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Many employees own shares in the company where they work. Here it is important to note the special features of shares in partnerships and corporations.

Table of Contents

Special features of shares in partnerships

Shareholders of a GbR, OHG or KG or comparable foreign company forms can conclude an employment contract with the company and work for the company as employees within the meaning of labor law. As part of the employment contract, you enjoy the legal and contractual protection rights for employees. With regard to social insurance, however, it must already be checked whether, for example, as limited partners they are also considered employees subject to social security contributions or whether they are viewed as self-employed co-entrepreneurs. Regardless of this, remuneration to co-entrepreneurs is generally not considered employment income, rental income or other income, but is generally taxed within the scope of the type of income realized by the partnership.

case study

An engineer who moved from Denmark takes up a position in Hamburg. His employer operates in Denmark as K/S (Kommanditselskabet). This legal form is comparable to the German limited partnership. The employee is employed at an independent branch in Hamburg. 

As part of the remuneration model, the employee gains limited partnership shares in the company for the first time in 03. Consequence: In years 01 and 02 he has income from employment and is subject to income tax on this income. In 03, however, he becomes a co-entrepreneur in the company based in Denmark and is therefore no longer considered an employee for tax purposes in Germany, although he still has the same status as before in terms of labor law and also with regard to SV. However, the employer no longer collects income tax. In the tax return of the Hamburg permanent establishment, all expenses for the “employee” are no longer deductible as business expenses. While the employer's contribution to the SV was granted tax-free until the year 02, the KG now also has to pay trade tax on it. The “employee” has to tax the employer’s contribution to the SV as well as the “wages” as company income, so he pays more taxes than before. After all, he is allowed to offset the trade tax borne by the KG and thus by all shareholders against his income tax in proportion to his shareholding quota.

Special feature of shares in corporations

Anyone who holds shares or participates in a GmbH, Ltd. or other comparable corporations, can receive wages from the company in addition to dividends from the participation as part of an employment relationship. Without discussing this in detail here, it should be noted that the level of participation and the actual balance of power within the company can lead to the wages being reclassified and no longer being wages for tax purposes, but being treated as a hidden distribution of profits.

case study

A Swiss entrepreneur sets up a GmbH in Germany. The owner himself is the managing director. Business is going well and he also accepts a salary that is quite normal. He employs his employees based on working conditions confirmed verbally or by email. However, he is not aware that as the controlling shareholder-managing director - from his understanding, with himself, so to speak - he is the only one who has to conclude a written contract in advance with customary criteria. An email to yourself is not enough because, unlike a fax, an email is not considered a “written form” in Germany.

Episode

Wages are reclassified for tax purposes as another type of income, namely dividends. These are not taxable at the place where the work is carried out, but rather where the center of one's life interests lies. Even if you also live in Germany, it can still be in Switzerland. However, wages cannot be deducted as a business expense for a GmbH.

The shareholder-managing director is not subject to SV, regardless of whether he has a written contract or not. In the sense of labor law and in the sense of tax law, he is considered an employee (assuming the contract is in place), but in the sense of social security law he is considered an entrepreneur.

An often unrecognized danger lurks in the so-called exit taxation of Section 6 AStG, which applies in Germany. Anyone who has had a place of residence or habitual residence in Germany for a total of 10 years throughout their life, in one go or in stages, will be taxed on the capital gains from shares in corporations when they move away. What this means can be seen from the following.

case study

 

A Chinese entrepreneur studied in Germany years ago. He lived in a student apartment in Leipzig for six years. Then he went back to China and built a small empire there, running his companies in the legal form of Ltd. and therefore as a corporation. Now his daughter is slowly getting ready to study in Germany too. Dad remembers the good times in Germany. He buys an apartment in Munich and uses it occasionally, especially in October. His daughter studies in Cottbus and also lives there. She also works in the company that her father founded there. After the daughter completed her master's degree in a record four years and is now working somewhere else, the father rents out the apartment. 

What happened? The father lived in Germany, initially for 7 and then again for 4 years. Altogether, that's 11 years in which he was subject to unlimited tax liability due to his residence in Germany. As a result of renting, he gives up his residence. The increase in assets is taxed in accordance with Section 6 AStG. However, the increase is not calculated from the increase in value that his company in China and the company in Germany achieved during his unlimited tax liability. The increase is calculated from the value of the corporation when it gives up its German residence less the original acquisition costs of the shares, i.e. the share capital.

Conclusion

People moving to the country, even if they are not employees, must be careful not to be overwhelmed by the departure tax. Anyone who keeps this in mind can and will take action in a timely manner.

Jürgen Bächle
Jurgen Bachle

has been working as an independent tax consultant and expert in international tax law since 1989 and has been a member of the board of the German Association of Tax Consultants Baden-Württemberg, DSTVBW, for over 20 years.

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