A limited liability company, or GmbH for short, is an attractive business type for entrepreneurs in Germany thanks to the tax advantages that it offers. This article explains which taxes a GmbH generally has to pay, how to calculate these taxes and what tax advantages to explore.

What's in this article?

• What taxes does a GmbH need to pay?
  
• How do you calculate a GmbH's taxes?
  
• What are the key tax considerations when distributing profits?
  
• What tax advantages does a GmbH have?
  
• How can you reduce a GmbH's tax burden?
  

What taxes does a GmbH need to pay?

In Germany, taxation for a GmbH is generally calculated based on the profits generated by the business. As a corporation, a GmbH is subject to corporation tax. As a commercial business, it is also subject to trade tax. The level of taxation is usually lower than for a sole proprietorship, which is subject to income tax as a partnership as well as trade tax as a business. In addition to corporation tax and trade tax, the managing directors of a GmbH can also be subject to other types of taxes. This depends on the individual circumstances of the business. We will provide an overview of this below.

Corporation tax on profits generated

According to the provisions of the Corporate Tax Act (KStG), a GmbH – as a corporation – is obliged to pay corporation tax (KSt) on the profits that it generates. The corporation tax rate in Germany is currently 15%.

Trade tax on trade income

In contrast to corporation tax, trade tax is not uniformly regulated. It is a municipal tax that is levied on a GmbH's trade income. The exact rate depends on the trade tax rate of the municipality in which the business is registered. Trade tax is regulated in the Trade Tax Act (GewStG).

VAT on goods and services

A GmbH is usually obliged to charge VAT on its goods and services and pay this to the tax office. VAT does not, therefore, contribute to the tax burden of a GmbH. The legal basis for VAT is outlined in the VAT Act (UStG).

Income tax on workers' salaries

If a GmbH employs workers, it is obliged to pay income tax to the tax office. Income tax is withheld directly from the employees' salaries. The legal basis for income tax can be found in the Income Tax Act (EStG).

Capital gains tax on profit distribution

If a GmbH distributes profits to its shareholders, taxes are levied on the amount that is distributed. This capital gains tax (KESt) is withheld by the GmbH and paid to the tax office in accordance with the regulations outlined in Section 44 of the Income Tax Act.

Land transfer tax on land or property

When acquiring land or property (e.g. offices) through purchase or transfer, a GmbH may be subject to land transfer tax. The tax rate for land transfer tax in Germany varies from state to state. Tax rates can be between 3.5% and 6.5% of the purchase price or value as outlined in the Property Transfer Tax Act (GrEStG).

Property tax on property ownership

If a GmbH owns property, an annual property tax is levied by the respective municipality. The rate of property tax is set by the municipality. It varies depending on the location, size and value of the property, as well as on local tax rates. The regulations governing this are outlined in the Property Tax Act (GrStG).

Does a GmbH also have to pay income tax?

A GmbH is subject to corporation tax of 15%. It does not have to pay income tax on its profits (i.e. on its "income"). This differentiates it from a sole proprietorship, for example, where the top tax rate is 42% (on incomes from €62,810). If income exceeds €277,826, the effective maximum tax rate can even reach 45% as of 2024. This is known as the "wealth tax".

Even if a GmbH, as a business, does not pay income tax, it should still be taken into account that the managing directors – as employees of the GmbH – receive a managing director's salary. They will need to pay tax on this in accordance with the Income Tax Act.

How do you calculate a GmbH's taxes?

There are two types of tax that are of fundamental importance when calculating the tax burden of a GmbH: first, there is corporation tax. This is currently set at 15% of all profits generated. Second, there is trade tax, which averages between 14% and 17%. When it comes to trade tax, the burden depends on the GmbH's location. This is because trade tax varies depending on the city or municipality. Trade tax is levied on the trade income (profit) of a GmbH. Overall, the combination of corporation tax and trade tax accounts for around 30% of the GmbH's profits.

If capital gains tax is also included alongside these two taxes in a sample calculation, then the current rate of 25% must be taken into account. Precise figures for further taxes cannot be specified in an example calculation. This is because they depend on a GmbH's individual circumstances: income tax, land transfer tax and property tax.

GmbH example tax calculation

Tax burden on profits of €100,000:

• 15% corporation tax: €15,000
  
• 14% trade tax: €14,000 (at a trade tax rate of 400% and a 3.5% base rate)
  

And, optionally, let's say that you have a 25% capital gains tax on a profit distribution of €10,000. This would mean an additional tax burden of €2,500.

In this example, the tax burden for the GmbH, inclusive of capital gains tax, is €31,500.

VAT is not taken into account here. This is because, ultimately, the taxation of profits is the decisive factor when calculating a GmbH's tax burden. The solidarity surcharge is also excluded because it is an additional levy, not a type of tax. It is usually set at 5.5% of corporation tax.

How are directors' salaries taxed?

Unlike a sole proprietorship, salary costs for management are deducted from profits in the case of managing directors employed at their own GmbH. Managing directors can claim their salary as a business expense, allowing them to pay less tax than sole proprietors.

What are the key tax considerations when distributing profits?

When distributing profits to a GmbH's shareholders, there are two types of taxation to choose from:

• Partial-income method (TEV): 60% of the distribution amount is taxed at the applicable income tax rate. Forty per cent is tax-free.
  

or

• Withholding tax: The distribution amount is taxed at a flat rate with a withholding tax. This is a form of capital gains tax set at 25% (plus 8% or 9% church tax, depending on location, on capital gains if the GmbH is subject to church tax).
  

The distribution of profits means that shareholders have to pay income tax or capital gains tax.

From a tax perspective, does it make sense not to distribute profits?

If profit remains in the GmbH's corporate assets, it is only taxed once at around 30% (the exact figure depends on the city or municipality's trade tax rate). However, if the profits are distributed, an additional 25% capital gains tax will be due on the distribution amount. If profit remains in the business's assets, this amount could be used for investment purposes or to increase business assets. This means that the overall value of the GmbH increases. It also improves the business's liquidity. Therefore, it can make sense – from a tax perspective – to leave profits in a GmbH and, if possible, not to make any distributions.

It is advisable to seek tax advice in this regard, to ensure that all aspects are taken into account. This will enable the most tax-efficient strategy to be developed.

What tax advantages does a GmbH have?

Taxation of a GmbH is often more favourable than taxation of a sole proprietorship. For the most part, this is due to the type of taxation. However, there are also tax advantages that apply to a sole proprietorship: operating expenses and depreciation can be deducted from tax to reduce taxable profit. Investments made in a business, such as in new systems or innovations, can enable tax depreciation and thus reduce taxable profits.

In contrast, investments in stocks, venture capital (VC) funds, property or futures present a tax advantage for a GmbH – provided partial exemptions are possible. For example, the partial exemption for dividend income from German corporations is 5%. This means that only 95% of dividend income is considered taxable. This regulation aims to prevent double taxation of profits, as the distributed profits have already been taxed by the distributing business.

Without the partial exemption, tax would be levied on the full profits generated by the GmbH. However, the partial exemption reduces corporation tax, which presents a significant tax advantage.

Example calculation for partial exemption

If a GmbH receives a dividend payout of €100,000 from another corporation, the corporation tax on the profit generated is calculated as explained below.

• Dividend payout: €100,000
  
• Taxable share after partial exemption: 95% of €100,000 = €95,000
  
• Corporation tax rate: 15% of €95,000 = €14,250
  

In this example, the GmbH would have to pay €14,250 instead of €15,000 (which would be 100%) in corporation tax on the dividend income.

How can you reduce a GmbH's tax burden?

In addition to the tax benefits outlined above, there are other ways to reduce a GmbH's tax burden and pay less taxes:

• Optimise remuneration of managing directors: A balanced combination of fixed salary and variable reward (e.g. bonus payments or benefits in kind) can minimise a GmbH's tax burden.
  
• Claim loss carrybacks: A GmbH can reduce its tax burden by offsetting losses from previous years against current profits. Conversely, if the business makes losses in the current financial year, these can be offset against the profits from previous years by carrying back losses, allowing taxes already paid in previous years to be claimed.
  
• Use investment deductions: An investment deduction allows a GmbH to deduct up to 40% of its expected acquisition or production costs for planned investments, thus reducing its profits. This reduces the tax burden in the year in which the deduction is made. The actual investment must then take place within three years.
  

A tax consultancy firm should help the GmbH to develop appropriate strategies to reduce its tax burden. There are many different tax considerations to take into account, depending on the structure and size of the GmbH. Any potential tax advantages stemming from the individual circumstances of a GmbH can only be fully leveraged by seeking professional tax advice. Tax advice also provides assurance that all the necessary legal requirements have been fulfilled, and that the various legal regulations have been taken into account for the taxation activities of a GmbH.

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