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Table of Contents

Opportunities for entrepreneurial involvement in Germany, with particular consideration of legal forms, tax compliance and labor law.

Table of Contents

With the new government, Germany will become highly innovative and therefore even more attractive

Germany is at the top of its popularity internationally. A company headquarters in Germany opens doors to markets that would otherwise be difficult to access or even completely closed. Germany's membership in the EU, in turn, opens the door and guarantees the commercial use of the entire EU area. The progress made within the EU towards deregulation is having a positive impact, for example in the organizational and financial processing of imports from third countries such as the USA or China. The world looks to Germany when it comes to climate protection measures. “Made in Germany” is still very important. After sleeping through a few years of general prosperity, Germany is currently making a powerful attempt to become a highly innovative country again. There are a lot of young members in the newly elected Bundestag who think and act across party lines. The country offers a high level of legal certainty and political stability. 

The world is facing a huge upheaval. Value chains are changing at an incredible pace. Existing companies are reviewing their value chains and structures. The high level of flexibility helps here to make structural changes in a tax-neutral or tax-efficient manner. However, structural changes also require clean craftsmanship, otherwise it can be quite expensive. However, the climate for adaptation is there. The disruptions in the supply chains are also noticeable in Germany, with entire factories closing production for several months due to a lack of components. Building materials are in short supply, and even the shelves in supermarkets are noticeably empty. Lessons will be learned from this and new companies will emerge to fill the gaps. 

Maybe there aren't that many supermarkets anymore. Electronic commerce in goods and services is experiencing a real boom, not least due to the corona pandemic. Therefore, the question of taxation of sales (VAT, VAT) and the question of taxation of profits have reached a new dimension. On July 1.7.2021, XNUMX, the VAT Digital Pact came into force throughout the EU. Foreign retailers who sell goods in the EU via dropshipping or a platform such as Amazon or Alibaba, but also in direct business, must register for sales tax purposes and also submit sales tax returns in each country to which they deliver.

It is worthwhile to process sales of goods or services to private individuals within the EU or services provided electronically to private individuals (e.g. e-books, software and downloads of music or films) via a one-stop shop with registration in Germany. artax has the approval of the Federal Central Tax Office to register as an OSS.

So that you can leave the money in Europe and invest it due to the liberal foreign exchange laws, it is worth thinking about starting a business in Germany. 

 

When it came to taxing profits, Germany found itself disadvantaged by the sometimes ruinous competition between countries. The minimum tax rate of 20% for large internationally active companies recently agreed at the level of the OECD and the G15 shows where the journey is headed. 15% taxes are attractive for medium-sized companies anyway. With the right design, taxes can also be reduced to a tolerable level in Germany. A holding company in Germany pays almost no taxes at all and even high real estate profits can be collected tax-free privately and even at the level of a corporation.

Freedom of establishment in the EU

The EU Charter of Fundamental Rights contains the free movement of persons and the free movement of capital as essential elements.

This means that every EU citizen should be free to decide in which country they settle and engage in professional or business activities. National laws that contain restrictions in this regard are overridden by EU law. Consumer law and tax law are always the focus of decisions by the European Court of Justice, the ECJ. This court is the highest authority in the EU, despite the recent derailments of the Polish Constitutional Court. In order to be able to rely on the law of the European Community and judgments of the ECJ, one must prove or establish a connection to the EU. Switzerland is not an EU country, but maintains close relations with the European Union. The legal relationships are largely regulated in the “bilateral contracts”. According to this, Switzerland is not generally equal to the EU countries, but in many respects. The Swiss Federal Council has emphasized that the further development of the bilateral path, as proposed by the Federal Council to the EU, remains its priority.

Legal forms

There are different legal forms available in Germany, although all legal forms recognized in other EU countries also have legal force in Germany.

one-man business

  • Simple, informal establishment in Germany
  • No entry in a register is required; things are different in Switzerland.
  • Particularities of commercial law must be taken into account in certain sectors (permits, approvals)
  • Otherwise no approval required
  • Registration of business with the municipality, but this does not apply to freelance professions (engineers, doctors, tax consultants, lawyers, journalists, etc.)
  • The sole proprietor has unlimited liability with all of his assets
  • Taxation occurs at the individual, not the company, level
  • If necessary, commercial income is determined separately from freelance income
  • If you are a merchant, the HGB (special private law) applies.
  • If you are a merchant, entry as an eK in the commercial register is possible, but not mandatory
  • Registration opens up access to tax-free mutation into other legal forms
  • Depending on the type and size of the company, the accounting obligation either does not arise at all, due to the German Commercial Code (HGB) or according to tax law

Civil Law Society (GbR)

  • Founded by at least 2 partners (which can also be corporations or partnerships
  • The company can be founded in Germany without any formalities, except for real estate and shares in corporations
  • Otherwise, the GbR is created without any contract when the company merges to achieve a common purpose
  • Overall representation applies, meaning everyone can and must participate in every action
  • Internally, this can be designed differently, and that definitely makes sense. This also partly has an external impact
  • No written contract necessary, but definitely advisable
  • Otherwise, the termination (including tax-effective) automatically applies when the purpose is achieved, the goal is abandoned, or a partner leaves 
  • The termination or death of a partner leads to the breakdown of the assets and termination of the GbR. 
  • It is therefore essential to conclude a written partnership agreement with appropriate regulations 
  • Registration of the business with the municipality, but does not apply to freelance professions (engineers, doctors, tax consultants, lawyers, journalists, etc.)
  • Otherwise no approval required
  • Unlimited personal and joint liability of all shareholders
  • Liability of new shareholders for old debts
  • Subsequent liability of departing shareholders
  • Taxation at the GbR level only with regard to trade tax and VAT
  • Taxation of the extracted and non-extracted results at the level of the shareholders, if necessary taking into account trade tax
  • Limited options for tax-free mutation into other legal forms

 

Not every GbR is entrepreneurial. The GbR is also used to hold and manage real estate or securities depots. If it is a business GbR, all items owned by a partner are treated as assets of the GbR for tax purposes, as long as these items are of only indirect use to the GbR. This requires increased attention when the use of the items changes, e.g. partial use of a property as an office is terminated because you are moving. Under certain circumstances, all partners then pay trade tax from the fictitious withdrawal profit, even though they do not own the property. Such and other questions should be clarified at an early stage and regulated in a written partnership agreement. 

This also applies in the event that a partner leaves. Because without a different regulation in a partnership agreement, the GbR's assets, such as the jointly held property, would have to be sold and the proceeds distributed after deducting the GbR's debts. In a contract, you can agree on termination and severance pay rules, or regulate management and representation in ways that deviate from the law. 

Open trading company (OHG)

Smooth transition from the GbR to the OHG, therefore a largely comparable situation.


Further requirements for the GbR:

  • Operate a commercial business (trade of goods) or
  • a business established in a commercial manner (e.g. larger craft business)


The OHG generally has merchant status, so in Germany, in addition to Sections 705 ff of the German Civil Code (GbR), the regulations of the German Commercial Code (HGB) apply.

  • Entry in the commercial register possible, but not mandatory
  • Company, ie trade name is possible and therefore protection
  • The entry is declaratory, not constitutive
  • For registration, a decision on the abstract and concrete design of the representation is required
  • Representation: OHG shareholders can represent the OHG individually.
  • Can be designed internally and partly with an external effect
  • Extended inspection obligations and legal consequences for commercial purchases
  • Advanced accounting
  • The departure of a partner does not terminate the OHG
  • Tax-free mutation into other legal forms possible via access to the UmwStG
  • Liability and taxes as with the GbR

 

The OHG is not possible for freelance professions (see above). These have a comparable legal form: the partnership company.

 

Partnership company (PartG)

A partnership is a company in which members of freelance professions come together to practice their professions (no silent partnerships or mere investments). The content of the PartG is modeled on the OHG. The partnership agreement must be in writing. It must also contain the name and location of the partnership, the surname and first name as well as the profession practiced in the partnership and the place of residence of each partner as well as the subject matter of the partnership.

The main objective of the amendment is to limit the liability of a partnership to the company's assets. According to the draft, in addition to the assets of the PartG, the partners are also jointly and severally liable for normal liabilities of the partnership. However, liability for claims for damages due to incorrect professional practice is limited to the respective partner who was involved in order processing within the partnership (actor liability). 

Unlike the OHG, the PartG must register and enter the partnership register at the responsible registry court. The PartG is then entered with its “company name”. Since the PartG in Germany is only open to freelance professions, there is generally no trade tax obligation. However, for every partnership, it should be noted that if commercial income is also generated in addition to the freelance income, the entire income is “infected”, i.e. trade tax then also arises for the freelance income.

A PartG registered in Germany can also have a foreign permanent establishment and can even be subject to tax in another country through a double taxation agreement

 

 

Limited partnership (KG)

Representation rules apply in all of the companies mentioned, according to which every partner is at least involved in the representation. The KG is available as another legal form, which is also a partnership. Although the KG is covered in the HGB, not every KG has merchant status. The most important exception is the asset-managing KG. Otherwise, all statements regarding the OHG also apply to the KG with the following differences:

 

  • At least one partner must be fully liable, analogous to the OHG, this is the general partner
  • Several general partners can also be involved
  • General partners can also be limited liability companies
  • The KG also has one or more other partners who are only liable for a fixed amount, these are the limited partners

 

A general partner does not need to make a contribution; he can participate without any assets. The general partner can be a natural person or a legal person, i.e. a corporation. Unlike other partnerships, management and representation is solely the responsibility of the general partner. The limited partners only have information and voting rights at the shareholders' meeting.

There can be several general partners. If there are only legal entities as general partners, this must be listed in the name of the company, e.g. GmbH & Co KG. Limited partners are only liable for their investment, but can have a higher liability amount entered in the register. The deposit has no legal minimum amount. The KG is only a tax subject for sales tax and trade tax. The KG's income is determined in a notification uniformly for the company and with a separate allocation of the respective share for the partners. Tax losses are also determined uniformly and separately. Losses can only be offset up to the amount of the liability; excess losses are carried forward and offset against future profits. Taxation is carried out separately for each partner in his or her personal tax return.

Asset management KG as a special form

A KG can operate as a business, but it can also just hold and manage its own assets. The KG then does not generate any commercial income, but rather income from rentals or capital assets. However, if the KG only has general partners in the legal form of a corporation, then the asset-managing KG also generates commercial income. This applies in any case if the GmbH & Co KG registered in Germany is also managed from Germany and is not considered tax resident elsewhere through a double taxation agreement, for example in Switzerland.

Entrepreneurial company, the "small GmbH"

In response to the flood of English Ltd's, Germany has introduced an alternative legal form in the family of corporations with the limited liability UG.

 

The founding of the UG in Germany is done very quickly and easily via a so-called protocol formation. There is no statutory requirement for a minimum capital. The capital can be raised from future profits, for which at least 25% of the respective profits must remain. Once the minimum capital of EUR 25.000 required for a GmbH has been raised, the name can be changed to a GmbH upon request.

The establishment is inexpensive, but also has certain restrictions in the design of the statutes, which must be based on the model statutes laid down in the law. The UG can only be chosen if a maximum of 3 goods come together.

 

Further key points:

 

  • Legal bases in the BGB, HGB, GmbHG
  • One or more partners (max. 3)
  • At least one managing director as legal representative
  • Shareholders' meeting as the highest body
  • No contributions in kind possible
  • Shares can be inherited and sold
  • Accounting analog GmbH (basics in the HGB apply to all chapters)
  • Tax treatment as a corporation, i.e. the UG taxes its income with corporate tax + trade tax (approx. 15% each, so in total approx. 30%)
  • In Germany, shares in a corporation are subject to the so-called “exit tax” according to the AStG

the

The limited liability company (GmbH) is the most common legal form in Germany, although not necessarily always the right one. The limitation of liability is linked to compliance with strict formal procedures, otherwise the case law sees a wealth of breakthroughs and holds the managing director, but not the shareholders, to the so-called “pass-through liability”.

 

  • Establishment in a notarial deed
  • Minimum share capital EUR 25.000
  • Contribution in cash or contributions in kind
  • Raise cash deposit of at least 50% immediately, 100% if founded by one man
  • For non-cash contributions: in-kind formation report required 
  • At least one managing director as legal representative
  • Shareholders' meeting as the highest body

 

The GmbH is liable with all of its assets, not just the share capital. With low capitalization, there is an increased risk of insolvency (see above). Controlling shareholders have increased formal due diligence requirements for contracts with close relatives or affiliated companies. By separating GmbH and shareholders as tax subjects, their tax results are determined separately in tax law. Losses of the GmbH cannot be offset against profits of the individuals. This becomes particularly unpleasant if the losses result, for example, from salaries paid to the goods. The salaries must be taxed, the loss cannot be offset; This means that more is taxed in these years than was earned.

In Germany, special accounting and external auditing regulations apply to corporations. The requirements are different depending on the so-called size class (small, medium, large).

Joint-stock company)

The AG has a different status in Germany than, for example, in Switzerland.

In addition to the BGB and HGB, the AktG contains the legal basis. Founding as a one-man company is permitted. The minimum share capital is EUR 50.000. The shares can be traded on the stock exchange if trading is permitted. Then the regulations of the capital market laws must also be observed. The shares can grant various rights, particularly in the distribution of profits and company assets. Preference shares can be issued as non-voting shares. Otherwise, the AG can be compared with a GmbH. The special features of the AG may need to be examined in more detail.

Further legal forms

In addition to hybrid forms of the legal forms presented, German law also recognizes the KGaA. So the limited partnership on shares, the cooperative, the association, the foundation.

Legal forms of EU and EEA countries

In addition to the freedom of establishment in Europe, all legal forms represented in the rest of the EU are added.

A company founded and based in Italy or Spain can move its headquarters to Germany; it does not need to change its legal form to do so. From a legal and tax perspective, it is then examined according to a so-called legal type comparison and treated in Germany in the same way as the legal forms at home here. The transnational legal form in the EU is the “Societas Europaea” (SE)” as a “European stock corporation”. German law largely equates EU companies by comparing legal types, but makes a clear difference to companies that were not established according to the law of an EU or EEA state.

A GmbH established under Swiss law cannot claim the same tax advantages in the event of mutations; the UmwStG is not applicable in this respect. This has consequences, for example, if a person resident in Germany is involved in a Swiss GmbH and this GmbH is converted into an AG in a tax-neutral manner in Switzerland. The German shareholder is then treated as if he had sold his shares while revealing the hidden reserves and then acquired the new shares. The tax consequences are very clear.

 

Tax issues

Tiered models for tax compliance | Even among small medium-sized companies, almost every second person is active abroad.

Regardless of the crisis on the financial markets, internationally active medium-sized companies want to become even more active abroad in the future. 46 percent of them plan to increase their commitment. 42 percent want to maintain their current level. This emerges from a joint study by KfW and the Creditreform association. In Switzerland the conditions are likely to be similar to those in Germany. Numerous other companies are planning their first step into international markets.

The study makes it clear for the first time that medium-sized companies consciously follow a “step-by-step plan” when developing their international activities, both in terms of regional orientation and the type of business they do. The first step usually leads to neighboring countries and only then to distant regions such as North America or Asia. Given this high willingness to invest, it is surprising that the same mistakes are made again and again. Even among the leading large companies it can be observed that they are having difficulty with globalization.

As long as the economy is strong and the coffers are full, they can afford expensive mistakes and sell even billion-dollar withdrawals to the markets as a success. In order to minimize the tax risks and tax burden, which are significantly higher in an international context, these companies employ their own tax departments in addition to external consultants.

 

Limited and unlimited tax liability – DTA

People residing in Germany are subject to unlimited tax on their worldwide income.

Anyone who has neither a place of residence nor a habitual abode in Germany, but has a source of income in Germany, is subject to limited tax liability in Germany on this income. This would lead to double taxation in an international context. As far as an agreement to avoid the double taxation (DTA), it is examined separately for each type of income to determine which of the countries involved waives the exercise of its rights. The avoidance of double taxation varies depending on the type of income, either through exemption or by offsetting the taxes paid in the other country.

Partnerships tax your earnings only with regard to trade tax, if this is due at all. Furthermore, the profits are taxed by the partners in their personal income tax returns, regardless of whether the profits were withdrawn or not. Shareholders of commercial or freelance partnerships resident abroad are subject to limited taxation in Germany. corporations tax their earnings with regard to trade tax and corporation tax. The tax liability with regard to trade tax is based on the commercial establishment, corporate tax is based on the company's registered office.

However, if the place of actual management is elsewhere, including abroad, then the right of taxation shifts to the administrative headquarters. If profits of the corporation are distributed, dividend taxation occurs at the level of the shareholders, whereby in Germany a withholding tax of 25% + SolZ, i.e. 26,375%, is levied.

Share the tax pie

A company's success is usually subject to tax at the company's registered office.

The tax liability covers the company's global income, regardless of where the result was generated. This is called unlimited tax liability. However, states are generally not satisfied with taxing companies based there. The income of non-resident companies is also taxed, but limited to domestic income. This is why we speak of limited tax liability. In the case of foreign commitments, unlimited tax liability (based on domicile) and limited tax liability (foreign income) come together.

 

Anyone who is active in business must comply with national accounting and tax regulations. That's already complex enough. Things become more difficult when you have to serve several tax authorities. Regardless of how you structure a foreign commitment, whether you maintain dependent establishments abroad or whether you establish subsidiaries, it is de facto a company. The business success can be controlled to specific units by assigning customers and markets and billing internal delivery and service relationships.

 

The tax authorities also know this and are wary of making sure that the other country doesn't get too much of the tax cake. There are discussions, sometimes even serious arguments, about whether any of the cake should be given away and, if so, how much. However, it remains to be seen whether the other country will be satisfied with the size of the allocated piece of cake. It is not uncommon for a country to agree to a maximum amount of what it excludes from national taxation. At the same time, however, the other country has a minimal idea of ​​what tax base it claims. Ideally, the cut piece of cake will fit exactly into the cut cake.

 

But that is by no means certain and not even likely. At least for medium-sized businesses, different national standards apply to accounting and determining taxable results. The same company will therefore report a different taxable profit in Germany than in Switzerland, the USA or China. The cut piece of cake, to stick with the image, is therefore not served 1:1 to another tax authority, but is transformed to its standard, making it nominally larger or smaller. This leads to the taxation of fictitious profits, which must be prevented through good design and careful work.

 

DBA - the limits of application

In order to give the economy at least some guidance and to avoid double taxation of one and the same economic success, the most important industrial nations have concluded so-called double taxation agreements (DTAs) bilaterally with other countries.

 

However, these only apply to the income taxes specified in the agreements. There are also DTAs with individual states in the area of ​​inheritance and/or gift taxes. Switzerland has concluded a DTA with Germany for income taxes and inheritance tax, but not for gift taxes. With regard to the particularly dangerous sales tax or VAT, neither Germany nor Switzerland have agreed to a DTA with other countries. 

 

The nature of a DTA is such that the respective national tax laws continue to apply regardless of a DTA. A DTA is understood to mean that two countries conclude a contract with each other in which they describe rules for each type of income, which lead to the allocation of taxation rights to one country or the other. The country that is “subject” to this classification is not allowed to exercise its existing taxation right by virtue of the DTA. In this respect, Germany has inserted a special provision into national tax law: Germany waives the exercise of its right to taxation due to a DTA, but if the other country does not use its right because, for example, it does not know “about its luck”, then Germany still taxes . This is intended to prevent income from remaining untaxed.

 

Qualification conflicts

Problems arise from the qualification of the income.

It happens that one country thinks that it is income from self-employment, while the other country thinks that it is commercial income or income from work. Similar coordination problems arise when qualifying interest, dividends and licenses. In this respect, it can be an independent type of income, or the income can be embedded in a company, for example.

There are also different perspectives regarding legal forms. A broad distinction is made between partnerships (OGH, KG) and corporations. Mixed forms are often chosen, for example GmbH & Co KG. While one country believes that it is a personal company, the other country sees a special form of capital company and therefore necessarily comes to completely different conclusions.

The unwanted DBA permanent establishment as a stumbling block

The tax pitfalls with the greatest potential for tax risk can be avoided if you at least address these questions:

 

  • unwanted permanent establishment

  • Sales representatives abroad 
  • Construction and assembly> 6, 9 or 12 months 
  • Advice from the parent company 
  • Transfer pricing

  • Relocation of production

 

A nationally oriented company has at least one Permanent establishment, although there are no special requirements in this respect. In the international context, the term “permanent establishment” has a completely different meaning, especially in relation to countries with which there is an agreement to avoid double taxation (DTA). In this respect, these are international agreements that take precedence over national law. You can also have a DBA branch in countries where you don't employ any staff at all and where you don't even have an office.

Tax permanent establishments are often unrecognized because they are not founded; they are created by law or based on the definition in the double taxation agreement (DTA). Two or more states have the right to tax. This is a circumstance that medium-sized companies in particular should definitely avoid.

The unwanted representative permanent establishment

At the top of the list are the business establishments that are created because a sales representative is employed abroad.

For example: A company based in Germany employs a sales representative in Switzerland to handle the local market. It should be noted that the sales man/woman

 

  • is subject to the tariff conditions of his home country
  • Subject to compulsory social insurance in the country of employment 
  • is personally liable to tax in his home country
  • The employer therefore has to fulfill employer obligations abroad

 

Since the employee has skills that legally bind the company and the orders placed are usually accepted, this is a so-called representative permanent establishment.

Calculating the profit of a permanent establishment

Consequence: the German annual financial statements must be split up for tax purposes.

The Swiss “piece of the cake” is then taxable under federal law. In concrete terms, this means that Swiss law must be applied to determine the tax result in this case. However, the division not only affects income and expenses but also the proportionate receivables and inventory, regardless of which country they are booked in or are physically stored in. Machines and patents are also covered. Liabilities and also equity must be allocated accordingly in a permanent establishment's balance sheet. In the end, depending on the countries involved, the two or more pieces of cake result in more or less than the original cake. Under certain circumstances, more will be taxed than was earned.

Advice and other services

In the DTAs with some countries, among others China It is determined that a permanent establishment in this country also exists if services in the field of consulting are provided, whether by the company's own employees or by other personnel, and this activity for the same or a related project lasts a total of more than 6 months within any 12-month period.

The unwanted construction and assembly facility

A mechanical engineer based in Germany is planning and building a special machine that will be exported to Egypt.

The order also includes assembly and integration into the existing machinery. A second order of this type comes from a customer based in China. The third order goes to Switzerland. The order in Egypt lasts from January to October 2012, the China order begins in June 2012 and ends in December 2012. The Switzerland order lasts from February to October. There are no further orders this year.

 

Solution:

 

a) Egypt
The Egypt DTA provides for a (BS) if the duration is more than 9 months. Since the order lasts 10 months, there is a BS in Egypt and the result of the order is taxable there. If it had been completed faster, the result would be taxed in Germany.

 

b) China
In the DTA China the duration is stated as 6 months. Because the order processing takes 7 months, there is a BS in China.

 

c) Switzerland

In the DBA Switzerland the duration is stated as 12 months. Because the order processing only takes 8 months, there is no BS.

 

d) Germany
Germany comes away empty-handed, except for the delivery to Switzerland. Under commercial law, the entire result must be shown in the German commercial balance sheet. The tax balance sheet must be divided into the permanent establishment balance sheets. The taxable results in Egypt and China must be determined in accordance with local regulations.

Purchasing abroad

From a tax perspective, warehouses abroad, whether as a collection warehouse for purchasing or as a distribution warehouse, do not lead to an income tax obligation abroad.

The reason for this is the regulations in the DTAs, which most industrialized nations, including Germany and Switzerland, have agreed based on the OECD standard. A Swiss manufacturing company that maintains a distribution warehouse in Germany is not subject to tax on its income. In other countries such as China, however, a purchasing company must also meet the standards of a quasi-company in order to be allowed to do business at all.

Customs law

The qualification of goods according to the so-called HS codes is somewhat harmonized in Europe, although the classification of the products and thus their customs classification is not easy.

While the EU, as a customs union, has abolished internal borders, these still exist in relation to third countries such as Switzerland, USA, China, etc. In addition to the formalism, this is also about economic burdens. EU products are also largely left unmolested in relations with Switzerland, and vice versa. But the issue cannot be neglected even when using professional customs clearance offices.

 

Even in small border traffic, countless lists, forms, registration and deposits have to be dealt with in order to even get to work. And then at 20 p.m. you're alone at customs or in the queue. Anyone who simply crosses the border without carrying out the necessary clearance will cause problems.

Transfer pricing

Always a hot topic and favorite topic for auditors is the design of transfer prices for deliveries and services between affiliated companies.

While large companies are usually well prepared here, medium-sized companies unfortunately all too often stumble because the prices are set by the boss or the internal calculations produce “reasonable” results. However, tax law requires that the prices be set as if they were between third parties. Whether an arm's length comparison is even possible remains to be seen. Principles that must be adhered to have been developed in the German Foreign Tax Act (AStG), in the DTA, in case law and in administrative instructions.

Essentially, the focus can be on the fact that a careful analysis of the functions, risk and opportunity potential must always be carried out for affiliated or related companies and this must be documented. A number of books have been written about how this should be done in detail. This is expert knowledge that you cannot simply acquire yourself. The risk and opportunity analysis leads to a choice of method that is decisive for the design of transfer prices. This may initially be strenuous and certainly risky, but on the other hand it also opens up avenues that would otherwise be closed, for example offsetting losses across the border.

Danger: non-recognition - APA procedure

A company buys a component for 100 from its foreign affiliated company, where the 100 is taxed.

If the domestic tax auditor thinks that 100 is too expensive, while 70 is more correct, then you run the risk of having to pay tax on 30 that was not earned anywhere. The same problem arises if the foreign auditor thinks that 100 is not enough and that 180 should have been calculated. Having to please several men at the same time can only be achieved if you work very carefully and in accordance with international standards.

If you want to be sure that “your” result will be recognized by all, you can achieve clarification in an “APA” procedure (Advanced Pricing Agreement). Depending on the situation, these procedures require more effort at the beginning, but avoid expensive and dangerous discussions and follow-up work later.

Liability for third-party taxes for cheap purchases

The trade in goods and services is subject to sales tax in the EU, Switzerland and many other countries.

While most countries have concluded the aforementioned agreements to avoid double taxation in the area of ​​income taxes, there are no such agreements for sales taxes. Before a product gets from the producer to the end customer, the product is usually resold several times. A classic way, using a tile as an example, could be:

 

  • Manufacturers in Portugal
  • Buyer / wholesaler in Spain
  • Importer based in Germany 
  • Resale to a Swiss company that also has sales in Germany

 

Each of the companies involved is an entrepreneur within the meaning of national sales tax or VAT legislation. This means that each company will invoice the subsequent buyer for VAT. If the subsequent entrepreneur is subject to regular taxation, he can deduct the VAT paid as input tax. An economic burden with VAT only occurs at the end consumer level.

 

Location Germany

However, this does not apply in Germany and other EU countries if one of the upstream suppliers does not pay its VAT debt and the buyer should have been aware of this. According to Section 25 d UStG Germany, the hypothetical need to know is already given if the price is below the usual market level. A particularly cheap purchase therefore carries the risk that the buyer will have to be responsible for a third-party tax debt. When the law was introduced, the aim was to target the so-called carousel shops, which were used for gang-related sales tax fraud. The system took advantage of the fact that the input tax deduction for purchased goods depended solely on the presence of an invoice with a VAT certificate and on payment of the invoice. However, the supplier, who has to pay the VAT received to the tax office, was able to run away and not pay his VAT.

 

In order to remedy this, the customer is now liable under certain circumstances for the VAT of the previous entrepreneur. This not only means the immediately preceding entrepreneur, but also the sales at the level before that. We are liable for the tax shown in an invoice, but not for taxes that are to be withheld and paid by the customer in the so-called reverse charge procedure.

 

The issuer of the invoice must have acted with the preconceived intention of not paying the tax or of having intentionally caused the situation of being unable to pay. However, the burden of proof that the reasons for liability do not exist lies with the customer (reversal of the burden of proof). Therefore, increased duties of care must be fulfilled in order to avoid liability. If in doubt, you have to leave a deal that seems cheap. Because the liability standard turns out to be extremely dangerous in practice.

 

However, liability can also be avoided through good design. By using the VAT ID numbers, a multi-stage commercial transaction can also be designed in such a way that the supplier does not receive any VAT, but rather the buyer withholds the tax directly using the reverse charge procedure and pays it to the tax authorities themselves, offsetting their input tax -claim.

Deviating entrepreneurial term in sales tax law

Anyone who is a Swiss entrepreneur and does not have sales subject to VAT in the EU can do so until June 30.6th. in some countries also until September 30.9th. or December 31.12st. submit a refund request the following year.

Requirement among other things. Submission of an entrepreneur's certificate. Anyone who misses the deadline is out of luck. Extension is not possible. In Germany, the original documents must be submitted. Those who are cautious and only submit copies will definitively exclude themselves from reimbursement for procedural reasons; grace periods are excluded. On the other hand, anyone who not only purchases but also generates sales subject to VAT has up to four years and is bound to fewer requirements.

You don't have to start a company to do this. The concept of entrepreneur is completely different in sales tax law than in income tax law. An entrepreneur's tax obligations may affect you much more in the area of ​​VAT/VAT than in income taxes. In some countries, for example France, a so-called fiscal representative must be appointed before any entrepreneurial activity. In other countries, for example Germany, fiscal representatives are admitted but are not required to be appointed.

Labor law in Germany

Labor law in Germany enjoys a dubious reputation abroad for being particularly employee-friendly and thus represents an obstacle to investment for investors.

It is true that a hire & fire mentality is not desired and that in Germany people rely on sustainable concepts in the spirit of a social market economy. However, labor law has been significantly modernized and made more flexible in recent years. The discussion about the minimum wage and temporary work is heating up people's minds, but it also shows that a level may have been reached at which parts of the workforce feel pushed back to such an extent that one can no longer speak of a one-sided distribution of interests in favor of the employees for a long time . The need to retain well-trained and motivated employees in the company over the long term is the same everywhere. The bilateral treaties between the EU and Switzerland also regulate the free movement of people. This not only affects self-employed people, but also employees. In principle, the law of the country to which the employer is subject applies to the employment contract. A Swiss employer can hire staff in Germany and have them work in Germany. Swiss contract law then applies (protection against dismissal, etc.), but possibly German posting law, social security law, tax law. Similar to Switzerland, however, Germany has a posting law, which does not apply to all sectors. Where the posting law takes effect, the defined minimum standards must also be adhered to.

Freedom of contract within limits

Whether an employment relationship or an employment contract comes into being depends on the actual circumstances and not on formalities (substance over form).

In Germany, the conclusion of an employment contract is not tied to any form by law, although the employee has the right to a written contract upon request. The written version is recommended anyway for verification purposes. For parties bound by collective agreements, the collective agreement may result in additional requirements for the employment contract. If there is a works council or there are works agreements, these must also be taken into account. The question of whether dependent employment exists depends on the overall picture of the circumstances.

These include integration into the employer's business, adherence to instructions, entrepreneurial initiative and entrepreneurial risk. Since Switzerland also introduced a law to combat bogus self-employment on January 1.1.2013, XNUMX, the two legal systems have become even more similar to one another. In Germany, the result of any necessary examination can also be clarified in advance through a so-called status determination procedure. In certain professions, instead of a permanent position, collaboration on an entrepreneurial basis is also possible (freelancer, freelance work).

 

Transfer of employment relationships by law

Employment relationships are not only concluded between employer and employee, they can also be transferred from one legal entity to another by operation of law in accordance with Section 613a of the German Civil Code (BGB).

This is the case with a transfer of business, regardless of how it is called. The purchase of essential production goods can already be a trigger for a transfer according to Section 613a if the sale restricts work opportunities and/or employees' claims are jeopardized. A 613a case always occurs with share deals, and usually also with asset deals.

Models of flexible working hours

In recent years, labor law in Germany has been adapted to the changing competitive situation in various areas and made more flexible.

In practice, alternative models have been developed to modify the rigid working time regulations. Thanks to flexible working time models, it is now easier to react to industry-, company- and employee-specific circumstances and needs. First and foremost, the option to limit employment relationships should be mentioned. But working time accounts have also proven successful. These agreements are based on individual goals. Agreements can also be based on a month, a year or a lifetime of work.

Time limitation (Part-Time and Temporary Employment Act TzBfG, entered into force on 01.01.2001)

For a time limit to be effective, there must be an objective reason. §14 I 2 TzBfG contains a non-exhaustive list:

 

  • the operational need for the work performance only exists temporarily,
  • the fixed-term contract takes place following training or study in order to facilitate the employee's transition into subsequent employment,
  • the employee is employed to represent another employee,
  • the nature of the work performance justifies the fixed-term contract,
  • the time limit is for testing purposes,
  • Personal reasons relating to the employee justify the fixed-term contract,
  • the employee is paid from budget funds that are intended for temporary employment and he is employed accordingly or
  • the time limit is based on a court settlement.

 

In exceptional cases, a time limit is effective without any factual reason. However, it may last a maximum of 2 years and can be extended up to three times. This does not apply if there is already a previous employment relationship with the same employer. Start-ups or start-ups have expanded options:

 

  • Limited to a maximum of 4 years
  • up to 4 years, multiple extensions permitted
  • Only for the first 4 years of the establishment of the company

 

In addition, older employees aged 52 and over can be employed flexibly. Employees aged 52 and over can be employed on a temporary basis as follows:

 

  • Maximum 5 years
  • Up to 5 years, multiple extensions permitted.
  • Requirement: The employee was unemployed for at least four months immediately before the start of the fixed-term employment relationship, or received transfer short-time work benefits and took part in a publicly funded measure.

Trial period in companies

Probationary periods can also be agreed for fixed-term employment relationships; the maximum duration is 6 months.

The notice period during the probationary period is 2 weeks. A shorter notice period is only permitted in the collective agreement.

 

Minimum wage in Germany

Due to the collective bargaining autonomy according to Article 9 Paragraph 3 of the Basic Law, wages can generally only be agreed by collective bargaining parties.

There is not (yet) a legal minimum wage for everyone in Germany. For certain industries, there are collectively agreed minimum wages that apply directly only to collective bargaining parties and only to non-members of the collective bargaining parties if there is a declaration of general applicability. For certain sectors, the collective minimum wages based on the Posting of Workers Act (AEntG) may apply to non-members of the collective bargaining parties. It's about protecting the domestic labor market against cheap imports by setting minimum standards.

Collective bargaining agreement (collective bargaining agreement law) in Germany

On the employee side, unions are committed to achieving collective agreements.

On the employer side, there are individual AGs (house tariffs) but also employer associations and their leading organizations. Regulations are agreed on individual rights and obligations that should exist between the collective bargaining parties as such. For example, what obligations the parties to the collective agreement have to implement the collective agreement and what they have to do and not do in detail. In addition, general working conditions are specified, which are intended to have a direct impact on the individual employment contracts. Ultimately, these are legal norms mutually agreed upon by the collective bargaining parties.

The members of the collective bargaining parties and the employer, who is themselves a party to the collective bargaining agreement, are bound by collective agreements. This means that on the part of the employees, this only applies to union members, not to the so-called outsiders. According to §5 TVG, the Federal Ministry of Labor and Social Affairs can, with the agreement of the leading organizations of employers and employees, declare a collective agreement to be generally binding, i.e. also for non-members of the collective agreement parties, if the employers bound by the collective agreement do not represent less than 50% of those falling within the scope of the collective agreement employ employees and the generally binding declaration appears to be necessary in the public interest.

In larger companies, a works council makes just as much sense as a uniform collective bargaining structure. This saves organizational costs and creates transparency.

Employer obligations regarding wage tax

The employer is obliged to withhold and pay wage taxes in Germany.

This also applies to foreign employers who then have a so-called payroll tax permanent establishment. Insufficient wage tax withheld cannot always be demanded back from the employee. The amount of wage tax depends on the marital status and social status of the employees. Very important: billing according to the correct income tax class. Since January 1.1.2013, XNUMX, employees only provide their boss with their tax identification number and their date of birth. This allows them to electronically access all the data required for income tax from the Federal Central Tax Office. The settlement is relatively dangerous. Submission to tax advisors is recommended.

Social insurance in Germany

International regulations on social security obligations do not receive nearly as much attention as tax agreements.

The social and financial impact is far greater. As a rule, an employee is subject to social insurance contributions and is subject to the labor law conditions of the country in which he or she physically performs the work. The EU decided on a change on April 1.4.2012, 100, which affects employees who live in one EU state and work in another EU state. Switzerland has joined the new EU regulation. This is about the social security obligation, which, unlike taxation, is never divided but is always assigned XNUMX% to one state. As I said, the decisive factor is the place where the work is physically carried out; the location of the employer is not important.

For example, anyone who lives in Germany and worked in Switzerland or France, but also carried out some of their work in Germany (for example home office days), was subject to 2012% of their income in Germany until March 100. Even the smallest activity in the country of residence was sufficient. Since April 1, 2012, at least 25% of the employment or working hours must be carried out in the country of residence in order to justify the social security obligation in the country of residence. Anyone who works Monday to Thursday in Switzerland but takes a home office day on Friday or is deployed in Germany only spends 1/5 or 20% of their working time in their country of residence and is therefore (new) in the country of SV -mandatory in which the employer operates.

If you work for several employers based in different countries, you will continue to be subordinated to the country of residence, regardless of whether a significant part of the work is carried out there. If the employee also has a part-time job, he or she will always be subject to social security contributions in his or her country of residence. The social insurance system in Germany is divided in several ways: Unlike in Switzerland, full-time self-employed people are not compulsorily insured in Germany. You have the choice between voluntary, statutory, private or no health and nursing care insurance at all. Workers or employees can take out voluntary insurance with a monthly salary of around EUR 4.000 or more. Self-employed people in Germany are also not compulsorily insured in statutory pension and unemployment insurance.

However, you can apply for compulsory insurance regardless of your nationality and thereby acquire all the rights and obligations of those with compulsory insurance. The contribution amount is determined from the respective employment income up to the contribution assessment limit of current monthly. 5.600 EUR and the current contribution rate of 18,9 percent. Workers and employees are compulsorily insured in statutory pension and unemployment insurance. The contributions of 18,9% are only levied up to a monthly income of EUR 5.600 and are therefore pension-forming in full, unlike in Switzerland. A foreign employer also has an SV permanent establishment in Germany if employees subject to SV are employed here.

Non-wage labor costs in Germany

The main component of the additional wage costs are the employers' social contributions, i.e. in particular the statutory employer contributions to social security, the expenses for company pension schemes and the expenses for continued wage and salary payments in the event of illness.

 

In 2011, employers in Germany in the private sector paid an additional 100 euros in additional wage costs for every 28 euros in gross earnings. This meant that Germany was below the EU average of 32 euros and, with 16th place, occupied a middle position within the European Union. The comparative value in Switzerland is around 22 euros, as long as you stay below the German contribution assessment limits. With higher incomes, the German value remains fixed, the Swiss value increases. In Sweden, the highest wage costs were paid at 52 euros and France at 50 euros, and in Malta the lowest were paid at 10 euros.

Self-employed Swiss people in Germany

Since April 1.4.2012, 25, self-employed people who are also subject to social security contributions in Switzerland are required to have a “significant part” (XNUMX%) of their employment in Switzerland in order to be subject to social security contributions here ( AHV, pension fund, third pillar).

 

A division is not an option. Anyone who works internationally must therefore be careful that they remain in the social security system. Conversely, you can also exempt yourself from the AHV obligation in Switzerland by behaving accordingly.

Codetermination and works council in companies

A co-determination and works constitution law applies in Germany. According to this, employees in companies with five or more employees can organize themselves into a works council.

But this rarely happens, at least as long as the relationship between employer and employees is good. The size of the works council depends on the number of full-time employees:

 

  • If there are 5 to 20 eligible voters: a works council 
  • If there are 21 to 50 eligible voters: three works councils 
  • If there are 51 to 100 eligible voters: five works council members 
  • With 101 to 200 eligible voters: seven works councils

Company agreement in companies based in Germany

In practice, the works agreement is of similar importance to the collective agreement.

This is a “company law” established between the employer and the works council of a company for all employees of that company, which accordingly also has a normative effect.

Termination of an employment relationship and protection against dismissal

An employment relationship in the company can be terminated by

 

  • Invalidity of an employment contract: e.g. incapacity to do business 
  • Challenging the employment contract
  • Expiry of the time limit
  • Reaching retirement age
  • Termination agreement
  • Termination: extraordinary and ordinary

 

Extraordinary termination by the employer is mandatory

 

  1. Written form: Termination by fax, email is invalid
  2. Compliance with the declaration deadline in accordance with Section 626 II BGB

 

And: he has to act quickly. The employer must give notice of termination within two weeks of becoming aware of the facts relevant to the termination. Termination is possible if there is an important reason, e.g

 

  • Pre-contractual breach of duty: e.g.: submitting falsified certificates
  • Violation of work obligations: persistent and unjustified refusal to work, feigning illnesses
  • Breach of fiduciary duty: usually intent required. E.g.: betrayal of trade secrets, violation of non-competition clauses
  • Criminal offense: primarily in the official area, . E.g.: theft at work; Crimes from the private sector are only relevant in exceptional cases

Despite the existence of an event mentioned above, a balancing of interests is necessary in each individual case. Extraordinary termination is only justified if it is unreasonable to continue the employment relationship until the ordinary termination. The notice period depends on the length of service.

There is no entitlement under the Dismissal Protection Act in the first 6 months of an employment relationship. Small businesses with up to 10 employees are not subject to the KSchG anyway. Only if one of the following three reasons for termination applies is termination socially justified and therefore effective

  • Termination due to conduct, §1 II KSchG
    What is required is that the employee has committed misconduct: this is comparable to extraordinary termination, only less serious and must also have been committed culpably. Usually only permissible after an unsuccessful warning

 

  • Personal termination, §1 II KSchG
    Differentiation from behavior-related termination: The reason for termination is not at the discretion of the contractor. Example: illness or disability
    Further fulfillment of the work obligation by the contractor is no longer possible
    Impairment of operational interests required
  • Termination for operational reasons, §1 II, III KSchG
    An urgent operational reason is required: e.g.: concrete job loss (priority of implementation), and proper social selection: length of service, age, maintenance obligations, severe disability of the employee.

General protection against dismissal under other laws

  • Prohibition of disciplinary measures according to § 612a BGB: according to this, a termination is invalid if it was only given because the contractor has asserted his legitimate interests against the client.
  • Prohibition of termination due to a transfer of a business or part of a business, Section 613 a Paragraph 4 of the German Civil Code (BGB).

Special protection against dismissal for certain groups of people

  • Pregnant women and women up to 4 months after childbirth
  • Severely disabled people: only with the consent of the Integration Office
  • ON during parental leave
  • Works council members, electoral board members, staff council members, etc.

Further labor market instruments in Germany

The special funds in the construction industry as well as in other sectors as well as the contribution system in the social funds relieve the employer.

As with individual risks, such as loss of work due to weather, illness, etc., short-time work allowance can be applied for in temporary economic emergency situations such as a lull in orders, etc., so that trained staff do not have to be laid off. In addition, a wealth of other instruments are available, especially for the qualification of employees. In the eastern federal states, significant investment subsidies are granted if permanent jobs are created. The Federal Employment Agency provides valuable assistance in the search for qualified personnel.

Contract law Germany - Switzerland

Agreed performance standard

Germany and Switzerland largely speak the same language.

However, the understanding of the content is shaped by respective national thinking and the different legal standards. A German provider interprets the agreed service standard according to local standards, unaware that his Swiss contractual partner assumes completely different content and legal consequences.

This becomes clear using the example of work contracts, such as those often agreed upon for construction work: In Germany, the contractor provides or the client expects fulfillment based on the local VOB standard. In Switzerland we have a different standard, the SIA. Subsequent legal disputes then revolve around the question of whether there is a material defect or not. You should therefore clarify in advance which performance standard should be agreed upon.

Contracts between Swiss and Germans

In Germany and Switzerland, most contract types (sales contract, work contract, rental agreement, etc.) are regulated by law and modified by case law.

However, there are sometimes considerable differences with regard to the assumption of risk, liability for material defects, returns and revocation. This is why it is always recommended for cross-border contracts

  • Agree on choice of place of jurisdiction
  • Build contracts properly
  • Note the differences between the purchase contract and the work contract
  • Pay attention to the special features of some contract types in the Swiss Code of Obligations
  • Transfer of risk in CH sales law is different than in D
  • Contractual guarantee versus legal product liability

German International Private Law (IPR) determines the applicability of German law in the event that no choice of law has been made. The Swiss IPR regulates the same case in exactly the opposite way.

A legal agreement also includes a regulation on the place of jurisdiction and a currency agreement with an offsetting agreement. Otherwise, in Germany, claims in EUR cannot be offset against claims in CHF.

Advice: Location Germany

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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