Business Operations in Germany (Portfolio 7140)

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The Business Operations in Germany Portfolio discusses the practical problems that confront foreign businesses operating in Germany. In particular it examines in detail the statutory and procedural framework of German income taxation as applied to individuals and corporations. The Detailed Analysis also covers many of the other legal details vital to the organization of a German company.

In addition to an in-depth explanation of the German system of income taxation (Einkommensteuer, Körperschaftsteuer), the Portfolio discusses the trade tax (Gewerbesteuer), the value added tax (Umsatzsteuer), the inheritance tax (Erbschaftsteuer) and the real estate transfer tax (Grunderwerbsteuer). Among the Worksheets in the Portfolio are the texts of Germany's tax treaties with the United States.


Bloomberg BNA Portfolios are written by leading tax professionals who set the standard as leaders in their fields. The Business Operations in Germany Portfolio was authored by the following attorneys.  


Dr. Klaus Sieker, Steuerberater

Credentials / University of Hamburg (1984), Doctor of Economics (1990), Steuerberater (1990), German Bar for tax consultants (Steuerberater); member, International Fiscal Association; member, American Bar Association; member, International Bar Association.

Table of Contents

Portfolio 7140-1st: Business Operations in Germany

Portfolio Description


Technical Advisors



Detailed Analysis

I. Germany — An Overview

A. Germany — the Country, Its People, and Economy

1. Population

2. Political Organization

3. Economic Structure

B. Sources of the Law

1. Statutes

2. Court System

II. Operating a Business in Germany

A. Foreign Investment Regulation

1. Opportunities

2. Incentives

3. Trade Licenses

B. Currency and Exchange Controls

1. Currency

2. Exchange Controls, Indexation Clauses

C. Trade and Commerce Regulation

1. Imports and Exports

a. Licenses and Quotas

b. Custom Duties and Other Taxes

c. Documentation

2. General Regulation of Business

a. Antitrust and Public Procurement Regulation

(1) General

(2) Agreements and Concerted Practices

(3) Market Domination

(4) Mergers and Other Combinations of Enterprises

(5) European Antitrust Law

b. Unfair Trading Practices

c. Price Controls

d. Securities Regulation

(1) Issuance of Bearer Certificates for Bonds and Debentures

(2) Listing on a German Stock Exchange

(3) Public Offering of Listed and Unlisted Securities

(4) Domestic and Foreign Investment Funds

(a) Structure of Domestic Investment Funds and Distribution of Their Shares in Germany

(b) Distribution of Shares in Foreign Investment Funds in Germany

(5) Foreign Mutual Funds

(6) Public Offering of Other Investments

3. Licensing and Franchising

a. General

b. Protection Afforded to Intangible Intellectual Property Rights

(1) Registration of Patents

(2) Registration of Petty Patents

(3) Registration of Designs and Models

(4) Registration of Trademarks and Service Marks

c. Industrial Know-how

d. Copyrights

D. Employment of Aliens in Germany

1. Residence Requirements

2. Permission to Take Up Employment

E. Labor Relations

1. Individual Labor Law

2. Collective Bargaining

3. Co-Determination — Labor Participation on Corporate Boards

a. Coal and Steel Co-Determination Act of 1951

b. One-Third Participation Act of 2004

c. Co-Determination Act of 1976

d. Works Constitution Act of 1952, as Amended

(1) Works Council (Betriebsrat)

(2) Economic Committee (Wirtschaftsausschuss)

F. Financing the Business

1. Shareholder Financing

a. Equity Capital

b. Debt Financing by Way of Shareholders' Loans

c. Hybrid Shareholders' Loans

(1) Subordination of Shareholders' Loans

(2) Waiver of Shareholders' Loans

(3) Conditional Waiver of Shareholders' Loans

(4) Participating Loans

(5) Typical Silent Participation Arrangements (Stille Gesellschaft)

(6) Atypical Silent Participation Arrangements

(7) Participation Rights

d. Currency Risks

e. Thin Capitalization Rules

2. External Financing

III. Forms of Doing Business in Germany

A. Principal Business Entities

1. Sole Proprietorship

2. Gesellschaft mit beschraenkter Haftung

3. Stock Corporation

4. Partnership

5. Branch of a Foreign Corporation

6. Other German Business Structures

7. European Union Business Structures

a. Societas Europaea

b. Europaeische wirtschaftliche Interessenvereinigung

c. Societas Cooperativa Europaea

B. Gesellschaft mit beschraenkter Haftung

1. Formation

a. Purpose Clause

b. Corporate Name

c. Incorporators

d. Articles of Association

e. Capital Stock

f. Incorporation Procedure

g. Costs of Incorporation

2. Operation

a. License

b. Amendment of Articles of Association

c. Increases and Reductions of Capital Stock

d. Contribution of Additional Capital (Nachschuss)

e. Acquisition of Treasury Shares

f. Redemption and Cancellation of Shares

g. Management

h. Shareholders' Meetings

i. Supervisory Board — Advisory Council

j. Books and Records

k. Financial Statements

l. Dividends and Other Distributions of Profits

m. Reserves

3. Dissolution and Liquidation

4. Reorganizations (Domestic and International)

a. Mergers

b. Corporate Spin-Offs

C. Stock Corporation (Aktiengesellschaft)

1. Formation

a. Purpose Clause

b. Corporate Name

c. Incorporators

d. Articles of Association

e. Capital Stock

f. Incorporation Procedure

g. Costs of Incorporation

2. Operation

a. License

b. Amendment of Articles of Association

c. Increases and Reductions of Capital Stock

d. Acquisition of Treasury Shares

e. Redemption and Cancellation of Shares

f. Board of Directors

g. Supervisory Board

h. General Meeting of Shareholders

i. Books and Records

j. Financial Statements

k. Dividends and Other Distributions of Profits

l. Reserves

3. Dissolution and Liquidation

4. Mergers and Other Corporate Reorganizations

D. Partnerships

1. Types of Commercial Partnerships

2. Formation

3. Dissolution

E. Branch of a Foreign Corporation

1. Registration

a. Commercial Register

b. Trade License (Gewerbeanmeldung, etc.)

2. Liability

3. Books and Records

IV. German Tax Law — An Overview

A. Sources of Authority in Tax

1. Legislative

a. Organization of the Tax Law

b. Other Legislative Documents that Can Be Used to Interpret the Law

c. Legislative Process

d. Constitutional Challenge

2. Administrative

3. Courts

B. Principal Taxes

1. Income Tax

2. Corporate Income Tax

3. Income Tax Surcharge

4. Net Worth Tax

5. Trade Tax

6. Value Added Tax

7. Inheritance and Gift Tax

8. Municipal Taxes

9. Church Tax

10. Real Estate Transfer Tax

C. Continuation of German Tax Reform

V. Taxation of Resident Corporations

A. What Is a Resident Corporation?

B. Corporate Income Tax

1. Taxation of Worldwide Income

2. Corporate Income Tax System

a. Final Determination of Reserves Available for Distribution to Shareholders

b. Reclassification of Income Under New System

c. Order in Which Four New Baskets Are Deemed to Have Been Used for Dividend Distributions

d. Illustration of How the System Works in Selected Situations

(1) Organization of Subsidiary Corporations, Capital Increases and Other Contributions to Capital

(a) Organization of Subsidiary Corporation — Subsequent Increases in Stated Equity Capital

(b) Other Open or Constructive Contributions to Capital Not Involving Issue of New Shares

(2) Significant Aspects of Taxation of German Subsidiary Corporation

(a) Constructive Dividends

(b) Former Thin Capitalization Rules

(c) Interest Deduction Limitations (Interest Barrier Rules)

(d) Interim Dividends

(e) Net Operating Losses

(3) Liquidation

(4) Repayment of Informal or Constructive Contributions to Capital

3. Accounting

a. General

b. Accounting Period

c. Accounting Methods

d. Methods of Valuation

(1) Depreciable Fixed Assets

(2) Other Assets

(3) Liabilities

(4) Provisions

(5) Contributions-in-kind

(6) Newly Organized Corporations

(7) Distributions in Kind

e. Consolidated Returns

4. Calculation of Gross Income

a. General

b. Capital Gains

(1) General Rule

(2) Exemption for Involuntary Realization

(3) Voluntary Conversions

(4) Reorganization Aspects

(5) Transfer of Assets Abroad

(6) Capital Gains from Sale of Shares in Domestic or Foreign Corporations

c. Dividend Income

d. Income from Foreign Sources

e. Other Exclusions from Income

(1) Contributions to Capital

(2) Premiums on Shares Issued

5. Business Expenses and Other Allowable Deductions

a. General

b. Organizational Expenses

c. Travel and Entertainment Expenses

d. Interest and Royalties

e. Rents

f. Repairs and Maintenance

g. Insurance Premiums

h. Taxes

i. Amortization of Fixed Assets

(1) In General

(2) Basis and Methods of Depreciation

(3) Rate of Depreciation

(4) Accelerated Depreciation

j. Obsolete Equipment

k. Charitable and Other Contributions

l. Reserve Accounts

(1) Liability Reserve

(2) Contingency Reserves

(3) Reserve for Loss Contingencies

m. Bad Debts

n. Casualty Losses

o. Salaries

p. Employer's Social Welfare Expenses

(1) Pension Reserves

(2) Pension Funds (Pensionskassen)

(3) Relief Funds (Unterstuetzungskassen)

(4) Reserve for Jubilee Benefits (Length of Service Awards)

q. Intercompany Charges

r. Business Gifts

s. Nondeductible Expenses

6. Capital Expenditure

7. Nondeductible Foreign Losses

8. Loss Carryforward and Carryback

a. General

b. Anti-Loss Trafficking Rules

c. Transfer of Net Operating Loss in a Statutory Merger

9. Tax Credits

a. Foreign Tax Credit

b. Investment Tax Credit

c. Other Credits

10. Consolidation of Profits and Losses of More Than One Corporation

11. Tax Rates

12. Assessment and Filing

a. Tax Returns

b. Payment of Tax

c. Audits

d. Statute of Limitations

e. Interest

f. Additions to Tax

g. Rulings

13. Incentives

14. Reorganizations

a. Changes in Legal Form

b. Statutory Mergers and Consolidations

(1) General Rule

(2) Tax-Free Reorganizations

c. International Reorganizations

d. Liquidation of a Corporation

VI. Corporate Income Tax — Nonresident Corporations

A. What Is a Nonresident Corporation?

B. Determination of Taxable Income

1. Business Profits

2. Capital Gains from the Sale of Shares in a Resident Corporation

3. Income from Capital Investment

a. General

b. Interest

c. Dividends

4. Rentals

5. Capital Gains from the Sale of Domestic Real Property

C. Method of Assessment — Tax Rates

1. Assessment

2. Tax Rates

D. Subsidiary v. Branch

1. Tax Rates

2. Intercompany Charges

3. Reorganization of Branch

4. Nontax Aspects

VII. Taxation of Partnerships

A. Scope of Income Taxation

1. Allocation of Income to the Partners

2. Qualification as a Partnership

B. Classification of Partnership Income

1. Income Received by a Partnership

2. Additional Income Allocated to a Partnership as a Result of Dealings with Partners

3. Partnership Losses

C. Transfer of Assets Between a Partner and a Partnership

VIII. Taxation of Resident Individuals

A. Scope of Taxation

B. Residence

1. Residence Defined

2. Elective Status as a Resident Taxpayer

a. Section 1(3) of the Income Tax Law

b. Section 1a of the Income Tax Law

C. Determination of Gross Income

1. Business Income

a. Gross Income

b. Business Expenses and Other Allowances

2. Income from Dependent or Independent Services

a. Income from Employment

(1) General

(2) Withholding at Source

b. Income from Independent Services

c. Relief Provisions

(1) Back Pay

(2) Termination Pay

3. Income from Capital Investment

a. Interest

b. Interest Withholding Tax

(1) Withholding Agent

(2) Claim by a Nonresident for Exemption from Interest Withholding Tax

c. Dividends

(1) General

(2) Constructive Dividends

(3) Stock Dividends

(4) Income from Shares in Domestic and Foreign Mutual Funds

(5) Participation Certificates (Genusscheine)

(6) Real Estate Investment Trust

4. Capital Gains

a. General

b. Private Capital Gains

c. Gains from the Sale of Shares in Corporations Under Section 17 of the Income Tax Law

D. Calculation of Taxable Income

1. Special Expenses (Sonderausgaben)

2. Expenses Attributable to Extraordinary Hardships (Aussergewöhnliche Belastungen)

3. Family Allowances

a. Child Support

(1) Child Subsidy Payments

(2) Child Allowance

b. Old Age Exemption

E. Tax Rates

1. Standard Tax Rates

2. Preferential Tax Rates

a. Capital Gains

b. Retained Profits

F. Assessment and Filing

G. Taxation of Employees Working Abroad

IX. Taxation of Nonresident Individuals

A. General

B. Business Income

C. Income from Personal Services

1. Income from Employment

2. Income from Independent Services

D. Investment Income

1. Interest

2. Dividends

E. Rental Income (Including Royalties)

F. Capital Gains

1. Capital Gains from the Sale of Stock in a Domestic Corporation under Section 17 of Income Tax Law

2. Sales of German Real Property

G. Method of Taxation

H. Status of German Citizens Who Emigrate to a Low-tax Jurisdiction

1. Move to a Tax Haven Country

2. Retention of Substantial Ties with Germany

3. Scope of Extended Limited Tax Liability

4. Deemed Disposition of a Share Interest in a Domestic Corporation under Section 17 of the Income Tax Law

X. Taxation of Expatriates

XI. Trade Tax (Gewerbesteuer)

A. Scope of Trade Tax

B. Trade Tax on Trade Profits

1. Additions to Taxable Income

2. Deductions from Taxable Income

3. Net Operating Loss Deduction

C. Assessment of Trade Tax

XII. Value Added Tax (Mehrwertsteuer)

A. Scope of Taxation

B. Entrepreneur

C. Taxable Events

1. Delivery of Goods Within Germany

2. Performance of Services Within Germany

a. General Rule — Place Where the Entrepreneur Rendering the Service Conducts His Business

b. Place Where the Entrepreneur Receiving the Service Conducts His Business

c. Situs of Real Property

d. Place of Transportation

e. Place Where an Activity Is Carried Out

f. Location of Recipient of Services

g. Use or Exploitation of Services in Germany

3. Importation of Goods from Non-European Union Member States

4. Intra-European Union Delivery of Goods

a. Intra-European Union Acquisitions Between Taxable Persons

b. Intra-European Union Acquisition of New Vehicles

c. Intra-European Union Sales to Private Individuals

D. Exemptions

E. Credit of Input Value Added Tax

F. Method of Assessment

G. Special Regime for Small Entrepreneurs

H. Reverse Charges on Recipient of Services

I. Refund Procedure

J. Fiscal Agent

XIII. Real Property Transfer Tax (Grunderwerbsteuer)

XIV. Inheritance and Gift Tax (Erbschaft-und Schenkungsteuer )

A. General

B. Estates and Gifts of Residents

C. Estates and Gifts of Nonresidents

D. Tax Rates

E. Procedures

F. Impact of Tax Treaties

XV. Special Provisions Relating to Multinational Corporations

A. Intercompany Pricing

1. Scope of the Provision

2. Determination of an Arm's-Length Price

3. New Transfer Pricing Documentation Requirements

4. Business Restructuring (Transfer of Functions)

B. Treaty Shopping

C. Attribution of Foreign Base Company Income to Resident Taxpayers

1. Definition of Controlled Foreign Corporation

2. Definition of Domestic Shareholder

3. Definition of Base Company Income

4. Low-Level Taxation

5. Computation of Attributable Tainted Income

6. Special Rules for the Attribution of Passive Income with a Capital Investment Character

7. Tainted Income of Second or Lower-tier Subsidiaries

8. Precedence of the Investment Tax Act over the Foreign Tax Law

D. Tax Status of Foreign Family Foundations

E. Exchange of Information, Assistance in Collection, Competent Authority Procedures

1. Exchange of Information

a. Exchange of Information Under Tax Treaties

b. Discretionary Disclosure of Information in the Absence of a Tax Treaty

c. Exchange of Information under European Law as Implemented in Germany

2. Assistance in Collection

3. Competent Authority

XVI. Avoidance of Double Taxation

Introductory Material

A. Foreign Tax Credits

1. Direct Foreign Tax Credit

a. Foreign-source Income

b. Foreign Income Taxes

2. Deduction of Foreign Income Taxes

B. Tax Treaties

1. Income Tax Treaties

2. Taxation of Business Income

a. Permanent Establishment

b. Industrial and Commercial Profits

3. Taxation of Investment Income

a. Dividends

b. Interest

c. Royalties

d. Capital Gains

e. Other Items of Income

4. Procedure for Claiming Tax Treaty Benefits

a. Items of Income Subject to Withholding Tax

b. Items of Income Not Subject to Withholding Tax

5. Treaties Between Germany and the United States

a. Germany-United States Tax Treaty

b. 2006 Protocol to the Germany-United States Tax Treaty

(1) Direct Investment Dividends

(2) “Triangular” Provision

(3) Mandatory Binding Arbitration Mechanism

(4) Other Provisions

c. Germany-United States Estate, Inheritance and Gift Tax Treaty

XVII. Income Tax Surcharge

Introductory Material

A. Taxpayers Covered

B. Basis for Imposition of Surcharge

C. Impact of Tax Treaties

1. Withholding Tax on Dividends

2. Withholding Tax on Interest Payments

3. Withholding Tax on Royalties

4. Withholding Tax Imposed on Members of Supervisory Board of German Corporation

5. Withholding Tax Imposed on Artists, Entertainers, or Professional Athletes in Germany

Working Papers

Working Papers

Table of Worksheets

Worksheet 1 Model Articles of Incorporation for a Wholly-Owned GmbH

Worksheet 2 Corporate Income Tax Return 2012 for Resident Corporations

Worksheet 3 Corporate Income Tax Return 2012 for Nonresident Corporations

Worksheet 4 Trade Tax Return 2012

Worksheet 5 Value Added Tax Return 2012

Worksheet 6 Unofficial Translation of Administrative Principles for the Allocation of Income of February 23, 1983

Worksheet 7 Application for Refund of German Withholding Taxes on Income from Capital under the Double Taxation Treaty between Germany and the United States

Worksheet 8 Application for (Partial) Exemption from German Withholding Tax on Income from Capital Pursuant to Section 50d EStG

Worksheet 9 Application Pursuant to Section 50d EStG for a Certificate of Exemption and/or Refund of Withholding Tax for Licensing Fees and Similar Remuneration on the Basis of the Double Taxation Agreement between Germany and the United States

Worksheet 10 Application Pursuant to Section 50d EStG for a Certificate of Exemption and/or Refund of Withholding Tax for an Artistic, Sporting or Similar Performance in Germany on the Basis of the Double Taxation Agreement between Germany and the United States

Worksheet 11 1989 Germany-United States Income and Capital Tax Treaty

Worksheet 12 2006 Protocol to 1989 Germany-United States Income and Capital Tax Treaty

Worksheet 13 1980 Germany-United States Estate, Inheritance and Gift Tax Treaty

Worksheet 14 List of Comprehensive Double Taxation Agreements and Related Protocols Signed by Germany as of July 1, 2013

Worksheet 15 Table of Tax Withholding Rates



English Language Treatises and Periodicals