The GmbH is one of the most popular legal formations for a business in Germany. This is due, in part, to the tax advantages it presents. In this article, you will discover what taxes a GmbH has to pay, what tax advantages are available, and how managing directors can reduce their tax burden. We will also explain how the managing directors of a GmbH can reduce their personal tax burden.

What’s in this article?

• What taxes does a GmbH have to pay?
  
• What tax advantages does a GmbH have?
  
• How can the managing directors of a GmbH reduce their tax burden?
  

What taxes does a GmbH have to pay?

A limited liability company, known as a GmbH, has its own legal personality and is required to pay tax. This means that the business itself pays taxes independent of its shareholders. A GmbH is subject to the following types of taxes:

• Corporation tax
  
• Solidarity surcharge
  
• Trade tax
  
• Value-added tax (VAT)
  
• Capital gains tax
  
• Employment tax
  
• Property tax
  
• Land transfer tax
  

Corporation tax and solidarity surcharge

As a corporation, the GmbH is subject to the regulations of the Corporate Tax Act (KStG). The GmbH’s profits will be taxed at a rate of 15%. In addition, the GmbH must pay a solidarity surcharge of 5.5% on the amount of corporation tax.

Trade tax

Like all businesses in Germany, the GmbH is legally required to pay trade tax. The level of trade tax in each individual case is dependent on the business’s profits and the trade tax rate of the responsible municipality. According to a survey by the German Chamber of Industry and Commerce (DIHK), which polled 701 communities with 20,000 or more residents, the national average trade tax in 2023 was 435%.

VAT

The GmbH must charge VAT on its goods and services and pay this directly to the tax office. The standard VAT rate is 19%, while the reduced rate is 7%. The actual amount payable must be calculated by the business itself. However, according to Section 19 of the UStG, you can use the small scale entrepreneur rule if your annual turnover is less than €22,000 in the previous year and less than €50,000 in the current year. By doing this, a GmbH can be exempt from having to pay VAT.

Capital gains tax

A GmbH is able to distribute dividends. The following taxes are levied on these dividends: 25% capital gains tax and a 5.5% solidarity surcharge. Capital gains tax on dividends is not paid by the recipient. Rather, it is withheld directly by the GmbH and forwarded to the tax office.
Employment tax
If a GmbH employs staff, it must pay employment tax on their salaries every month. If applicable, it must also pay church tax. The amount of employment tax varies depending on the respective salary and personal circumstances of the employees.

Property tax

Property tax needs to be paid if the GmbH owns developed or undeveloped land. This is charged by the municipal authority for the area in which the property is located. There are three steps for calculating property tax:

• The responsible tax office determines the property tax value, otherwise known as the land value. All necessary data is provided by the GmbH. This includes the property location, area, ground value, and type of property or building.
  
• In the next step, the property tax value is multiplied by the statutory basic federal rate. For a GmbH, this is 3.5 per thousand. The resulting figure is the basic property tax amount.
  
• Finally, the basic property tax amount is multiplied by the assessment rate of the respective municipality. The assessment rates vary. This variation is not just local. Given that the rates are determined by a resolution at a local council or city council meeting and are included in the budget, they can be adjusted annually.
  

Land transfer tax

If a GmbH uses its assets to purchase a property, a one-time land transfer tax is due. The payable amount is dependent on the purchase price. This is multiplied by the tax rate of the respective state. The tax rates vary between 3.5% and 6.5%.

What tax advantages does a GmbH have?

As well as the limitation of liability and flexibility when distributing profits, the GmbH continues to be a popular legal formation thanks to the tax advantages it offers. Businesses that know how to take advantage of these opportunities may be able to reduce their tax burden.

Limited tax burden

A GmbH benefits from comparatively low taxation on its profits. As a corporation, it pays corporation tax. This means that shareholders do not have to pay personal income tax on their profits. This is what happens in, for example, sole proprietorships or partnerships. For high incomes, tax rates of up to 45% can apply (see Section 32a of the Income Tax Act).

Optimizing remuneration for managing directors

The remuneration for managing directors of a GmbH can be optimized for tax purposes. In principle, it is possible to be remunerated via salary or profit distribution. The former is recommended, since managing directors’ salaries—as well as bonuses and fees—can, for tax purposes, be deducted as a business expense for the GmbH. Since managing directors are also employees of the business, their remuneration reduces the GmbH’s taxable profit. This is because no corporation or trade tax is levied on the remuneration paid to the managing directors. This reduces the business’s overall tax burden, leaving more profit for the GmbH.

Distribution of profits via a holding company

In the case of profit distribution to managing directors, for example, 25% capital gains tax and a solidarity surcharge of 5.5% apply. However, a holding structure provides an opportunity to reduce the tax burden. A holding company is a parent company that owns shares in its subsidiaries. The simplest form is to link two GmbHs or to link a UG (limited liability) with a GmbH. In a holding company, the distribution of profits can be made from a subsidiary GmbH to another corporation. In this scenario, the tax rate is only 1.5%. By doing this, you can avoid capital gains tax, which is levied when the profits are distributed to an individual. Therefore, a holding GmbH can be considered a special type of asset management GmbH.

Lower taxes on rental income with a real estate GmbH

A real estate GmbH is another special form of asset management GmbH that enables tax relief. It can make sense for the GmbH’s shareholders to purchase a property through the business rather than using private assets. Anyone who rents or leases private property pays up to 45% tax on the rental income. However, when renting through a real estate GmbH, you will only be charged 15% corporation tax. There is no trade tax payable.

However, this exemption from trade tax liability only applies if the real estate GmbH limits itself to renting out its properties. Commercial trading is not permitted. Such activities are presumed if the business purchases and subsequently sells more than three properties in a five-year period. Rental of real estate that is not part of the business’s own assets is also considered a commercial activity.

How can the managing directors of a GmbH reduce their tax burden?

Managing directors of a GmbH who are looking to reduce their personal tax burden have various options.

It is possible to optimize the salary structure of the business and use salary components that come with tax advantages. For example, managing directors—like all employees—can receive €10,000 per year in benefits in-kind. These are taxed at a flat rate of 30%. It is important to note that benefits in-kind are provided in addition to basic remuneration and are not cash benefits (see Section 37b of the Income Tax Act).

If the GmbH offers a pension plan, the managing directors can invest a portion of their gross salary in this occupational pension. This reduces tax and social security contributions during the savings period. The occupational pension is only subject to tax when it is paid out.

Managing directors can also claim certain business expenses in order to reduce their taxable income. This includes costs for work equipment, training, or travel as part of their professional role.

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