Setting Up and Doing Business in Germany With a GmbH

Setting up a GmbH

The minimum capital of a GmbH is 25.000,00 Euro. A quarter of the nominal capital but at least 12.500,00 EUR has to be paid in at the time when the company is founded and before the application for the entry in the commercial registry is filed. If the GmbH has only one partner who shall also act as director he will have to provide a security for the outstanding residual amount.

In November 2008 a new sort of baby-sized GmbH was introduced. It is called Unternehmergesellschaft (haftungsbeschraenkt) or UG (haftungsbeschraenkt) and may operate at the start with a share capital between 1,00 and 24.999 Euro. However, the partners of such business company with limited liability are obliged to invest one quarter of the future annual profits of the company in into its capital reserves until the statutory minimum share capital of 25.000 Euro is reached.

The company agreement is subject to a notarial recording. The notary manages for the partners also the application for the registration of the company in the Commercial Register. However, the a notarial recording if the partners choose a standard set of clauses provided by law for their articles of association. This set stipulates only the minimum which is necessary for the company's entry in the registry.

Costs for the establishment of a GmbH then depend on the nominal capital. For a GmbH holding the minimum capital of 25.000 Euro; the costs are:

- 168 Euro; of the notarial drafts of the company charter,

- 168 Euro; for the notarial recording of the first general meeting (actually not needed),

- 42 Euro; for the entry in the register, publication in the gazette

- 100 Euro; publication in the gazette

The notarial establishment of any company charter also requires the involvement a sworn translator unless the founders waive this requirement. The waiver is only accepted by the civil notary if he is assured that the founders gain proper knowledge of the company charter in another way.

Conduct of the GmbH

The start of a business must be reported to the local office of trade and industry. It will inform the tax office immediately and they will send a questionnaire to the owner of the business in order to acquire data which are necessary for taxation purposes. The questions refer from general information such as the type of business, its address, banking data and so on to data which are particularly important for the taxation, e.g. if the business is liable to VAT due to its size or whether the tax office will have to assess advance payments on the income, corporation and business taxes. If cross border business is planned the business owner can apply for a trade ID. The questionnaire has to be filled in and sent back to the tax office within a month.

GmbHs have to maintain an adequate and orderly accounting in the shape of a double entry book keeping irrespective of their size. They will also have to produce annual statements consisting at least of a balance sheet, the explanatory notes to the accounts and a profit-and-loss report within three months as of the beginning of a new accounting year. For small GmbHs this period is extended to six months. The annual statements have to be published by furnishing them to the Commercial Register.

Managing directors (Geschaeftsfuehrer, GF) act as statutory representatives of the GmbH. As such, they are exposed to various liabilities in particular if the business of the GmbH is not thrivng. In general, any damage caused through deliberate acts contrary to public policy can incur a personal liabilty of the GF eg. by the placement of orders at a time when the GmbH is already overindebted and is not able to pay the rendered work later on. In connection with the overindebtedness of a GmbH the criminal delay by the managing director in filing a bankruptcy petition is practically very relevant. Such petition is to be filed without undue delay upon the occurrence of either an overindebtedness or an illiquidity of the GmbH (after three weeks at the latest). However, if no plausible solution to save the business is on hand there is no cause in deferring the filing until the end of this three-week-deadline. Any financial obligation incurred after illiquidity or indebtedness may cause a personal liability of the GF against the contractors of the GmbH. Furthermore, the failure to pay wage withholding tax or social security contributions for the employees often may cause respective claims. Therefore, any GF is well advised to shorten the staff`s salaries or wages if necessary in order to keep enough cash to meet the statutory obligations. Otherwise, even a prison sentence for the GF may be imminent.

Business Income Taxation and Taxation of the Partners

The German government offers a variety of tax advantages as well as funding supports to starting businesses.

The GmbH is liable to corporate income tax including the solidarity surcharge and to business income tax. The corporation tax rate at present is 15 %. Losses incurred by the GmbH in one fiscal year can be carried further or backwards which may reduce the profits that serve as a basis for the assessment of the corporation taxes in earlier or later tax assessment periods.

In addition to the corporation tax the profits of the GmbH are subject to the municipal business tax at a rate that is made of result of the municipal rate as fixed by the municipality multiplied with 3,5 %. As the tax rates differ considerably from town to town the business tax constitutes a decision factor on the location of the company.

Dividends paid out to the shareholders as well as profits arising of the sale of share are liable to capital gains taxes at a rate of 25 % plus solidarity surcharge and - if applicable - church tax. Upon a respective application, the tax rate can be reduced for taxpayers with low income. Partners holding at least 25 % of the nominal capital or partners who hold at least 1 % and work for the GmbH can also opt for a taxation pursuant a partial income procedure (Teileinkuenfteverfahren). Here, 60 % of the dividends received or the sales profits are subject to income taxation. the other 40 % of the proceeds are income tax free. For corporations holding interests in a GmbH only 5 % of the dividends and sales profits received are subject to taxation. Foreign shareholders/ partners have to observe the taxation rules as stipulated in the double taxation agreements between Germany and their respective home country.

Labour Relations

A foreign employer will have to observe that labour contracts had better concluded in writing. This also applies to notices of termination of a work contract. Employees benefit from several rights which cannot be deviated from by mutual agreement to their disadvantage, e.g. in regard to the vacation which are stipulated in the Federal Vacation Act.

Employers are required to pay half of their workers' health, unemployment, pension and old-age care insurance. They also have to pay for the statutory accident insurance. Moreover, they are responsible that the employers' and the employees' shares of the insurance contributions are paid to the Employers` Liability Insurance Association and health insurance fund in charge for the collections.

Further Information for Founders of New Businesses and Foreign Investors

The German Ministry of Economy and Technology offers an English language online service for foreigners wishing to start a business in Germany. This step-by-step portal lists start-up procedures, business planning strategies and management techniques to ensure the company is successful. State aid can also be applied for, although previous employment in the country is required for at least a year to be eligible for assistance in general.

Foreign nationals seeking to start-up a business the German Federal Ministry of Economy provides a website in English, French, Turkish and Russian with further information (URL: existenzgruender.de)

For foreign investors the "Invest in Germany GmbH" - a government agency - provides among others a thorough investment guide and comprehensive information about the German industries (URL: gtai.com)

Henning M. Haarhaus Certified German Attorney-at-Law/ Certified Tax Specialist Lawyer Schlosssstr. 96, 12163 Berlin http://www.kanzlei-haarhaus.de/english/Overview-english.htm

The Intricacies of China Unseating Germany As the World's Biggest Exporter! (Part 1)

In the January 10, 2010 edition of the yahoo.com news, it was promulgated that China has overtaken Germany as the world's biggest exporter even though full confirmation is expected in February 2010 when the final figures for Europe's biggest economy is released. The assertion from the perspective of the author of the article is a reflection of the economic strides China has made to reach a pinnacle of an economic super power and also a vivid sign of a gradual shift of power from the West to the East. According to the article, the total export in 2009 for China was more than $1.2 trillion as against $1.17 forecasted for Germany. Sincerely, this is not the first time China has overtaken Germany with regards to economy issues as it is germane and a memento of what happened in 2007 with regards to the two countries. Recall in 2007, China overtook Germany as the world's third biggest economy and obviously that should have served as a signal that the country is on course to unseat Germany as the world's largest exporter. At least, the incident should not preposterous to the world considering the fact that the symptoms were evident enough.

In my article titled "Another Economic Bubble Burst Ahead- China, I prognosticated the possibility of China becoming the locomotive engine driving the world economy as it is predestined to lead the world in the industrial sector, technology sector and the financial sector. Believe it or not, the attainment of the status of the world's largest exporter coupled with technology and strong financial base suggest a paradigm of the country being the "locomotive" engine driving the world economy. If China continues to maintain its GDP growth rate of over 8% whilst that of the western world hovers around growth values of less than 3%, it is likely China will dethrone Japan as the world's second biggest economy by the year 2015 and if possible in the years after overtake United States as the world's largest economy. This hypothesis is based on the 2008 GDP growth estimates where China recorded 9.6% with Japan recording -0.4%, Germany 1% and U.S 1.1%. Optimists argue that it is not possible for China to overtake United States as the world's biggest economy and they could be partially right. However, the world did not envision China would overtake United States in Auto sales in 2009. Again, analyst did not envisage China overtaking Germany so soon and here we are it has happened. Indeed, the moment may be right and China could be said to be on its way to the throne. As an analyst, I am of the view that China can overtake Japan but not United States. There are several factors involved here which will be discussed in a later article. But for now, I will touch on one of the factors namely the economic statistic GDP (purchasing power parity) per CAPITA which is only an indicator of the standard of living. Though this is not a true measurement for standard of living it can be used as a proxy for accessing the standard of living of countries. China has a population of about 1.3 billion with an estimated growth of 0.655 % (2009 estimate) whilst the U.S has a population of about 307 million and an estimated growth of 0.975 % (2009 estimate). China has estimated GDP (ppp) per CAPITA of $2,033 and is ranked 131th out of 207 economies in the world in terms of per capita income. United States value is $44,155 and is ranked 8th also out of 207 economies. Hypothetically, the standard of living of the people in the United States should be about ten times better than that of China. Doing the math here, it presupposes that the ability of the citizens to impact the economy (in terms of GDP growth) through their purchasing power is ten times more for United States. This also means the ability of the United States to maintain its economy size judging from the fact that the U.S economy depends much on domestic consumer spending is more predictable as against China. If China's economy is to be dependent on domestic spending in the midst of global slump in exports, then the low GDP (ppp) per CAPITA signals a disadvantage compared to United States. China may increase its GDP growth but it would have to leverage its per capita by bridging the wide purchasing power parity gap between its urban and rural population segments. Subsequently, it may call for policies that would increase the standard of living of its people across all segments.

How be it, China cannot overtake the U.S in terms of economy size until this population segment factor and other factors are diligently pursued and completed. Meanwhile, in terms of global competitiveness they are ranked nearly the same (U.S is 5.59/134 whilst China is 4.73/134). However, in terms of attracting and retaining investors or Foreign Direct Investment, U.S is better ranked than China. Reminder is the growing impasse between Google and China about the internet security breach prompting threats of Google leaving China. What is not clear is whether China would accept the departure of Google. If Google should leave, what effect will it have on the credibility of companies or nations doing business with China? Now, proponents of GDP per CAPITA economics may argue that the GDP per CAPITA statistic is not a good measure for standard of living and personal income levels in a country. Nevertheless, all things being equal there is a systematic level of correlation between GDP per CAPITA and standard of living in most countries. That is to say GDP per CAPITA decreases as the standard of living decrease and vice versa.

Strangely, the yahoo.com news article attributed the feat of China to its ability to enact policies to deal with the world recession. The article emphasized that its policies were able to cushion the economic shock from the global economic crises whilst other nations were overwhelmed by the crisis. It must be stressed here that much as the policies and global recovery were contributing factors, the real cause of China's survival and stronger emergence is bottled up in its exchange rate policies and government subsidies and financial assistance package that is the stimulus. In fact, the combine policy framework of exchange rate manipulation and government subsidies promotes low pricing strategy for its exports ultimately increasing the attractiveness of its products and also its market share of the world's export. Unfortunately, the global trade imbalance cannot be completely removed as the Chinese government would want to enact policies and strategies that will give Chinese products an edge in exports in addition to promoting less import. Now, in the midst of all these developments there are two questions that needs to be addressed by the world and they are

1. Whether China the current locomotive engine of the world economy will bow to another

currency revaluation pressure

2. Whether the trade imbalance between China and the world is a threat in terms of monopoly and

whether the world has other options to deal with it.

The objective of this two part article is to discuss in circumspect the ramifications of the unanswered questions and what it means for the world.

Currency revaluation issue

In the next few months and perhaps years there is expected to be a growing pressure on China by the United States, Germany and the other economies of the world about the urgent need for China to revaluate its currency the Yuan to correct for and curtail the growing trade imbalance between China and these economies. It is an undisputable fact that China has trade surplus with almost all these countries as these economies are drowning in mounting trade deficit with no end in sight. The fact is China has been through such barrage of criticisms before with regards to the impact of its low valued currency on exports. Recall in 2005, China under growing criticism of the impact of its low valued currency on international trade was compelled to revalue the Yuan by a whooping 2% against the dollar. Additionally, a policy change of pursuing a floating exchange rate system for its currency was effected. The corollary was the creation of a currency (the Yuan) whose value was based on a set of major currencies which could deviate as much as 0.5% within a day. Yet again, the western world in the nearest future may be agitating for another round of revaluation. Europeans and the United States may be perturbed because competition with China is becoming difficult primarily due to the Yuan being relatively low in value which makes the products from China less expensive for foreign countries and that of EU and U.S more expensive. However, criticisms may not be feasible this time. It is likely China may not vouchsafe to the western countries led pressure to revalue its currency. Apparently, the world may be forced to seek for other options of dealing with the situation which could call for trade tactics such as imposition of trade tariffs, quotas e.t.c. on Chinese exports. But one wonders if such option will yield the expected results as well judging from the fact that an action plan of this sort may seem more visionary to China than pragmatic and results-producing. On the other hand, China may argue that revaluation of the yuan will have marginal impact on the exports trend and subsequently the global imbalance using the developments in 2005 as the basis for argument. In retrospect, the revaluation of its currency in 2005 produced a marginal effect on the attractiveness of its exports and consequently China may not yield to the exchange rate policies again. Analytically, revaluation may not reduce the competitiveness of Chinese products neither would it correct the international trade imbalance due to the fact that there are other factors other than exchange rate policies that contribute to the attractiveness of its exports. These are factors that are contributing immensely to the low priced exports therefore exacerbating the global trade imbalance.

Now, the factors other than exchange rate that make its exports superior in terms of global demand are government subsidies, expansion of China's trade horizon and piracy problems. Government provides subsidies for exporters which culminate in lower cost of production. These firms and investors receive free loans and some free factors of production such as land which has led to lower cost of production and lower pricing of exports. There are also cases of other government fiscal inputs such as increased tax rebates on exports, increased tax refunds and improved export credit insurance during the year 2009. Let's not forget also the 4 trillion yuan ($586 billion) stimulus package injected into the economy by the government. All these factors are incentives that culminate in a lower cost of production and substantiate lower pricing of its exports in addition to making it more competitive. Ultimately, if China should revalue its currency again to make its products expensive, the effect on trade imbalance would be marginal. But the question that remains is whether the government will remove these incentives for its exports to be expensive and to plummet.

Currently, China has judiciously widen its trade horizon with several countries in the world and should the western world reduce their imports of Chinese goods, there is the possibility of China expanding its trade with the East (The Asian block), South America (predominantly Brazil based on BRIC alliance), and Africa where it has made unimaginable strides. This is even against the background that the western world is the major trading partner of China. Turning their attention away from the western world will be a desperate move as the country would want to maintain its superiority in exports. On the other hand, people in the western world are attracted to China's low priced products because of the propensity to make some savings in this era of economic hardships. So the situation seems very paradoxical with regards to the export between China and the western world.

Another factor that has contributed to reduction in market share for the western world is the lack of restrictions on piracy in China. Individuals engage in fictitious production of products that are similar to those produced by EU or United States firms operating in China and abroad. For example low-tech goods or electronic gadgets such as CDs and DVDs can easily be produced by individuals and this is taking market share from other countries. The other serious defect of this problem is the reduction in imports as well for China. The pirated products increase supply and so lessen proclivity towards more imports. China much as it exports lots of low-tech goods also imports many as well but the imports are likely to be reduced by the pirated products in the system. This means due to piracy products in the system, there is less import demand compared to actually what the import should have been. This is to the advantage of China obviously increasing its net exports and GDP as well.

All in all, the demand by the world on China to pursue exchange rate policies to correct the imbalance in trade may not suffice because of these factors and secondly China would want to maintain its position in the world economy. Nevertheless, on a positive note the growth of China is good for the world. Like a German analyst recently said, growth in China is good for the other economies of the world as the country's demand for capital goods such as machinery, raw materials, oil and high value products used in its industrial sector also stimulates exports from other countries such as Germany and United States. However, what remains to be known is whether future policies will seek to monopolize the world economy by promoting vertical integration in the Chinese industrial sector. An action plan of vertical integration will ultimately reduce the importation of heavy duty or high valued products by firms in China. Read the next segment of this article!

Source: Charles Horace Ampong [MSc(Eng), MBA(finance)]
GLG Councils Consultant
Blog: http://www.charliepee.blogspot.com

How to Set Up a Company (GmbH) In Germany

Setting up a Company

The most common corporate structure in Germany is the GmbH (limited liability company). The procedure for setting up as a GmbH is less lumbered with regulations than it is with many other countries, principally those operating under the scope of common law jurisdictions. The drafting of the corporate charter can be framed in relatively simple general language, without any need for lengthy purpose clauses defining all possible corporate activities. There are no nationality requirements for shareholders or company heads and no compulsory boards.

The minimum capital of a GmbH is 25.000,00 EURO. A quarter of the nominal capital but at least 12.500,00 EUR has to be paid in at the time when the company is founded and before the application for the entry in the commercial registry is filed. If the GmbH has only one partner who shall also act as director he will have to provide a security for the outstanding residual amount.

In November 2008 a new sort of baby-sized GmbH was introduced. It is called Unternehmergesellschaft (haftungsbeschränkt) or UG (haftungsbeschränkt) and may operate at the start with a share capital between 1,00 and 24.999 EURO. However, the partners of such business company with limited liability are obliged to invest one quarter of the future annual profits of the company in into its capital reserves until the statutory minimum share capital of 25.000 EURO is reached.

In principal, the company agreement is subject to a notarial recording. The notary manages for the partners also the application for the registration of the company in the Commercial Register. However, the a notarial recording if the partners choose a standard set of clauses provided by law for their articles of association. This set stipulates only the minimum which is necessary for the company´s entry in the registry.

GmbHs have to maintain an adequate and orderly accounting in the shape of a double entry book keeping irrespective of their size. They will also have to produce annual statements consisting at least of a balance sheet, the explanatory notes to the accounts and a profit-and-loss report within three months as of the beginning of a new accounting year. For small GmbHs this period is extended to six months. The annual statements have to be published by furnishing them to the Commercial Register.

Taxation of the GmbH

The German government offers a variety of tax advantages as well as funding supports to starting businesses.

The GmbH is liable to corporate income tax including the solidarity surcharge and to business income tax. The corporation tax rate has been reduced from 25 % at present to 15 % in order to realize the main policy of the government reducing the tax burden for corporations to 30 % and less.

If profits of the company are paid out to the shareholders such payments are liable to capital gains taxes which however can be set off against the final income tax debt of the shareholder generated by this source. As of 01.01.2009 the half-income taxation system will be replaced by a final withholding tax system. Under the present half-income system, an individual shareholder is entitled to a dividends-received exclusion from taxable income in an amount of 50% of the gross amount paid. Foreign shareholders/ partners have to observe the taxation rules as stipulated in the double taxation agreements between Germany and their respective home country. As of 2009, the withholding tax rate will be 25 % plus solidarity surcharge.

If the GmbH incurs losses from its operations its partners cannot set off such losses with their income resulting from other sources. As a self-contained legal entity the GmbH's taxation is independent of the taxation of its partners. Although the losses are locked in the GmbH it is possible to carry such losses further or backwards which may reduce the tax burden of the GmbH in earlier or later tax assessment periods.

Labour Relations

A foreign employer will have to observe that labour contracts had better concluded in writing. This also applies to notices of termination of a work contract. Employees benefit from several rights which cannot be deviated from by mutual agreement to their disadvantage, e.g. in regard to the vacation which are stipulated in the Federal Vacation Act.

Employers are required to pay half of their workers' health, unemployment, pension and old-age care insurance. They also have to pay for the statutory accident insurance. Moreover, they are responsible that the employers' and the employees' shares of the insurance contributions are paid to the Employers` Liability Insurance Association and health insurance fund in charge for the collections.

Report to Public Authorities

The start of a business must be reported to the local office of trade and industry. It will inform the tax office immediately and they will send a questionnaire to the owner of the business in order to acquire data which are necessary for taxation purposes. The questions refer from general information such as the type of business, its address, banking data and so on to data which are particularly important for the taxation, e.g. if the business is liable to VAT due to its size or whether the tax office will have to assess advance payments on the income, corporation and business taxes. If cross border business is planned the business owner can apply for a trade ID. The questionnaire has to be filled in and sent back to the tax office within a month.

Further Information for Founders of New Businesses and Foreign Investors

The German Ministry of Economy and Technology offers an English language online service for foreigners wishing to start a business in Germany. This step-by-step portal lists start-up procedures, business planning strategies and management techniques to ensure the company is successful. State aid can also be applied for, although previous employment in the country is required for at least a year to be eligible for assistance in general.

Foreign nationals seeking to start-up a business the German Federal Ministry of Economy provides a website in English, French, Turkish and Russian with further information (URL: existenzgruender.de)

For foreign investors the "Invest in Germany GmbH" - a government agency - provides among others a thorough investment guide and comprehensive information about the German industries (URL: gtai.com)

Henning M. Haarhaus
Certified German Attorney-at-Law
Certified Tax Specialist Lawyer
Schloßstr. 29, 12163 Berlin
http://www.kanzlei-haarhaus.de/english/Overview-english.htm