www.ecovis.com 0

Open Session 10.07.2013

Tax and Legal 101

Tax Services Accounting Auditing Legal Services

www.ecovis.com

Personal advice and interdisciplinary

solutions

global consulting firm

particular strength of

ECOVIS

core competencies

clients

tax consulting

accounting

Auditing *1

legal advice *1

*1 In cooperation with Members of the ECOVIS Group

combination of personal advice at a local level

with the general expertise of an international

and interdisciplinary network of professionals

it has over 4,000 people operating in over 50

countries

Ecovis concentrates mainly on mid-sized firms

both nationally and internationally, its one-stop-

shop concept ensures all-round support in

legal, fiscal, managerial and administrative

issues

1

www.ecovis.com

Contact person

Person

Daniel Frischkorn, certified tax advisor, Partner

E-Mail: daniel.frischkorn@ecovis.com

Head of ECOVIS WWS Steuerberatungsges. mbH,

Berlin

Vita

Certified Tax Advisor since 2006

Previously engaged as

• Tax advisor/Manager with a leading international

advisory firm

• Tax Manager with an international media concern

joined Ecovis in 2011

2

www.ecovis.com

Agenda

Timeline - What a startup needs to know

1

2

3

4

3

www.ecovis.com 4

Timeline - What a start-up needs to know

Set up process

1. Understanding of the German tax system

2. Structuring

3. Establishment process

4. Registration

5. Set up of the accountancy process/system

Current compliance

Tax obligations, financial statements

Hiring employees

Financing, Exit

short-term

mid-term

long-term

www.ecovis.com 5

Reasons why you need to know it?

Extract of various reasons:

taxes (and mistakes) can be very expensive

VAT mistakes can kill your margin

German tax authority is one of the most formal one

Various tax compliance obligation exist (monthly, quarterly, annually)

CEO and CFO are fully responsible, can lead to personal liability of the managing directors

www.ecovis.com

Agenda

Timeline - What a startup needs to know

Set up process – German tax system

1

2

3

4

6

www.ecovis.com

Set up process - German tax system

Most relevant taxes: taxation at three levels

Taxation at company level – business taxes

• Corporate income Tax (CiT)

• Trade income Tax (TiT)

Taxation at shareholder level

• personal income taxes on dividends or exit gain

• personal income taxes on income from partnerships

Additionally, sales tax system at consumer level

• EU VAT (European Value Added Tax)

• common VAT system for all members of the European Union

• Real Estate Transfer Tax (RETT)

7

www.ecovis.com

Set up process - German tax system

Corporate income Tax (CiT)

Taxable Person

• Corporate entities, e.g Unternehmergesellschaft haftungsbeschränkt (UG), GmbH, public

limited company

Tax Rate

• CiT 15 % plus solidarity surcharge 5,5 % = 15,8 %

8

www.ecovis.com

Set up process - German tax system

Trade income Tax (TiT)

Taxable Person

• Corporate entities, Partnerships, one-man business (in opposite to liberal professions)

Tax Rate

• Trade income Tax rate is set by each municipality individually

• Berlin: 14,35 % ( bases amount 3,5% x multiplier Berlin 410 %)

Particularities

• partners of a Partnership and entrepreneurs maybe able to credit the TiT against the

personal income tax liability

9

www.ecovis.com

Set up process - German tax system

Personal income Tax

Taxable Person

• private person

Tax Base:

• income, e.g. from:

• rent and lease

• income from employment

• income from Partnerships, one-man business, trading activities

• income from capital, profit distributions, dividends, exist gains etc.

Tax Rate

• individuell with regard to the personal circumstances (progressiv 0-45 %)

• special withholding taxes 25 % on gross dividends contributed by corporate entities

10

www.ecovis.com

Set up process - German tax system

Value Added Tax (VAT)

Consumption tax

• EU VAT taxes the consumption of goods and services in the EU VAT area

• key issue is where the supply and consumption occurs, thereby determining which member

state will collect the VAT and which VAT rate will be charged

• a business is generally able to recover input VAT up to the extent the expense is used to

make taxable outputs

• each member state's national VAT legislation must comply with the provisions of EU VAT

law as set out in directive 2006/112/EC, but does allow member states some degree of

flexibility in implementation of VAT legislation

Particularities

• very formal

• very complex in cross border transactions

• various tax exemptions in place, e.g “small business owner” rule

• mistakes in the VAT treatment (input and output) can kill your margin

11

www.ecovis.com

Set up process - legal forms of business

Legal forms of business ->Corporate entity

Main forms in Germany: AG, GmbH, UG haftungsbeschränkt

(For tax purposes) similar to ….

• Italy Società per azioni (S.P.A.), Società a responsabilità (S.R.L.)

• United Kingdom Public company limited by shares (Plc), Private company limited by

shares (Ltd.)

• Greece Anonynos Etairia (A.E.), Etairia periorismenis evthinis (E.P.E.)

• Poland Spólka akcyjna (S.A.), Spólka z ograniczona odp… (Sp.z.zo.o.)

• France Société anonyme (SA), Société de responsabilité limitée (SARL)

• USA (Public) Corporation (Corp, Inc.), Closed Corporation(Corp. Inc.)

• Czech Republic Akiová spulecnost (a.s.), Spolecnost s rucen im (spol.s.r.o.)

• Portugal sociedade anonima (S.A.), sociedade com respons. Limitada (L.da)

• Denmark Aktieslskb (A/S), Anpartsselskab (Aps)

• Spain Sociedad Anonima (S.A.), Sociedad de Respons. Limitada (SRL)

12

www.ecovis.com

Set up process - German tax system

Taxation of a corporate entity

Income taxes at company level

• CiT, TiT --- combined tax rate in Berlin approx. 31 %

Income taxes at shareholder level on profit contributions and exit gains

• for corporations: tax exemption (5 % have to be treated as non deductible expenses)

• for private persons: 25% flat rate withholding tax or partially private income tax

13

www.ecovis.com

Set up process - legal forms of business

Legal forms of business ->Partnerships

Main forms in Germany: GbR, KG, OHG

(For tax purposes) similar to ….

• Italy Società a accommandita (S.a.)

• United Kingdom Limited Partnership, Partnership

• Greece Eterrorrythmos (EE), Omorrorrythmos (O.E.)

• Poland Spólka cywilna) (S.c.), Spólka komandytowa (Sp.K.)

• France Société en commandite simple

• USA Limited Partnership (LP, LLP), General Partnership

• Czech Republic Komanditi spolecnost (kom.spol.),

• Portugal sociedade civil, sociedade em comandita

• Denmark Kommanditselskab (K/S), Interessentskab (I/S)

• Spain Sociedad en Comandita (SC), Sociedad regular Colectiva Compania

(SrC)

14

www.ecovis.com

Set up process - German tax system

Partnership

General Rule: In Germany treated as a transparent entity

Income taxes at company level

• (Only) Trade income Tax (excemption of the transparency principle)

Income taxes at shareholder level

• personal income tax on the income of the partnership to be allocated to each shareholder

• paid Trade income Tax might be credited against the personal income tax relating to the

partnerships income

In international comparison:

• Transparent : (company itself is no own tax subject but the shareholders)

• Germany, Denmark, Ireland, Italy, Luxembourg, Netherlands, Poland, UK

• Intransparent (own tax subject)

• Greece, Portugal, Hungary, Belgium

• Hybrid (it depends)

• USA, France

15

www.ecovis.com

Agenda

Timeline - What a startup needs to know

Set up process – Structuring

1

2

3

4

16

www.ecovis.com 17

Set up process - structuring

1. Single company vs. Holding structure

2. Legal entity vs. (mere) Permanent Establishment

3. Corporation or limited Partnership

4. Cross border structures

www.ecovis.com

Agenda

Timeline - What a startup needs to know

Set up process – registration

1

2

3

4

18

www.ecovis.com

Set up process - registration

Registration requirement

• registration with the trade register (notary)

• registration with the trade office

• own company registration number / employment office

• registration for tax purposes with the German tax office

Further registration obligations, for instance:

• employers' liability insurance association

• registration of the employees

19

www.ecovis.com

Agenda

Timeline - What a startup needs to know

Set up process – set up of the accountancy process/system

1

2

3

4

20

www.ecovis.com 21

Set up process – accountancy process/system

Who is doing your accountancy

service provider

tax advisor

you

Software

Datev

Unternehmen Online

ECOVIS Onlinekasse

COLLMEX

other solutions, SaaS, shared software, cloud solutions

www.ecovis.com

Agenda

Timeline - What a startup needs to know

Set up process – set up of the accountancy process/system

Current compliance obligations

1

2

3

4

22

www.ecovis.com

Current compliance obligations

Financial Statements

• annual financial statement according to the rules of the German HGB

• publishing the financial statement in the electronic ‘Bundesanzeiger’

Tax Returns

• annual tax returns for TiT, CiT and VAT

Preliminary Returns and self assessment

• advance VAT declarations on a monthly/quarterly basis

• self-assessment wage tax return to be filed by the employer on a monthly basis

23

www.ecovis.com

Agenda

Timeline - What a startup needs to know

Set up process – set up of the accountancy process/system

Current compliance obligations

Hiring employees

1

2

3

4

24

www.ecovis.com

Hiring employees

Various possibilities

„ordinary“ employee

marginal or small-scale employment

• students

• trainee

• temporary employment (Aushilfe)

• marginal employment (Minijobber <450 €)

freelancer/ service Provider

• payed fees are deductible business expenses

• precaution: risk of treatment as „quasi-self-employment person“

25