There are several particular tax regulations that apply to GbRs. To avoid financial drawbacks and mistakes, business partners should make sure that they are fully aware of their tax obligations when establishing a business. Find out what taxes a GbR or its managing partners have to pay in this article. We'll also explain how the fundamental profit determination and distribution of a GbR works, how it is different from a GmbH in terms of tax and the tax implications of dissolving a GbR.

What's in this article?

• Which taxes does a GbR need to pay?
  
• How is profit determined in a GbR?
  
• How is profit distributed in a GbR?
  
• What are the tax differences between a GbR and a GmbH?
  
• What are the tax implications of dissolving a GbR?
  

Which taxes does a GbR need to pay?

A Gesellschaft bürgerlichen Rechts (civil law partnershp), or GbR for short, is a popular legal form for associations of small business operators, independent professionals and practice or working groups – primarily because the administrative burden is manageable. Although a GbR can be founded informally and there is no obligation to record it in the Commercial Register, it still has tax obligations. However, it is important to first differentiate between a GbR where the partners work in a freelance capacity and a commercial business.

Relevant taxes for freelance GbRs:

• Income tax
  
• Value-added tax (VAT)
  
• Wage tax (if applicable)
  
• Property transfer tax (if applicable)
  

Relevant taxes for an active GbR:

• Income tax
  
• Value-added tax (VAT)
  
• Trade tax
  
• Wage tax (if applicable)
  
• Property transfer tax (if applicable)
  

Income tax

As a GbR is a partnership and does not have its own legal personality, it is not subject to income or corporation tax. This means that the profits cannot be taxed directly through a tax return. Instead, GbRs need to submit a separate profit statement to the relevant tax office (see below). This shows the business's profit or loss and the share allocated to the individual partners. The partners then declare their share of the profit in their private tax returns.

If the partners are natural persons, the profits are subject to income tax. If they are legal entities, corporation tax applies. Taxation applies whether the profits remain in the business or are withdrawn.

VAT

For value-added tax (VAT) purposes, a GbR is a separate taxable entity – provided that it is considered a business under the VAT Act (UStG). It therefore has to pay VAT of 19% or 7% for goods and services provided against payment in Germany. A GbR may be exempt from VAT when providing other services within the European Union.

If turnover is low, the business may be exempt from VAT under the rules for small scale entrepreneurs. This rule applies when a business's annual turnover for the previous year does not exceed €22,000 and is not expected to exceed €50,000 in the current year. These prerequisites are laid out in Section 19 of the VAT Act (UStG). However, small scale entrepreneurs cannot claim a refund of input tax from the tax office.

Trade tax

Businesses in Germany are legally required to pay trade tax. This also applies to GbRs if they are registered with the trade office. Trade tax is paid directly to the local authorities and the amount depends on the GbR's profits and the trade tax assessment rate applied by the relevant local authority. No trade tax is payable up to the legal exemption allowance of €24,500 (Section 11(1) of the Trade Tax Act, or GewStG).

Employment tax

Employment tax is a particular form of income tax that businesses forward to the relevant tax offices. Income tax is a universal tax applied to the income of all natural persons in Germany. Employment tax is the equivalent of income tax paid by employees. If a GbR employs staff, it must pay employment tax on their salaries each month as a sort of advance payment on its annual income tax. The level of employment tax varies from case to case based on the employee's salary and personal circumstances.

Property transfer tax

If a GbR uses the business's assets to purchase a property, it must pay property transfer tax. The same applies if property is sold from the business's assets or if one of the GbR's properties becomes the sole property of a partner. However, under certain circumstances, it is possible to obtain a pro rata exemption from property transfer tax (Section 5f of the Property Transfer Tax Act, or GrEStG).

How is profit determined in a GbR?

The partners' personal income tax and the GbR's trade tax are calculated based on the profits made by the business. So, a GbR must prepare a profit statement as part of its annual tax return and submit it to the tax office.

A GbR's profit can be established either through cash-basis accounting (Einnahmenüberschussrechnung, EÜR) or through a comparative balance sheet. Cash-basis accounting is a simplified method of calculating profits, but it can only be used by certain types of businesses: freelancers, small business operators and commercial operators with low turnover and profits. Commercial operators can also use cash-basis accounting as long as they do not exceed the annual limits of €600,000 in turnover and €60,000 in profit. Because GbRs are usually relatively small, they generally use cash-basis accounting. Businesses that exceed these limits or keep accounting records on a voluntary basis, on the other hand, must use a comparative balance sheet to determine their profits (Section 4(3) of the Income Tax Act, or EStG).

What is cash-basis accounting?

Cash-basis accounting is calculated by directly comparing actual income and expenditure in a financial year. It follows the cash inflow/outflow principle. This means that transactions are only recognised when a payment is received or made. Lastly, taxable profit or loss is determined by comparing operating income and expenses.

What is a comparative balance sheet?

A comparative balance sheet compares a business's assets at the end of the financial year with the business's assets at the end of the previous financial year. The taxable profit or loss is the difference between the two. This method of calculating profits requires double-entry bookkeeping. This means recording every business transaction in at least two accounts – one debit and one credit. Comparative balance sheets provide a more detailed view of a business's finances because they record receivables and liabilities in addition to income and expenses. This comprehensive accounting method also includes preparing a profit and loss statement, and it ensures maximum transparency of the business's financial performance.

How is profit distributed in a GbR?

Once the profit has been calculated, the next step is profit distribution. The question is: how is the GbR's total profit divided between the partners? The distribution can be specified in a partnership agreement. This is recommended as a way of finding a balance agreed by all parties when the partners' contributions are of different proportions.

For example, it might be distributed based on a partner's share of the total turnover. It is also possible for one or more partners to waive profits altogether. The profit can also simply be divided equally between the partners. If the GbR has no memorandum of association or any corresponding clause on the distribution of profits, the statutory provisions apply and the annual profits are automatically shared equally between the partners.

The individual partner's share of the profit is not necessarily the same as the amount actually paid out. This is because the calculated profit may only be paid out in part or may remain in the business in its entirety. The partner's share of the GbR's profit – not the amounts paid out – must be reported in their personal income tax return. This way, the GbR's entire profit or loss is taxed.

What are the tax differences between a GbR and a GmbH?

Taxation of a GbR and a GmbH differs in several ways:

• Legal formation and liability: A GbR is a partnership in which the partners have full personal liability. Meanwhile, a GmbH is a corporation where the partners' liability is generally limited to their contributions.
  
• Taxable entity: A GbR is not an independent taxable entity. A GbR's profits and losses are taxed via its partners. A GmbH is an independent taxable entity and pays tax on its profits.
  
• Taxation of profits: Tax on a GbR's profits is paid by the partners as personal income tax. This can be up to 45%. A GmbH's profits are subject to corporation tax of only 15%. This comparatively low level of taxation can benefit the founders of a GmbH if they keep the profits in the business instead of paying them out – for example, by purchasing tangible assets. Once the profits have been distributed, they are subject to 25% capital gains tax. This effectively offsets the tax advantage.
  
• Accounting and disclosure: GmbHs generally have greater accounting and disclosure obligations to the tax authorities than GbRs.
  
• Obligatory social security contributions: In a GmbH, the partners are generally not required to pay social security contributions – provided that they have significant influence over the business due to their share of the capital. In a GbR, the partners may be subject to social security contributions depending on their investment and involvement in the business.
  

What are the tax implications of dissolving a GbR?

Dissolving a GbR has several tax implications for its partners. These depend on the circumstances and the specific tax situation. It's important to take the following tax considerations into account:

• Liquidation profits: Liquidation profits may be realised when a GbR is liquidated. These may be taxable and must be declared in the partners' income tax returns accordingly.
  
• Hidden reserves: Liquidation of a GbR may lead to the disclosure of hidden reserves. These profits are based on the valuation leeway provided under commercial law to businesses required to prepare balance sheets when valuing their assets. Items are recognised at a book value below the actual market value. The difference is a hidden reserve (i.e. the positive difference between equity and the assets available). Hidden reserves may also be taxable and must be declared in the tax return accordingly.
  
• Duty of disclosure to the tax authorities: The tax authorities must always be notified when liquidating a GbR. Liquidating a GbR may result in certain tax obligations, such as submitting a final balance sheet or fulfilling liquidation tax obligations.
  
• Conversion to a different legal formation: In some cases, when liquidating a GbR, it can be converted into a different legal formation. The potential tax implications of this conversion should be carefully examined in advance.
  

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