the GmbH as one of many items in the income statement.
Tax issues become exponentially more complex if the managing director is also a shareholder of the company. In this case, comprehensive tax advice is a must.
Restrictions set out in the GmbH articles of association
A frequent tax calculating error happens when special regulations in the articles of association are forgotten about. If the articles of association of a GmbH contain provisions for the distribution of profits, these supersede the provisions of the GmbH Act.
If you are devising a creative profit appropriation strategy, it is worth consulting a tax adviser as it may not make financial sense.
Instead of distributing the profit, the shareholders can also opt to do Rücklagenbildung (reserve building). When it comes to assessing a company’s finances, retained earnings have a positive effect on its creditworthiness. However, shareholders should note that Gewinnrücklage (retained earnings) cannot simply be dissolved to compensate for losses in subsequent business years. To this end, Gewinnvorträge (profit reserves) are formed.
Wait, how are Gewinnvorträge & Gewinnrücklage different?
The difference is that Gewinnvorträge or Gewinnvortrag (profit reserves) can be used for distributions without restrictions or a corresponding resolution. This is not the case with a Gewinnrücklage (retained earnings). Here, the shareholders must first pass a Gewinnverwendungsbeschluss (resolution on the appropriation of profits).
In principle, hidden profit distributions (verdeckte Gewinnausschüttung) are not allowed. But what exactly does that mean? Profit distributions are hidden when money flows from the company to the shareholders or the managing director without being properly taxed.
Hidden profit distributions come about without an official shareholder resolution. The opposite of this is the transparent distribution of profits (offene Gewinnausschüttung), which is agreed upon using a Gewinnverwendungsbeschluss (resolution on the appropriation of profits) during the AGM/shareholders’ meeting.
In most cases, a hidden distribution is knowingly or unknowingly made through a payment to the shareholders. The situation gets more complicated if the managing director is a shareholder of the GmbH as well. Because of the dual functions, the separability of income and profit participation is crucial for the assessment of capital flows from the company to the shareholders. Only by keeping clean books can you protect your GmbH – and explain yourself convincingly to the tax office.
Examples of hidden profit distributions
- Inappropriately high salary* of the managing director
- Interest-free loans from the GmbH to a GmbH shareholder
- Excessive increases* in the managing director’s salary
- Private use of company vehicles
- Financing of private parties from company assets
* Fundamentally, the appropriateness and customary nature of certain payments, distribution increases and any remuneration should stand up to an arm’s length comparison. This means that when in doubt, the tax office checks whether other companies in the same economic sector have comparable transfers of assets from the company to the owners and/or the management.
This comparison aims to avoid distorting the corporate tax assessment of the company. As previously mentioned, the salary of the managing director reduces the GmbH’s profit. Consequently, the taxable profit of the company cannot get reduced by hidden distributions in the form of excessive salaries and benefits. The basis of the regulations is set out in § 8 of the Körperschaftsteuergesetzes (corporate tax law).
What are the consequences of having hidden profit distributions?
If the tax office discovers the existence of one or more hidden profit distributions, things can go wrong. As soon as there are reasonable grounds for suspicion, the competent tax authority will start investigating your GmbH and you will be assigned a tax auditor. This is because hidden distributions remain buried until a tax audit is carried out. If the auditor finds hidden distributions, the GmbH has to pay tax on them retroactively.
Tax advantages for managing director salaries
Sometimes it may be more favourable for a GmbH, from a tax point of view, if the managing director receives a higher salary. This is because the higher salary reduces the GmbH’s taxable profits. That being said, the managing director’s salary does not remain untaxed, since the managing director’s income is subject to income tax, the GmbH saves on trade tax, among other things, due to the reduced profit. Overall, this can lead to lower taxes.
When making this decision, don’t forget that the managing director’s salary must pass an “arm’s length comparison”, otherwise, expect a retroactive tax bill.
Every commercial GmbH must pay Gewerbesteuer (trade tax). All GmbHs are liable to pay trade tax because of their legal form. Important: It’s not possible to use Gewerbesteuerfreibeträgen (trade tax allowances) or Anrechnungen (credits) against a shareholder’s income tax liability. An exception to the trade tax liability, however, is the asset-managing GmbH (vermögensverwaltende GmbH).
Calculating trade tax
Gewerbesteuer (trade tax) is always calculated based on the Gewerbeertrag (trade income), which is derived from a business’s profit. This means that the amount of trade tax is based on the profits of the GmbH:
|How to calculate Gewerbesteuer
|Profit from trading (calculated from P&L)
|Σ Trade income before loss deduction
– Trade loss from previous years
|Σ Trade income (rounded down) x tax rate 3.5%
|Σ Tax base x assessment rate of your municipality
|Σ Trade tax burden
– Trade tax prepayments
|Σ Trade tax liability
The result of the Gewerbeertrag (trade income) is rounded down to a full €100 and then multiplied by the tax rate of 3.5%. Subsequently, another multiplier is applied: the Hebesatz (assessment rate). The exact trade tax rate for your GmbH therefore always depends on the place of business, because each municipality sets an independent assessment rate. Throughout Germany, the assessment rates are very different. The average in 2019 was 436%. Hamburg has the highest average trade tax assessment rate of the federal states at 470%, while Brandenburg has the lowest. The city of Oberhausen in North Rhine-Westphalia last had the highest assessment rate at 580%. Since 2004, if a municipality has not set an assessment rate, it has been at least 200%.
Trade tax with several permanent establishments
If a GmbH has more than one Betriebsstätte (permanent establishment) in different municipalities, the trade tax liability is split. The proportional tax liability is weighted according to the respective assessment rate and paid to the respective municipalities.
Lohnsteuer (wage tax) is due on salaries of employees of a GmbH and church tax (if a church affiliation exists). The tax Solidaritätsbeitrag (solidarity contribution) has been waived since 2021 up to a taxable income of €61,717 (which is the “0 zone” or “exemption limit”). This change in the law affects around 90% of all taxpayers. A further 6.5% with incomes up to €96,409 benefit from the mitigation zone, in which the reduced Solidaritätsbeitrag (solidarity contribution) is levied progressively.
Wage tax is deducted from the remuneration for work and paid to the tax office. For this purpose, an advance return must be made by fixed deadlines. How the advance notification period is defined depends on the amount of tax liability in the previous year:
- Tax liability > €3,000: Monthly declaration
- Tax liability between €800 and €3,000: Quarterly declaration
- Tax liability < €800: Annual declaration
Advance wage tax return for new businesses
If the GmbH is newly minted and hence has no historical data, the Lohnsteuer-Voranmeldung (advance wage tax advance return) for the first business year is an estimation. For this, extrapolate the annual amount from the first full month to the whole year. This results in a valid advance notification period for the GmbH’s wage tax. For mini-jobbers, separate rules apply to the lump sum. The competent authority for the wage tax registration of mini-jobbers is the Minijob-Zentrale der Knappschaft-Bahn-See.
Deliveries of goods and services, as well as imports and exports of these from the GmbH for non-business purposes, are all subject to Umsatzsteuer (VAT). The normal tax rate is 19%. The reduced VAT rate (ermäßigte Umsatzsteuersatz) of 7% applies among other things to:
- Printed matter such as books and brochures
- Works of art
- Foodstuffs (except beverages)
- Agricultural and forestry products
VAT is calculated on the net invoice amount. The tax office offsets outstanding VAT amounts (against other companies) against the VAT liability of your GmbH. This offsetting is also called the Vorsteuerabzug (input tax deduction). If your company meets the requirements for input tax payments, this method can be used to reduce the total annual VAT liability.
Similar to the wage tax, the registration and payment of VAT amounts depend on the amount of the previous year’s tax liability:
- Input tax surplus or tax liability > €6,136: Monthly declaration
- Tax liability < €6,136, but > €512: Quarterly declaration
- Tax liability < €512: Annual declaration
The Kleinunternehmerregelung (small business regulation) may apply if the sales subject to VAT remain below €22,000. In this case, the turnover of the GmbH can be exempted from VAT.
Advance VAT return for new businesses
If a GmbH is new, the Umsatzsteuer-Voranmeldung (advance VAT return) is due every month. Outstanding payments must also be settled monthly. This regulation applies for the first two calendar years after the GmbH is formed. Your trusted tax adviser should provide you with information on this topic.
Grundsteuer (land tax) is payable on real property owned by your GmbH. This includes undeveloped as well as developed land. The company must pay the tax liability to the municipality in which the land is located. The basis for the calculation is always the unit value of the land weighted by the tax rate (depending on the type of land) and the assessment rate of the respective municipality.
The rates of assessment vary greatly in Germany. And, hence, to avoid property tax havens, a minimum assessment rate of 200% has been set for the whole of Germany. A distinction is made between agricultural and forestry enterprises and almost all other types of real estate.
The Grunderwerbssteuer (land transfer tax) is only due once when a piece of land is purchased. When your GmbH purchases a piece of land or real estate, the purchase price is multiplied by the land transfer tax rate. Depending on the federal state, this varies between 6.5% and 3.5%.
We’re building a library of accounting-related articles in English to help you understand what’s involved in managing a business’s finances in Germany. The Master List can be found here, here’s a sampling:
- Everything you need to know about income tax
- How much in tax do you pay as a self-employed person?
- Optimising taxes with holding structures