Investment in Germany

2008 KPMG Deutsche Treuhand-Gesellschaft Aktiengesellschaft Wirtschaftsprfungsgesellschaft, a subsidiary of KPMG Europe

LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.
Investment
in
Germany


Authors
Oliver Drfler
Diplom-Kaufmann, Steuerberater
KPMG, Frankfurt
Dr. Gerrit Adrian
Eva Handwerker
Diplom-Kaufmann, Steuerberater
KPMG, Frankfurt
Diplom-Wirtschaftsjuristin (Univ.)
KPMG, Frankfurt
Christian Birker
Michael Hundebeck
Rechtsanwalt, Wirtschaftsprfer,
Steuerberater
KPMG, Frankfurt
Diplom-Finanzwirt
KPMG, Frankfurt
Dirk Fleckenstein
Dr. Martin Ribbrock
Rechtsanwalt
KPMG, Frankfurt
Rechtsanwalt
KPMG, Frankfurt
Oliver Franz
Christian Schenk
Diplom-Wirtschaftsjurist (Univ.),
LLM
KPMG, Frankfurt
Rechtsanwalt
KPMG, Frankfurt
III


Preface
Investment in Germany is one of a series of booklets prepared by KPMG to provide information on subjects of
importance to investors and entrepreneurs contemplating
investments or business operations abroad.
The economic environment in Germany has undoubtedly
become much more complex, thus giving rise to a growing
need for reliable pathfinders to guide investors through the
maze of new rules and regulations.
Numerous legislative changes were enacted in 2007, further altering Germanys tax
and economic landscape. Particularly noteworthy are the 2008 Business Tax Reform
Act (Unternehmensteuerreformgesetz 2008), the Real Estate Investment Trust Act
REIT Act (REIT-Gesetz), and the 2008 Tax Act (Jahressteuergesetz 2008).
This booklet is intended to provide general background information and initial guidance in your preliminary planning efforts. We recommend that you obtain comprehensive advice before taking any action and would appreciate the opportunity to assist you
in planning and executing your investment in Germany.
Our approach combines high-quality advice with a comprehensive focus on our clients needs. We put ourselves in your shoes. We ask ourselves what demands are placed
on you and your business and develop appropriate solutions with which you can efficiently meet these demands. This is the challenge we set for ourselves every day.
I would like to take this opportunity to thank our National Tax Department, headed by
Dr. Martin Lenz, and each of this booklets authors: Oliver Drfler, Dr. Gerrit Adrian,
Christian Birker, Dirk Fleckenstein, Oliver Franz, Eva Handwerker, Michael Hundebeck, Dr. Martin Ribbrock and Christian Schenk.
June 2008
Ernst Grbl
Member of the Board
KPMG, Germany


Contents
Contents
Investment in Germany. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Authors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
III
Preface . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Germany an outline . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1.1
1.2
1.3
1.4
1.5
1.6
1.7
1.8
1.9
Geography and climate. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

History and political system . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Population and language. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
European influence on the economy and currency. . . . . . . . . . . . . .
1.4.1 General European background . . . . . . . . . . . . . . . . . . . . . . .
1.4.2 The economy and currency. . . . . . . . . . . . . . . . . . . . . . . . . .
Monetary policy in the European Union. . . . . . . . . . . . . . . . . . . . . .
Working conditions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1.6.1 Residence and work permits. . . . . . . . . . . . . . . . . . . . . . . . .
1.6.1.1 Residence permits . . . . . . . . . . . . . . . . . . . . . . . . .
1.6.1.2 Work permits. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1.6.2 Business hours. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1.6.3 Cost of living and housing. . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign direct investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1.7.1 Foreign direct investment in Germany . . . . . . . . . . . . . . . . .
1.7.2 German direct investment in foreign countries. . . . . . . . . . .
Attitudes towards foreign investment . . . . . . . . . . . . . . . . . . . . . . . .
1.8.1 Exchange controls. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1.8.2 Business regulations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1.8.2.1 Notification requirements. . . . . . . . . . . . . . . . . . . .
1.8.2.2 Regulated industries. . . . . . . . . . . . . . . . . . . . . . . .
1.8.2.3 Special business permits . . . . . . . . . . . . . . . . . . . .
German banking system, regulations and sources of finance for
commerce and industry. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1.9.1 The German Central Bank and the European Central Bank
VII
1
1
2
3
3
4
5
6
6
6
6
7
7
8
8
9
9
9
10
10
10
10
10
11

Investment in Germany
1.9.2 German banking institutions. . . . . . . . . . . . . . . . . . . . . . . . .
Banking regulations and the impact of the EU. . . . . . . . . . . . . . . . .
Stock exchanges. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
11
13
15
Importing to Germany. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
17
2.1
Customs duties. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2.1.1 German customs tariff. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2.1.2 Customs value transaction value . . . . . . . . . . . . . . . . . . . .
2.1.3 Origin of goods and preferences. . . . . . . . . . . . . . . . . . . . . .
2.1.4 Customs regimes to avoid, reduce, or defer duty payment. .
Anti-dumping and countervailing duties. . . . . . . . . . . . . . . . . . . . . .
Special import duties. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2.3.1 Other excise duties. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2.3.2 Import VAT tax. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Starting business in Germany other than through
branches or subsidiaries. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
18
18
18
19
20
21
21
21
21
Company law. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
23
3.1
23
23
26
27
28
29
30
30
1.10
1.11
2
2.2
2.3
2.4
3.2
3.3
Limited liability companies and stock corporations. . . . . . . . . . . . .

3.1.1 Formation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3.1.2 Registered share capital. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3.1.3 Management. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3.1.4 Supervisory board. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3.1.5 Shareholders or general meetings. . . . . . . . . . . . . . . . . . . . .
3.1.6 Amendment of the GmbH Law. . . . . . . . . . . . . . . . . . . . . . .
3.1.6.1 Accelerated formation of GmbHs . . . . . . . . . . . . .
3.1.6.2 Increasing the attractiveness of the GmbH via
greater flexibility of the corporation . . . . . . . . . . .
3.1.6.3 Abuse deterrence. . . . . . . . . . . . . . . . . . . . . . . . . .
3.1.7 German Corporate Governance Code. . . . . . . . . . . . . . . . . .
3.1.8 Business register Unternehmensregister. . . . . . . . . . . . . . .
3.1.9 Insolvency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3.1.10 Liquidation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other forms of corporations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3.2.1 Societas Europaea SE . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3.2.2 Limited partnership with share capital KGaA . . . . . . . . .
Other business associations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3.3.1 Partnerships. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
VIII
22
31
31
32
33
33
33
34
34
34
35
35

Contents
3.3.2 Silent partnerships. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3.3.3 Civil law associations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3.3.4 Sole proprietorship. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Branches . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Companies organized under the law of a foreign jurisdiction . . . . .
36
37
37
37
38
Accounting and reporting. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
41
4.1
German accounting principles. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

4.1.1 Financial statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4.1.2 Consolidated financial statements . . . . . . . . . . . . . . . . . . . .
International Financial Reporting Standards (IFRS). . . . . . . . . . . .
4.2.1 Consolidated financial statements . . . . . . . . . . . . . . . . . . . .
4.2.2 Financial statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Enforcement. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
41
41
45
48
48
48
49
Recent and proposed changes in fiscal policy . . . . . . . . . . . . . .
51
5.1
51
51
51
51
52
52
52
3.4
3.5
4
4.2
4.3
5
5.2
Current legislation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5.1.1 2008 Business Tax Reform Act. . . . . . . . . . . . . . . . . . . . . . .
5.1.1.1 Tax relief for corporations. . . . . . . . . . . . . . . . . . .
5.1.1.2 Earnings stripping rules. . . . . . . . . . . . . . . . . . . . .
5.1.1.3 Trade tax addbacks. . . . . . . . . . . . . . . . . . . . . . . . .
5.1.1.4 New change-in-ownership-rules . . . . . . . . . . . . . .
5.1.1.5 Transfer pricing changes . . . . . . . . . . . . . . . . . . . .
5.1.1.6 Retained earnings of partnerships and
sole proprietorships . . . . . . . . . . . . . . . . . . . . . . . .
5.1.1.7 Flat tax for income from capital and capital gains
5.1.2 Real Estate Investment Trust Act REIT Act . . . . . . . . . . .
5.1.3 2008 Tax Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5.1.3.1 Recapture taxation of carryover EK 02. . . . . . . . .
5.1.3.2 Application of 8b (3) KStG to shareholder loans
5.1.3.3 Redesign of general anti-abuse provision . . . . . . .
5.1.3.4 Changes in the Foreign Transactions Tax Law. . .
Pending Legislation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5.2.1 Act for the Modernization of the Legal Framework for
Equity Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5.2.2 Draft Accounting Law Modernization Act. . . . . . . . . . . . . .
5.2.2.1 Improvement of information content. . . . . . . . . . .
5.2.2.2 Relief from certain requirements . . . . . . . . . . . . .
IX
53
53
53
54
54
54
54
55
55
55
56
56
56

5.2.3 Draft Inheritance Tax and Valuation Law Reform Act. . . . .
5.2.4 Draft 2009 Tax Act. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5.2.4.1 Losses with a foreign nexus. . . . . . . . . . . . . . . . . .
5.2.4.2 Taxation of non-resident taxpayers . . . . . . . . . . . .
5.2.4.3 Treaty and directive shopping. . . . . . . . . . . . . . . .
5.2.4.4 Bookkeeping in a foreign country. . . . . . . . . . . . .
Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
57
57
57
58
58
58
58
Business taxation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
59
6.1
6.2
59
59
59
59
60
60
63
64
67
68
68
68
68
69
69
70
71
71
71
72
73
73
74
75
75
76
77
77
78
5.3
6
Comparison of legal forms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Taxation of corporations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6.2.1 Corporate income tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6.2.1.1 Companies subject to taxation. . . . . . . . . . . . . . . .
6.2.1.2 Basic principles . . . . . . . . . . . . . . . . . . . . . . . . . . .
6.2.1.2.1 Resident corporations . . . . . . . . . . . . .
6.2.1.2.2 Non-resident corporations. . . . . . . . . .
6.2.1.3 Determination of taxable income. . . . . . . . . . . . . .
6.2.1.4 Earnings stripping rules. . . . . . . . . . . . . . . . . . . . .
De minimis threshold (Freigrenze) . . . . . . . . . . . .
Non-group businesses (Konzernklausel). . . . . . . .
Escape clause. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest carry forward. . . . . . . . . . . . . . . . . . . . . .
Tax groups (Organschaft) . . . . . . . . . . . . . . . . . . .
6.2.1.5 Loss relief. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6.2.1.6 Tax groups (Organschaft). . . . . . . . . . . . . . . . . . . .
6.2.1.7 Double taxation and relief for foreign taxes . . . . .
6.2.1.7.1 Methods of relief. . . . . . . . . . . . . . . . . .
6.2.1.7.2 Tax treaties. . . . . . . . . . . . . . . . . . . . . .
6.2.1.7.3 Subject-to-tax clause. . . . . . . . . . . . . .
6.2.1.8 EU directives relating to direct taxation . . . . . . . .
6.2.1.8.1 EU Parent/Subsidiary Directive . . . . .
6.2.1.8.2 EU Merger Directive . . . . . . . . . . . . . .
6.2.1.8.3 Interest and Royalties Directive. . . . . .
6.2.1.9 Transfer pricing . . . . . . . . . . . . . . . . . . . . . . . . . . .
6.2.1.10 Filing requirements and payment of tax . . . . . . . .
6.2.1.11 Taxation in the event of liquidation. . . . . . . . . . . .
6.2.1.12 Withholding taxes . . . . . . . . . . . . . . . . . . . . . . . . .
6.2.1.13 Solidarity surcharge. . . . . . . . . . . . . . . . . . . . . . . .

Contents
6.3
6.4
6.2.1.14 Binding rulings (verbindliche Auskunft). . . . . . . .

6.2.2 Trade tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6.2.2.2 Determination of trade income . . . . . . . . . . . . . . .
6.2.2.3 Tax groups (Organschaft). . . . . . . . . . . . . . . . . . . .
6.2.2.4 Sample tax calculation. . . . . . . . . . . . . . . . . . . . . .
6.2.3 Net worth tax. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Taxation of partnerships . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6.3.1 Income tax. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6.3.1.1 Determination of taxable income. . . . . . . . . . . . . .
Step 1: Determination of income at the level
of the partnership. . . . . . . . . . . . . . . . .
Step 2: Special remuneration, special business income and expenses. . . . . . . . . .
6.3.1.2 Loss relief. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6.3.1.3 Trade tax credit against income tax. . . . . . . . . . . .
6.3.1.4 Tax group (Organschaft) . . . . . . . . . . . . . . . . . . . .
6.3.1.5 Sale of an interest in a partnership. . . . . . . . . . . . .
6.3.2 Trade tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6.3.2.2 Loss relief. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6.3.2.3 Sale of an interest in a partnership. . . . . . . . . . . . .
Taxation of permanent establishments . . . . . . . . . . . . . . . . . . . . . . .
6.4.1 Definition of permanent establishment . . . . . . . . . . . . . . . . .
6.4.2 Taxation of German-source income of a permanent
establishment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6.4.2.1 Income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6.4.2.2 Trade tax. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6.4.3 Determination of taxable income . . . . . . . . . . . . . . . . . . . . .
79
79
79
80
82
82
83
83
83
83
84
85
86
86
86
86
87
87
87
88
88
88
89
89
89
89
Indirect Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
91
7.1
91
91
92
93
93
93
94
Value added tax (VAT) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

7.1.1 Liability for VAT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7.1.2 VAT registration. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7.1.3 Taxable transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7.1.4 Place of supply. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7.1.4.1 Goods. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7.1.4.2 Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
XI

7.2
Other taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103
8.1
8.2
7.1.4.3 Intra-EC movements of goods. . . . . . . . . . . . . . . . 94

7.1.4.4 Reverse charge procedure . . . . . . . . . . . . . . . . . . . 95
7.1.5 VAT rates. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95
7.1.6 Collection, filing and payment of tax . . . . . . . . . . . . . . . . . . 96
7.1.6.1 Output tax. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96
7.1.6.2 Input tax. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96
7.1.6.2.1 Electronic invoice transmission. . . . . . 96
7.1.6.2.2 Amendment of the input tax deduction
within the scope of 15a UStG. . . . . . 97
7.1.6.3 VAT returns. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97
7.1.6.4 EC sales lists . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97
7.1.6.5 Intrastat declarations . . . . . . . . . . . . . . . . . . . . . . . 98
7.1.7 Foreign entrepreneurs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98
7.1.8 Enforcement. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98
7.1.8.1 Tax audits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98
7.1.8.2 Electronic audits. . . . . . . . . . . . . . . . . . . . . . . . . . . 99
7.1.8.3 Fraud. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99
Taxes on consumption (excise duties). . . . . . . . . . . . . . . . . . . . . . . . 99
7.2.1 General. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99
7.2.2 Tax territory and commodity subject to tax . . . . . . . . . . . . . 100
7.2.3 Time of tax liability and parties liable . . . . . . . . . . . . . . . . . 100
7.2.4 Tax concessions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100
7.2.5 EU directives. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101
Ecological taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
8.1.1 Electricity tax. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
8.1.2 Energy tax. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
8.1.3 Rates of ecological tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Miscellaneous taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
8.2.1 Real estate transfer tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
8.2.2 Real estate tax. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
103
103
103
104
104
104
105
Taxation of inbound investments. . . . . . . . . . . . . . . . . . . . . . . . . 107
9.1
Choice of legal form and location. . . . . . . . . . . . . . . . . . . . . . . . . . . 107

9.1.1 Types of inbound investments. . . . . . . . . . . . . . . . . . . . . . . . 107
9.1.2 Taxation of current income. . . . . . . . . . . . . . . . . . . . . . . . . . 109
9.1.3 Exit taxation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111
XII

Contents
9.2
9.3
9.4
9.5
9.6
Financing of inbound investments. . . . . . . . . . . . . . . . . . . . . . . . . . . 112

9.2.1 Permanent establishments and partnerships. . . . . . . . . . . . . 112
9.2.2 Corporations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113
German holding companies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115
Taxation of controlled foreign corporations (CFC rules) . . . . . . . . . 117
Transfer pricing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 121
9.5.1 Transfer pricing principles. . . . . . . . . . . . . . . . . . . . . . . . . . . 121
9.5.2 Documentation requirements . . . . . . . . . . . . . . . . . . . . . . . . 122
9.5.3 Transfer pricing principles for the secondment of staff . . . . 123
German REITs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125
10 Acquisition and restructuring of business entities . . . . . . . . . . 127
10.1
10.2
Legal aspects of acquisitions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

10.1.1 Sales of business entities. . . . . . . . . . . . . . . . . . . . . . . . . . . .
10.1.2 Typical steps of a business entity acquisition . . . . . . . . . . . .
10.1.2.1 Initial contact. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10.1.2.2 Confidentiality agreement. . . . . . . . . . . . . . . . . . .
10.1.2.3 Letter of intent. . . . . . . . . . . . . . . . . . . . . . . . . . . .
10.1.2.4 Due diligence. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10.1.2.4.1 Significance and purpose in Germany.
10.1.2.4.2 Legal consequences. . . . . . . . . . . . . . .
10.1.2.5 Sale and purchase agreement. . . . . . . . . . . . . . . . .
10.1.2.5.1 Contents of the purchase agreement. .
10.1.2.5.2 Statutory warranties . . . . . . . . . . . . . .
10.1.2.5.3 Contractual warranty clauses. . . . . . .
10.1.2.6 Completion. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10.1.3 Antitrust law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax considerations for acquisitions. . . . . . . . . . . . . . . . . . . . . . . . . .
10.2.1 Asset deal. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10.2.2 Acquisition of shares in a corporation. . . . . . . . . . . . . . . . . .
10.2.3 Acquisition of a partnership interest. . . . . . . . . . . . . . . . . . .
10.2.4 Funding an acquisition. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10.2.4.1 Acquisition of a corporation . . . . . . . . . . . . . . . . .
10.2.4.1.1 Acquisition by a corporation. . . . . . . .
10.2.4.1.2 Acquisition by an individual . . . . . . . .
10.2.4.1.3 Thin capitalization rules . . . . . . . . . . .
10.2.4.1.3.1 Through 2007. . . . . . . . . . .
10.2.4.1.3.2 From 2008 onwards. . . . . .
XIII
127
127
127
128
128
128
129
129
129
129
129
130
130
131
131
132
132
133
134
134
134
134
135
135
135
136

10.3
10.4
10.2.4.2 Acquisition of a partnership. . . . . . . . . . . . . . . . . .

10.2.5 Utilization of pre-acquisition tax losses . . . . . . . . . . . . . . . .
10.2.5.1 Acquisition of a partnership interest . . . . . . . . . . .
10.2.5.2 Acquisition of corporations. . . . . . . . . . . . . . . . . .
Legal aspects of reorganizations. . . . . . . . . . . . . . . . . . . . . . . . . . . .
10.3.1 Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10.3.2 Reorganizations under the German Reorganization Act . . .
10.3.2.1 Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10.3.2.1.1 Types of mergers. . . . . . . . . . . . . . . . . .
10.3.2.1.2 Legal entities subject to merger. . . . . .
10.3.2.1.3 The merger process . . . . . . . . . . . . . . .
10.3.2.1.4 Preparation of balance sheet at
date of merger . . . . . . . . . . . . . . . . . . .
10.3.2.2 Division . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10.3.2.2.1 Types of divisions. . . . . . . . . . . . . . . . .
10.3.2.2.2 Legal entities subject to division. . . . .
10.3.2.2.3 The division process. . . . . . . . . . . . . . .
10.3.2.2.4 Preparation of a balance sheet at the
date of the division. . . . . . . . . . . . . . . .
10.3.2.3 Change of legal form. . . . . . . . . . . . . . . . . . . . . . .
10.3.2.3.1 Definition. . . . . . . . . . . . . . . . . . . . . . .
10.3.2.3.2 Legal entities subject to conversion. . .
10.3.2.3.3 The conversion process . . . . . . . . . . . .
10.3.3 European Company (SE). . . . . . . . . . . . . . . . . . . . . . . . . . . .
10.3.3.1 SEs by merger. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10.3.3.2 Holding SEs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10.3.3.3 Subsidiary SEs. . . . . . . . . . . . . . . . . . . . . . . . . . . .
10.3.3.4 SE by conversion . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax issues arising from corporate restructuring. . . . . . . . . . . . . . . .
10.4.1 Mergers and contributions. . . . . . . . . . . . . . . . . . . . . . . . . . .
10.4.1.1 Mergers of corporations. . . . . . . . . . . . . . . . . . . . .
10.4.1.2 Merger of a corporation into a partnership . . . . . .
10.4.1.3 Contributions to corporations . . . . . . . . . . . . . . . .
10.4.1.3.1 Contribution of assets . . . . . . . . . . . . .
10.4.1.3.2 Contribution of shares (share-forshare exchange). . . . . . . . . . . . . . . . . .
10.4.1.4 Contribution to a partnership. . . . . . . . . . . . . . . . .
10.4.2 Divisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10.4.2.1 Split-up of a corporation. . . . . . . . . . . . . . . . . . . . .
XIV
137
137
138
138
138
138
140
140
140
141
141
142
142
142
143
143
143
144
144
144
144
144
145
146
146
147
147
148
148
149
149
150
150
151
151
152

Contents
10.5
10.4.2.2 Spin-off of a corporation. . . . . . . . . . . . . . . . . . . . 152

10.4.3 Change in legal form. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 153
Tax due diligence review. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 153
11 Taxation of individuals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 155
11.1
11.2
11.3
11.4
11.5
11.6
11.7
11.8
11.9
Overview. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Basic principles of an individuals liability to tax. . . . . . . . . . . . . . .
11.2.1 Distinction between unlimited and limited tax liability. . . .
11.2.2 Special forms of tax liability. . . . . . . . . . . . . . . . . . . . . . . . .
Taxation of income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
11.3.1 Taxation of resident individuals. . . . . . . . . . . . . . . . . . . . . . .
11.3.2 Computation of taxable income. . . . . . . . . . . . . . . . . . . . . . .
11.3.3 Standard deductions for income-related expenses . . . . . . . .
11.3.4 Itemized deductions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
11.3.5 Child benefit payments, child allowances. . . . . . . . . . . . . . .
11.3.6 Private pension savings. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
11.3.7 Homeowner subsidies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
11.3.8 Utilization of losses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
11.3.9 Determination of tax liability . . . . . . . . . . . . . . . . . . . . . . . .
11.3.10 Relief from double taxation. . . . . . . . . . . . . . . . . . . . . . . . . .
11.3.10.1 Unilateral relief . . . . . . . . . . . . . . . . . . . . . . . . . . .
11.3.10.2 Tax treaty relief . . . . . . . . . . . . . . . . . . . . . . . . . . .
11.3.11 Non-resident individuals. . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capital gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
11.4.1 Sales of business assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
11.4.2 Sales of investments held as private assets. . . . . . . . . . . . . .
11.4.3 Other private capital gains. . . . . . . . . . . . . . . . . . . . . . . . . . .
Special issues relating to investment income . . . . . . . . . . . . . . . . . .
11.5.1 Half-income rule. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
11.5.2 Withholding tax on investment income. . . . . . . . . . . . . . . . .
Filing requirements and payment of tax. . . . . . . . . . . . . . . . . . . . . .
Solidarity surcharge. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Basic principles of church tax. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Basic principles of inheritance and gift tax. . . . . . . . . . . . . . . . . . . .
155
155
155
156
157
157
157
158
159
160
160
161
161
162
163
163
163
164
165
165
165
166
166
167
167
168
169
169
170
12 Opportunities for international investors. . . . . . . . . . . . . . . . . . 173
12.1 European investment grants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

12.2 Investment subsidy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
XV
173
173

12.3 Federal and regional investment grants. . . . . . . . . . . . . . . . . . . . . . . 175
12.3.1 Measures to promote investment. . . . . . . . . . . . . . . . . . . . . . 175
12.3.1.1 Subsidies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 175
12.3.1.2 Loans at concessionary interest rates. . . . . . . . . . . 178
12.3.1.3 Guarantees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 179
12.3.2 Key areas for grants. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 179
12.3.2.1 Research and development. . . . . . . . . . . . . . . . . . . 179
12.3.2.2 Human resource development . . . . . . . . . . . . . . . . 180
12.3.2.3 Environmental protection. . . . . . . . . . . . . . . . . . . . 180
13 Labor Law. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 181
13.1
13.2
13.3
13.4
Residence and work permits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Employment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
13.2.1 Employment contract. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
13.2.2 Terms of employment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
13.2.2.1 Working hours. . . . . . . . . . . . . . . . . . . . . . . . . . . .
13.2.2.2 Paid vacation . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
13.2.2.3 Continued payment of salary in the event of illness.
13.2.2.4 Discrimination. . . . . . . . . . . . . . . . . . . . . . . . . . . .
13.2.2.5 Requests to work part-time . . . . . . . . . . . . . . . . . .
13.2.2.6 Maternity and parental leave. . . . . . . . . . . . . . . . .
13.2.3 Termination of employment. . . . . . . . . . . . . . . . . . . . . . . . . .
13.2.4 Job security legislation . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Labor regulations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
13.3.1 Collective bargaining agreements. . . . . . . . . . . . . . . . . . . . .
13.3.2 Co-determination and works councils. . . . . . . . . . . . . . . . . .
Labor costs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
13.4.1 Wage regulation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
13.4.2 Social insurance system. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
13.4.2.1 Health insurance and nursing care
insurance systems . . . . . . . . . . . . . . . . . . . . . . . . . . .
13.4.2.2 Public pension insurance system. . . . . . . . . . . . . .
13.4.2.3 Unemployment insurance system. . . . . . . . . . . . . .
13.4.2.4 Statutory accident insurance . . . . . . . . . . . . . . . . .
13.4.2.5 International agreements. . . . . . . . . . . . . . . . . . . .
181
181
181
182
182
182
182
182
182
183
183
184
184
184
186
188
188
189
189
190
191
191
192
14 Appendix I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 193
14.1
Table of withholding tax rates. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 193

XVI

Contents
14.2
Map of development areas in Germany. . . . . . . . . . . . . . . . . . . . . . . 196
15 Appendix II. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 197
15.1
15.2
15.3
15.4
KPMG Deutsche Treuhand-Gesellschaft Aktiengesellschaft

Wirtschaftsprfungsgesellschaft . . . . . . . . . . . . . . . . . . . . . . . . . . .
KPMGs regional tax offices in Germany. . . . . . . . . . . . . . . . . . . . .
Region North. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Region West. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Region East . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Region Central. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Region Southwest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Region South. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
KPMG tax services in Germany. . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate Tax Services. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financial Services Tax. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Global Transfer Pricing Services. . . . . . . . . . . . . . . . . . . . . . . . . . . .
Indirect Tax Services. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
International Corporate Tax Services. . . . . . . . . . . . . . . . . . . . . . . .
International Executive Services. . . . . . . . . . . . . . . . . . . . . . . . . . . .
People Services, Pensions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mergers & Acquisitions Tax Services. . . . . . . . . . . . . . . . . . . . . . . .
Tax Management Services. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
KPMGs Country Specialists. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
XVII
197
197
197
197
198
198
199
199
200
200
200
200
201
201
201
202
202
202
203

List of tables and figures

Table 1:
Table 2:
Table 3:
Table 4:
Table 5:
Table 6:
Table 7:
German population in relation to the European Union . . . . . . . . . .

Development of gross domestic product . . . . . . . . . . . . . . . . . . . . . .
Average exchange rate of the Euro. . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer price index. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bank system . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Classification of company size (accounting obligations). . . . . . . . . .
Criteria for mandatory preparation of consolidated
financial statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Table 8: Computation of income / corporate income tax rates on payment of
dividends 2008 and 2009. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Table 9: Taxation of a corporation and dividends paid to individuals and
corporations (assessment period 2008) . . . . . . . . . . . . . . . . . . . . . .
Table 10: Taxation of partnerships: retained vs. distributed profits. . . . . . . . .
Table 11: Mineral oil tax rates / energy tax rates . . . . . . . . . . . . . . . . . . . . . . .
Table 12: Electricity tax rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Table 13: Trade tax rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Table 14: Tax burden for permanent establishment, partnership and
corporation (current taxation). . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Table 15: Exit tax burdens for various legal forms . . . . . . . . . . . . . . . . . . . . . .
Table 16: Comparison of tax burden for equity and debt financing
of a German subsidiary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Table 17: Main characteristics of German holding companies . . . . . . . . . . . .
Table 18: Single individuals. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Table 19: Married couples filing jointly. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Table 20: Classes of relationship. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Table 21: Inheritance and gift tax classes. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Table 22: Summary of maximum subsidy rates. . . . . . . . . . . . . . . . . . . . . . . . .
82
84
104
104
110
Figure 1: German stock indices. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
16
XVIII
2
4
4
8
12
42
46
61
111
112
115
117
162
162
170
171
177

Geography and climate
Germany an outline
1.1
Geography and climate
The Federal Republic of Germany is located in the center of Europe. It is one of the
largest countries in Europe, covering an area of approximately 357,000 square kilometers (138,000 squaremiles) and measuring 885 kilometers (550miles) from north to
south and 595 kilometers (370miles) from east to west. Germanys neighboring countries are Poland, the Czech Republic, Austria, Switzerland, France, Luxembourg, Belgium, the Netherlands, and Denmark (clockwise). Germanys ideal location in the
heart of Europe, with major international airports in Frankfurt/Main, Munich, Duesseldorf, Cologne, Hamburg and Berlin, as well as access to the North and Baltic Seas,
creates a multitude of opportunities for European and international business.
The climate in Germany is mild, with moderate rainfall throughout the year. In the
lower-altitude regions, winter temperatures are usually above freezing with rare snowfalls, and summers are occasionally hot. Regions above 500 meters generally have
mild summers and moderate amounts of snow in the winter.
1.2
History and political system
Under the German constitution, the Federal Republic of Germany is a parliamentary

democracy with currently 16 states (Lnder). The capital of Germany is Berlin. At the
federal level, the executive branch consists of the Federal President (Bundesprsident)
and the Federal Government (headed by the Federal Chancellor and the Cabinet). The
bicameral legislature consists of the Federal Parliament (Bundestag), the delegates of
which are elected in part directly and in part under a party list proportional system,
and the Council of States (Bundesrat), consisting of representatives from the governments of the Lnder.
The origin of Germanys civil law is Roman law. Important legislation is mainly federal and is usually embodied in general codes. The judicial system is generally threetiered (federal, regional and local courts), except for the tax courts, which are twotiered. The Federal Constitutional Court (Bundesverfassungsgericht) is the court of
last resort if constitutional issues are involved. The European Court of Justice (ECJ) is
the supreme decision-making body for issues relating to the fundamental freedoms
guaranteed by the EC treaty and to other questions of EU law.

Germany an outline
1.3
Population and language
The population of Germany is currently around 82.2 million. Table 1 shows the population of Germany in comparison with that of other EU countries. The size of its population makes Germany the largest consumer market within the European Union. Most
German citizens speak one or two foreign languages, of which English, French, Spanish, and Russian are the most common.
Table 1:
German population in relation to the European Union
Country
Germany
Austria
Belgium
Bulgaria
Cyprus
Czech Republic
Denmark
Estonia
Finland
France
Greece
Hungary
Ireland
Italy
Latvia
Lithuania
Luxembourg
Malta
Netherlands
Poland
Portugal
Romania
Slovak Republic
Slovenia
Spain
Sweden
United Kingdom
EU: total
Population
(inhabitants,
millions)
82.2
8.3
10.7
7.6
0.8
10.3
5.5
1.3
5.3
63.8
11.2
10.0
4.4
59.6
2.3
3.4
0.5
0.4
16.4
40.0
10.6
21.4
5.4
2.0
45.3
9.2
61.3
497.2
German State (Land)
Population
(inhabitants,
millions)
Baden-Wuerttemberg
Bavaria
Berlin
Brandenburg
Bremen
Hamburg
Hesse (Hessen)
Mecklenburg-Vorpommern
Lower Saxony (Niedersachsen)
North Rhine-Westphalia
(Nordrhein-Westfalen)
Rhineland-Palatinate
(Rheinland-Pfalz)
Saarland
Saxony (Sachsen)
Saxony-Anhalt (Sachsen-Anhalt)
Schleswig-Holstein
Thuringia (Thringen)
10.7
12.5
3.4
2.5
0.7
1.8
6.1
1.7
8.0
Germany: total
82.2
18.0
4.1
1.0
4.2
2.4
2.8
2.3
Source: Eurostat/U.S. Bureau of the Census/German Federal Statistical Office, 2008

European influence on the economy and currency
1.4
European influence on the economy and currency
1.4.1
General European background
The Federal Republic of Germany, one of the worlds major industrialized nations, is a
founding member of what is now called the European Union, which was created in
1957 under the Treaty of Rome. The signatories to the Treaty agreed to form a common market by abolishing all customs barriers within the Union: creating common
external tariffs for imports from non-member countries, allowing freedom of movement of capital and labor within the Union, as well as harmonizing economic policies,
legal and taxation systems, and social conditions. In recent years, the European Union
has been increasingly active in the area of harmonization of company law, including
requirements for the format of financial statements, and has issued directives on consumer protection, fair-trade practices, antitrust regulations, and certain taxes. On January 1, 1993, the single European market came into existence. On November 1, 1993,
the Maastricht Treaty came into force, establishing the European Union (EU). This
treaty between the (at that time 15) member states of the EU defines the following
three fundamental objectives:
Economic and monetary union
Common foreign and security policy
Close cooperation in legal and internal matters.
More recently, the Amsterdam Treaty entered into force on May 1, 1999, followed on
February 1, 2003 by the Treaty of Nice. Both treaties seek to achieve more effective
political cooperation and improvements in the rights of individual EU citizens.
On May 1, 2004 the following countries joined the EU: Cyprus, the Czech Republic,
Estonia, Hungary, Latvia, Lithuania, Malta, Poland, the Slovak Republic, and Slovenia. On January 1, 2007, Bulgaria and Romania joined the EU. Turkey, Croatia, and
Macedonia are currently considered candidates for admission to the EU.
The Treaty Establishing a Constitution for Europe, commonly referred to as the European Constitution, was international treaty intended to create a constitution for the
European Union. Its main aims were to replace the overlapping set of existing treaties
that comprise the EUs current constitution, to codify uniform basic rights and democratic principles throughout the EU, and to streamline decision-making. It was signed
in 2004 by representatives of the member states of the European Union subject to ratification by all member states. This proved impossible to obtain, since several member
states declined to ratify the Constitution. Following the failure of the constitutional
treaty, it was decided at a European Council meeting in June 2007 to start negotiations


Germany an outline
on a treaty of reform as a replacement. This treaty (the Treaty of Lisbon) was signed on
December 13, 2007 at a summit in Lisbon, Portugal. It amends the existing treaties of
the European Union (EU). It would take effect in 2009 if ratified by all European
Union member states.
1.4.2
The economy and currency
In 2007 the German gross domestic product (GDP) was 2,423.8 billion. Over the
past few years, German GDP has changed as follows:
Table 2:
Development of gross domestic product
Year
GDP in billion
Increase
2005
2006
2007
2,244.6
2,322.2
2,423.8
0.8%
2.9%
2.5%
Source: German Federal Statistical Office, 2008

In 2007, the annual inflation rate was around 2.2%. The prime interest rate of the
European Central Bank (ECB) (main refinancing operations minimum bid rate) was
recently increased to 4.25%, effective July 9, 2008.
This interest rate, which applies in the European Monetary Union (EMU), influences
the exchange rate of the Euro against other currencies. The value of the Euro in other
major currencies was as follows as of June 2008:
Table 3:
Average exchange rate of the Euro
Country
United Kingdom
Japan
Switzerland
USA
Currency
Pounds sterling
Yen
Swiss francs
U.S. dollars
Exchange Rate
0.79095
168.0
1.6185
1.5568
Source: European Central Bank, June 2008

As in all other Eurozone member countries, notes have been issued in the denominations 5, 10, 20, 50, 100, 200, and 500, and coins have been issued with
values of 1 -cent, 2 -cent, 5 -cent, 10 -cent, 20 -cent, 50 -cent, 1, and 2.

Monetary policy in the European Union
1.5
Monetary policy in the European Union
The third stage of the European Monetary Union (EMU) was implemented on January 1,
1999. The EMU commenced with 11 member countries (Belgium, Germany, Spain,
France, Ireland, Italy, Luxembourg, the Netherlands, Austria, Portugal, and Finland).
Greece joined with effect from January 1, 2001. Slovenia qualified in 2006 and was
admitted on January 1, 2007, Malta and Cyprus were admitted on January 1, 2008. Of
the present 27 EU member states, 15 are now part of the Eurozone. The participating
countries were deemed by the European Council to have satisfied the convergence
criteria, in particular
Price stability (low inflation)
No excessive government deficits
No excessive government debt.
The fulfillment of these criteria will also be used in the future to determine which
countries will be allowed to join the EMU.
Monetary policy in the participating countries is managed by the European System of
Central Banks, which consists of the European Central Bank (ECB) and the national
central banks. The ECB is based in Frankfurt/Main. It started work on January 1,
1999 and is an independent institution which is committed to maintaining stable prices.
Subsequently, it has repeatedly refused to ease monetary policy to stimulate the economy.
An important part of the EMU is the Stability and Growth Pact, under which governments are committed to reach a budgetary position of close to balance or in surplus
in the coming years. The Stability Pact also sets up procedures on how to handle
excessive deficits, which are deemed to begin at a rate above 3% of GDP, except in
extreme economic conditions. Furthermore, the ratio of gross government indebtedness to GDP is not permitted to exceed 60% at the end of any fiscal year. In the past, a
number of member states, including Germany, have struggled to meet the targets of the
Stability Pact. However, the EU ministers of finance refrained from imposing sanctions, given the global economic downturn at the time.
The official currency in Germany and the other Eurozone member countries is the
Euro (see above). The Euro was launched in 1999, at which time the exchange rates
between the national currencies and the Euro were permanently fixed. The Deutsche
Mark (DM) no longer exists as a currency, only as a unit of measurement: the value of
one Euro is 1.95583 DM. Effective January 1, 2002, the Euro became the sole legal
tender in the Eurozone. Firms and individuals can still exchange DM notes at the Ger

Germany an outline
man Central Bank (Deutsche Bundesbank) or its Regional Offices (Hauptverwaltungen) for an indefinite time period.
Initially, the Euro fell against the U.S. dollar, but it has since appreciated significantly.
In June 2008, the exchange rate was 1.5568 U.S. dollars per Euro.
1.6
Working conditions
1.6.1
Residence and work permits
1.6.1.1
Residence permits
The residence of foreign nationals is regulated by the Residence Act (Aufenthaltsgesetz AufenthG). Most foreign nationals from outside the EU require a residence title
(Aufenthaltstitel) to enter or reside in Germany: either a visa (Visum), a residence permit (Aufenthaltserlaubnis), or a permission of settlement (Niederlassungserlaubnis).
Persons wishing to enter Germany must normally obtain a residence title in the form
of a visa in advance from an official representative of the Federal Republic of Germany in their home country. A short-term visa is sufficient for a stay of up to three
months within a six month period without taking up paid work. Furthermore, citizens
of many countries do not need a visa for private or business trips of up to three months
duration. If the intention exists to stay for more than three months or to take up paid
work, then a national visa (nationales Visum) must be obtained. A national visa must
be approved by the immigration office (Auslnderbehrde) of the place where the foreign person intends to settle. The Federal Employment Office (Bundesagentur fr
Arbeit) must also approve the issuance of the visa if employment is to be pursued.
Nationals from EU member states do not need a visa or another residence title to enter
or reside in Germany. However, they must register with the proper authorities (Einwohnermeldeamt) in the same manner as German citizens. They have the right to be
automatically granted a residence permit where this right exists under the EU treaty
(freedom of movement of workers, etc). Citizens of Australia, Israel, Japan, Canada,
South Korea, the United States and New Zealand may also travel to Germany without
a visa and apply for the necessary residence permit upon entry.
1.6.1.2
Work permits
Nationals from EU member states do not require a work permit due to the EU rights of
freedom of movement. However, certain specific rules apply for citizens of the new
member states during a transitional period: Except for nationals of Cyprus and Malta,
persons seeking dependent employment still have to apply for a work permit at the
local Employment Agency (Arbeitsagentur). Foreign nationals from outside the EU


Working conditions
who are not self-employed and intend to work in Germany require a work permit in
addition to a residence permit. This work permit can be granted by law (for instance,
permission of settlement carries automatic entitlement to work). Otherwise, any gainful employment must be specifically authorized in the residence title (visa or residence
permit). Before granting permission to work, the immigration office must obtain the
approval of the employment office. Certain persons, including members of the management board of corporations and various other employees (e.g. employees on shortterm foreign assignment) are exempt from the requirement of a work permit.
Highly qualified employees can be granted work and residence permits of indefinite
duration. There are three groups of highly qualified employees:
Scientists with extraordinary qualifications;
High-level teachers/professors or high-level research assistants; and
Specialists and management level employees with extraordinary experience who
receive an annual salary of at least EUR 85,500.
1.6.2
Business hours
The office hours of major companies are generally from Monday to Friday from
8:30 a.m. to 5:00 p.m. By passing the federalism reform on June 30, 2006, the Federal
Parliament (Bundestag) transferred the legislative competence concerning retail store
business hours to the states (Lnder). The states (Lnder) are now permitted to enact
their own laws concerning retail store business hours. So far, all states (Lnder)
except Bavaria and Saarland have liberalized their laws on store business hours. In
most German states, shops are now permitted by law to be open around the clock. Not
all shops take advantage of these hours; many are open from 9:00 a.m. to 6:30 p.m.
There is a general trend towards more flexible business hours in bigger cities. The
effects on retailers are still unclear. Most government institutions have office hours in
the morning only (8:00 a.m. to noon) from Monday to Friday (except on Thursdays,
when they are open until 6:00 p.m.). The banks are open from 9:00 a.m. until 4:00 p.m.
from Monday to Wednesday and on Friday; on Thursday they are generally open until
6:00 p.m. Automatic teller machines (ATMs) are readily available throughout the
country.
1.6.3
Cost of living and housing
The cost of living in Germany varies broadly and depends mainly on the general cost
of living and the place of residence. Housing in Munich, in southern Germany, is likely
to be more expensive than that in Rostock, located in the northeastern part of Ger

Germany an outline
many. Retail price movements are identified using various consumer categories (previously, a basket of goods) and documented in the form of a consumer price index by the
Federal Statistical Office.
Table 4:
Consumer price index

Year
2005
=
100
Change
compared to
previous year
in%
Food / non-alcoholic beverages

Alcoholic beverages, tobacco products
Clothing and shoes
Accommodation, water, gas, electricity, etc.
Furnishings, household goods
Health care
Transport
Communications
Leisure, entertainment, etc.
Education
Restaurant services
Other goods and services
105.9
106.4
100.7
104.9
101.0
101.3
106.9
94.9
99.8
126.9
104.0
103.7
3.8
3.3
1.3
1.9
1.2
0.8
3.8
1.1
0.3
25.0
2.8
2.6
Total index 2007
103.9
2.3
Source: German Federal Statistical Office, June 2008
1.7
Foreign direct investment
1.7.1
Foreign direct investment in Germany
In the not too distant past, foreign direct investment (FDI) in Germany was rather
slow, and international companies claimed that the German economy had lost its
attractiveness for foreign investors. However, there has been a turnaround in FDI over
the last couple of years. German industry is growing significantly again. Current trends
towards tax reform should further improve opportunities for foreign investors.
Recently, however, global investment confidence has diminished somewhat, which has
evidently had an effect on FDI in Germany.
Foreign investment is welcomed in Germany and there are no substantial restrictions
on new foreign investment (see chapter1.8), nor are there any permanent currency
controls or administrative controls on such investment. Attitudes towards foreign take-

Attitudes towards foreign investment

overs of German firms are much more positive today than they were just a few years
ago.
1.7.2
German direct investment in foreign countries
German direct investment in foreign countries amounted in 2004 to 679.2billion

and increased by 105 billion to 784.6 billion in 2005 (according to the German
Central Bank). Most of this investment is in other EU member states.
1.8
Attitudes towards foreign investment
There are few controls on foreign investment in Germany. In general, foreign investors
are subject to the same conditions as German investors when obtaining licenses or
building permits or applying for and receiving investment incentives.
Where restrictions exist with respect to a particular business activity, such as licensing
and notification requirements (see below), such restrictions apply to German and foreign firms equally.
The July 2006 Takeover Directive Implementation Act amended the Securities Acquisition and Takeover Act (Wertpapiererwerbs- und bernahmegesetz WpG) to
bring it into line with the 2004 EU Takeover Directive. The WpG now is also applicable to cross-border takeovers as well.
As the German Federal Cartel Office (Bundeskartellamt) aims to prevent the establishment of dominant market positions, large firms must register proposed takeover
bids in advance based on certain criteria. The applicable criteria pertain to global markets.
1.8.1
Exchange controls
The Euro is freely convertible into other currencies and the import and export of capital is free, subject only to reporting requirements.
A free European capital market was created by EU Directive 88/36L and the implementation of former Article 67 (now: Article 56) of the EU Treaty in national law. This
Directive completely abolishes all restrictions on the transfer of capital between EU
member states.

Germany an outline
1.8.2
Business regulations
1.8.2.1
Notification requirements
While freedom of enterprise is a valid principle under Section 1 of the Business Practice Act (Gewerbeordnung GewO), any business, factory, trade, or industrial establishment, whether German or foreign, must notify the respective local administration
and tax authorities of its business prior to commencing activities.
1.8.2.2
Regulated industries
In order to protect the general public from risky business practices, special licenses are
necessary for certain businesses, including the following:
Insurance,
Commercial banking,
Brokers and agents for real estate, housing, investment, and mutual funds,
Asset-custody and security businesses,
Pawnbroking and auction sales,
Gambling.
1.8.2.3
Special business permits
Environmental regulation in Germany is strict. Business activities which are inherently dangerous, polluting, or otherwise clearly detrimental to the environment are
subject to special authorization. The centerpiece of such legislation is the Federal Pollution Control Act (Bundesimmissionsschutzgesetz BImSchG). Industrial facilities
and their modifications must comply with strict standards, which are defined in the
Technical Directives. The licensing procedure for such special business permits is
very formal. Complaints are often heard from investors about the complexity of the
licensing procedure. This, in turn, has led to a review of the procedure by governmental and legislative bodies in Germany with the aim of reducing the complexity and
burden for the investor.
1.9
German banking system, regulations and sources of

finance for commerce and industry
Germany has a universal banking system, i.e. German banks are typically engaged in
a full range of banking activities rather than being specialized or restricted to certain
10

German banking system, regulations and sources of finance for commerce and industry
activities. Despite all the differences in their legal form, size, organization and business structure, the vast majority of banks provide virtually every type of banking
transaction. Large parts of the banking sector are publicly owned or controlled, or are
co-operatives. These banks play an important role in the development of local communities.
1.9.1
The German Central Bank and the European Central Bank
The central bank of Germany is the German Central Bank (Deutsche Bundesbank). It
has nine Regional Offices (Hauptverwaltungen, formerly known as State Central
Banks, Landeszentralbanken), located in Berlin, Duesseldorf, Frankfurt/Main, Hamburg, Hanover, Leipzig, Mainz, Munich, Stuttgart, and 47 branches (as of June 2008).
The duties of the German Central Bank include country-specific tasks within the
framework of European monetary policy, such as joint decision-making and the implementation of a common European monetary policy, and the management of currency
reserves. The German Central Bank is also involved in monitoring banks and financial
services institutions and is a member of the International Monetary Fund (IMF) and
International Clearing Bank.
The European Central Bank (ECB) was established in June 1998 and is located in
Frankfurt/Main. Under the European Treaty, the European System of Central Banks
(ESCB) consists of the ECB and the national central banks of the EU member states.
The key tasks of the ECB are to issue bank notes within the Euro area and to formulate
monetary policy for the Euro area in particular to determine the prime interest rate.
The ECB is independent not only of the governments of the EU member states, but
also of the national central banks in the Euro system. Furthermore, the ECB has its
own budget and is thus financially independent.
1.9.2
German banking institutions
In Germany, there are a large number of banks (around 2,340), with an extensive network of about 44,000 branches. Germany has a system of universal banks, i.e.
engaged in the full range of banking activities. In addition, there are some banks which
specialize in particular functions (e.g. mortgage banks and home loan banks). Most
banks conduct both corporate and private customer business, although there is a trend
towards big corporations increasingly being handled by the major banks, while small
and medium-sized companies are handled by smaller, regionally based banks (e.g.,
savings and loan banks, credit cooperatives for trade, and agricultural credit coopera-
11

Germany an outline
tives). Meanwhile, many non-banking firms, such as insurers, department stores, mailorder firms, and car manufacturers have become financial services providers.
In the past few years, the German banking sector has undergone significant consolidation. The most striking examples of this are the takeover of Dresdner Bank by Allianz
and, in 2005, the takeover of Hypovereinsbank by Uni Credito. Even in the case of cooperatives, there have been numerous mergers between branches. The surge towards concentration has led to a reduction in the banking branch network in Germany (Table 5).
Nevertheless, Germany is still at the European forefront in this respect, with a density of
around one banking outlet per 1,766 inhabitants (including post office savings banks).
Table 5:
Bank system
Number of banks
Number of German branches
Total number of German banking outlets
Number of foreign subsidiaries
1995
2000
2005
3,785
67,930
71,716
579
2,912
56,936
59,848
714
2,344
44,100
46,444
685
Source: Bundesverband Deutscher Banken, 2007

Commercial banks, which account for the largest percentage of the volume of banking
business, engage in most types of banking operations. They grant short-term loans,
lines of credit, and medium and long-term loans; they also place issues and trade in
securities for customers and for their own account. They are also allowed to own shares
and participations in other industries. Postbank, which is the bank of the privatized
state enterprise Deutsche Post AG (postal services company), offers the same services
as the other commercial banks, with banking services available at any post office. The
range of services offered by banks is becoming increasingly diversified and includes
new activities such as online banking and investment banking. Moreover, the number
of direct banks with no branch network has been increasing.
Savings and loan banks (Sparkassen) are mostly municipal and regional banks. They
are coordinated through central institutions and serve as regional clearinghouses. Savings and loan banks are also engaged in commercial banking activities. Their credit
business, however, consists mostly of long-term loans, often made to state or local
governments.
Credit co-operatives for trade (Volksbanken) and for agriculture (Raiffeisenkassen)
generally extend lines of credit and long-term loans to their members typically
smaller businesses, but also individuals. Regional and federal central institutions serve
as clearinghouses and sources of refinancing.
12

Banking regulations and the impact of the EU

Mortgage banks (Hypothekenbanken) specialize in long-term mortgage loans and
long-term loans to federal, state, and local governments. They issue bonds secured by
mortgage loans and loans to public authorities.
In addition, a number of private and public banks provide highly specialized services
and special forms of financing. Insurance banks and leasing companies also play an
important role in the financing of industrial business.
1.10
Banking regulations and the impact of the EU
Banks, financial services institutions, and insurance enterprises in Germany are governed by a state regulator, the Federal Financial Supervisory Authority (Bundesanstalt
fr Finanzdienstleistungsaufsicht BaFin). BaFin was established in 2002, following
the adoption of the Act on Integrated Financial Services Supervision, by combining
the former offices for banking supervision, insurance supervision, and securities
supervision. BaFin functions under the auspices of the German Federal Ministry of
Finance (Bundesministerium der Finanzen BMF). Its main objectives are
to ensure the proper functioning, stability, and integrity of the German financial
system (the prime objective),
to ensure the ability of banks, financial services institutions, and insurance undertakings to meet their payment obligations, and
to enforce standards of professional conduct which preserve investors confidence
in the financial markets.
The tasks of the BaFin directorate for Banking Supervision include among other
things constant monitoring of banks to ensure that they comply with the capital
adequacy requirements, maintain sufficient liquid funds, and comply with statutory
risk limits (e.g., large exposure limits). It also ensures that the banks bad debt provisions are in line with their risk exposure. The BaFin directorate for Insurance Supervision is responsible, inter alia, for granting the regulatory authorization required by
enterprises in order to carry out insurance business. The BaFin directorate for Securities Supervision/Asset Management is responsible for ensuring, inter alia, that insider
trading prohibited by the German Securities Trading Act (Wertpapierhandelsgesetz
WpHG) does not occur.
The Deutsche Bundesbank participates in ongoing banking supervision. Its participation is governed by 7 of the Banking Act. Among other things, the Bundesbank
analyses the reports and returns that institutions have to submit on a regular basis and
assesses whether their capital and risk management procedures are adequate.
13

Germany an outline
The Basel Committee on Banking Supervision, founded in 1974 and based in Basel,
Switzerland, is exerting an increasing influence on banking supervision. The objective
of this committee, which comprises representatives from the central banks and from
the banking supervisory authorities of the G10 nations, is to develop an international
supervisory code and network to improve the quality of banking supervision worldwide. Of the committees publications, the consultative paper on the New Basel Capital Accord (Basel II), which was first published in mid 2004 (and last updated in July
2006), will have a particularly significant influence on the banking sector. The purpose of Basel II is to create an international standard that banking regulators can use
when drafting regulations on how much capital banks need to put aside to guard
against the types of financial and operational risks that banks face. Basel II should
help protect the international financial system from the types of problems that might
arise should a major bank or a series of banks collapse. In practice, Basel II attempts
to accomplish this by setting up rigorous risk and capital management requirements
designed to ensure that a bank holds capital reserves appropriate to the risk to which
the bank exposes itself through its lending and investment practices.
The European Union has implemented Basel II via the EU Capital Requirements
Directive, which consists of Directive 2006/48/EC (Banking Directive) and Directive
2006/49/EC (Capital Adequacy Directive), published on June 30, 2006.
Germany implemented the relevant parts of the Capital Requirements Directive on
January 1, 2007. Major laws, regulations and rules in this context in Germany are:
KWG German Banking Act
SolvV Regulation governing solvency
GroMiKV Regulation governing large exposures and loans
MaRisk Minimum Requirements for Risk Management
On January 1, 2004, the Investment Modernization Act (Investmentmodernisie
rungsgesetz), which transposed directives 2001/107/EC and 2001/108/EC of January
21, 2002 (UCITS III) into German law, came into force. This act has several consequences: First, it broadly overhauls and consolidates the investment-related fiscal regulations, which were previously contained in the German Capital Investment Companies Act (Gesetz ber Kapitalanlagegesellschaften KAGG) and the German Foreign
Investment Funds Act (Auslandsinvestmentgesetz AuslInvestmG). Furthermore, it
integrates hedge funds into the range of regulated investment funds capable of being
marketed in Germany. These provisions were incorporated into an Investment Act
(Investmentgesetz InvG) and a corresponding Investment Tax Act (Investment
14

Stock exchanges
steuergesetz InvStG). One key feature of the legislation is that, for the first time,
domestic hedge funds can be established as investment funds managed by an investment management company (Sondervermgen einer Kapitalanlagegesellschaft) or as
investment companies (Kapitalanlagegesellschaft). Therefore, hedge funds must meet
the same requirements as investment funds, e.g. sales prospectuses, contractual terms
and conditions (articles of association), and accounting.
In June 2008 the Bundestag passed the Risk Limitation Act (Risikobegrenzungsgesetz RBG). The main goal of this act is to prevent undesirable activities by financial
investors. The shareholder structure should be made more transparent. Larger investors have to disclose their strategic objectives.
The influence of the EU on money market policy has been described in previous sections of this chapter.
1.11
Stock exchanges
The most important stock exchange in Germany is the Frankfurt Stock Exchange
(Frankfurter Wertpapierbrse FWB). The institution operating FWB is Deutsche
Brse AG. In addition, there are stock exchanges in Berlin, Duesseldorf, Hamburg,
Hanover, Munich, and Stuttgart. The German Exchange Supervisory Authority, an
institution of the German federal states (Lnder), monitors the setting up, closing
down, and operations of stock exchanges, and ensures that trading is properly conducted.
The Frankfurt Stock Exchange offers a wide range of services, providing access to
both the equity and derivatives markets for companies as well as investors, in particular access to the electronic trading platform Xetra one of the leading electronic trading platforms in the world. After the London Stock Exchange, FWB is the most important market for securities and derivatives in Europe.
In the beginning of 2003, FWB introduced a new segment of the equity market. The
goal was the division of the market into two separate segments with different standards of transparency as well as a new concept of sector indices. The legal basis for the
new segment is the 4th Financial Market Promotion Act (ViertesFinanzmarkt-Frderungsgesetz), which resulted in a comprehensive reform of the law governing stock
exchange transactions. The stock exchange admission segments distinguish between
the General Standard with statutory minimum transparency requirements and the
Prime Standard with high international transparency criteria. Admission to the Prime
Standard requires:
15

Germany an outline
Quarterly reporting,
The application of international accounting standards (IAS/IFRS, U.S. GAAP, see
also chapter4),
Publication of a financial calendar,
Staging at least one analyst conference per year, and
Ad hoc disclosures also in English.
The shares in the Prime Standard are quoted in the Xetra trading system. Only Prime
Standard issuers qualify for all FWB indices. The largest companies by market capitalization and sales are included in the DAX (the German Share Index). Smaller and
mid-sized companies are included in MDAX and SDAX, if they operate in the classic
industry sectors, and in TecDAX if they operate in the technology sector.
Figure 1: German stock indices
DAX
MDAX
SDAX
TecDAX
Further Listed Companies

Prime Standard
General Standard
Source: Deutsche Brse (German Stock Exchange), 2007

The admission of a security to the Frankfurt Stock Exchange is determined by the
Listing Board for the Official Market or the Listing Committee for the Regulated Market. The admission criteria vary according to the market segment. All issuers must
prepare an offering prospectus containing the information needed to evaluate the
securities. Admission to the General Standard requires no further involvement from
the issuer. However, if admission is sought to the Prime Standard, an application must
be made by the issuer, with admission being contingent on the companys compliance
with the transparency criteria referred to above.
16

Importing to Germany
Germany is a Member State of the European Union (EU). Goods can circulate freely
within the EU, but must be cleared through customs when imported into the EU customs territory from a non-EU country. This can be achieved either by importing the
goods under special customs procedures (in which case customs duties often do not
arise), or by clearing the goods for free circulation (as defined for customs purposes).
Clearance for free circulation generally triggers import duties. These duties include in
particular customs duty, import turnover tax and, where applicable, excise duties.
The level of the customs duties depends on the classification of the imported goods
within the customs tariff and on the customs value that is placed on the goods. In many
cases, the Community grants tariff preferences to goods from certain non-EU countries in the form of preferential customs duties.
In contrast to these customs duties, protective customs duties are becoming increasingly important. Trade policy instruments in the form of import permits, quantitative
restrictions, and anti-dumping duties are used to direct the flow of goods and to protect
local economies. Customs duties are used as a control measure particularly in the agricultural sector.
In addition to the above, an important security-related update of the Community Customs Code has recently been introduced. This affects everyone who is involved in
international trade with the EU. With effect from January 2008, the Authorized Economic Operator (AEO) concept will be introduced, under which approved importers/
exporters who meet certain criteria will be encouraged to apply for registration as
AEOs as a part of the EUs continuing anti-terrorism-program. Registered AEOs may
qualify for a wide range of simplified customs procedures.
The following section deals with goods cleared for free circulation on which customs
duties and import VAT tax arise. This applies only to tangible items; intangible items,
such as the utilization of foreign patents, production processes, and other intellectual
services are not subject to customs clearance.
A discussion of customs duty exemptions and tariff reductions follows that of duties
and import turnover tax.
17

2.1
Customs duties
2.1.1
German customs tariff
Germany, like the other EU member states, applies the Common Customs Tariff of
the EU (CCT), which is the basic law for the classification of goods. The first six digits of the classification code numbers are based on the Harmonized System (so far
adopted by 179 countries) to which further EU sub-headings of the Combined Nomenclature (CN) are added and which determines the duty rates applied. The General
Rules for the interpretation of the Harmonized System (HS) are an integral part of the
CCT.
Under the case law of the European Court of Justice, the HS Explanatory Notes and
HS Classification Opinion are authoritative sources of interpretation which must be
adhered to by EU legislation. In addition there are Explanatory Notes (CN) of the EU
and single-case regulations of the Council or Commission which must also be adhered
to.
Upon application by an importer, the appropriate customs authorities must issue binding tariff information (BTI). Any BTI issued by a Member State binds the customs
authorities of all member states if the holder requests its application and the imported
goods are identical in every respect with those described in the BTI.
2.1.2
Customs value transaction value
Customs duties are calculated as a percentage of the value of the product (advalorem
duties). Thus, a common definition of the applicable customs value is necessary to
ensure that duties are imposed uniformly within the customs union.
There are different methods of determining the value of imported goods. Normally,
the customs value will be the transaction value, in general the actual price paid or
payable for the goods when sold for export to the EU if this price is not subject to certain restrictions in use (substantially affecting the value, or to certain conditions not
affecting the value and not influenced by the relationship between seller and buyer).
Additionally, costs or values incidental to the production and the sale of the goods or
associated with the transportation of the goods must be added if not included in the
price already.
This applies to:
Commissions and brokerage (except buying commissions),
Costs of containers and packing,
18

Customs duties
Royalties and license fees,
Resale proceeds,
Cost of transportation
While these costs must be added, certain other costs are not deemed to be a component
of the customs value, provided they are distinguishable from the price actually paid or
payable for the imported goods. Financing costs and buying commissions are examples.
2.1.3
Origin of goods and preferences
The origin of goods is defined differently depending on the purpose and may affect the
treatment of goods under customs law, foreign trade law, and also under commercial
aspects. Under the Customs Code there are different rules of origin for non-preferential purposes and for customs preference purposes.
The non-preferential origin of goods imported into Germany, as certified by a certificate of origin, may be relevant for
Foreign trade purposes (import restrictions, i.e., licensees, quantity restrictions),
Statistical purposes and
Anti-dumping proceedings.
Goods have their non-preferential origin in that country in which they are wholly
obtained or produced. However, if more than one country is involved in the production, goods have their non-preferential origin in the country where they underwent
their last substantial, economically justified processing or re-working in an undertaking equipped for that purpose and resulting in the manufacture of a new product or
representing an important stage in the manufacturing of the goods.
Various duty-preference agreements between the EU and other countries exist which
grant exemption from customs duties or lower duty rates for goods originating from
certain countries (e.g. EEA/EFTA countries, Maghreb countries, or developing countries). The principles of all agreements are the same, but details of the definition of
origin and other conditions may differ for certain products.
Products wholly obtained in the beneficiary country are considered to originate in that
country. This corresponds largely to the non-preferential origin. For other products,
the re-working or processing required on non-originating materials used in manufacturing is generally set out in a list covering the different chapters of the CCT.
19

The origin must be certified by a certificate of origin. Preferential treatment will
only be granted at the request of an importer.
2.1.4
Customs regimes to avoid, reduce, or defer duty payment
In principle, goods may at any time be assigned any customs-approved treatment or

use, irrespective of their nature or quantity, or their country of origin or destination. It
is important for an importer to file the request and make the declaration that result in
the customs procedure that minimizes duties or costs.
Customs warehousing
Under the customs warehousing procedure, imported goods can be stored indefinitely in a customs warehouse, without as yet being subject to payment of import
duties, import VAT, or excise taxes, or to the application of commercial policy
measures.
Inward processing
This customs procedure applies to goods imported temporarily into Germany from
non-EU countries for processing and subsequent re-export in the form of compensating products.
Temporary use
This customs procedure allows goods to be imported into Germany for a short
period without triggering duties and taxes, and subsequently re-exported, e.g.
goods temporarily imported in conjunction with a fair or exhibition or for testing
and educational purposes.
End-use relief
The customs tariff provides a customs duty exemption for certain goods if the
goods are used in Germany for a specifically described purpose.
Transit procedure
Under the transit procedure, goods can be moved from one point to another within
the EU without incurring liability for customs VAT or excise tax, and without
being subject as yet to commercial policy measures.
Tariff suspensions
If goods are not available in the EU (either at all or in the same or a similar form)
in sufficient quantity or quality, the shortfall can be offset by imports from non-EU
countries. In this case, the suspension of tariffs serves as an incentive to import
such products.
20

Anti-dumping and countervailing duties

Non-tariff customs duty exemptions
These exemptions are generally linked to the use to which the goods are put or the
purpose for which the goods are used. This includes personal and household items
imported in connection with the relocation of residence to the EU, as well as materials used in teaching, education, and research.
2.2
Anti-dumping and countervailing duties
The EU Anti-Dumping and Anti-Subsidies Regulation provides for the imposition of

anti-dumping or countervailing duties in line with the GATT Anti-Dumping Code
when a formal investigation has found that:
Dumping or subsidization is taking or has taken place,
Such dumping or subsidization is causing or threatening material damage to an
industry segment in the EU, and
The imposition of such duties is in the interest of the EU.
If all of these requirements are fulfilled, the EU Commission may impose duties
equivalent to the value of the dumping margin or the subsidy in question. Alternatively, it may accept a voluntary undertaking by the private party or the country
involved that the dumping or subsidization will be discontinued.
2.3
Special import duties
2.3.1
Other excise duties
Germanys main excise duties are at present the energy tax, the alcohol tax, and the
tobacco tax (see chapter8.1.2 and 7.2.1). These excise taxes are levied as a general
matter when the goods are imported into Germany.
Relief from excise duties is available under certain circumstances in the form of
reduced tax rates or exemption from tax.
2.3.2
Import VAT tax
The import of goods into Germany from non-EU countries is subject to German import
VAT (Einfuhrumsatzsteuer), which is part of the German value added tax system (see
chapter7.1).
21

The standard tax rate of 19% is subject to reductions for privileged goods (e.g., food
and books). Importers who are taxable persons for VAT purposes may recover the
import VAT from the tax authorities.
2.4
Starting business in Germany other than through

branches or subsidiaries
Under Article 64 of the Community Customs Code, a customs declarant must have at
least a permanent establishment in the EU to apply for customs clearance.
If a foreign company wishes to enter the German market without establishing a branch
or a subsidiary it may make use of an
Independent sales agent,
Independent distributor, or a
Representative office employee.
Rather than setting up a branch or subsidiary in Germany, it may be worthwhile to
consider using independent sales agents/distributors to perform marketing and sales
functions. In this case, the company does not need to maintain its own sales force. In
various industry segments, especially in the field of information technology, it has
become common practice for independent distributors to deal with the end-users.
Dependent employees can be used to set up a representative office in Germany.
The decision as to which of the above options is the most advantageous must be based
on the individual circumstances and the specific needs of the business in question.
Legal as well as business aspects should be taken into account, for example the implications of the German Commercial Code (Handelsgesetzbuch HGB). In all cases, it
is advisable that agreements with representatives, distributors or agents be entered into
only in writing.
22

Limited liability companies and stock corporations
Company law
German law offers a broad variety of legal forms for conducting business. Foreign
investors can select between several types of corporations (Kapitalgesellschaften) and
partnerships (Personengesellschaften). Alternatively, operating through a branch of a
foreign legal entity or in the case of an individual a sole proprietorship, may also be
considered.
3.1
German law provides two major types of corporations: the limited liability company
(Gesellschaft mit beschrnkter Haftung GmbH) and the stock corporation (Aktien
gesellschaft AG). Both are separate legal entities with shareholders liability restricted
to the value of the corporations assets (including outstanding contributions). The
GmbH is the most common form of incorporated company under German commercial
law. The GmbH is generally preferred as a vehicle for closely held companies (no IPO
possible) and subsidiaries of foreign corporations due principally to the flexibility it
offers. Among the special features of the law governing the GmbH which are important for the choice of entity consideration are: firstly, the ability to tailor the articles of
association to the needs of the enterprise and, secondly, the right of the shareholders at
the shareholders meeting not only to formulate general guidelines for management,
but also to stipulate specific instructions for particular areas of business in which the
shareholders wish to exert their influence. By contrast, the AG is the corporate form
adopted by many of Germanys largest corporations. The principal advantage of an
AG is that its shares, unlike those in a GmbH, may be transferred with relative ease
and can be listed on a stock exchange.
3.1.1
Formation
A GmbH or AG can be formed by one or more persons, who may be individuals or

companies and need not be German nationals or domiciled in Germany.
The existence of corporate founders and the authority of their agent must be proven by
certified extracts from the commercial register or other official documents.
The formation of a GmbH or AG starts with a deed, certified by a German public
notary, in which the founders (or single founder) issue a declaration of formation,
undertake to pay in the registered share capital (Stammkapital or Grundkapital), and
23

Company law
stipulate the articles of association of the GmbH (Gesellschaftsvertrag) or the articles
of incorporation of the AG (Satzung). The articles must include, inter alia, the companys name and registered office (Sitz), the purpose of the enterprise, the amount of the
registered share capital and in case of a GmbH the amount each shareholder must
contribute to the registered share capital (original contribution, Stammeinlage) and
in the case of an AG the par value or number of shares, the issue price and, if more
than one class of shares exists, the class of shares subscribed by each founder. In contrast to a GmbH, the articles of an AG may deviate from statutory provisions only
where this is expressly allowed by the German Stock Corporation Act (Aktiengesetz
AktG); generally there is little ability to amend the articles in view of the many mandatory provisions contained in the AktG. Since the laws governing GmbHs and AGs are
federal laws, the location of the registered office does not affect the rules governing a
GmbH or AG. The location of the registered office is the place where the GmbH or AG
operates its business or where the corporations management is located. This location
must be within Germany. In addition to the registered office, a GmbH or AG may
maintain any number of branches throughout Germany and abroad.
For a GmbH, one or more managing directors (Geschftsfhrer) must be appointed as
provided for in the articles. This is usually stipulated in the articles, but can also be
changed at a later date. Managing directors are allowed to hold an interest in the
GmbH. They must be individuals, but need not be citizens or residents of Germany.
The managing director(s) appointed must submit an application to register the GmbH
in the commercial register (Handelsregister) maintained by the local court where the
GmbH has its registered office. The GmbH comes into legal existence only upon registration.
In the case of an AG, the founders appoint the auditors for the AGs first full or partial
fiscal year and appoint the initial supervisory board (Aufsichtsrat), which in turn
appoints the first board of management (Vorstand). The appointment of the auditors
and the supervisory board must be certified by a public notary. The members of the
boards (management and supervisory) must be individuals but need not be citizens or
residents of Germany. They can be shareholders, but cannot simultaneously be members of both the management and supervisory boards. The founders must also prepare
a formation report (Grndungsbericht), in which they are required to describe the
transactions leading up to the formation, the initial acquisition of assets, capital contributions in-kind, and special advantages or remuneration granted to the members of the
management or supervisory boards. In addition, the formation of an AG must be examined by the members of both boards and, in certain circumstances, the auditors may be
required to issue an examination report. The founders and members of the management and supervisory boards must submit the application to register the AG in the
24


commercial register maintained by the local court where the AG has its registered
office. The AG comes into legal existence upon registration.
The registration procedure in the commercial register was simplified in 2007 by introducing an electronic register. Now the necessary documents for entity formation are
filed in electronic format. The local court rules on the registration promptly and thereafter the documents are recorded in the electronic commercial register.
Practical Example:
Businessman A would like to form a GmbH. He has to deliver the necessary documents to his notary to initiate the required registration in the commercial register. If
the application form and deeds are available in hard copy only, the notary will convert them into an electronic format. The notary thereafter notarizes the documents
and sends them in electronic form to the appropriate local court. Upon receipt, the
local court will process the documents and enter the GmbH in the electronic commercial register. The GmbH then comes into legal existence. Registration means simultaneous electronic publication, so anyone can view the data online at the homepage:
www.unternehmensregister.de (see chapter3.1.8).
If the founders delegate their powers to authorized representatives, they need not
appear in person before the acting notary for the formation deed. Any power of attorney must be notarized or at least authenticated by a public notary. In the case of
notarization or authentication by a foreign public notary, the certificate of the foreign
public notary will only be recognized by German courts if it has been legitimized by
the German Consulate in the country in which the power of attorney was notarized or
authenticated. There are, however, numerous provisions in international conventions
stipulating that a so-called apostille certificate (i.e. additional attestation by a foreign authority) is sufficient or, indeed, that neither legalization nor attestation is necessary.
Several weeks may elapse between the date of notarization of the articles and the registration of the GmbH or AG. During this period, the GmbH or AG is referred to as a
company in formation (Vorgesellschaft). Such company is considered to be a separate entity, which is entitled to act through its representatives, commence business,
enter into transactions, and assume liabilities. During this period any person acting in
the name of the GmbH or AG is personally liable to the creditors of the company in
formation; if more than one person acts in the name of the corporation, such persons
are jointly and severally liable. Additionally, the founders may be held liable for any
losses to the stated capital in proportion to their percentage holdings (i.e. not jointly
and severally). Upon registration, the founders are liable for pre-registration losses
25

Company law
(Vorbelastungshaftung), i.e. they are required to reimburse the GmbH or AG for any
losses to the stated capital incurred prior to registration. Specific rules apply where the
founders continue to conduct business despite the fact that registration of the company
is no longer sought or where registration is not possible; in these cases, the founders
are jointly and severally liable for the losses of the company. This also includes direct
liability to the creditors of the company.
3.1.2
Registered share capital
The statutory minimum registered share capital, which must be subscribed in full, is
25,000 for a GmbH and up to 50,000 for an AG. If contributed in cash, only one
quarter of the registered share capital of a GmbH (but not less than 12,500) must be
paid in by the date of the application for registration in the commercial register. In the
case of an AG, one quarter of the registered share capital and the entire premium, if
any, must be paid in. The capital of a GmbH or AG must be paid in full or security
must be given in respect of outstanding capital if the GmbH or AG is established by a
single shareholder. Contributions in kind must be fully contributed in such a way that
the assets are permanently at the free disposition of the managing directors/board of
management.
The legislation governing GmbHs and AGs is designed to ensure that registered share
capital is paid up and maintained. The rules applicable to an AG are stricter in this
respect. In particular, an AG is not permitted to repay share capital contributions to its
shareholders regardless of whether such payment would reduce the AGs net assets to
a level below its registered share capital. A GmbH, on the other hand, is prohibited
only from making payments to shareholders that would reduce the GmbHs net assets
to a level below its registered share capital.
The AG may issue share certificates either with a par value (Nennbetragsaktien) of at
least 1 per share or multiples thereof or without par value (Stckaktien). Both common shares (Stammaktien) and preferred shares (Vorzugsaktien) may be issued, either
as bearer shares (Inhaberaktien) or registered shares (i.e. where the name of the owner
is registered in the AGs share register, Namensaktien). Bearer shares are freely transferable; the corporation is not allowed to restrict their transfer. For registered shares,
the articles may provide that a transfer requires the consent of the company. In general,
each share confers one vote, although preferred shares may be non-voting. Multiple
voting rights are not permissible.
By contrast, the capital of a GmbH is not issued in the form of certificates. Rather,
each shareholder holds a share (a business interest, Geschftsanteil) in the company in
the amount of the original contribution (Stammeinlage), which must be at least 100,
26


or any greater amount divisible by fifty. The share in a GmbH may be transferred by
assignment or upon inheritance. Any contractual transfer of ownership must be notarized and can be made conditional upon the consent of the GmbH or other holders of
shares or any other restriction stipulated in the articles of association. The GmbH is
not required to maintain a share register, book, ledger, or other formal records of share
ownership. The ownership of the shares is documented only in the formation deed; any
subsequent transfers are documented by notarized deeds.
3.1.3
Management
A GmbH is managed and represented by its managing director(s) (Geschftsfhrer) in

and out of court. Unless otherwise provided by the articles, the principle of collective
management and representation applies, meaning that all managing directors must act
jointly.
The power of representation (Vertretungsmacht) cannot be restricted vis--vis third
parties; only the management authority (Geschftsfhrungsbefugnis) can be restricted
internally, and the shareholders may exercise their right to give the managing directors
instructions regarding any particular matter on which they wish to exert their influence. A GmbH must have at least one managing director and can have in total as many
as the shareholders wish. They must be individuals, but need not be citizens or residents of Germany, and are allowed to hold an interest in the GmbH. The managing
directors are appointed at a shareholders meeting as provided in the articles. The
appointment can be revoked at any time, without prejudice to any contractual indemnification claims. The articles can restrict the right of revocation to the reasons set
forth in the articles.
The AG is managed and represented in and out of court by a board of management
(Vorstand). Unless otherwise specified in the articles, all members of the board of
management must act jointly in both managing the corporation and representing the
corporation vis--vis third parties. The board of management may have internal rules,
which may provide for committees and may stipulate the transactions requiring board
of management consent. A limitation on the statutory authority of the board of management to represent and bind the AG is not effective against third parties; only internally may the management be subject to certain restrictions, e.g. specific transactions
may require the approval of the supervisory board. Board members are appointed,
removed, and supervised by the supervisory board. They are appointed for a term not
to exceed five years and can only be dismissed during their term of office for cause.
Neither the shareholders nor the supervisory board may issue instructions to the board
of management.
27

Company law
A recent amendment to the AktG codified the so-called business judgment rule, which
up to then was a corporate law concept developed by the case law. Essentially, the business judgment rule creates a strong presumption in favor of the board of management
of an AG, shielding the board members from liability for decisions that result in
unforeseeable harm to the corporation. Since the managers of a GmbH are directly
responsible to its shareholders, no statutory business judgment rule has as yet been
enacted with regard to GmbHs.
3.1.4
Supervisory board
The supervisory board (Aufsichtsrat) is mandatory for an AG. It controls and supervises the board of management, but may not participate in the corporations day-to-day
management. It may, however, determine that certain categories of transactions are
subject to its approval. If the approval is denied, the board of management may appeal
the decision to the shareholders. The supervisory board consists of a minimum of
three members with a total number of members that must be divisible by three; the
maximum permissible in an AG with a registered share capital of more than 10million is 21 members. Except for employee representatives, whose appointment is governed by special provisions, the members of the supervisory board are elected by
shareholder resolution for a term not to exceed five years as set forth in the articles or
in the resolution of appointment. A right to appoint members to the supervisory board
(Entsenderecht) may be granted by the articles of association to specific shareholders
or to the holders of specific shares. Members can be dismissed only by court order, by
a 75% majority of votes cast in a general meeting of shareholders, or by the shareholder with the right to appoint the member in question. Members may also be recalled
by a simple majority of shareholder votes if they cease to meet the requirements specified in the articles. The main functions of the supervisory board are:
Appointment and dismissal of the members of the board of management, including
agreeing to the terms and conditions of the employment contracts of the members
of the board of management;
Supervision of the board of management, including the examination of both legal
and commercial aspects of management board actions;
Representation of the AG in its dealings with the board of management;
Representation of the AG (together with the board of management) in litigation
relating to the validity of shareholder resolutions;
Authorization of business decisions of the board of management where required by
the articles or by the supervisory board itself; and
28


Appointment of the statutory auditor, review and approval of the annual financial
statements.
In the case of a GmbH, a supervisory board is mandatory only if the GmbH has more
than 500 employees. In all other cases, shareholders are entitled to form a supervisory
or advisory board (Beirat) and to define the functions of said board in the articles.
3.1.5
Shareholders or general meetings
Shareholders decisions are made by way of shareholder resolutions taken at shareholder meetings (Gesellschafterversammlung) in the case of a GmbH and at the general meeting of shareholders (Hauptversammlung) in the case of an AG.
For a GmbH, shareholder meetings are normally called by the managing directors (or
the supervisory board, if applicable), or by holders of at least 10% of the share capital.
The meetings need not be held in Germany. Votes can be cast by telex, fax etc. Unless
otherwise provided in the articles of association, the statutory rights of shareholders at
shareholder meetings include decisions on: appointment of managing directors, review
of the activities of the managing directors, approval of the financial statements, appropriation of profits, and amendments to the articles of association. Unless otherwise
stipulated in the articles, each 50 participation entitles the owner to one vote. Decisions are made by a simple majority of votes (more than 50%), unless the articles provide otherwise. In some cases a 75% majority is required by law.
For an AG, a general meeting must be held each year within eight months of the end of
the financial year and is convened by the board of management. The meeting is normally held in Germany at the place where the AG has its registered office. In addition,
the board of management, the supervisory board, or shareholders holding at least onetwentieth of the registered share capital have the right to call an extraordinary general
meeting. The statutory rights of the general meeting include decisions regarding the
appointment of members of the supervisory board; the appropriation of profits; formal
approval of the board members (management and supervisory) with respect to their
activities during the preceding financial year; the appointment of auditors; amendments to the articles of incorporation; reorganizations; and the liquidation of the AG.
Decisions are made by a simple majority of votes (more than 50%) unless:
The law mandates a greater majority, e.g. 75% to amend the articles or to increase
or decrease share capital;
The law requires the consent of certain shareholders, e.g. the consent of preferred
shareholders whenever their rights are effected;
29

Company law
The articles provide otherwise.
3.1.6
Amendment of the GmbH Law
On June 26, 2008 the Bundestag the lower house of the German parliament passed
the Act for the Modernization of Limited Liability Company Law and the Deterrence
of Abuses (Gesetz zur Modernisierung des GmbH-Rechts und zur Bekmpfung von
Missbruchen MoMiG). This act is the first extensive amendment of the GmbH Law
since 1980 and seeks to make the GmbH more competitive internationally as a form of
business association, as well as more attractive to small and medium-sized businesses.
3.1.6.1
Accelerated formation of GmbHs
At the core of the act is the facilitation and acceleration of corporate formation. Slow
corporate formation was seen as a competitive disadvantage of the GmbH compared
with foreign legal forms, e.g. the British limited company (ltd.), because most EU
member states have lenient requirements for the establishment of a corporate entity.
In consideration of the requirements of companys founders, who in general desire a
low initial registered share capital, the act will create a so-called business company
(Unternehmergesellschaft GmbH UG). The GmbH UG will not be a new legal form;
it will be a version of the GmbH that can be formed without minimum registered share
capital. A GmbH UG will not be allowed to distribute its profits completely; the minimum stated capital of such entities will have to be saved up over the years.
Currently, each shareholder holds a business interest in the company in the amount of
the original contribution, which must total at least 100 or any higher amount divisible by fifty (see chapter3.1.2). The draft legislation would reduce the minimum value
of each business interest to 1, permitting the shares to be divided, consolidated, or
sold more easily.
The bill also includes model articles of association (Musterprotokoll) for uncomplicated incorporations. Where these model articles are used, notarial charges can be
reduced.
To simplify the formation of a GmbH established by a single shareholder, the act would
repeal the requirement of providing security. Currently, the capital of a GmbH must be
paid in completely or security must be posted for the outstanding amount if the corporation is formed by a single shareholder.
30


3.1.6.2
Increasing the attractiveness of the GmbH via greater flexibility

of the corporation
German company law follows the seat-of-management rule (Sitztheorie). According to

this basic principle, both the corporations registered office and its place of management must be in Germany. Moving the place of management abroad leads to dissolution of the corporation. By contrast, corporations founded in another EU member state
in which the place-of-incorporation rule (Grndungstheorie) applies may transfer their
place of management to Germany. Under the decisions of the European Court of Justice (ECJ) in the cases Centros, berseering, and Inspire Art, Germany has to respect
the legal capacity the country of formation grants to the corporation (see chapter3.5).
Inability to transfer their place of management abroad constitutes a significant competitive disadvantage for German corporations. To eliminate this disadvantage, the
draft legislation would enable the GmbH to select a place of management that differs
from the place of registration. This place of management could even be located outside
Germany.
3.1.6.3
Abuse deterrence
Another essential aim of the draft legislation is the prevention of certain abuses that
have become evident in practice.
In order to make it easier to take legal action against a corporation, the bill would
require GmbHs to record their domestic postal address in the commercial register.
Hence, creditors could find out easily against whom they must assert their claims. This
rule would also apply to AGs, sole proprietors, partnerships, and branches as well.
Furthermore shareholders would be required to file an insolvency petition against the
GmbH if it lacks effective management and the other conditions for insolvency are
fulfilled. This is intended to make it more difficult to evade the obligation to commence insolvency proceedings against the GmbH. Furthermore, the circumstances
disqualifying individuals for service as managing directors of GmbHs would be
expanded.
The draft legislation must pass both houses of the German parliament (Bundestag and
Bundesrat) before it can become law. The legislation is expected to take effect in the
second half of 2008.
In summary, it is noted that the draft legislation does not contemplate a fundamental
overhaul of GmbH law. It seeks to make the GmbH more competitive internationally.
Simplified formation of the GmbH and the ability to select a place of management
outside Germany would make the GmbH more competitive internationally as a busi-
31

Company law
ness association. Whether the measures will prevent abuses remains to be seen. Nevertheless, the pending legislation is a big step forward.
3.1.7
German Corporate Governance Code
The German Corporate Governance Code contains major statutory provisions for running and monitoring German corporations, including nationally and internationally
accepted standards for good and responsible corporate governance. The Code is
intended to make corporate governance rules more transparent for national and international investors and to strengthen the confidence of shareholders, associates, customers, and the public in the management of corporations. The Code describes the
general legal framework for a company and insofar the functionality of the board of
management and the supervisory board of German corporations.
The German Corporate Governance Code contains three types of terms: recapitulations, proposals and recommendations. The recapitulative terms are informational.
They reiterate statutory rules already in effect, thus giving foreign investors an overview of important German corporate governance provisions. The terms in the second
category the proposals are recognizable by should or can phrases. While the
proposals are not mandatory, they help potential investors focus attention on specific
areas of management action. In the final category, the recommendations constitute
accepted standards of corporate governance and are identified by shall phrases.
Their application is also not mandatory, but corporations that decline to adhere to the
recommendations must state their reasons for failing to do so. Depending on context,
the recommendations relate either to the board of management or to the supervisory
board or to both boards.
Under 161 of the Stock Corporation Act (Aktiengesetz AktG), the board of management and the supervisory board of corporations with publicly traded shares must
declare annually whether the corporate management complies with the terms of the
German Corporate Governance Code and identify any proposals and recommendations that are not adhered to. This so-called declaration of conformity must be available to the shareholders at all times.
The German Corporate Governance Code is intended primarily for public corporations, but it is recommended that non-public corporations follow the code as well.
The German Corporate Governance Code is published by the Federal Ministry of Justice in the German Federal Gazette. The Code is monitored by the Commission of the
German Corporate Governance Code (Regierungskommission Deutscher Corporate
Governance Kodex), which was formed by the Federal Ministry of Justice and holds
32


meetings under the chairmanship of the chairman of the supervisory board of ThyssenKrupp AG. As a rule the code is reviewed at least annually and will be amended if
necessary.
3.1.8
Business register Unternehmensregister
In 2007 an electronic business register was introduced in Germany. The business register shows the records in the commercial register. Anyone may view the information
online on the website: www.unternehmensregister.de. Documents that must be on
record in the commercial register may now be filed in electronic form; from 2009
onwards, electronic filing is mandatory. The announcement of entry in the commercial
register takes place online only. The previous process of announcement in the daily
newspapers has been discontinued. In addition, the business register contains all essential business data subject to publication requirements, e.g. financial statements. They
are published on the website as well (so-called one-stop-shopping).
The introduction of the business register has lead to a debureaucratization of corporate
disclosures (Unternehmenspublizitt). By bringing together all essential business data
in one database, the legislature sought to improve the transparency of the market.
3.1.9
Insolvency
GmbHs and AGs are considered insolvent when they cannot pay their debts as they fall
due (illiquidity), or when, on the companys balance sheet or interim statement, liabilities exceed the value of the assets, measured at their going-concern value. This deficiency of assets is known as over-indebtedness (berschuldung).
If a situation of over-indebtedness or illiquidity is identified, the managers of the corporation must file a petition for the commencement of insolvency proceedings with the
local district court without culpable delay, at the latest after three weeks. Otherwise,
they may be held personally liable and be subject to criminal penalties. A petition for
the commencement of insolvency proceedings may also be filed against the company
by any creditor.
3.1.10
Liquidation
An AG and a GmbH may be dissolved on expiration of a period provided in the articles,

by resolution of three quarters of the shareholders, upon commencement of insolvency
proceedings, or by court order. Subsequent to the dissolution, the corporation is to be
liquidated unless bankruptcy proceedings have begun. An AG is liquidated by the
board of management and a GmbH by the managing director(s), unless otherwise
33

Company law
provided for in the articles or decided upon by a shareholder resolution. In certain
cases, liquidators may be appointed by a court order requested by a certain percentage
of shareholders or by the supervisory board in the case of an AG.
The liquidation must be entered in the commercial register. Financial statements must
be prepared as of the date of the opening of the liquidation proceedings and for every
year-end thereafter.
The creditors of the company must be notified of the liquidation and requested, through
three consecutive publications in the German Federal Gazette (Bundesanzeiger), to
submit their claims. Upon discharge of the liabilities, the remaining assets are distributed among the shareholders in liquidation, but not earlier than one year after the third
public notification to the creditors.
3.2
Other forms of corporations
3.2.1
Societas Europaea SE
On October 8, 2001, the European Council adopted a regulation establishing a statute

for a European stock corporation (Societas Europaea SE). The SE regulation was
accompanied by a directive on the involvement of employees in the SE. The SE regulation adopts the seat-of-management rule: Once incorporated, the SE can change its
seat to another Member State without giving up its legal status. The SE can move
freely within the EU and the EEA (Norway, Iceland, and Liechtenstein) Member
States.
A SE can be set up by two or more stock corporations from at least two different EU
Member States (see also chapter10.3.3). Operating throughout the EU on the basis of
a single set of core regulations, the SE is an alternative for corporate reorganizations
on a European level. The SE is designed as a publicly held corporation comparable to
a German AG with a registered share capital of at least 120,000. Depending on the
form adopted in its articles of incorporation, the SE can be governed by either a supervisory body and a management body (two-tier system) or by a single administrative
body (one-tier system).
3.2.2
Limited partnership with share capital KGaA
The Stock Corporation Act contains provisions on limited partnerships with share
capital (Kommanditgesellschaft auf Aktien KGaA). These companies are similar to
stock corporations, except that one or more general partners are personally liable for
the companys debts. This business form is not frequently used in Germany.
34

Other business associations
3.3
Other business associations
3.3.1
Partnerships
Besides GmbHs and AGs, commercial partnerships (as defined by the German Commercial Code) play an important role in Germanys business life. Such partnerships
include general partnerships (Offene Handelsgesellschaft OHG) and limited partnerships (Kommanditgesellschaft KG). The only major difference between the two
forms is the liability of partners. In an OHG, all partners are jointly and severally liable for all of the partnerships debts. In a KG, at least one general partner (Komplementr) is personally liable whereas the liability of the limited partners (Kommandi
tisten) is limited to their registered contribution to the partnership. For this reason,
foreign investors usually choose a KG when setting up a partnership structure for their
investment in Germany.
To set up a partnership, at least two partners are required to execute a partnership
agreement; in principle, the partners may freely agree upon their rights and obligations. The partners (general as well as limited partners) of a German partnership may
be either individuals, German or foreign corporations, or other partnerships. No special form must be observed unless the agreement includes certain obligations, e.g. the
transfer of real estate (in this case the agreement must be executed in a deed certified
by a public notary). The partnership must be registered with the relevant commercial
register. All partners are obligated to apply for registration. In order to achieve the
liability protection for the limited partners, the liable contribution (Haftsumme) must
be properly registered; otherwise, it is not legally effective. In the event the partnership
commences business prior to registration, each limited partner who has agreed to the
commencement of the business is liable in the same manner as a general partner for
any debts arising from the commencement of business prior to registration, unless that
partners status as a limited partner was known to the creditor. The transfer of any
partnership interest (as limited or general partner) requires an agreement between the
transferor and the transferee together with the consent of all other partners, unless the
partnership agreement provides otherwise.
The partnership is managed and represented in and out of court by the general partners; the limited partners may only participate in the management if the partnership
agreement so provides. The limited partners are also unable to act on behalf of the
partnership, unless the partnership agreement confers representation authority on
them.
35

Company law
The partners determine the affairs of the partnership through partnership resolutions,
which generally must be passed unanimously, unless otherwise agreed in the partnership agreement.
Although an OHG or KG is not an entity entirely separate from its partners, the partnership may carry on business, acquire, hold and dispose of property, and sue and be
sued in its own name. All partnership property is owned by the partners in joint tenancy.
The reasons why a partnership might be preferred over a corporation include, firstly,
the great flexibility in tailoring the partnerships internal affairs to the individual needs
of the partners and, secondly, less extensive publication requirements (unlike the articles of a GmbH or AG, the partnership agreement need not be filed with the commercial register). Other factors are the greater ease of dissolution and distribution of the
capital to the partners and direct management and representation by the general partner.
German company law does not restrict the mixing of corporate forms. A very common
form of a commercial partnership is the GmbH & Co. KG, a limited partnership with
a limited liability company acting as general partner. The GmbH & Co. KG combines
certain advantages of partnerships with the liability limitations of corporations. Based
on a large number of court decisions, the GmbH & Co. KG has emerged as a business
association in its own right.
3.3.2
Silent partnerships
A silent partnership or participation (stille Gesellschaft) exists where a person contributes to the capital of an existing business and shares in its profits (possibly also in its
losses), without incurring any liabilities towards creditors. Silent partnerships have no
entity or quasi-entity status, but are mere financial participations in another business
on a contractual basis. Aside from their tax planning uses, silent partnerships are used
especially to allow third parties to share profits and risks of a business without acquiring any rights or assuming any obligations not specifically covered in the silent partnership agreement. Silent partnerships also permit the silent partner to avoid disclosing its investment, since silent partnerships are generally not registered in the commercial register. However, various higher regional courts have held that silent partnerships must be registered in the commercial register if the business in which the silent
partner participates is an AG, because the creation of a silent partnership is effectively
an agreement to transfer a portion of the profit, which affects the distribution of total
profit to the shareholders.
36

Branches
3.3.3
Civil law associations
A civil law association (Gesellschaft brgerlichen Rechts GbR) is a partnership

which has no registered business name and does not constitute an entity entirely separate from its partners. However, the GbR as such may generally conclude contracts and
bear the rights and obligations thereof and can sue and be sued in its own name. All
property acquired by the association in its name is owned by the partners in joint tenancy. All partners are jointly and severally liable for all debts incurred by the GbR
unless a liability limitation is agreed with each single creditor for each transaction.
To set up a civil law association, at least two partners are required to execute an association agreement; no registration is required. Possible partners can be either individuals, German or foreign corporations, or commercial partnerships or other civil law
associations.
The legal relationship between the different partners is determined by the rights and
obligations agreed upon in the association agreement. Unless otherwise agreed, the
GbR is managed and represented in and out of court by all partners, and each transaction requires the consent of all partners.
A civil law association is typically used for non-commercial purposes (e.g. associations of professionals) and for individual transactions or contracts (e.g. construction
projects), in most cases for a limited period of time.
3.3.4
Sole proprietorship
In a sole proprietorship (Einzelkaufmann), the owner is engaged in a typical commercial business. He is personally liable for all debts and must register the business with
the commercial register.
3.4
Branches
A foreign individual entrepreneur, corporation or partnership may establish a branch

in Germany. The branch must be registered in the commercial register with the local
court where it has its registered office, and it must notify the local municipality when
starting business operations. A branch is not a separate legal entity even though contracts may be concluded in its name.
To register a branch, the court will request evidence of the legal existence of the foreign company, copies of the articles of association/incorporation, the names of all
managing directors or members of management boards and their power of representation, the amount of registered share capital, the location of the registered office, its
37

Company law
organization, as well as the names of the persons who will act for it in Germany. This
information and all subsequent changes must be registered in the electronic commercial register and published on the homepage of the German Federal Gazette (Bundes
anzeiger).
Depending on the type of business the branch intends to conduct, it may be necessary
as in case of banking and insurance to produce evidence of proper qualifications
and obtain special permits. The licensing procedures have been relaxed recently as
part of developments within the EU.
3.5
Companies organized under the law of a foreign

jurisdiction
Since the seat-of-management rule has up till now applied to all companies formed
under German law, companies organized under the laws of a foreign jurisdiction have
been an attractive alternative. Following a series of decisions by the European Court of
Justice (ECJ) (Centros, berseering, Inspire Art Ltd.) it is now possible for companies
organized under the law of another European jurisdiction to move their seat of management to Germany if their foreign jurisdiction permits such a move. In contrast,
German business associations have to liquidate in Germany when moving their seat of
management to another country. However, the German cabinet intends to permit
GmbHs to select a place of management that is outside of Germany (see chapter3.1.6.2).
According to the ECJ, Germany is required to respect the legal capacity of companies
duly formed in accordance with the law of another EU Member State, even if the foreign company has moved its actual place of administration/management to Germany.
The requirements of ECJ rulings apply to corporations as well as to other business
associations.
A substantial presence in their home jurisdiction is not required. Even if the foreign
company lacks any material connection with the country in which it was formed and
only has a token presence in its nominal home jurisdiction, Germany may not refuse to
recognize the foreign company.
All business organizations formed under the law of a Member State that follows the
place-of-incorporation rule e.g. UK, Ireland, and Netherlands must be recognized
by the German authorities and German courts. Under a bilateral agreement (1954 German-American Treaty of Friendship, Commerce and Navigation), U.S. companies (e.g.
Delaware LLC) are recognized as well.
38

Companies organized under the law of a foreign jurisdiction

The formation of a foreign corporation e.g. a UK Ltd. might involve fewer formalities and entail less expense compared with forming an AG or a GmbH in Germany. However, the operating costs of a foreign company that conducts its business in
Germany often exceed the costs their German counterparts would incur. In addition,
there are legal uncertainties and implications concerning the taxation of such entities
which often render corporations organized under the law of a foreign jurisdiction less
attractive.
39

German accounting principles
Accounting and reporting
4.1
4.1.1
Financial statements
The German Accounting and Reporting Act (Bilanzrichtliniengesetz BiRiLiG) was

enacted in December 1985 to implement the 4th, 7th, and 8th EU Directives into German law. Since that date, there have been a number of subsequent amendments relating
in particular to the transposition into German law of the EU directive on small and
medium-sized companies (Council Directive 90/604/EEC of November 8, 1990), and
the EU directive on different types of incorporated companies (Council Directive
90/605/EEC of November 8, 1990). Most of the provisions can be found in the third
book (238342e) of the German Commercial Code (Handelsgesetzbuch HGB),
which contains regulations to be complied with by all businesses as well as supplementary regulations for incorporated companies, credit institutions, and insurance
companies. The supplementary regulations designed for incorporated companies also
apply to general partnerships (Offene Handelsgesellschaften OHG) and to limited
partnerships (Kommanditgesellschaften KG) where no individual is personally liable
(known as KapCoGesellschaften). In Germany, this applies particularly to the form
of limited partnership known as the GmbH & Co. KG, which has a limited liability
company (GmbH) as general partner and individuals typically the members of the
GmbH as limited partners.
A recent amendment to the German Commercial Code (Accounting Law Reform Act,
Bilanzrechtsreformgesetz BilReG) accompanied the introduction of the EU IAS
Regulation and implements several EU Directives (Modernization Directive, Threshold Directive, and Fair Value Directive). The BilReG led to a further alignment of
German accounting law around EU legal standards.
The Federal Ministry of Justice has released draft legislation that is intended to modernize German accounting law (Accounting Law Modernization Act, Bilanzrechtsmodernisierungsgesetz BilMoG). The basic purpose of the changes is to make German
accounting law a fully adequate und simpler alternative to the International Financial
Reporting Standards (IFRS). The elimination of various capitalization, recognition,
and valuation elections would bring German domestic accounting law closer to IFRS
while retaining the existing accounting principles of German commercial law (see
chapter5.2.2 for detailed information of the Draft Accounting Law Modernization
Act). Enactment of the act is expected for the end of 2008.
41


The Accounting Law Reform Act (BilReG) addresses such matters as size criteria, the
management report, and the information to be presented in the notes. For incorporated
companies (AG, KGaA, GmbH, SE) and for KapCoGesellschaften, which are treated
in the same manner as incorporated companies, the German Commercial Code contains three reporting categories based on the respective companys size: small,
medium-sized, and large companies. Three criteria are used to determine the category
to which a company belongs: balance sheet total, turnover, and number of employees.
A company is included in a particular size class if it meets two out of the three criteria
on two successive balance sheet dates (see table 6).
Table 6:
Classification of company size (accounting obligations)
Small
Medium-sized
Large
up to
above
to
above
Balance sheet
total
million
Turnover
million
Number of
employees
(average per year)
4.015
4.015
16.060
16.060
8.030
8.030
32.120
32.120
50
50
250
250
The initial classification of newly established companies depends on the companys

characteristics on the first balance sheet date. However, publicly quoted companies are
always deemed to be large companies.
The classification of companies by size is significant because the disclosures required
by the German Commercial Code vary according to the size of the company. Large
companies must prepare a balance sheet, an income statement, notes to the financial
statements (comments and supplementary disclosures about items in the balance sheet
and income statement, as well as additional information about such matters as accounting policies, affiliated companies, and the remuneration of management and of the
supervisory board), and a management report (containing a description of business
trends and future prospects for the company), each in the complete format prescribed
by law. The Accounting Law Reform Act (Bilanzrechtsreformgesetz BilReG)
expanded the scope of the information to be included in the notes regarding the nature,
scope, and valuation of specific derivative financial instruments.
Since 2007 documents must be filed in electronic form with the German Federal
Gazette (Bundesanzeiger) for publication on its homepage (see www.bundesanzeiger.
de and www.unternehmensregister.de). Companies are not distinguished by size in
this respect. Small and medium-sized companies must also file with the German Federal Gazette.
42


Simplifications based on size are available for small and medium-sized companies
with respect to the disclosure documents. Medium-sized companies need only prepare
a simplified income statement (including exemption from the requirement to analyze
the gross profit figure) and simplified notes to the financial statements (including
exemptions from the requirement to analyze sales by areas of activity and by geographical markets and to disclose (i)the extent to which the result for the year has been
affected by the application of tax concessions and (ii)any future charges that will arise
therefrom).
Small companies are not required to prepare a management report, and the notes to the
financial statements are largely simplified. The balance sheet may be presented in an
abbreviated format.
Enterprises that are neither corporations (Kapitalgesellschaften) nor KapCoGe
sellschaften are not required to disclose their financial statements. There are exceptions, however, under the Disclosure Act (Publizittsgesetz PublG) for large enterprises which exceed two of the three size criteria (balance sheet total: 65,000,000;
turnover: 130,000,000; number of employees: 5,000). Special disclosure requirements also apply to enterprises in specific industry sectors (e.g., banking, insurance).
Corporations and KapCoGesellschaften must prepare their balance sheet in the
accounting format prescribed by law for their size category. This method of presentation is largely followed by other types of enterprises.
The income statement must be prepared by corporations and KapCoGesellschaften
in vertical form using either the cost-summary method or the cost of sales method. For
each of these two methods, the organization of the income statement is prescribed by
law. Enterprises which have a different legal form are only required, when selecting
the form of presentation of the income statement, to comply with the principle that
financial statements must be clear and understandable; in practice, the form of presentation used for corporations is usually followed.
Irrespective of the legal form of the enterprise, every business is required to maintain
accounts that reflect its business transactions and its financial position in accordance
with German principles of proper accounting. These principles are derived from a
variety of sources and are frequently amended.
Specifically, German accounting principles require that entries be complete, correct,
and chronological; that annual financial statements be prepared; that all computations
be made on a Euro currency basis; and that books and records be maintained in a living language and retained for a certain period of time. Loose-leaf accounting (Lose
blattbuchfhrung), open item accounting (Offene-Posten-Buchhaltung), and IT43


based accounting systems are acceptable if they meet certain requirements. Inventories of goods must generally be compiled, valued, and recorded in the accounts at the
balance sheet date. Reliance on perpetual inventory records is permissible if they are
in conformity with the legal requirements and show the inventory on the balance sheet
date. Additionally, a physical inventory of movable fixed assets must be taken at each
balance sheet date, unless perpetual inventory records are maintained. Such records
are also sufficient for tax purposes, provided certain requirements regarding detailed
information on the respective assets are met.
Furthermore, commercial law requires that the accounting system be set up in such a
way that an independent professional is able, within a reasonable amount of time, to
obtain an overview over the assets, liabilities, and operations of the company. The
provisions, however, focus on accounting and reporting by companies. The objective is
to ensure that companies present a true and fair view of their net assets, financial position, and operational results. If this is not accomplished by the balance sheet and
income statement alone, additional information must be provided in the notes to the
financial statements.
In principle, tax law incorporates by reference the requirements under commercial law
and relies on the financial statements prepared for commercial purposes. In other
words, the commercial financial statements form an authoritative basis for tax accounting purposes. However, there are also certain specific tax accounting rules (see chapter6). The option exists to apply numerous special tax rules in the commercial financial statements. However, in some cases there are mandatory differences between the
commercial and tax accounting. Differences therefore commonly arise between the
commercial financial statements and the tax accounts.
One unavoidable difference between the commercial financial statements and the tax
accounts results from provisions for anticipated losses on transactions in the course of
completion (pending transactions). Such provisions are mandatory under commercial
law, but not permitted in the tax accounts.
German accounting regulations require the application of a strict historical cost principle under both commercial and tax law. If the value of an asset at a later date exceeds
its historical cost, the increase may not be recognized in the balance sheet until a realization event occurs (e.g. on sale of the asset). The principle of the lower of cost or
market value applies in a different form for fixed and current assets. Any reductions in
the value of the asset should be reflected in its balance sheet valuation. If the value of
the asset subsequently increases, write-backs are mandated in the tax accounts and,
for incorporated companies, in the commercial financial statements.
44


Fixed assets must be stated in the balance sheet at their purchase or manufacturing
costs less accumulated amortization or depreciation. Assets are generally amortized or
depreciated over their estimated useful lives using the straight-line method, the declining-balance method, the declining-balance combined with the straight-line method, or
an output-related method, depending on the type of asset involved. For tax purposes
only the straight-line method and the output related method are applicable. If diminution in the value of an asset is believed to be permanent, the asset must be written
down to the lower value in accordance with the principle of the lower of cost or market
referred to above. If there is a temporary diminution in the value of the asset, an enterprise may make an exceptional write-down in the commercial financial statements, but
not in the tax accounts. In the case of corporations, such write-downs are only permitted in the commercial financial statements for financial fixed assets. If the value of the
asset increases subsequent to an exceptional write-down, a write-back must be made in
the financial statements of the company.
Current assets should be stated at purchase or manufacturing cost and written down to
the lower of cost or market. A write-down is only permissible for tax purposes where
the diminution in the value of the asset is believed to be permanent. If the value of the
asset subsequently increases, write-backs are mandatory in the tax accounts and, for
incorporated companies, in the commercial financial statements.
For commercial accounting purposes, provisions must be created for liabilities of an
uncertain nature and for anticipated losses on transactions in the course of completion.
In addition, provisions may be made in the commercial balance sheet for individual
obligations (expense provisions). The creation of provisions for tax purposes is
restricted.
4.1.2
Consolidated financial statements
For companies that are not publicly traded, the requirements for the preparation of
consolidated financial statements and the consolidation and valuation principles to be
applied in consolidation accounting are set out in the German Commercial Code (Handelsgesetzbuch HGB). In addition, the German Federal Ministry of Justice
(Bundesjustizministerium) issues supplementary recommendations for the application
of group accounting principles. These recommendations are drawn up by the German
Accounting Standards Committee (GASC). For publicly traded parent companies, the
application of the IAS Regulation is mandatory (see chapter4.2).
Under the German Commercial Code (Handelsgesetzbuch HGB), corporations (i.e.
AG, KGaA, GmbH, and SE) and KapCoGesellschaften (see chapter4.1.1) that are
the parent company of a group of companies and resident in Germany must prepare
45


worldwide consolidated financial statements. All the companies under the control of a
domestic parent company are deemed to be members of the group. Companies are
always controlled where the parent company holds a majority of their voting rights or
is entitled to appoint the majority of members of their boards of management or supervisory boards, as well as where the parent company controls the other companies by
virtue of a management control agreement.
In general, both domestic and foreign companies must be included in the consolidated
financial statements. Group financial statements comprise a consolidated balance
sheet, a consolidated income statement, and notes to the financial statements, as well
as a report on the business trends and outlook of the group (management report). The
consolidated financial statements must include a cash-flow-statement showing the cash
flows of the period and a statement of changes in equity showing the changes in consolidated equity and comprehensive income. Optionally, segment reporting may be
added to the consolidated financial statement.
Table 7:
Criteria for mandatory preparation of consolidated financial statements
Pre-elimination figure exceeds

Consolidated figure exceeds
Balance sheet
total
million
Turnover
million
Number of
employees
(average per year)
19.272
16.060
38.544
32.120
250
250
Consolidated financial statements must be prepared if at least two of the above criteria
have been met on both the reporting balance sheet date and the preceding balance
sheet date. The financial statements which are included in the consolidated financial
statements must be prepared using the same accounting and valuation policies as those
of the parent company. Exemptions from this rule apply only where tax regulations do
not permit the valuation policies in the original financial statements to be modified for
consolidation purposes.
For group reporting purposes, the equity accounting method is mandatory for certain
investments (associated enterprises) which are included in the group financial statements. An associated enterprise is one over which the group exercises significant influence and which is neither a subsidiary nor a joint venture (German Accounting Standard 8). This situation is deemed to exist if the reporting company holds more than
20% of the voting rights of a company. Under the equity method of accounting, all
post-acquisition movements in the equity of the associate are either debited or credited
to the investment account in the books of the parent company in proportion to the parent companys share of equity in the associate.
46


The consolidation of shareholders equity follows the purchase method, under which
the difference between the book value of the investment (cost) and the portion of the
shareholders equity to be consolidated at the time of the acquisition is allocated to the
assets and liabilities of the acquired company to the extent possible (fair value accounting), with the remainder, if any, being presented as goodwill. In accordance with German Accounting Standard 4, the share of the assets and liabilities attributable to the
minority shareholders should be stated at fair value (total revaluation).
An interest in a joint venture with outsiders or other non-consolidated parties should
be included in the consolidation using the proportionate consolidation method or the
equity method (German Accounting Standard 9). This consolidation method means
that all assets and liabilities, income, and expenses are included in the group accounts
pro-rata to the interest in the joint venture, so that no minority interest arises.
Generally, inter-company profits and losses should be eliminated. However, this rule
may be waived if sales or services were made or rendered on customary market terms
and the calculation of inter-company profits or losses would cause unreasonable
expense. However, if this exception is relied on, this must be disclosed in the notes to
the consolidated financial statements.
The obligation to prepare consolidated financial statements in accordance with German accounting regulations exists even if the German parent company is itself the
subsidiary of a foreign group of companies (sub-group financial statement). However,
there are significant exceptions to this rule. The German parent company is exempt
from the requirement to prepare German (sub-group) consolidated financial statements
if the foreign parent company prepares consolidated financial statements (exempting
consolidated financial statements) which include the German sub-group, provided
these exempting consolidated financial statements comply with EU-Directive 83/349/
EEC of June 13, 1983, and fulfill a number of other requirements (e.g., examination of
the exempting consolidated financial statements by qualified auditors). In such cases it
is irrelevant whether the parent company is domiciled in the EU, in the European Economic Area, or in a third country. This exemption does not, however, apply if the German parent company is a stock corporation (AG) with shares which are listed and
traded on a recognized stock exchange. If the foreign parent company holds at least
90% of the shares in the German parent company, the exemption from the obligation
to prepare consolidated financial statements depends on the consent of all the other
shareholders. If the foreign parent company holds less than 90% of the shares in the
German parent company, other shareholders holding 10% of the shares (in the case of
an AG, KGaA or SE) or 20% of the shares (in the case of a GmbH) may block the
exemption.
47

4.2
International Financial Reporting Standards (IFRS)
4.2.1
Consolidated financial statements
On July 19, 2002, the European Parliament and the European Council issued a regulation on the application of International Accounting Standards (IAS Regulation). The
objective of the IAS Regulation is to harmonize the financial information presented by
companies in order to achieve a high level of transparency and comparability in the
financial statements, thereby ensuring the efficient functioning of the capital market in
the EU. The IAS Regulation stipulates that, from 2005, publicly traded companies
must prepare consolidated financial statements in accordance with IAS, since renamed
International Financial Reporting Standards (IFRS). Furthermore, the IAS Regulation
permits Member States to decide whether the application of IFRS to the consolidated
financial statements of non-publicly traded companies and/or to individual company
financial statements shall be optional or mandatory.
As mentioned in chapter4.1.1, the Accounting Law Reform Act (Bilanzrechtsreform
gesetz BilReG) governs the transition to IFRS accounting. It mainly addresses publicly traded parent companies kapitalmarktorientierte Unternehmen i.e. companies whose securities are traded on a regulated market in any Member State of the EU.
The obligation of publicly traded companies to prepare their consolidated financial
statements in accordance with IFRS starting in 2003 is not, however, explicit under the
German Commercial Code (Handelsgesetzbuch HGB). It is instead based on the IAS
Regulation. Sec.315a (2) HGB goes beyond the obligatory requirements of the IAS
Regulation in that it requires parent companies to prepare their consolidated financial
statements in accordance with IFRS if they have filed an application for admission of
their securities to trading on a regulated market. Non-publicly traded parent companies may now meet their legal requirements by preparing their consolidated financial
statements in accordance with IFRS. Under the IAS-Regulation, publicly traded companies that prepared their accounts under the regulations of a non-EU/EEA market
(e.g. U.S. GAAP) were permitted to continue doing so until 2006. This exception also
applied to companies that had only publicly traded debt securities. Starting in 2007,
the application of IFRS is obligatory for all EU/EEA parent companies publicly traded
on a regulated market in the EU/EEA.
4.2.2
Financial statements
In order to fulfill certain requirements for publication and reporting, companies may
replace their regular annual financial statements with annual financial statements prepared in accordance with IFRS. This will allow these companies to compete on an
equal footing for financial resources on international capital markets. For the assess48

Enforcement
ment of dividends and for tax filing purposes, annual financial statements must, however, continue to be prepared in accordance with the principles of German commercial
law.
4.3
Enforcement
The Accounting Control Act (Bilanzkontrollgesetz BilKoG) of December 15, 2004

introduced a two-stage enforcement procedure into German law. In the first stage, an
independent financial reporting enforcement panel audits the financial statements of
publicly traded companies at the request of the Federal Financial Supervisory Authority (Bundesanstalt fr Finanzdienstleistungsaufsicht BaFin). Requests are made if
there are indications of infringement of financial reporting requirements and for general sampling purposes.
The findings are disclosed to the audited company and to the Federal Financial Supervisory Authority. Errors identified by the panel are published and must be corrected by
the company. If the company fails to co-operate with the auditor, the Federal Financial
Supervisory Authority may order a second audit.
49

Current legislation
Recent and proposed changes

in fiscal policy
5.1
Current legislation
Following the September 2005 election of a new Bundestag (Federal Parliament),

negotiations between the Christian Democrats (CDU/CSU) and the Social Democrats
(SPD) led to formation of a new governing coalition at the end of November 2005. The
so-called Grand Coalition then elected Angela Merkel as Chancellor. Peer Steinbrck was named as Minister of Finance. The major business tax reform that was
announced by the coalition partners shortly thereafter takes effect as of January 1,
2008. There is also other recent tax legislation. The following sections outline these
changes.
5.1.1
2008 Business Tax Reform Act
The tax reforms central feature is the reduction of the tax burden for corporations to
less than 30%. However, the law makes changes that broaden the tax base, such as a
limitation on the deductibility of interest. The highlights of the 2008 Business Tax
Reform Act are summarized below.
5.1.1.1
Tax relief for corporations
The tax burden for corporations falls from 39% to just under 30%, assuming an average trade tax multiplier of 400%. The corporate income tax rate is reduced from 25 to
15% and the trade tax base rate decreases from 5.0 to 3.5%. After the reduction of the
corporate income tax rate, the effective overall tax rate depends even more heavily on
the trade tax, which varies among the municipalities.
5.1.1.2
Earnings stripping rules
The 2008 Business Tax Reform Act repeales the German thin capitalization rules and
introduces earnings stripping rules in German tax law for the first time. The new rules
are broader than the previous thin capitalization rules since all third party debt financing (even if not back-to-back) is covered. Furthermore, the new rules apply to all business activities regardless of their legal form, not just to corporations.
Under the earnings stripping rules, interest expense is deductible to the extent the taxpayer earns positive interest income. Interest expense in excess of interest income is
51

Recent and proposed changes in fiscal policy

deductible only up to 30% of EBITDA (interest deduction ceiling). Non-deductible
interest expense may be carried forward. The interest deduction ceiling does not apply
where (i) interest expense exceeds positive interest income by less than 1 m (de minimis threshold), (ii) the business is not a member, or is only a proportional member, of
a controlled group or (iii) businesses forming part of a controlled group satisfy the
conditions of the escape clause. To qualify for the escape clause, the taxpayer must
prove that the equity ratio of the business in question is not more than 1 percentage
point less than that of the controlled group as a whole (equity ratio pursuant to IFRS,
alternatively GAAP of an EU member state or U.S. GAAP). The exemption for noncontrolled businesses and the escape clause apply to corporations only if no detrimental shareholder financing (schdliche Gesellschafterfremdfinanzierung) exists (see
chapter6.2.1.4 for details).
5.1.1.3
Trade tax addbacks
Fundamental changes are made in the tax treatment of financing expenses for trade tax
purposes. Under 8 no. 1 Trade Tax Act (Gewerbesteuergesetz), one fourth of the sum
of the following payments is added back in calculating trade income: loan remuneration, recurring payments, profit shares of a silent partner, one fifth of rental payments
for movable assets, 65% of rental payments for immovable fixed assets, and one-fourth
of royalty payments. The addbacks occur only where the aggregate amount of financing expenses exceeds a de minimis threshold of 100,000.
5.1.1.4
New change-in-ownership-rules
The previous change-of-control rules (8 (4) Corporate Income Tax Act Krperschaftsteuergesetz) allowed the use of loss carryforwards where the corporation claiming a loss was legally and economically identical to the one that suffered the loss.
Under the new change-in-ownership rules, a transfer of more than 25% of a corporations shares or voting rights results in forfeiture of existing loss carryforwards in proportion to the percentage of shares transferred (pro rata forfeiture). A transfer of more
than 50% of a corporations shares or voting rights triggers forfeiture of all loss carryforwards (total forfeiture). The same applies for trade tax purposes.
5.1.1.5
Transfer pricing changes
The legislation codifies the comparable uncontrolled price method, the cost plus
method and the resale minus method as the preferred methods for determining arms
length transfer prices. Where the transfer prices chosen by the taxpayer are outside of
a narrowed range, a correction is made to the median of the narrowed range. A hypo-
52

Current legislation
thetical arms length test applies where it is impossible to determine arms length prices
on the basis of a recognized transferring method.
5.1.1.6
Retained earnings of partnerships and sole proprietorships
The law brings the tax burden on the retained earnings of sole proprietors and partnerships owned by individuals into line with that of corporations. This is accomplished by
subjecting the retained earnings of partnerships and sole proprietorships to a reduced
tax rate of 28.25% (29.80% including solidarity surcharge). The reduced tax rate
applies, upon request by the partner/sole proprietor, separately for each business and
partnership interest, subject to certain de minimis rules. The tax allocable to retained
earnings is recaptured upon their withdrawal.
5.1.1.7
Flat tax for income from capital and capital gains
The 2008 Business Tax Reform Act creates a flat tax on income from capital and capital gains. The flat tax will take effect as of the 2009 tax assessment period and apply
only to individuals, not to corporate taxpayers.
The income tax on income from capital and capital gains is fixed at 25% regardless of
an individuals personal income tax rate. A taxpayer can also apply for taxation at his
or her personal income tax rate instead. Where income from capital is subject to withholding tax, the income tax liability is deemed to be satisfied by the tax withheld. The
flat tax is not levied in addition.
5.1.2
Real Estate Investment Trust Act REIT Act
For many years, German tax law provided no means of indirect investment in real
estate with transparent taxation at the level of the investor. Passage of the REIT Act
has created such a vehicle. A REIT corporation is completely exempt from German
corporate income tax if it meets various requirements.
The REIT corporation must be organized in the legal form of a joint stock corporation
(Aktiengesellschaft) with both its registered office and its actual seat of management in
Germany. Its shares must be registered for trading on a public exchange in a member
state of the EU or EEA. At least 75% of its gross revenues must be derived from the
rental, lease, or sale of real estate, as opposed to trading in real estate. The corporation
must fulfill certain requirements regarding the composition of assets and capital, dispersed stock ownership, and profit distributions.
A corporation meeting all these requirements is exempt from German corporate
income tax, trade tax, and solidarity surcharge retroactive to the date of registration in
53


the commercial register (Handelsregister). Exemption at the corporate level generally
means full taxation at the shareholder level. Dividends paid by a REIT to foreign investors are subject to a definitive 25% withholding tax. However, many tax treaties provide for reduction of German withholding tax to 15%. Foreign investors are thus in
many cases able to derive income from a German REIT subject to a German tax burden of only 15%. Depending on the relevant tax treaty, capital gains on the sale of
REIT stock held by foreign investors may be exempt from German taxation as well.
The failure of a REIT corporation to meet the above mentioned requirements for REIT
status may trigger the forfeiture of the tax exemption, or fines could be imposed by the
tax authorities.
5.1.3
2008 Tax Act
Numerous changes in German tax law are made by the 2008 Tax Act (Jahressteuergesetz 2008 JStG 2008). The Act took effect on January 1, 2008. Its highlights are as
follows.
5.1.3.1
Recapture taxation of carryover EK 02
The equity accounts of many corporations still contain previously untaxed earnings
classified as EK 02 under the old corporation tax credit system in force until 2001. The
2008 Tax Act provides for definitive, one-time recapture taxation of carryover EK 02,
which is separately assessed for the last time as of December 31, 2006. Irrespective of
any actual disposition of EK 02, a flat tax of 3% of EK 02 is imposed. Later distribution of these equity funds triggers no further taxation at the corporate level.
5.1.3.2
Application of 8b (3) KStG to shareholder loans
The 2008 Tax Act denies any deductions for reductions in profits that result from loans
made, or comparable transactions engaged in, by substantial shareholders (direct or
indirect holding of at least 25% of the shares), persons related to substantial shareholders under 1 (2) German Foreign Transactions Tax Act (Auensteuergesetz AStG),
and third parties with a right to recourse against the aforementioned persons. The
denial would not apply if the lender can prove that an unrelated party would have made
the loan on the same terms.
5.1.3.3
Redesign of general anti-abuse provision
The changes in 42 (1) Tax Procedure Law (Abgabenordnung AO) are intended to
provide greater specificity concerning the situations covered by this general provision
54

Pending Legislation
denying tax effect to legal transactions that are abusively structured. Inappropriateness
remains the standard by which one determines whether an arrangement is abusive.
When scrutinizing an arrangement for abuse, a threshold question is whether a comparison of the tax consequences of the chosen legal structure with those of an appropriate legal structure shows that the taxpayer or a third party has derived a tax benefit.
Only if the tax benefit is not contemplated by the tax code is the chosen structure further scrutinized for abuse. Even if the chosen structure is inappropriate, it is nevertheless not abusive under 42 (2) Tax Procedure Law (Abgabenordnung AO) if the
taxpayer can demonstrate non-tax reasons for the arrangement that are relevant considering all the facts and circumstances.
5.1.3.4
Changes in the Foreign Transactions Tax Law
In its Cadbury-Schweppes decision, the ECJ held that the British rules respecting
imputational taxation of the income of controlled foreign corporations (CFC rules)
infringe the freedom of establishment to the extent that they apply to arrangements
that are not wholly artificial in nature. In response, 8 (2) of the Foreign Transactions
Tax Act (Auensteuergesetz AStG) was amended so that it no longer applies to the
income of companies having their registered office or place of management in an EU/
EEA country, provided the foreign company is shown to carry out a genuine economic
activity in its country of residence.
5.2
Pending Legislation
Despite the astonishing number of bills already enacted by the German government,
there are currently several new bills pending. Selected features of the pending legislation are described below.
5.2.1
Act for the Modernization of the Legal Framework for Equity

Investments
The German Bundestag adopted an Act for the Modernization of the Legal Framework
for Equity Investments (Gesetz zur Modernisierung der Rahmenbedingungen fr Kapi
talbeteiligungen MoRaKG) that is intended to create incentives for the private sector
to provide capital needed to found and develop new business ventures. Included in this
act is the New Venture Capital Promotion Law, which allows companies to qualify as
venture capital investment companies (Wagniskapitalgesellschaften) if they meet certain requirements. Venture capital investment companies are organized as partnerships and hold shares only in corporations. Their activities would be deemed to constitute passive asset management that is not subject to trade tax. If the statutory require55


ments are fulfilled, all taxation would take place at the level of the investor. The legislation also contains a list of standard situations in which the activities of a venture
capital investment company exceed the limits of passive asset management, resulting
in commercial business income.
The act amends various other laws to facilitate investment in small and medium-sized
companies.
5.2.2
Draft Accounting Law Modernization Act
The German government has adopted draft legislation that is intended to modernize
German accounting law (draft Accounting Law Modernization Act). The basic purpose of the changes is to make German commercial accounting law a fully adequate
and simpler alternative to International Financial Reporting Standards (IFRS). The
balance sheet according to German domestic commercial law (German GAAP) would
remain the basis for fixing the limits of permissible dividend distributions as well as
for determining taxable income. In addition, the draft legislation contains relief from
various requirements for certain companies.
The enactment of the Accounting Law Modernization Act is expected at the end of
2008. Most provisions shall apply for annual periods beginning after December 31,
2008.
The most significant changes are highlighted in the following.
5.2.2.1
Improvement of information content
Various capitalization, recognition, and valuation elections would be eliminated in

order to bring German GAAP closer to IFRS. The aim is to enhance the informational
content of the financial statements while retaining the existing accounting principles
of German commercial law. For these purposes, the principle of reverse linkage
(umgekehrte Mageblichkeit) would be abandoned. Furthermore, internally generated
intangible assets would have to be recognized in the balance sheet. Financial instruments that are acquired for trading purposes would have to be valued at fair value on
the balance sheet date. The valuation of provisions would be changed so that they are
discounted at a market rate and with respect to rises in pricing and costs. Amongst
other provisions, several depreciation elections would be eliminated.
5.2.2.2
Relief from certain requirements
Sole proprietors that are not capital-market-oriented would be exempted from the
requirement of keeping books and preparing financial statements if their income does
56

Pending Legislation
not exceed 50,000 and their sales revenues do not exceed 500,000 on the balance
sheet dates of two consecutive fiscal years.
The size limits that determine which reporting requirements companies must fulfill
would be raised by 20%, permitting more companies to take advantage of the reduced
requirements for smaller companies.
5.2.3
Draft Inheritance Tax and Valuation Law Reform Act
In 2007, the federal government released draft legislation reforming the inheritance
tax and valuation laws. Changes in the principles underlying the taxation of succession
are mandated by the Federal Constitutional Courts 2006 ruling that the current inheritance and gift tax system based on assessed value is unconstitutional.
The draft bill would value business assets, real estate, and non-publicly traded shares
at fair market value. In general, the new valuation system would result in higher values
compared with the assessed values applicable up to now. By way of compensation, the
tax exempt amounts would be raised for spouses, children, and grandchildren, so that
close family members would in most cases not owe any inheritance tax. A preference
would be created for the transfer of businesses, provided jobs are preserved for at least
10 years and the business is continued over a period of at least 15 years.
The Reform Act would take effect on January 1, 2009. However, provisions concerning inheritance would be retroactive to January 1, 2007.
5.2.4
Draft 2009 Tax Act
Numerous changes in German tax law would be made by the draft 2009 Tax Act
(Jahressteuergesetz 2009 JStG 2009). The law is expected to be approved by the end
of 2008 and enter into force on January 1, 2009. The highlights of the draft are summarized below.
5.2.4.1
Losses with a foreign nexus
In response to decisions by the ECJ and a pending EC treaty infringement proceeding,

the draft act would limit the application of 2a Income Tax Act (Einkommensteuergesetz EStG) to losses arising in non-EU/EEA countries. The bill would permit the
losses arising in EU or EEA countries to be netted against German-source income
where the applicable tax treaty avoids double taxation under the credit method. Foreign losses would be disregarded in Germany where the exemption method applies.
57


5.2.4.2
Taxation of non-resident taxpayers
As under current law, the tax withheld on income from employment or from capital
and the tax withheld under 50a Income Tax Act would still constitute satisfaction in
full of a non-resident taxpayers German tax liability. However, the exceptions to this
principle would be materially expanded, thus subjecting non-resident taxpayers to the
assessment procedure in many cases in the future.
The draft legislation contains further changes in the taxation of non-resident tax
payers.
5.2.4.3
Treaty and directive shopping
The withholding tax on certain income from capital (such as dividends) received by
foreign corporate entities will be reduced from 25% to 15%. The provision intends to
adjust the withholding tax rate to the corporate tax rate of 15%. The reduction is limited to recipients meeting the activity and substance requirements of 50d (3) Income
Tax Act.
5.2.4.4
Bookkeeping in a foreign country
The draft act authorizes the tax authorities to grant a taxpayer request to transfer its
computer-based accounting system and other electronic records to another member
country of the EU or EEA where certain requirements are met.
5.3
Summary
The unifying theme of the governments tax legislation is the attempt to make the German tax system more competitive internationally. In addition, EU legislation and decisions by the European Court of Justice (ECJ) have had a great impact on German law
and required German legislative action. As a result, Germanys attractiveness as a destination for investment has been further enhanced from a tax standpoint.
58

Comparison of legal forms
Business taxation
6.1
Comparison of legal forms
A companys tax status depends, first of all, on the legal form chosen by its organizers.
Corporations (i.e. Aktiengesellschaft AG, Gesellschaft mit beschrnkter Haftung
GmbH, Kommanditgesellschaft auf Aktien KGaA, and Europische Gesellschaft
SE) are taxable entities subject to corporate income tax (Krperschaftsteuer), trade tax
(Gewerbesteuer), and the solidarity surcharge (Solidarittszuschlag).
Partnerships (non-corporate entities, i.e. Offene Handelsgesellschaft OHG, Kommanditgesellschaft KG, and Gesellschaft brgerlichen Rechts GbR), are not taxable entities for corporation or income tax purposes. The income determined at the
level of the partnership is allocated to the individual partners. The partnership prepares returns for informational purposes, and the partners declare their respective
shares of partnership profits or losses on personal tax returns. The partnership itself is
subject only to trade tax. The determination of income at the level of a partnership is
generally similar to that of a corporation. However, the income of a non-commercial
partnership can also be determined under a different method. The main aspects of
income determination are explained below. Specific issues affecting the taxation of
partnerships are highlighted in chapter6.3.
The foreign investor can also operate through a permanent establishment in Germany.
But a permanent establishment is not a legal form (for the taxation of permanent establishments see chapter6.4).
6.2
Taxation of corporations
6.2.1
Corporate income tax
6.2.1.1
Companies subject to taxation
Corporations resident in Germany are subject to tax on their worldwide income (unbeschrnkte Steuerpflicht). Corporations not resident in Germany are subject to tax on
their income from sources in Germany (beschrnkte Steuerpflicht), which includes
income derived from a permanent establishment (Betriebssttte) or a permanent representative in Germany, gains from the sale of shares in a German corporation, income
from agriculture and forestry, rental income, investment income, and certain categories of income subject to withholding tax. No differentiation is made between publicly
59

Business taxation
and closely held corporations. Capital gains on the sale of real estate located in Germany are also subject to German corporate income tax.
A corporation is considered resident in Germany if it maintains either its registered
office (as determined by its articles of incorporation) or its principal place of management in Germany. The principal place of management is where key decisions are regularly made and the place from which day-to-day business operations are managed.
Corporations lacking either of these nexuses are considered non-resident. Residence
determines whether a corporation is subject to tax in Germany on its worldwide income
or only on its German-source income.
6.2.1.2
Basic principles
6.2.1.2.1
Resident corporations
Corporations are classified as trading entities (Gewerbebetriebe) by virtue of their

legal form under civil law and therefore all of their income constitutes trade income
(gewerbliche Einknfte), irrespective of its source.
Profits are subject to a corporate income tax rate of 15% at the level of the corporation
plus a solidarity surcharge of 5.5% (15% plus 5.5% of 15% = 15.825%). When profits
are distributed to an individual, half of the amount distributed is subject to tax at the
level of the individual (hence the term half-income system).
From the 2009 assessment period onwards, a flat-rate tax of 25% (plus solidarity surcharge, 5.5% of 25%) applies in principle to income from capital and capital gains
received by individuals. A taxpayer may also elect to be taxed at his or her individual
income tax rate instead should such tax rate be lower. The flat tax is not applicable to
income from capital that also falls into another income category, e.g. income from
trade or business. In such cases 40% of the received income is tax exempt and 60% of
the related expenses are deductible as business expenses (partial-income system
from 2009 onwards).
If the shareholder is a corporation, the distributed profits are exempt from taxation.
However, an amount equivalent to 5% of a corporations dividend income is treated as
a non-deductible business expense. Thus, only 95% of the dividend income received is
effectively tax-exempt. Costs actually incurred are deductible without limit. This rule
applies to dividends which are paid by domestic or foreign corporations. The de facto
95% tax exemption for dividends received by corporations does not apply for credit
institutions and insurance companies if special requirements are met. As a consequence, these dividends are completely subject to tax. If the shareholder is a partner-
60

ship, the dividends are taxed for corporate or income tax purposes at the level of the
partners and not at the level of the partnership.
The corporation paying the dividend must deduct withholding tax (Kapitalertragsteuer) on the dividend, generally at a rate of 20% (from 2009 onwards 25%), and
remit such tax to the tax authorities. The shareholder can offset the amount so withheld against its ultimate tax liability.
The required calculations can be illustrated as follows:
Table 8:
Computation of income / corporate income tax rates on payment of

dividends 2008 and 2009
Assessment period 2008

Type of shareholder
Individual:
Half-income
system
Corporation
100.0
15.0
100.0
15.0
Income after tax

Dividend
WHT (20%)
85.0
85.0
17.0
85.0
85.0
17.0
Cash dividend
68.0
68.0
Taxable income of shareholder (50%/5%)

Income tax (45%)
Corporate income tax (15%)
Creditable withholding tax
42.5
19.1
4.3
17.0
0.6
17.0
Income after taxation
65.9
84.4
Income of corporation
61

Business taxation
Assessment period 2009
Type of shareholder
Individual:
Final withholding tax
Income of corporation
Individual:
Corporation
Partial-income
system
100.0
15.0
100.0
15.0
100.0
15.0
85.0
85.0
85.0
85.0
21.3
85.0
85.0
21.3
63.7
63.7
51.0
23.0
4.3
Income after tax

Dividend
WHT ( 25%)
Cash dividend
21.3
Final WHT (25%)

taxable income of shareholder
(60%/5%)
Income tax (45%)
Creditable withholding tax
0.0
21.3
0.6
21.3
Income after taxation
63.7
62.0
84.4
Please note that for simplification purposes trade tax and solidarity surcharge have
not been considered in the above tables.
Capital gains arising on the sale of shares held by a corporation are also exempt from
corporate income tax. Similar to the treatment of dividends, 5% of the capital gain is
treated as a non-deductible business expense. Costs incurred in connection with the
sale reduce the net amount of the capital gain and are thus not separately deductible as
business expenses, but do reduce the base on which deemed non-deductible business
expenses are calculated. Losses on the sale of shares and write-downs due to impaired
value are likewise not tax deductible.
In conjunction with the change in 2000/2001 from the imputation system of corporate
taxation to the half-income system, a tax credit arose equivalent to the difference
between the previous corporate income tax rate on retained earnings (40%) and the
previous corporate income tax rate on distributed earnings (30%). Corporations could
therefore claim a tax credit when profits were distributed that were previously subject
to the 40% retained earnings rate. The corporate income tax credit equaled 1/6th of
the distributed profits and could be offset against the corporate income tax liability for
the year in which the distribution was made. The legislature allowed corporations until
2019 to distribute old retained earnings and realize the associated credit. At the end of
2006, the rules were simplified. Refunds no longer depend on dividend distributions.
The remaining corporate tax credit balance is determined definitively as at 31 Decem-
62

ber 2006 and refunded in ten equal annual installments over the period from 2008 to
2017.
In conjunction with the system change, a further transitional rule applied to equity
previously classified as so-called EK 02, which was German-source tax-exempt
income that arose under the imputation system. When amounts were distributed out of
equity previously classified as EK 02, the corporate income tax was increased by 3/7
(42.86%) of the distributed amount. The legislature has changed this transition rule as
well effective in 2008. The system of increasing the income tax is replaced by a partial
payment. The amount of carryover EK 02 is determined by separate assessment for the
last time as of 31 December 2006. Irrespective of any actual disposition of EK 02, a
flat tax of 30% is imposed on 1/10th of the amount EK 02 retained at this date. Future
distributions of these equity funds will not trigger any further taxation at a company
level. Economically speaking, this means that tax will be payable in the amount of 3%
of the amount of EK 02 determined to exist on 31 December 2006. This tax will be
payable in ten equal annual installments. Corporations may elect instead to pay a single installment, which will then be discounted at a rate of 5.5%.
Constructive dividends (verdeckte Gewinnausschttungen) occur when a corporation
confers a benefit on its shareholders or on persons affiliated with shareholders which it
would not normally confer on unrelated third parties. Constructive dividends result in
increased taxable income either through the disallowance of a tax deduction claimed
(e.g. excessive service fees paid to an affiliate) or an increase in an income item (e.g.
below-market interest rate charged on a loan to an affiliate).
Constructive dividends are, in general, taxed the same way as declared distributions.
Hence, constructive dividends received by a corporation are in effect 95% tax exempt.
An exception to this basic rule the congruency principle was introduced into German tax law in 2007. Under the congruency principle, the 95% tax exemption on dividends received is limited to dividends that have not reduced the taxable income of the
distributing corporation. This means that a constructive dividend that is deducted as a
business expense at the level of the distributing corporation will not be tax exempt in
the hands of a recipient corporation.
6.2.1.2.2
Non-resident corporations
For non-resident corporations, the tax treatment of certain types of income depends on
whether the tax is levied via a filing and assessment procedure (the case for e.g. business income derived through a permanent establishment, income from agriculture and
forestry, rental income from immovable property, and interest income secured by real
property located in Germany) or by means of a withholding tax procedure (the case for
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Business taxation
dividends, interest, rental income from movable assets, and royalties). The standard
15% corporate income tax rate generally applies in assessment procedures. Withholding tax rates vary depending on the kind of income and the person who bears the withholding tax.
6.2.1.3
Determination of taxable income
There is an underlying principle in Germany that tax accounting is based on commercial accounting (Mageblichkeitsprinzip). Accordingly, the determination of taxable
income is based on the results shown in the annual accounts (see chapter4), as adjusted
to comply with pertinent tax provisions. If the books of account are not kept in a lawful
manner, the tax authorities are entitled to estimate taxable income.
All assets and liabilities must be valued as of the balance sheet date, i.e. the end of the
fiscal year. Unrealized losses must be recognized (subject, however to a restriction for
provisions for anticipated losses on pending transactions; see below), whereas unrealized profits are not recognized. Assets are carried at cost, less depreciation if applicable, or at their lower going concern value (Teilwert). Going concern value is defined as
the amount or fraction of the total purchase price which a purchaser of the entire business would allot to a specific asset assuming the purchaser intends to continue the
business. This lower going concern value may only be recognized if the impairment in
value is considered to be of a lasting nature. If the reason for the impairment in value
no longer exists, the write-down must be reversed. In general, all assets with a useful
life in excess of one year must be capitalized on the balance sheet. An exception applies
for depreciable movable assets whose acquisition or production costs are 150 or less
so-called assets of minor value (geringwertige Wirtschaftsgter). These assets must
be expensed in the year of the acquisition or production. Assets purchased at prices
from 150.01 to 1,000 must be aggregated for each assessment period and depreciated over five years. Intangible assets must be reflected on the balance sheet if acquired
for consideration, in which case they are amortized over their useful life. Capitalization is prohibited for self-created intangible assets and intangible assets acquired gratuitously.
Inventories must be valued at the lower of cost or market price. For essentially similar
goods, a weighted average is allowed. The German Income Tax Act (Einkommensteuergesetz EStG) explicitly permits the use of the last-in-first-out method (LIFO) if
this is in accordance with generally accepted accounting principles.
Provisions (Rckstellungen) must be established for contingent liabilities if there is a
reasonable expectation that a liability will materialize in the future. In particular, provisions are required for anticipated guarantee and warranty costs. General and specific
64

allowances (Wertberichtigungen) must be recognized for the general risk of non-collection and for specific doubtful debts. A pension provision must be recognized if the
employers obligation to make pension payments is documented in a written promise
and the employee has a legal right to one-time or periodic pension benefits. Pension
claims are generally vested and not contingent on the employees continuing in the
service of the employer if the employee is more than 30 years old and the pension
promise has been in existence for at least 5 years. The pension provision must be actuarially calculated annually for each employee using an interest rate of 6.0%.
Provisions for anticipated losses from pending transactions must be recognized where
applicable for financial reporting purposes. For tax purposes, however, it has not been
possible to recognize such provisions since January 1, 1997. Tax rules also stipulate
stricter recognition criteria for a number of provisions, including provisions for
infringement of patents, copyrights or similar industrial rights, and provisions for
long-term service awards. Provisions (and liabilities) must be discounted for tax purposes using an interest rate of 5.5% (except pension provisions, see above). Only shortterm provisions and liabilities (maturing within 12 months of the balance sheet date) or
interest-bearing amounts are excepted from this requirement.
Some of the major items in determining taxable income are considered below:
Capital gains are, in general, treated as ordinary income and taxed at ordinary
rates (except gains form the sale of shares, see above). 100% of gains realized on
the sale of real estate and buildings may be offset against the cost of similar assets
acquired in the year of sale, the preceding year, or the following 4 years (6 years
for buildings roll-over relief).
Non-taxable income includes declared and constructive contributions to capital.
Organizational expenses incurred as a result of forming a corporation or increasing its capital may not be capitalized. They must instead be deducted in the year
incurred. Organizational expenses include accountant and attorney fees and registration fees, among other things.
Salaries and other compensation paid for the services of shareholder-employees
are deductible. The compensation must be at arms length or a constructive dividend may be imputed.
Rental expense in connection with the business may be deducted as incurred.
Interest expenses are generally deductible unless they relate to tax-exempt income
(other than dividends and capital gains from the sale of shares). But the deduction
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Business taxation
of interest expenses is restricted due to the earnings stripping rules (see chapter6.2.1.4).
Repair and maintenance expenses are deductible in the period incurred.
Depreciation is, in general, allowed on tangible or intangible fixed assets with a
useful life of more than one year. Land and investments in other corporations cannot be depreciated, but may be written down to a lower going-concern value. Please
note that write-downs of investments in other corporations are not deductible for
corporate income tax purposes (8b (3) KStG). The 2008 Tax Act expanded this
rule to cover shareholder loans. The denial of a deduction does not apply if the
lender proves that the loan is at arms length. Goodwill acquired for consideration
can be amortized on a straight-line basis over 15 years. The basis for amortization
is the last balance sheet value before the start of amortization.
Depreciation is based on the acquisition or production cost of an asset. The straightline, declining-balance, and units-of-production methods can be used. A taxpayer
may change from the declining-balance to the straight-line method, but not vice
versa. Rates under the declining-balance method may not exceed twice the applicable straight-line rate, or 20%, whichever is less. As part of legislation enacted in
early 2006, special depreciation rates apply with respect to goods produced or
acquired after December 31, 2005 and before January 1, 2008. Qualifying goods
may be depreciated using the declining-balance method at rates up to three times
the applicable straight-line rate, capped at 30%. Except for buildings, depreciation
rates are not fixed by statute, however, the Federal Ministry of Finance publishes
guidelines on useful asset lives in officially recommended tables. The decliningbalance method was abolished for assets produced or acquired after December 31,
2007.
Typically accepted straight-line rates are: buildings 2%; office buildings and factories 3% where the building permit was applied for later than March 31, 1985; commercial and residential buildings are under certain circumstances eligible for
higher rates; plant equipment 5% to 20%; office equipment and furniture 10% to
20%; machinery 10% to 20%; motor vehicles 20%; EDP equipment 33 1/3%.
Depreciable movable assets not exceeding 150 (excluding VAT) (assets of minor
value) can be expensed in full in the year of acquisition or production.
A write-down to a lower going-concern value to reflect technical or economic
obsolescence is possible for tax purposes.
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Charges by a foreign parent for providing certain assets or services to its German
subsidiary are deductible if at arms length. To the extent that they exceed an arms
length price, they are treated as constructive dividends.
Excise taxes, and real estate tax are all deductible for corporate income tax purposes.
Corporate income tax and trade tax are not deductible expenses, however.
Other non-deductible expenses include expenses relating to tax-exempt income; in
addition, as a general rule, expenses for hunting rights, yachts or guest houses not
located on business premises, and 50% of fees paid to members of the supervisory
board are not deductible.
Business gifts worth up to 35 per recipient per year are deductible if they are
accounted for separately.
Only 70% of reasonable business entertainment expenses are deductible.
Deductions for charitable contributions are limited to 5% of income or 0.2% of the
sum of sales and payroll. Contributions for scientific and cultural purposes may be
deducted up to the level of 10% of income.
6.2.1.4
Earnings stripping rules
New earnings stripping rules replaced existing thin capitalization rules with general
effect as of January 1, 2008. For a non-calendar fiscal year 2007/2008 earnings stripping rules can be applying before 2008: The earnings stripping rules are applicable for
business years beginning after May 25, 2007 and not ending before January 1, 2008.
The earnings stripping rules apply in general to all types of debt financing of sole proprietorships, partnerships and corporations. The scope of the new rules is far broader
than the previous thin capitalization rules as all third party debt financing (whether or
not there is a back-to-back financing) is included. Interest expense is completely
deductible from the tax base only to the extent the taxpayer earns positive interest
income in the same financial year. Interest expense in excess of interest income (net
interest expense) is deductible only up to 30% of tax EBITDA (interest deduction ceiling). Tax EBITDA is defined as taxable profit before application of the interest deduction ceiling, increased by interest expenses and by fiscal depreciation and reduced by
interest earnings.
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Business taxation
De minimis threshold (Freigrenze)
The interest deduction ceiling does not apply where interest expense exceeds positive
interest income by less than 1 m. (tax threshold). Thus, small and medium sized
business enterprises are in many cases unaffected by the new earnings stripping
rules.
Non-group businesses (Konzernklausel)
The interest deduction ceiling also does not apply to businesses that are not part of a
controlled group. An enterprise is regarded as part of a controlled group if it is or
could be included in consolidated financial statements in accordance with IFRS, German GAAP or U.S. GAAP.
The exemption for non-controlled corporations applies only if the corporation establishes that remuneration on shareholder debt accounts for at most 10% of net interest
expense. Shareholder debt is defined as debt capital received from a substantial shareholder (more than 25%), an affiliated person, or a third party having recourse against
a substantial shareholder or an affiliated person.
Escape clause
For businesses which are part of a controlled group, a so-called escape clause applies.
If the equity ratio of the entity in question is equal to or greater than the equity ratio of
the controlled group, the interest deduction ceiling will not apply. There is a 1% safety
cushion for the equity ratio of the business in question. As a consequence, the escape
clause is still met when equity ratio of the entity is 49% and the equity ratio of the
controlled group is 50%. The escape clause applies only if the corporation establishes
that remuneration on shareholder debt accounts for at most 10% of net interest expense.
Shareholder debt is defined as debt capital received from a substantial shareholder
(more than 25%), an affiliated person, or a third party having recourse against a
substantial shareholder or an affiliated person.
Interest carry forward
Interest expense that is not deductible in the period in which it arose may be carried
forward. It increases interest expense in the following year, but is not taken into account
to determine tax EBITDA. Interest expense carried forward will, however, be erased
in reorganizations and where the change-of-control rules apply.
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Tax groups (Organschaft)
For purposes of the earnings stripping rules, the controlling company and controlled
companies of a tax group are treated as a single entity.
6.2.1.5
Loss relief
Tax losses which cannot be offset in the current year may be carried back one year up
to an amount of 511,500 for corporate income tax purposes. To the extent that the
losses exceed 511,500 or cannot be fully offset against the previous years income,
they may be carried forward indefinitely. However, the so-called Basket II Legislation
limits the offset in any one year beginning with the 2004 tax assessment period so
called minimum taxation provisions. Under this legislation, losses carried forward
may be offset without restriction against profits only up to an amount of 1 million.
Losses carried forward in excess of this amount may offset no more than 60% of taxable income in the current period. There are no time limitations on the use of loss carryforwards. The taxpayer can elect whether to carry back the losses or not and may
also decide, within the limits described above, the amount to be carried back.
Changes in the ownership of corporations can, however, cause forfeiture of losses for
tax purposes so-called change-in-ownership rules. The restriction proceeds in two
steps. Acquisitions of more than 25% and less than 50% of a corporations shares or
voting rights within a five year period by a person or parties related thereto triggers pro
rata forfeiture of losses. The forfeiture of losses is total where more than 50% of the
shares or voting rights are transferred. The statute covers both direct and indirect
transfers. The rules also operate where shares are transferred to a group of purchasers
with convergent interests. The change-in-ownership rules were introduced into German tax law with effect from 2008 and apply to transfers of shares on or after January
1, 2008.
Different loss limitation rules applied in the past: no use could be made of existing loss
carryforwards if a corporations economic identity had changed. A change of economic identity was assumed if more than 50% of the shares in the corporation were
transferred and the corporation recommenced or continued its trade or business with
predominantly new assets. The old loss limitation provisions are last applicable where
more than 50% of the shares in a corporation are transferred within a five-year period
beginning prior to January 1, 2008 and predominantly new business assets are injected
prior to January 1, 2013. There is thus a period during which the old and new rules
overlap and apply cumulatively.
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Business taxation
The losses of a foreign permanent establishment whose income is exempt from German tax under a tax treaty are disregarded in computing taxable income. There is
some doubt, however, whether this restriction is consistent with EU law. If the income
of the permanent establishment is not exempt from taxes under a tax treaty, its losses
can be deducted in Germany only if the permanent establishment is deemed to engage
in active operations (such as manufacturing and delivering goods, extracting natural
resources, or providing commercial services). If the operations of the permanent establishment are deemed to be passive, its losses may only be offset against foreign
source income of the same kind from the same country (per country limitation).
6.2.1.6
Although consolidated tax returns are not allowed by German tax law per se, the rules
governing tax groups (Organschaft) provide similar relief. Under the Organschaft system, the income or loss of a controlled company (Organgesellschaft) is attributed to a
controlling company (Organtrger). In order to qualify, the controlling and the controlled company must enter into a profit and loss pooling agreement (Ergebnisabfhrungsvertrag), and the controlled company must be financially integrated into the controlling company. This requires that the controlling company hold a majority of the
voting rights in the controlled company. Financial integration can be achieved through
direct or indirect shareholdings. The profit and loss pooling agreement must be entered
into for a minimum of five years.
A profit and loss pooling agreement only becomes effective after the shareholders of
both the parent and subsidiary company approve the contract by a majority of 3/4ths of
the votes cast and after the contract has been entered in the commercial register of the
subsidiary company. The relevant shareholder resolutions must be notarized. This
applies not only to stock corporations (AGs), for which the above requirements are
stipulated by the Stock Corporation Act (Aktiengesetz AktG), but also to limited liability companies (GmbHs), for which the case law of the Federal Court of Justice
(Bundesgerichtshof BGH) establishes comparable requirements in the absence of
explicit statutory provisions.
The Stock Corporation Act contains specific provisions for any enterprise agreement
(Unternehmensvertrag) entered into by a stock corporation (AG) or a limited partnership with share capital (KGaA). Enterprise agreements (which include inter alia profit
and loss pooling agreements) only become effective after the relevant resolution has
been approved at a general meeting of shareholders. The management board of the AG
or KGaA is required by law to submit a comprehensive written report which must
describe the nature of the enterprise agreement, the individual terms of such agree-
70

ment and, in particular, the type and extent of compensation and consideration paid to
minority shareholders. The report must substantiate the various aspects of the agreements from a legal and financial perspective. It must also draw attention to any special
difficulties in valuing the businesses of the contracting parties and the potential consequences for the interests of the shareholders. The enterprise agreement must be audited
by qualified independent auditors unless all of the shares of the controlled company
are held by the controlling company.
For Organschaft purposes, the controlling company can be a corporation with its place
of management in Germany or a registered branch of a foreign corporation. A partnership resident in Germany may also be the controlling company if it engages in commercial activities. The controlled companies must be corporations, however.
6.2.1.7
Double taxation and relief for foreign taxes
6.2.1.7.1
Methods of relief
In the absence of a tax treaty, a corporation resident in Germany is also subject to tax
on its income from foreign sources. However, the foreign income taxes paid on that
income may be credited against its German tax liability. The foreign tax credit must be
determined separately for each foreign country and may not exceed the German tax
attributable to the income from the respective country (per country limitation). For
this purpose, foreign source income is defined by the German Income Tax Act and
includes income generated in a foreign country from agriculture and forestry activities, other commercial activities, the sale of certain assets and shares, income from
certain investments, and income from the lease of real estate. Only foreign taxes
equivalent to German corporation/income taxes can be credited against the German
tax liability. Taxpayers may elect either an offset (if creditable) or a deduction (if not
creditable) of the foreign taxes. No carryforward is available for foreign taxes which
cannot be offset or deducted in the period for which they accrued.
6.2.1.7.2
Tax treaties
For corporations resident in Germany, tax relief may also be available under the tax
treaties that Germany has concluded with approximately 88 countries (as of January 1,
2008). Typically, these treaties grant the right of taxation either to the country where
income has its source (country of source) or to the country where the recipient is resident (country of residence), while exempting the income from taxation in the other
country. In some cases, alternatively, they provide relief from double taxation by allowing a foreign tax credit.
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Business taxation
In most treaties, the treatment of certain categories of income follows the OECD
Model Tax Convention, as outlined below assuming Germany to be the country of
residence:
Business profits derived through a permanent establishment in the other treaty
country are, in general, exempt from tax in Germany.
Dividends paid to a German corporation may be subject to a reduced withholding
tax rate of up to 15% in the other country and are taxable in Germany (subject to
the tax exemption rules stated below). Normally, the withholding tax would be
creditable against the German tax liability. However, due to the tax exemption for
dividend income at the level of the recipient corporation, the withholding tax is not
creditable in most cases.
Under most tax treaties with developed countries, interest income is tax-exempt in
the country of source and taxable in Germany, unless it is attributable to a permanent establishment.
Royalties, unless attributable to a permanent establishment, are usually exempt
from tax in the country of source and taxable in Germany.
Capital gains are, in most cases, taxed only in Germany unless the property sold is
attributable to a permanent establishment in the other contracting state.
Income from immovable property (including capital gains on the sale of such property) may be taxed in the country of location (situs). Income from foreign real
property is therefore, in most cases, exempt from tax in Germany.
6.2.1.7.3
Subject-to-tax clause
The 2007 Tax Act (Jahressteuergesetz 2007) unilaterally modified Germanys application of its tax treaties by adding a generally applicable subject-to-tax clause to German domestic tax law for the first time. Germanys avoidance of double taxation by the
exemption method under the terms of its tax treaties can in some cases cause the
income in question to escape taxation altogether (so-called white income). This is
the case where the other treaty country fails to tax the income that Germany has
exempted, for instance because the two countries classify the income differently for
treaty purposes (qualification conflict) or have different interpretations of a particular
treaty provision.
Under the subject-to-tax-clause, Germany does not avoid double taxation by the exemption method under its tax treaties to the extent the other treaty state
72

classifies the income under a different treaty provision, causing it to be exempt in,
or to be taxed at a reduced rate by, the other treaty state, or
fails to tax the income because it is derived by a person that is not subject to tax in
the other state by reason of the persons domicile, residence, place of management,
registered office, or other similar criterion.
The subject-to-tax clause does not apply to dividends that are excluded from the German tax base under a tax treaty. But the subject-to-tax clause does apply if the dividends in question reduced the income of the distributing corporation.
6.2.1.8
EU directives relating to direct taxation
6.2.1.8.1
EU Parent/Subsidiary Directive
As implemented in Germany, the Parent/Subsidiary Directive allows the payment of

dividends free of withholding tax by a direct 15% subsidiary resident in Germany to
its parent resident in another EU Member State, provided the appropriate application is
filed with the German Federal Central Tax Office (Bundeszentralamt fr Steuern).
Furthermore, a minimum holding period of 12 months is required to qualify for zero
rate withholding tax.
Dividends paid by a German subsidiary to a non-German permanent establishment in
the EU which is maintained by a qualifying EU parent company are also exempt from
withholding taxes. The same applies if such a permanent establishment is maintained
by a German parent company, provided the relevant shares are effectively connected
with the German companys EU permanent establishment.
Furthermore the currently required minimum shareholding of 15% is reduced to 10%
if a German subsidiary distributes a dividend to an EU parent company and such a
dividend is not subject to tax in the parent companys jurisdiction, provided dividends
distributed from this state to 10% German parent companies are likewise not subject
to withholding tax (reciprocity principle Gegenseitigkeitsklausel).
A directive amending the 1990 Parent/Subsidary Directive was adopted by the European Council on December 22, 2003. The most important provision reduced the minimum percentage shareholding required to qualify as a parent company under the
directive from 25% to 10%. Member States are required to implement the reduction in
three phases (i) 20% in 2005, (ii) 15% in 2007, (iii) 10% in 2009 (see also Appendix
12.1).
Non-EU based parent companies may therefore benefit by establishing a holding company in the EU. However, the German fiscal authorities may disallow the reduction of
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Business taxation
the withholding tax rate for dividends paid by a German subsidiary to, for example, a
Dutch holding company, if (i) the foreign company is owned by persons who would not
be entitled to the reduction if they derived the income directly, and (ii) any one of the
following additional conditions is met:
the interposition of the foreign company is not supported by economic or other
valid reasons or
the foreign company does not derive more than 10% of its total earnings from its
own economic activities or
the foreign company does not engage in general economic activity through a business organization appropriate to its business purpose.
Whether the elements of the statute are fulfilled is determined solely with reference to
the situation of the foreign company. The provision aims to counter abuse of the EU
Parent/Subsidiary Directive by interposition of foreign companies without economic
function for the purpose of obtaining benefits under the directive (so-called directiveshopping).
6.2.1.8.2
EU Merger Directive
The EU Merger Directive covers various transactions within European groups of companies. Its scope is limited to specific transactions (certain types of mergers, divisions,
transfer of assets, and exchanges of shares), not all of which are familiar, or legally
permissible, in all Member States. In broad terms, the objective of the EU Merger
Directive is to allow specific types of reorganizations to take place without triggering
tax.
In 2006 German tax treatment of business reorganizations was revised in response to
changes in European law and to redefine the tax consequences of inbound and outbound asset transfers. New types of business associations the European Company
(societas europaea: SE) and the European Cooperative (SCE) were created and
recent amendments to the EU Tax Merger Directive were transposed into German law.
The so-called SE Introductory Act (Tax Act Accompanying the Introduction of the
European Company and Amending Other Tax Provisions) also responds to recent
decisions of the European Court of Justice, such as the SEVIC case on cross-border
mergers (see chapter10).
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6.2.1.8.3
Interest and Royalties Directive
Beginning January 1, 2004, payments of interest, royalties, and licensing fees are generally exempt from withholding tax pursuant to EU Directive 2003/49/EC, provided
the payments are made between associated enterprises within the European Community (minimum shareholding of 25%). This rule also applies to royalty payments
between permanent establishments of affiliated enterprises within the European
Union. Germany implemented the Directive in late 2004, applicable retroactively to
payments made on or after January 1, 2004. Generally, the entire tax amount is withheld and remitted to the tax authorities. Taxpayers may then apply for a refund. It is,
however, also possible to obtain an exemption certificate from the German Federal
Central Tax Office (Bundeszentralamt fr Steuern). A payment is only exempt from
withholding taxes where, at the time of payment, the payor has a valid exemption certificate.
6.2.1.9
Transfer pricing
All transactions between related companies must comply with the arms length principle. Where corporate transfer prices are not in line with market prices, constructive
dividends or constructive contributions generally result. In this case the tax administration is entitled to adjust the profits of the German corporation. The position of the
tax administration is contained in transfer pricing regulations (so-called Administrative Principles) issued in 1983. The German tax authorities issued comprehensive
transfer pricing documentation and procedure regulations on April 12, 2005. These
regulations supplement 90(3)Tax Procedure Law (Abgabenordnung AO) and the
Profit Allocation Documentation Regulation (Gewinnabgrenzungsaufzeichnungsver
ordnung-GAufzV). The effective date for the documentation and cooperation duties
set out in the new regulations relates back to the issuance of the GAufzV. Accordingly,
the new regulations are generally effective for fiscal years beginning after December 31, 2002. However, some of the penalty provisions contained in the regulations are
first effective for fiscal years beginning after December 31, 2003.
In general, the new regulations address two documentation duties the duty to document all facts and circumstances relevant to establishing and evaluating transfer prices
(factual documentation), and the duty to document the appropriateness of the taxpayers transfer prices (appropriateness documentation). In order to fulfill these
duties, the taxpayer must compile and submit extensive documentation, and must
cooperate with the tax administration in the clarification of all relevant facts and circumstances. The failure to comply with such duties can lead to the estimation of the
taxpayers income and/or to the imposition of penalties. The new regulations also
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Business taxation
address permissible transfer pricing methods, procedural rules applicable to the tax
administration, and EU Mutual Agreement and Arbitration procedures.
Further information on transfer pricing regulations in Germany is provided in chapter9.5.
6.2.1.10
Filing requirements and payment of tax
The competent tax office (tax office with jurisdiction over a taxpayer) is determined by
the taxpayers central place of management or its registered office or the location of the
main capital asset. Corporate income tax returns (Krperschaftsteuererklrungen)
must be filed annually for the calendar year, based on the corporations fiscal year-ending with or within the calendar year. The returns must be filed by May 31st, with an
automatic extension until December 31st if the return is prepared by a professional tax
advisor. Further extensions may be granted on application.
Additional documents to be filed with the return include: the corporations financial
statements; a copy of the auditors report; a reconciliation between financial statement
figures and those shown in the tax accounts or a separate balance sheet for tax purposes; a copy of the resolution of the supervisory board approving the financial statements, or, in the alternative, a copy of the shareholder resolution to this effect, and a
copy of the shareholder resolution on the distribution of the profit for the year.
After receipt of the annual tax return, the tax office will issue a notice of assessment
(Steuerbescheid), possibly subject to change on audit (unter Vorbehalt der Nachprfung). Administrative appeals (Einspruch) against assessments must be lodged within
one month.
Taxes must be paid in advance on a quarterly basis. The amounts due on March 10th,
June 10th, September 10th, and December 10th are determined by the tax office based
on the preceding years tax liability or on estimated profits. The notice of assessment
will show the balance payable, which must be paid within one month, or the balance
receivable (i.e. in case of overpayment), which will be refunded or credited against
other tax liabilities.
Taxes paid more than 15 months after the end of the tax assessment year are subject to
interest at an annual rate of 6%. The taxpayer may claim interest for overpaid taxes
(tax refunds) in similar circumstances.
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6.2.1.11
Taxation in the event of liquidation
The taxation of corporations in the event of liquidation (winding-up) is dealt with in

the Corporate Income Tax Act (Krperschaftsteuergesetz KStG). The liquidation
gain is computed by deducting the book value of the assets at the beginning of the
liquidation from the market value of the assets which are distributed to the shareholders at the end of the liquidation. For tax purposes, the liquidation period should in
general not exceed three years.
In the hands of the shareholder, the liquidation gain is divided into the liquidation gain
per se and the amount deemed to constitute net available equity, i.e. refund of the balance of the so-called tax-specific capital contribution account (steuerliches Ein
lagekonto).
The taxation of shareholders depends on the type of payment received. Liquidation
installments (profits) in the form of payments out of revenue reserves, and from previously hidden reserves (stille Reserven) are subject to tax as income from capital in
accordance with the general rules (half-income system, from 2009 flat tax rate or
partial-income system for individuals or de facto 95% exemption from tax for corporations).
Where stated capital and amounts from the tax-specific capital contribution account
are repaid to individuals who hold at least 1% of the shares as a private investment, the
amounts so repaid are taxed in accordance with the half-income system (from 2009
onwards: partial-income system) to the extent the repayments exceed the original
cost of investment. If the investment in the corporation (irrespective of the percentage
shareholding) is held by an individual as a business asset or by a corporation, the
repayment of stated capital and amounts from the tax-specific capital contribution
account are subject to income or corporate income tax (half-income system or partial-income system for individuals or de facto 95% exemption from tax for corporations), to the extent these amounts exceed the carrying amount of the cost of investment. Liquidation installments received by corporations are therefore also de facto
95% exempt from taxation.
6.2.1.12
Withholding taxes
Corporations, whether subject to unlimited or limited tax liability in Germany (i.e.

resident corporations subject to tax with respect to their worldwide income or nonresident corporations subject to tax with respect to their German-source income), are
required to withhold taxes at the source on the following types of payments and to
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Business taxation
remit such taxes to the tax authorities (the same applies to individuals and partnerships):
Wage tax (Lohnsteuer) must be withheld by the employer and remitted to the tax
authorities.
Dividends, other profit distributions, and income from a silent partnership or profit
participating loan are subject to withholding tax (Kapitalertragsteuer) at a rate of
20% (from 2009 onwards 25%).
The EU Parent/Subsidiary Directive requires Germany to reduce the withholding tax
on qualifying dividends paid to a parent company in another EU State to zero effective
as of July 1, 1996 (see EU Parent/Subsidiary Directive).
In addition, payments to non-residents are subject to taxation in the following cases
(unless modified by tax treaty):
Royalty income is subject to withholding tax at a rate of 20%.
Supervisory board fees paid to non-residents are subject to withholding tax at a
rate of 30%.
The income of artists, writers, journalists etc. from independent services performed in Germany is subject to withholding tax at a rate of 20%.
The tax rate applicable to non-resident corporations is 15%. The tax rate was
reduced effective January 1, 2008 to reflect the reduction in the corporate income
tax rate.
With certain exceptions, interest paid to non-residents is not generally subject to withholding tax. The 30% interest withholding tax (Zinsabschlagsteuer) applies only to
interest paid to residents.
6.2.1.13
Solidarity surcharge
Since 1995, income and corporate income tax in Germany has been subject to a solidarity surcharge (Solidarittszuschlag). The solidarity surcharge was originally introduced for a limited period to help finance the reunification of Germany. It was subsequently extended beyond the originally envisaged period.
The solidarity surcharge is levied on, among other things, the assessed amount of corporate income taxes, corporate income tax prepayments, and withholding taxes. The
rate of the solidarity surcharge is 5.5%. The tax rate for corporations of 15% is therefore increased by the solidarity surcharge to 15.825% (15% plus 5.5% of 15%) and
78

the 20% withholding tax rate is increased to 21.1%. From 2009 onwards, withholding
tax plus solidarity surcharge will amount to 26.375% (25% plus 5.5% of 25%). If,
however, a tax treaty is in place which reduces the withholding tax on dividends, e.g.
to 5%, no solidarity surcharge can be levied upon the withholding tax.
6.2.1.14
Binding rulings (verbindliche Auskunft)
It is possible to request a binding ruling from the tax authorities. The 2007 Tax Act
authorizes the tax authorities to charge fees when a taxpayer requests such a ruling.
The amount of the fee depends on the potential tax consequences of the matters set
forth in the request. For this purpose, the tax owing under the taxpayers interpretation
of the law is compared with the tax owing in the event of contrary interpretation. The
difference between these two amounts is the basis for calculating the fee (amount at
stake in the binding ruling). The minimum fee is 121, the maximum 91,456. If the
amount at stake cannot be estimated, the time required to issue the ruling will be
charged at 50 per half hour, at least 100.
The fee for binding rulings requested is payable even if (i) the tax authorities reject the
taxpayers interpretation of the law, (ii) the tax authorities ultimately refuse to issue
any binding ruling, or (iii) the taxpayer withdraws its request. Waiver of the charge by
the tax authorities is possible in the latter case, however.
6.2.2
Trade tax
6.2.2.1
Basic principles
Trade tax (Gewerbesteuer) is based on federal law, but is levied by local municipalities
on a corporations trade income (Gewerbeertrag).
Certain corporations (e.g. public corporations) can claim an exemption on income up
to 3,900. The trade income is multiplied by a basic tax rate (Steuermesszahl) of 3.5%
to arrive at the so-called base amount (Steuermessbetrag).
The relevant multiplier (Hebesatz) for each local municipality is then applied to the
base amount. These multipliers typically range between 300490%, i.e. a factor of 3.0
to 4.9, yielding a tax rate of 10.517.15%. A sample tax calculation for income tax
purposes is included in chapter6.2.2.4. In order to eliminate so-called trade tax havens,
the law was changed effective 2004 to require municipalities to set their multipliers at
or above 200%.
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Business taxation
Where a company has permanent establishments in different municipalities, the base
amount is apportioned among the municipalities based on the proportion of payroll
expenses of the respective permanent establishments.
With certain exceptions (public enterprises acting in the public interest, farmers, architects, engineers, lawyers, doctors, accountants, and other professionals), the trade tax
applies to all businesses. The business of corporations is always treated as a trade. The
mere administration of property, on the other hand, is not a trade and therefore not
subject to trade tax, provided certain requirements are met.
6.2.2.2
Determination of trade income
Trade income is determined by the taxable income for income tax or corporate income
tax purposes modified by certain additions and deductions.
The additions include one-fourth of the sum of following items, which must be added
back when computing income for trade tax purposes:
Loan remuneration (e.g. interest),
Recurring payments,
Profit shares of a silent partner,
20% of rental and leasing payments for movable fixed assets,
65% of rental and leasing payments for immovable fixed assets,
25% of payments to obtain license rights for a limited time period, except for
licenses that merely confer entitlement to license to third parties the rights derived
thereunder.
The addbacks apply only to the extent payments exceed an exemption amount of
100,000.
Additionally, the following items must be added back when computing income for
trade tax purposes:
Dividends that are not included in the computation of income for corporate income
tax purposes, where the requirements of exemption for trade tax purposes are not
fulfilled (see below).
Distributive share of the losses of domestic or foreign partnerships.
80

The additional deductions (Krzungen) include:
1.2% of 140% of the assessed value (Einheitswert) of real property.
Distributive share of profits from an interest in a domestic or foreign partnership.
Dividends from a domestic corporation in which the taxpayer holds at least a 15%
interest as of the beginning of the calendar year, to the extent this income was
included in the computation of the profit.
Dividends from a non-resident corporation in which the taxpayer holds an interest
of at least 15% (10% in case the EU Parent/Subsidiary Directive is applicable),
provided this corporation has little or no passive income. This also applies to indirect holdings in a second-tier subsidiary. Taxable income is only reduced to the
extent this income was included in the computation of the profit. However, the
active business requirement is not applicable with respect to companies resident in
an EU Member State or in a country which is within the European Economic
Zone.
Charitable contributions.
As a result of the various additions and reductions relating to dividends, dividend
income is effectively 95% exempt from trade tax at the level of a corporation if the
receiving corporation holds an interest of at least 15% in the corporation paying the
dividend. If the interest held is less than 15%, the dividend (less the expenses relating
to the dividend which were non-deductible for corporate income tax purposes) must be
added back for trade tax purposes. Since the 15% threshold must be met at the beginning of the calendar year, dividend income arising in the year the shareholding is
acquired is subject to trade tax. Gains on the sale of shares in a corporation are also de
facto 95% exempt from trade tax.
Trade losses (Gewerbeverlust) can be carried forward from preceding years and
deducted against future trade income. No loss carry back is available. The minimum
taxation rules also apply mutatis mutandis to trade tax: up to a limit of 1 million, loss
carryforwards may be fully set off against earnings in the tax assessment period in
which such earnings are generated. Beyond this limit, loss carryforwards may be offset against no more than 60% of the trade income in the current period. There is no
time limit for the use of loss carryforwards.
Prepayments are due February 15th, May 15th, August 15th, and November 15th. Any
balance due upon final assessment is payable within one month.
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Business taxation
6.2.2.3
The Organschaft system (see chapter6.2.1.6) also applies to the trade tax. The requirements are the same as described for corporate income tax purposes.
The controlled corporation is treated as a permanent establishment of the controlling
entity. The trade income of controlled and controlling entities is combined. The trade
tax is assessed at the level of the controlling entity and levied by the relevant municipalities.
This treatment does not apply to a non-resident controlling entity unless it has a permanent establishment in Germany.
6.2.2.4
Sample tax calculation
Assumption: the multiplier is 400%. The effective tax rate for trade tax on income can
be calculated using the following formula:
Effective tax rate
Table 9:
Multiplier x assessment rate
Income before taxes

Income subject to corporate income tax
Trade tax (e.g., 14%)
Corporate income tax
Income after tax
Dividend
Withholding tax (20%)
Cash dividend
Credit for withholding tax
Net cash-flow
Taxable dividend
Trade tax (14%)
Income / Corporate income tax base
Income tax (e.g., 45%)
Net cash-flow
1
2
14% x 71.0 (see chapter6.2.2.2)

14% x 3.6
=
+
=
400% x 0.035
14%
Taxation of a corporation and dividends paid to individuals and corporations (assessment period 2008)
Type of shareholder
Individual:
Half-income
system
100.0
100.0
14.0
15.0
71.0
71.0
14.2
56.8
14.2
71.0
35.5
35.5
16.0
55.0
Corporation:
hareholding
S
< 15%
15%
100.0
100.0
100.0
100.0
14.0
14.0
15.0
15.0
71.0
71.0
71.0
71.0
14.2
14.2
56.8
56.8
14.2
14.2
71.0
71.0
3.6
3.6
9.9
0.5
3.6
3.6
0.5
60.5
0.5
70.0
Please note that for simplification purposes the solidarity surcharge has not been
considered in the above example.
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Taxation of partnerships
6.2.3
Net worth tax
Following a decision of the Federal Constitutional Court (Bundesverfassungsgericht)

dated June 22, 1995, the levying of net worth tax (Vermgensteuer) in Germany was
suspended effective as of the tax year 1997. The Federal Constitutional Court ruled
that the existing law contained an unacceptable preference for the valuation of real
estate compared with other assets. Net worth tax has not formally been abolished and
could be reinstated if the appropriate changes were made to the valuation rules.
6.3
6.3.1
Income tax
6.3.1.1
The most important forms of partnership in Germany are civil law associations
(Gesellschaft brgerlichen Rechts GbR), general partnerships (Offene Handels
gesellschaft OHG), and limited partnerships (Kommanditgesellschaft KG). A partnership is not subject to income or corporate income tax, but it may be subject to trade
tax.
For income / corporate income tax purposes, the profits of a partnership are allocated
to the partners in proportion to their interest in the business (transparency principle).
The partners income from the partnership is then subject to income tax (in the case of
an individual) or corporate income tax (in the case of a corporation) at the appropriate
tax rate, unless the taxpayer elects flat-rate taxation. Flat-rate taxation may only be
elected by individuals. The flat rate of 28.25% (plus solidarity surcharge) is applicable
to retained profits. Later distribution of these profits triggers an additional tax of 25%
(plus solidarity surcharge).
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Business taxation
Table 10: Taxation of partnerships: retained vs. distributed profits
Partnership
Retention
Distribution
100.0
14.0
100.0
14.0
= Income after trade tax
86.0
86.0
+
=
Income tax retained profits (28.25%)

Income tax distributed profits (45%)
(Trade) tax credit
Income after tax
Distribution
Tax base distributed profits
Subsequent taxation (25%)
24.3
6.31
13.3
68.7
86.0
61,7
15.4
0.0
45.0
13.3
54.3
= Net cash-flow
53.3
54.3
Income before taxes

Trade tax (14%)
At the level of the partners, trade tax is treated as distributed profits for income tax purposes.
Please note that for simplification purposes the solidarity surcharge has not been
considered in the above example.
The nature of the income allocated to the partners (see chapter11.3.1 for details of
income categories) is based on how the income is classified at the level of the partnership. A partnership generates income from trade or business (Einknfte aus Gewerbebetrieb) if it is a trading entity (Gewerbebetrieb). To qualify as a trading entity it has to
operate autonomously on a continuing basis, generate profits, and participate in general commerce. Activities relating to agriculture and forestry and self-employed work
are excluded. The scope of the activities must constitute more than the mere management of private assets. A typical GmbH & Co. KG qualifies by virtue of its legal form
as a trading entity with trade income.
Since the determination of income and the allocation of that income to the partners are
separate processes, the determination of the income of a commercial partnership must
be made in two stages:
Step 1:
Determination of income at the level of the partnership
The determination of income at the level of the partnership follows the same rules as
the determination of income for corporations, but with the following specific features:
If the acquisition costs exceed the carrying amount of equity attributable to the
partner, it is necessary to recognize the excess amount in a separate supplementary
tax balance sheet (steuerliche Ergnzungsbilanz). In this supplementary (off-thebooks) balance sheet, the difference must be allocated to assets and liabilities in
84

proportion to their individual going-concern values (Teilwerte). If the excess
amount as described above is greater than the individual going-concern values of
the assets and liabilities previously recognized by the partnership, the remaining
difference must be recognized in the supplementary tax balance sheet as goodwill.
If the excess amount is allocated to depreciable or amortizable assets (including
goodwill), they can be depreciated/amortized in subsequent years in accordance
with the rules applicable to the relevant asset. In other words, when an interest in a
partnership is purchased, it is possible to amortize, with tax effect, the goodwill
included in the purchase price (this is not possible in the case of the acquisition of
shares in a corporation). Any losses arising from a partners supplementary tax
balance sheet are allocated to the partner.
Special remuneration (Sondervergtungen) paid by the partnership to its partner for
services (e.g., directors remuneration), loans (interest), and the use of assets (rental
expenses) are deducted in step 1. For tax purposes, the remaining income is then allocated to the partners in accordance with the applicable profit allocation key.
Step 2:
Special remuneration, special business income and expenses
In a second step, the above mentioned special remuneration is added back to the profit/
loss of the partnership. Hence, special remuneration neither reduces the taxable profit
(nor increases the losses) of the partnership.
At this stage, so-called special business income (Sonderbetriebseinnahmen) and
special business expenses (Sonderbetriebsausgaben) must be taken into account.
This relates to a partners income and expenses generated or incurred as a result of an
economic link to the investment in the partnership. Special business income includes
interest income on loans granted by a partner to a third party in the interest of the
partnership (for example to the landlord of a building rented by the partnership). In
particular, dividend income from a GmbH acting as the general partner of a GmbH &
Co. KG qualifies as special business income. Similarly, the costs of financing and
administering the investment and the costs (including financing costs, and depreciation) in connection with assets provided for use by the partner to the partnership qualify as special business expenses. It should be noted that special business expenses
incurred abroad may also be taken into account in the determination of the income of
the German partnership.
As part of the process of allocating taxable profits to the partners, it should be noted
that special remuneration and special business income and expense are only allocated
to the partners who received or incurred them.
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Business taxation
6.3.1.2
Loss relief
Partners must consider the following issues relating to the offset of tax losses:
Under German tax law, loss carryforwards may be set off in full against only the
first 1 million of net income, and can be set off against only 60% of the remaining current period net income. Retained profits with respect to which flat-rate taxation has been elected may not be offset against losses carried forward.
Limited partners and other partners with comparable liability are subject to a separate restriction regarding tax losses. Under these rules, losses from a partnership
(negative income from trade or business) can only be offset against profits of the
same partnership if the limited partners capital account is negative or becomes
negative as a result of the loss allocation. In effect, the amount of losses which can
be offset is limited to the amount of the partners capital account.
6.3.1.3
Trade tax credit against income tax
Partners who are individuals may credit a standard amount of the partnerships trade
tax against their income tax liability, thus reducing the double taxation otherwise
resulting from income tax and trade tax. The amount that can be credited against
income tax is equivalent to 3.8 times the partners share of the partnerships trade tax
base amount (see chapter6.3.2.1 below). Each partners share must be computed using
the applicable profit allocation key.
6.3.1.4
Tax group (Organschaft)
A German-resident partnership may be the controlling company of a tax group (Organschaft) if it has commercial activities. The controlled companies of the tax group,
however, must be corporations.
6.3.1.5
Sale of an interest in a partnership
The gain on the sale of an interest in a partnership (consideration less cost of sale and
the partners capital account) is taxed as trade income. If a partner who is at least
55 years of age disposes of his or her entire interest in the partnership and the gain
does not exceed 136,000, a once-in-a-lifetime allowance of 45,000 is available. In
addition, other relief is available when the entire interest in a partnership is sold.
The book values of the assets/liabilities of the partnership are increased by the amount
by which the purchase price paid by the new partner exceeds the amount of the capital
account acquired. This increase is recognized in a supplementary tax balance sheet.
86

The assets shown in this balance sheet are depreciated or amortized in subsequent
years in accordance with the general rules. The resulting expense reduces the partners
share of profits in subsequent years (see also chapter6.3.1.1 above).
6.3.2
Trade tax
6.3.2.1
Basic principles
Whereas corporations automatically constitute trading entities (Gewerbebetriebe) by

virtue of their legal form and are subject to trade tax, partnerships are basically only
subject to trade tax if they have commercial activities, i.e. generate trade income. The
partnership must therefore engage in qualifying commercial activities to be subject to
trade tax. But regardless of the nature of its activities, a partnership in the legal form of
a GmbH & Co. KG (see chapter3.3.1) is generally deemed to be subject to trade tax by
virtue of its specific structure.
Trade tax (unlike income tax) is levied at the level of the partnership, i.e. it is the partnership which is subject to trade tax.
Trade income is derived from the profit/loss of the partnership computed in accordance with income tax rules. This corresponds to the combined result of the two steps
of profit determination (see chapter6.3.1.1). This figure is then adjusted for specific
additions and deductions as in case of corporations (see chapter6.2.2).
Like individuals, partnerships can claim an exemption on the first 24,500 of trade
income. After deducting this amount, trade income is multiplied by the basic trade tax
rate (Steuermesszahl) of 3.5%. That amount is multiplied by the local municipal multiplier to determine the trade tax.
6.3.2.2
Loss relief
A trade tax loss may be carried forward but not back. The minimum taxation rules
apply to trade tax analogously (see above). A trade tax loss can be offset against future
trade income provided the identity of the business and partners remains unchanged
through the period in which the tax losses are offset. A portion of the tax losses therefore ceases to be available for offset when a partner leaves the partnership. The business is deemed to retain the same identity if the activities pursued by the partnership in
the period of tax loss offset are the same as in the year in which the loss arose.
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Business taxation
6.3.2.3
Sale of an interest in a partnership
A gain on the sale of a partners interest in a partnership is not subject to trade tax
where the partner is an individual who held a direct interest in the partnership. By
contrast, a sale by a corporation, by another partnership, or by an individual who previously held an indirect interest in the partnership is subject to trade tax at the level of
the partnership.
6.4
Taxation of permanent establishments
6.4.1
Definition of permanent establishment
Under German tax law permanent establishments are any fixed place of business or
facility which serves the business of an enterprise (12 Tax Procedure Law, Abgabenordnung AO). In particular the place of management, branches, offices, factories,
and warehouses are permanent establishments. Under German tax law, a permanent
representative (13 AO) is similar to a permanent establishment (13 AO). A permanent
representative need not be an employee of the corporation. A permanent representative
within the meaning of 13 AO conducts business on behalf of a company on an ongoing basis and is subject to the companys instructions.
A right of taxation under German domestic tax law by virtue of a permanent establishment or permanent representative maintained by a foreign resident in Germany may be
modified by a tax treaty.
Under typical German tax treaties, which follow the OECD Model Tax Convention,
permanent establishments are any fixed place of business in which the business of the
enterprise is wholly or partly carried on. In particular the place of management,
branches, offices, and factories are permanent establishments. Warehouses are not
permanent establishments, in contrast to German tax law. A person acting in Germany
on behalf of a foreign enterprise is deemed to be a permanent establishment in Germany if the person has, and habitually exercises in Germany, an authority to conclude
contracts in the name of the enterprise. This does not apply when the activities of the
person are limited to the purchase of goods or merchandise for the enterprise. Furthermore a foreign enterprise is not be deemed to have a permanent establishment in Germany merely because it carries on business in Germany through a broker, general
commission agent, or any other agent of an independent status, where such persons are
acting in the ordinary course of their business.
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Taxation of permanent establishments

6.4.2
Taxation of German-source income of a permanent

e stablishment
6.4.2.1
Income taxes
Germanys tax treaties typically provide that the income and the assets of a permanent
establishment may be taxed in the country in which the permanent establishment is
located. Hence, foreign investors are subject to tax in Germany with respect to their
German-source income attributable to a permanent establishment.
The investors tax status is relevant for determining the level of taxation of the income
attributable to the permanent establishment. If the investor is a corporation (from a
German tax perspective), the investor is subject to corporate income tax and to the
solidarity surcharge. If the investor is an individual, the investor is subject to income
tax and to the solidarity surcharge. If a partnership owns the permanent establishment,
the profits are allocated to the partners in proportion to their respective ownership
interests and taxed at the level of the partners. Partners are accordingly liable to personal or corporate income taxes and to the solidarity surcharge.
6.4.2.2
Trade tax
A domestic permanent establishment earning trade or business income is subject to

trade tax. Where the foreign investor is a corporation, the corporation is subject to
trade tax. The same applies if a partnership is the owner of the permanent establishment. The German-source income is allocated to the partnership and taxed at that
level. For trade tax purposes, the partnership is treated as an separate taxpaying entity.
The partners themselves are not liable to trade tax. If an individual owns the permanent establishment, trade tax arises on the level of the owner.
6.4.3
Because the head office and its permanent establishment legally form a single unit,
contractual obligations between head office and permanent establishment, e.g. loan or
rental agreements, are not possible from a legal standpoint. Profits from such internal
transactions will not be recognized.
Because a permanent establishment is merely a part of the overall enterprise, only a
portion of the overall profits of the enterprise is allocable to the permanent establishment. The required allocation of business profits between head office and permanent
establishment is made using either the direct or the indirect profit allocation method.
89

Business taxation
Under the direct method, the income of the domestic permanent establishment is determined separately under German taxation principles. Assets which contribute to the
operations or the functions of the permanent establishment are attributed to it. These
include primarily assets intended for exclusive use by the permanent establishment.
Under the indirect method, the whole income of the enterprise is apportioned between
the head office and the permanent establishment on the basis of an appropriate formula. The following formulars are acceptable: sales for enterprises providing services
and trading in goods, revenue from premiums for insurance companies, the share of
working capital for banks, and wage and salary expense for manufacturing enterprises.
90

Value added tax (VAT)
Indirect Taxes
7.1
The value added tax (Mehrwertsteuer) system was introduced in West Germany in
1968. The completion of the internal market of the EU required the elimination of fiscal frontiers between member states of the EU. From January 1993 onwards, the imposition and abatement of taxes on goods crossing the German border applies only to
transactions carried out with territories outside the EU (non-EEC countries). The transitional arrangements introduced in the EU on January 1, 1993 are still in force and
apply to intra-EC movements of goods.
7.1.1
Liability for VAT
All entrepreneurs (individuals and entities) who are engaged independently in a trade,
business, or profession with the objective of earning income are liable for VAT. As a
result, sole proprietors and self-employed professionals are subject to VAT as well as
commercial entities, whether incorporated or not (e.g. partnerships, companies, associations).
VAT liability begins independently of the formation of the corporation or the partnership by civil law with the inception of sustained entrepreneurial transactions. It
ends when the entire legal relations of the entrepreneur are completed.
VAT liability arises regardless of citizenship, residence, principal place of management, or the place of billing or payment. The only criterion for liability for German
VAT purposes is that the entrepreneur executes taxable transactions within Germany
in excess of certain limits.
Persons who acquire, retain, and sell interests in companies are not liable for VAT.
Where a holding company is actively engaged in the day-to-day business of the subsidiary, the acquisition, retention, and realization can be treated as entrepreneurial activity that is liable for VAT. The same applies if an investment was acquired to perform
management services for subsidiary companies (e.g. administrative, financial, or technical services).
Individuals who manage and represent companies in which they are partners or shareholders may act as self-employed persons if certain criteria are met. Corporations are
considered to always act as self-employed, even if the corporation must comply with
instructions adopted by shareholder resolution. Exchanges of services between a com91

Indirect Taxes
pany and one of its shareholders are also liable to VAT if the exchanges are not based
on the shareholder relationship.
Generally, where one or more entrepreneurs in Germany are integrated according
to the definition below with each other in substance, they are treated as a single
entrepreneur for German VAT purposes under the Organschaft rules. An Organschaft
requires a controlling company (Organtrger) and a controlled company (Organgesellschaft). The latter must be a corporation (see also chapter6.2.1.6). Integration for
VAT purposes is required financially, economically and organizationally:
Financial integration the members of the Organschaft must be under common
control (control being defined as more than 50% of voting rights);
Economic integration the controlling company in the Organschaft must exercise
actual influence over the business of the controlled company and the controlled
company must serve, promote, and supplement the business of the entire Organschaft; and
Organizational integration the controlling company in the Organschaft must be
in a position to ensure that its instructions are followed by the controlled company,
for example by restricting the controlled companys freedom in relation to personnel, tax, legal, and accounting issues, by coordinating business planning, accounting, and correspondence, by sharing the same business premises, by imposing
internal reporting requirements, and by having identical management boards.
As soon as all of the above criteria are met, an Organschaft for German VAT purposes
comes into existence until such time that the criteria are no longer met.
The controlling company is considered to be the sole entrepreneur for German VAT
purposes. Supplies between Organschaft members are disregarded for German VAT
purposes, i.e. intra-group supplies of goods and services are not subject to VAT. In the
case of an international group of companies, the Organschaft is limited to the German
entities (companies, partnerships, branches, etc.) of the group. In this case, the most
significant of the entities in Germany from a business point of view is deemed to be the
entrepreneur for VAT purposes.
7.1.2
VAT registration
A German entrepreneur is normally allocated a single tax reference number for all
taxes including VAT. Furthermore, on application, a VAT identification number is
issued for each registered entrepreneur. Entrepreneurs and individual members of an
Organschaft can also request a separate VAT identification number from the tax
92


authorities to be quoted on invoices received and issued in relation to intra-EC supplies
of goods.
7.1.3
Taxable transactions
The German Value Added Tax Act (Umsatzsteuergesetz UStG) covers the following
transactions which are within the scope of German VAT:
Supplies of goods (Lieferungen) and services (Leistungen) which an entrepreneur
delivers or renders for consideration (monetary or non-monetary) within Germany
(this does not include the Isle of Helgoland and the Swiss enclave of Buesingen and
warehouses, etc. with special customs status).
The private (i.e. non-commercial) use of business assets (both goods and services)
of an entrepreneur with a registered office in Germany and of a foreign entrepreneurs permanent establishment in Germany.
Gratuitous supplies of goods and services within Germany by a partnership to its
partners or by a corporation to its shareholders or to third parties affiliated with a
partner or a shareholder.
The importation of goods from territories outside the EU into Germany is subject
to German import turnover tax (Einfuhrumsatzsteuer).
Movements of goods into Germany from another territory within the EU are subject to acquisition VAT (Erwerbsteuer).
It is noted that, as long as certain criteria are met, the sale of a business as a going
concern is not normally seen as a taxable transaction.
7.1.4
Place of supply
7.1.4.1
Goods
Only supplies that are deemed to take place in Germany are subject to German VAT.
The general rules for determining the place of supply of goods for VAT purposes are
as follows:
Goods where the goods are located at the time that the buyer acquires control of
the goods.
Imports into an EU territory from outside the EU where the supplier is liable for
the import VAT the country of import.
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Indirect Taxes
Movements from a special customs warehouse regime into free circulation within
the EU the location of the goods when they are put into free circulation.
7.1.4.2
Services
Services are generally deemed to be rendered for VAT purposes where the entrepreneur has its place of business; if those services are rendered through a permanent
establishment, then the location of the permanent establishment will be deemed to be
the place where the services are rendered.
Notable exceptions to this general rule include the following:
Services relating to a specific land or property site where the land or property is
located.
Transportation services where the transport is performed. (Note: special rules
apply in case of intra-community transportation)
Work on moveable goods (e.g. valuation, inspection, repair) where the goods are
located when the work is performed (this rule may not apply where the goods do
not remain at the same location throughout).
Use of patents, copyrights, and trademarks, advertising, legal, tax, technical and
management consulting services, financial services, use of information and knowhow, provision of personnel, leasing of goods (but not vehicles) where the customer is located, unless the customer is in another EU country and is not an entrepreneur, in which case the general rule above applies.
Telecommunication services where the customer is located, unless the customer
is in another EU country and is not an entrepreneur (in which case the general rule
above applies). In addition, if the services are performed by a non-EU entrepreneur
but are used and enjoyed within the EU, then the place of supply is where the services are used and enjoyed.
7.1.4.3
Intra-EC movements of goods
The place of an intra-EC acquisition of goods is normally deemed for VAT purposes to
be the place where the goods are located at the time when the transport to the person
acquiring them ends. VAT (here: acquisition VAT, Erwerbsteuer) is normally paid by
the recipient in the country of destination.
There are numerous exceptions to the practical day-to-day application of this rule, the
most notable being the situation where the recipient is registered for VAT purposes
94


with a VAT identification number in the EU country of destination or where the supplier does not hold adequate proof of the shipment of goods. In these cases, VAT is
payable by the supplier in the EU country from which the goods are dispatched.
Where goods are moved from Germany to another EU country without any change in
legal and/or economic ownership, German VAT is due unless proof of shipment is held
and the German entrepreneur is registered for VAT purposes in the country of destination. This rule applies even if the goods only remain in the ownership of the German
entrepreneur for a short time in the country of destination and are destined for sale to
a single customer in that country (i.e. consignment stock).
7.1.4.4
Reverse charge procedure
Under the reverse charge procedure, the liability for the tax is transferred to the recipient of a supply of goods or services. The scope of the reverse charge procedure
includes services and work supplies of foreign entrepreneurs, supplies within the scope
of the Real Estate Transfer Tax Act (Grunderwerbsteuergesetz), construction works,
supplies of gas and electricity, and supplies of objects transferred by way of security.
As of 2007, the reverse charge procedure does not apply in the case of services of foreign entrepreneurs or foreign performance companies connected to the access authorization for domestic fairs, exhibitions or congresses.
7.1.5
VAT rates
Two different VAT rates apply in Germany. The standard rate for supplies of goods or
services taking place in Germany is 19%. This rate was increased from 16% to 19%
at the beginning of 2007.
Certain goods and services are subject to the lower rate of 7%. The most common
examples are books (but not electronic books), newspapers, and food.
Certain goods and services are exempt from VAT altogether. The most common examples are intra-EC deliveries of goods and exports of goods to a non-EU destination and
services related to these deliveries.
The exemption from VAT also applies to certain specified services, including medical,
educational, charitable or financial services, and services relating to real estate. VAT
on expenditure relating to all of these services cannot normally be recovered (there are
various exceptions to this rule: the main exception being certain financial services
provided outside the EU). It is possible for the supplier to opt to charge VAT on some
of these exempt supplies (mainly land and property, and financial services), thus allowing the supplier to recover VAT on related expenditure.
95

Indirect Taxes
7.1.6
Collection, filing and payment of tax
7.1.6.1
Output tax
The entrepreneur must pay to the tax authorities the VAT due on its supplies, regardless of whether the VAT has been collected from the entrepreneurs customers. The
only exception to this rule is where it can be proven that the customer is unlikely to
ever pay for the supplies it has received. In addition, if an entrepreneur issues a VAT
invoice incorrectly showing VAT due on a supply, this VAT amount shown on the
invoice becomes payable to the tax authorities. In order to avoid such tax liability, the
entrepreneur can correct the invoice. Here, the issuance of a corrected invoice is conditioned on the prior consent of the tax authorities. This consent will be granted only
if the threat to the treasury of lost tax revenue has been eliminated. This means that
the issuer must show either that the invoice recipient did not claim an input tax credit
based on the improper invoice or that any input VAT deducted has been repaid to the
tax authorities.
7.1.6.2
Input tax
The entrepreneur can reduce the payment of VAT due to the tax authorities by the
amount of VAT charged to it by its suppliers on business expenditure (note: certain
employee expenditure may not qualify) to the extent that the entrepreneur generates
sales subject to VAT. However, in order to deduct input VAT in this manner, the entrepreneur must be in possession of valid VAT invoices from its suppliers and must either
have paid the suppliers or actually received the goods or services from the suppliers.
All invoices issued on or after January 1, 2004 must show either the tax registration
number or the VAT ID number of the taxable person who supplied the goods or services. Otherwise, the invoice recipient is unable to deduct the related input VAT. Under
certain circumstances, German entrepreneurs are permitted to issue VAT invoices to
themselves on behalf of their German suppliers (self-billing).
7.1.6.2.1
Electronic invoice transmission
German VAT regulations allow the electronic transmission of invoices. Such electroni
cally transmitted invoices entitle the recipient entrepreneur to deduct input VAT, provided that, in addition to the generally applicable invoice requirements, they safeguard
the authenticity of their source and the integrity of their contents.
There are two means by which this can be safeguarded:
Through the use of a qualified electronic signature or the use of a qualified electronic signature with vendor accreditation;
96


Through the electronic data interchange (EDI) process supplemented by an additional invoice in paper or electronic form confirming the transaction, provided the
electronic invoice includes at least a qualified electronic signature.
Accordingly, invoices an entrepreneur receives via e-mail that do not contain a qualified electronic signature will not be recognized for input VAT deduction purposes.
7.1.6.2.2
Amendment of the input tax deduction within the scope of 15a UStG
Under 15a Value Added Tax Act (Umsatzsteuergesetz UStG), a deduction of input
tax must be amended where the conditions upon which the original claim for an input
tax deduction were based change substantially during the use of an asset.
Input tax deduction adjustments under 15a UStG are made with respect to fixed and
current assets and with respect to services (sonstige Leistungen).
For real estate, the adjustment period is ten years. For all other fixed assets, the adjustment period is generally five years. The adjustment must be made at the time of actual
use whereby it is irrelevant when such use takes place.
7.1.6.3
VAT returns
Most German entrepreneurs must file a preliminary VAT return with the tax authorities for each calendar month (under certain circumstances for each calendar quarter)
and pay the net VAT amount due to the tax authorities at the same time. The normal
deadline for filing and payment is the 10th working day after the end of the calendar
month, but the tax authorities will normally extend this deadline by one month upon
request. A final VAT return has to be filed as well for the calendar year, summarizing
the information already reported in the preliminary monthly returns and correcting
any errors which are found in them. This annual return must be submitted by May 31st
of the following year. Extensions may be granted by the tax authorities. Any additional
VAT due to the tax authorities for that year must be paid to the tax authorities within
four weeks of the submission date of the annual return.
7.1.6.4
EC sales lists
Where a German entrepreneur is involved in the intra-EC sale of goods, an EC Sales

List (zusammenfassende Meldung) must be completed for each calendar quarter and
submitted to the tax authorities within the same deadlines as agreed for the submission
of preliminary VAT returns. The EC Sales List must show the VAT identification number of the recipient of the goods and the value of the intra-EC supply made to the
recipient. Each of the Organschaft members involved in the sale of goods within the
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Indirect Taxes
EU must complete a separate EC Sales List (i.e. it is not acceptable to submit one EC
Sales List for the entire Organschaft).
7.1.6.5
Intrastat declarations
If a German entrepreneur acquires goods from or delivers goods to other EU countries

in excess of 300,000 in a calendar year, then the entrepreneur must submit monthly
Intrastat Declarations to the tax authorities. These declarations contain information
about the goods being shipped, including inter alia the method of transportation, the
part of Germany in which the goods originated, the weight of the goods, and an intrastat product classification number. In case of an Organschaft, each of the Organschaft
members involved in intra-EC movements of goods must complete a separate Intrastat
Declaration (i.e. it is not acceptable to submit a single Intrastat Declaration for the
entire Organschaft).
7.1.7
Foreign entrepreneurs
As a general rule, entrepreneurs not registered for VAT in Germany can recover VAT
incurred on German purchases only if they themselves do not supply goods or render
services in Germany (except for supplies of goods or services where the recipient is
responsible for paying the German VAT thereon to the tax authorities) and they do not
have a permanent establishment there. The major purpose of the new VAT warehouse
regime is to permit taxable persons not established in Germany to avoid German VAT
registration if the only supplies they effect in Germany relate to merchandise in a VAT
warehouse. The normal VAT recovery rules for German entrepreneurs (see above) will
be applied to them. When applying for a refund, foreign entrepreneurs must submit the
original VAT invoices from the German suppliers to the German tax authorities.
7.1.8
Enforcement
7.1.8.1
Tax audits
Normally, tax audits of German entrepreneurs are carried out by the tax authorities.
Such audits include, amongst other things, an audit of VAT returns submitted. Any
errors found will result in assessments for additional VAT due to the authorities.
Assessments for unpaid VAT normally do not extend back for more than four years.
The tax authorities now have the power to visit an entrepreneurs business premises
without warning and demand access to business records. German business records
must be retained for ten years.
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Taxes on consumption (excise duties)

7.1.8.2
Electronic audits
With effect from January 1, 2002, Germany introduced new legislation to increase the
audit powers of the tax authorities by requiring that German entrepreneurs store all
electronically produced tax-relevant data in electronic form for immediate electronic
access by the tax authorities upon demand. This may present problems for international businesses which store records for their German operations in another country.
7.1.8.3
Fraud
Recent legislation allows the tax authorities to shift the liability for any VAT fraud that
occurs to other parties involved in the supply chain. This may present problems for
purchasers of goods from fraudulent suppliers if they cannot prove that they did not
have knowledge that fraud was taking place.
To protect tax revenue, the recent legislation imposes VAT liability on the assignee of
a receivable where the assignee collects or reassigns the receivable and the assignor
fails to remit all or part of the VAT owing on the supply that gave rise to the receivable.
This is applicable to receivables that are assigned, pledged, or attached after November
7, 2003.
Furthermore, the supplier of movable property pursuant to a rental or quasi-rental
agreement which was entered into after November 7, 2003 can be held liable for a
customers failure to pay the tax owed by reason of a downward adjustment in the input
tax credit allowable to the customer of supply. The supplier may be held liable for the
resulting tax assessed against the customer. This provision was repealed effective January 1, 2008.
7.2
7.2.1
General
The main characteristic of excise duties is that they are levied on the utilization and
consumption of certain commodities. The country-of-destination principle applies, i.e.
the duties are levied in the country in which they are actually used or consumed. The
most important excise taxes in Germany are the energy tax (on mineral oil, coal, natural gas, and gasoline), the alcohol tax, the tobacco tax, the coffee tax, the beer tax and,
last but not least, the electricity tax. The last-mentioned tax will be discussed separately.
Excise tax is levied indirectly via the selling price of the goods, meaning that the enduser acts as the ultimate taxpayer. The customs authorities are responsible for collect99

Indirect Taxes
ing the tax from the party legally liable. This is the owner of the manufacturing operation or an excise duty warehouse, or the importer in the event of import from a non-EU
country. This procedure limits the number of parties liable for the tax, considerably
reducing the administrative burden compared with a direct tax levy.
7.2.2
Tax territory and commodity subject to tax
The tax territory comprises the Federal Republic of Germany excluding Buesingen
and the Isle of Helgoland. A number of specific rules apply for trade with other EU
countries (see chapter7.2.5).
Whether or not a commodity is subject to excise duties depends in most cases on its
classification in the Electronic Customs Tariff (see chapter2.1.1). If a commodity can
be assigned to a particular caption in the Electronic Customs Tariff, it constitutes an
object of taxation within the meaning of the relevant excise duty law.
7.2.3
Time of tax liability and parties liable
The levying of excise taxes is linked to actual utilization or consumption of the goods.
As a consequence of this principle, goods should remain untaxed until the time of use
or consumption. This is achieved by the so-called tax suspension procedure. Provided certain conditions are fulfilled, it covers the manufacture, processing, storage,
and transportation of goods, both within Germany and the EU.
Goods subject to excise duties that are imported into Germany from a non-EU country
can either be cleared for free circulation immediately at the time of import (with the
consequence that the tax is levied at this time) or they can be transferred into the tax
suspension arrangements (postponing the levying of the tax until they are cleared for
home consumption).
The party liable for tax is in each case the owner of the excise duty warehouse, the
owner of the manufacturing operation, or the importer.
7.2.4
Tax concessions
The excise tax regulations provide for various tax exemptions and tax concessions.
They apply for the most part where products subject to excise duties are passed on to a
certain group of purchasers or where goods are processed into particular products or
are used for particular purposes. In addition to or alongside the individual tax concessions, the individual excise tax laws also cover other situations where excise duties
may be abated or reimbursed. This includes, for example, concessions available to
manufacturing commercial enterprises (Unternehmen des produzierenden Gewerbes)
100


in the area of energy tax on heating oil, natural gas, and electricity introduced in conjunction with the ecological tax reform (see chapter8.1).
7.2.5
EU directives
The establishment of the EU internal market created the need for uniform EU excise
duty laws to prevent differing excise duty regulations in the individual member countries from undermining the functioning of the EU internal market. The EU therefore
issued a number of harmonization directives. While these did not directly affect the
tax revenues and administrative sovereignty of the member states, they did result in a
convergence of excise duty rates and the organization of tax concessions.
It should be noted that the harmonization directives only refer to harmonized excise
duties, i.e. mineral oil, alcohol and alcoholic beverages, and tobacco products. In 2006
Germany implemented Council Directive 2003/96 restructuring the Community
framework for the taxation of energy products and electricity. In addition, the European Commission reviews the derogations of this Directive in order to achieve greater
transparency and greater coherence in the energy tax legislation.
Under the so-called System Directive, excise duties on dutiable goods generally
arise when they are manufactured or imported into the territory of the Community. If
the goods are initially transferred into a customs procedure at the time they enter Community territory (see chapter2.1.4), the time of import is deemed to be the date of
withdrawal from this procedure.
Excise duties are not levied while the goods are still subject to tax suspension arrangements. The transportation of products subject to excise duties within the EU is also
part of the tax suspension procedure. Under the country-of-destination principle, taxes
should be levied in the country of actual utilization or consumption.
An exception to the country-of-destination principle exists for goods purchased by
private individuals for their own use. In this case, the country-of-purchase principle
applies.
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Ecological taxes
Other taxes
8.1
Ecological taxes
8.1.1
Electricity tax
An electricity tax was introduced in Germany in April 1999.

The geographic area within which the electricity tax is levied corresponds to that for
other excise duties (see above). The commodity subject to tax is similarly determined
by its classification in the combined customs regulations.
The tax arises when electricity provided by suppliers resident in the tax territory is
withdrawn from the supply network (electricity grid) by the final consumer. In this
context, the term supplier means an energy supply company within the meaning of
the German Energy Act (Energiewirtschaftsgesetz EnWG). In addition, the electricity tax is also triggered when a supplier withdraws electricity from the supply network
for its own use and when other generators (so-called self-generators) withdraw electricity for their own use. In the first two cases (i.e. electricity withdrawn by consumers
or by a supplier for its own use), the tax is levied at the level of the supplier. In the third
case, the tax is levied at the level of the self-generator. Operators of small electricitygenerating systems are defined as self-generators.
The party liable for the tax must file returns on a monthly or an annual basis and remit
the amount due with the return. Suppliers generally pass on the tax burden to their
customers via the electricity price. Manufacturing commercial enterprises can obtain
a tax refund or credit under certain circumstances. Renewable energy sources are taxexempt.
8.1.2
Energy tax
The general comments in chapter 7.2 above (Taxes on consumption (excise duties))
also apply to energy tax.
One point worthy of mention is the interplay of the energy tax with the electricity tax:
If an entity qualifies as a manufacturing commercial enterprise that is entitled to a
reduced electricity tax rate and can claim an additional abatement or reimbursement
down to a base amount (Sockelbetrag), it can also claim a reduction in the rate of the
energy tax for certain kinds of mineral oil (in particular heating oil and natural gas).
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Other taxes
The taxation of energy in Germany recently underwent fundamental reform. Parts of
the EU Energy Tax Directive were implemented in connection with this reform. The
previous Mineral Oil Tax Act (Minerallsteuergesetz) was repealed and replaced with
the Energy Tax Act (Energiesteuergesetz) with effect from August 2006 as part of this
reform. Compared with the prior tax situation, the legislation broadens the range of
items subject to taxation. Under the new law, both brown coal and black coal are taxed
and new regulations regarding the taxation of natural gas are introduced.
8.1.3
Rates of ecological tax
Table 11: Mineral oil tax rates / energy tax rates

Tax rate
(in )1
Tax rate per 1000 liter of petrol/gasoline
Tax rate per 1000 liter of diesel
Tax rate3 per 1000 liter of light heating oil
Tax rate3 per 1000 kilogram of heavy heating oil
Tax rate3 per 1 megawatt of natural gas
1
2
3
4
654.502
470.402
61.354
25.00
5.50
From January 1, 2003 onwards.

Sulfur content 10 mg/kg (sulfur-free).
When used for heating purposes. Mineral oil abatement or refund available to manufacturing commercial
enterprises and agricultural and forestry enterprises.
Sulfur content 50 mg/kg (from January1, 2009 onwards).
Table 12: Electricity tax rates

Period
Normal rate
(per mwh1)
Reduced rate2
(per mwh1)
20.50
12.30
From January 1, 2003 onwards

1
2
Mwh = megawatt hour.

For manufacturing commercial enterprises and agricultural and forestry enterprises. In case of consumption
less than 25.0 mwh per year the normal rate applies.
8.2
Miscellaneous taxes
8.2.1
Real estate transfer tax
Real estate transfer tax (Grunderwerbsteuer) is generally imposed on any transaction

that causes a change in the ownership of real property situated in Germany, or in the
person empowered to dispose of such property. Transferor and transferee, whether or
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Miscellaneous taxes
not resident, are jointly and severally liable; usually the contract specifies which party
will pay the tax.
German real estate transfer tax is also triggered by direct or indirect transfers of at
least 95% of the interests in a partnership owning German real property to new partners within a five year period. The 95%-requirement is determined in this case by the
interest in the assets of the partnership (Beteiligung am Gesellschaftsvermgen).
Furthermore, an acquisition of shares in a corporation owning German real property
that results in a direct or indirect holding of at least 95% of the shares is also subject to
German real estate transfer tax. The same applies if the shares of such a corporation
are not held by a legal entity or sole proprietor after the acquisition, but rather by a
group of controlled companies (e.g. members of a tax group).
Various transfers, such as acquisition by inheritance or donation, as well as acquisitions by spouses or descendants, are exempt from real estate transfer tax. The tax is
normally assessed on the basis of the consideration given. Otherwise, the tax is based
on the value of the real estate as established under the German Valuation Act (Bewertungsgesetz). With effect from January 1, 1997, the tax rate is 3.5%. Following adoption of Art. 105 (2a) of the German Constitution (Grundgesetz GG) as part of the
2006 federalism reform, the states (Lnder) have the right to determine the tax rate in
their respective state. The state of Berlin was the first to increase its tax rate to
4.5%.
8.2.2
Real estate tax
Real estate tax (Grundsteuer) is an annual tax levied by German municipalities on real
property. It is payable by the owner of the property irrespective of residence. The tax is
levied on the assessed value (Einheitswert) of the property using the basic tax rate of
0.35%. To the resulting base amount (Steuermessbetrag), the municipalities apply
their respective multipliers to arrive at the final tax due. The multipliers vary by
municipality and may be different for industrial or agricultural property. Multipliers
for industrial property typically range from 150% to 600%.
105

Choice of legal form and location
Taxation of inbound investments
9.1
9.1.1
Types of inbound investments
A foreign investor planning to set up a business in Germany has a wide range of

options. If the activities on the German market are only intended to be short-term, the
investor may choose not to establish a physical presence, but instead prefer direct
transactions with his business partners. If, however, business activities are intended to
be of a longer term nature and require a physical presence in Germany, the foreign
investor may establish:
a branch or permanent establishment,
a partnership,
a corporation.
Income taxation in Germany differs depending on the legal form chosen (see chapter6). In general terms, the tax treatment of the various vehicles for doing business in
Germany is as follows:
Direct transactions
In principle no tax accrues where a foreign investor has neither a permanent establishment, a permanent representative, nor a business entity (company or partnership) in Germany. Imports from other countries to Germany are in themselves not
taxable events under German tax law.
Permanent establishment/permanent representative
A permanent establishment is defined as a fixed business facility or plant which
serves the activities of a business and over which the entrepreneur (here: the foreign investor) exercises control. This definition does not require human intervention, so that the presence of an internet server or an oil pipeline on German territory may constitute a permanent establishment. A permanent representative is
defined as an individual who is required to follow the instructions of a foreign
entity and runs that entitys business on an ongoing basis in the absence of a permanent establishment. The existence of a permanent establishment or permanent
representative in Germany exposes the investor to German tax liability.
107


An applicable tax treaty may modify the concept of a permanent establishment or a
permanent representative. For example, the OECD Model Tax Convention (OECD
MTC) requires that a permanent representative have the authority to enter into contracts. Furthermore, under most tax treaties, agents of an independent status do not
constitute permanent representatives and therefore do not, in themselves, subject a foreign entity to tax liability.
Partnerships
A partnership is not itself a taxable entity for income tax purposes. Its income is
determined at the level of the partnership, but taxed in the hands of the partners.
However, a partnership is a taxable entity for trade tax purposes (Gewerbesteuer
GewSt) if its business activity qualifies as a trading activity. A number of different forms of partnership are available (see chapter3.3 for further details):
General partnership (Offene Handelsgesellschaft OHG): All partners of an
OHG are jointly and severally liable.
Limited partnership (Kommanditgesellschaft KG): The general partners of a
KG (Komplementre) are personally liable, while the limited partners (Kommanditisten) are liable only up to their subscribed and registered contribution
to the partnership.
GmbH & Co KG: This is a specific form of limited partnership (KG) in which
a corporation (limited liability company) acts as the general partner.
Corporations
A (domestic) corporation is subject to both trade tax and corporate income tax.
Shareholders, whether individuals or corporations, are taxable on the profits distributed to them. The following types of corporations are available (see chapters
3.1 and 3.2 for further details):
Limited liability company (Gesellschaft mit beschrnkter Haftung GmbH):
the most common corporate form in Germany. It is often chosen by foreign
investors to carry out business in Germany.
Stock corporation (Aktiengesellschaft AG): a corporate form usually selected
for large corporations, as only stock corporations can be listed on a German
stock exchange.
Limited partnerships with share capital (Kommanditgesellschaft auf Aktien
KGaA): a fairly rare corporate form, under which at least one of the partners
has personal liability and the remaining partners own shares and have only
limited liability.
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The choice of the most appropriate legal form depends on a number of factors, including employee co-determination rights, the structure of the management and supervisory bodies, equity funding requirements, credit rating, reporting and audit requirements, incorporation costs, etc. The following sections discuss the tax-relevant characteristics of the various legal forms.
9.1.2
Taxation of current income
The effective tax rate of an investment usually depends on a number of factors such as
the applicable categories of tax, tax rates and tax bases.
Where a foreign corporation carries on business activities, corporate income tax, trade
tax, and a solidarity surcharge (a supplementary tax based on the corporate income tax
assessed) are levied on the German income generated, regardless of whether the investment is structured as a permanent establishment, a partnership, or a corporation.
The tax base for corporate income tax purposes is based on the income for financial
reporting purposes under the German Commercial Code (Handelsgesetzbuch HGB).
The income for financial reporting purposes, however, is adjusted in several respects
in accordance with German tax law and regulations. These adjustments relate in particular to depreciation and the deductibility of certain expenses (see chapter6.2). For
trade tax purposes, taxable income is further adjusted by certain deductions and addbacks. The 2008 Business Tax Reform made major changes in the addbacks, requiring
for instance that 25% of the interest expense on all liabilities be added back to taxable
income (previous rule: addback of 50% of interest on long-term debt only).
A uniform corporate income tax rate applies whether profits are retained or distributed. Effective 2008, the corporate tax rate has been reduced to 15% to increase Germanys international tax competitiveness.
Apart from corporate tax, German businesses are generally subject to trade tax.
Although trade tax is governed by federal law and the trade tax base is therefore computed in the same way throughout Germany, the actual trade tax burden varies sharply
from municipality to municipality, because each municipality is entitled to determine
its own trade tax multiplier (Hebesatz). The multiplier determines the rate at which
trade tax is levied. Smaller municipalities, in particular those adjoining larger towns,
can make their location more attractive by setting their multiplier below that of their
neighbors. However, the trade tax multiplier must be at least 200%. Table 13 illustrates
the effect of different multipliers on the trade tax rate.
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Table 13: Trade tax rates
Location of business1
Multiplier
Conurbation
Adjoining areas
1
400%
200%
Trade tax rate

14%
7%
These examples are illustrative only. Trade tax multipliers in Germany cannot be less than 200%. At the
moment, Munich has the highest multiplier: 490%.
Where a permanent establishment is maintained, the foreign investor is subject to tax

on the German-source income attributable to the permanent establishment. If the foreign investor is a corporation, the foreign corporation is subject to trade tax, corporate
income tax, and solidarity surcharge. The same applies where business is carried on
through a German partnership. However, the partnership as such is liable to trade tax,
whereas for income tax purposes the profits of the partnership are allocated to the
partners in proportion to their respective ownership and are subject to tax in their
hands.
In the case of investment in a corporation, the distribution of profits triggers withholding tax (Kapitalertragsteuer), normally 20% of the gross dividend (increasing to 25%
in 2009). If the non-resident recipient of the dividend is a corporation, the withholding
tax rate is often reduced by a tax treaty. A summary of the withholding tax rates in tax
treaties between Germany and other industrial countries is included in Appendix I
(chapter 14.1 below). Where the requirements of the Parent-Subsidiary Directive are
met, withholding tax on dividends paid to a corporation resident in another EU country is reduced to zero.
The following table compares the effective tax rates for permanent establishments,
partnerships, and corporations. The calculations assume that the German corporation
distributes all of its profits and that the withholding tax is reduced to 5% by a tax
treaty.
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Table 14: Tax burden for permanent establishment, partnership and
corporation (current taxation)
Type of investment
Permanent
establishment
Partnership
Corporation
Income before tax

Trade tax (multiplier: 400%)
100.00
14.00
100.00
14.001
100.00
14.00
Income before corporate income tax

(5.5% of CIT)
100.00
15.00
100.00
15.00
100.00
15.00
Withholding tax (5%)
Net amount after German taxes

German tax burden3
1
2
3
0.83
0.83
0.83
70.17
0.00
70.17
0.00
70.17
3,512
70.17
70.17
66.66
29.83%
29.83%
33.34%
Trade tax arises at the level of the partnership; income before trade tax is allocated to the partners and taxed
at their applicable tax rate. This two-step profit determination is discussed in chapter6.3.1.
If the foreign parent company is located in another EU country, the withholding tax on dividends can be
avoided. Assumption: foreign investor is a corporation.
Assumption: foreign investor is a corporation.
If the foreign investor is an individual or a partnership with individuals as partners, the

result for permanent establishments and partnerships would be different: the profits
would be subject to income tax at the individuals applicable tax rate (between 25%
and 45%) instead of corporate income tax.
Specific problems may arise where special remuneration is paid by a German partnership to an individual or corporate shareholder (e.g. interest on partners loans). The tax
authorities treat such remuneration as part of the partnerships profits. However, tax
treaties may contain special rules dealing with this issue.
9.1.3
Exit taxation
The issue of exit taxation should always be considered, in particular where the investment is only expected to be of a short duration.
If the investment is structured in the form of a permanent establishment or an interest
in a partnership, any gain on winding-up or liquidating the permanent establishment/
partnership in Germany is subject to tax at the level of the foreign entity. If the foreign
entity maintaining the permanent establishment is a corporation, the gain is subject to
corporate income tax (plus solidarity surcharge) and to trade tax. If it is an individual
or partnership, the gain is subject to income tax (plus solidarity surcharge in each
111


case). Germanys tax treaties generally permit it to tax the gain on the sale of a permanent establishment or an interest in a partnership.
Where the German investment takes the form of a corporation, a foreign corporate
shareholder will profit from the capital gains exemption, as the sale of shares in a corporation by another corporation is exempt from corporate income tax. However, since
5% of capital gains are qualified as non-deductible expenses for corporate income tax
purposes, effectively 95% of the capital gain is tax-exempt. Where the foreign seller is
an individual or a partnership with individuals as partners, the gain on the sale is subject to the half-income rule, whereby only half (as of 2009 60%) of the gain is subject to income tax. It should be noted that a 25% minimum tax rate applies (as is the
case for all individuals with non-resident tax liability). Germanys tax treaties typically
assign the right to tax capital gains on the sale of shares to the sellers country of residence.
The following table compares the German tax burden on capital gains on the sale of
German permanent establishments, partnerships, and corporations. The table assumes
that no tax treaty is applicable and that the seller is a foreign corporation.
Table 15: Exit tax burdens for various legal forms
Type of investment
Capital gain on sale

Trade tax (multipl.: 400%)
Income before corp. income tax
(5.5% of CIT)
Income after tax / net gain
Permanent
establishment
Partnership
Corporation
100.00
14.00
100.00
15.00
100.00
14.00
100.00
15.00
100.00
0.00
100.00
0.75
German tax burden
0.83
0.83
0.04
70.17
70.17
99.21
29.82%
29.82%
0.79%
9.2
Financing of inbound investments
9.2.1
Permanent establishments and partnerships
In addition to the legal form of the inbound investment, thought must also be given to
how it will be financed and what its distribution policy will be. The limited status of a
partnership as a legal entity and the fact that a permanent establishment is not a separate legal entity are considerations relevant both to the choice of legal form and to the
financing options.
112

Financing of inbound investments

A German permanent establishment is part of the foreign investors business. Hence,
loan agreements between the head office and the permanent establishment are not
accepted legally or for tax purposes. However, interest expenses attributable to the
German permanent establishment may be deducted in Germany.
Loan agreements between a foreign partner and its German partnership are in principle recognized for tax purposes. However, interest deducted at the level of the partnership is added back at the level of the respective partner to determine the income of the
partnership as such and the profit share of the individual partner. Hence, loan agreements between a foreign partner and a domestic partnership are only relevant for the
profit allocation between the partners.
9.2.2
Corporations
German corporate subsidiaries can be financed by one or more of the following methods:
Equity financing
The minimum capital of a corporation depends on its legal form. The minimum
registered share capital of a limited liability company (GmbH) is 25,000; for a
stock corporation (AG) it is 50,000. Additional capital may be paid into the corporation at any time by means of a formal increase of registered share capital or by
a simple transfer of amounts to the capital reserve (Kapitalrcklage).
Debt financing
Contractual relationships with the parent company are recognized for tax purposes. Loans may be granted by the parent, by affiliated companies, or by third
parties (secured where necessary by the parent or a related company).
Internal financing
Internal financing results from reinvestment of retained earnings in the business
and deductions without impact on cash-flow (such as depreciation). Naturally,
internal financing is only possible where a business is profitable.
A foreign investor carrying on business activities in Germany should compare the tax
implications of debt and equity financing. While dividends are not tax deductible,
interest is in principle deductible under German tax law. However, there are restrictions on the deduction of interest expense. Until 2007, German thin capitalization rules
applied to any (domestic or foreign) debt financing by a shareholder or a related party.
Starting January 1, 2008, new earnings stripping rules replace the thin capitalization
rules. Unlike the thin capitalization rules, the new rules apply to all types of debt
financing (shareholder and third party debt). They also apply not just to corporations,
113


but to all businesses, including sole proprietorships, partnerships, and consolidated tax
groups (Organschaft).
Under the new rules, net interest expense is deductible for tax purposes only up to 30%
of EBITDA. Interest expense is fully deductible to the extent of interest revenue. Net
interest expense is defined as interest expense less positive interest revenue. EBITDA
for tax purposes is taxable income plus interest expense and depreciation/amortization
and less positive interest revenue.
Interest expense may be carried forward where it is not deductible in a particular
year.
By way of exception, interest is fully deductible in the following cases:
Net interest expense of the entity is less than 1 m.
The entity is not part of a controlled group (Konzern) and, if a corporation, has no
detrimental shareholder debt financing.
The entity is part of a controlled group, but has no detrimental shareholder debt
financing and proves that its equity ratio is not more than one percentage point less
than that of the controlled group as a whole (equity ratio pursuant to IFRS, alternatively local GAAP of EU member state or U.S. GAAP).
Interest that is not deductible under the earnings stripping provisions may be carried
forward infinitely and used in future tax periods. Termination or transfer of a business
leads to forfeiture of the interest carryforward. Where the entity in question is a partnership, the interest carried forward is forfeited pro rata when a partner withdraws
from the partnership.
For further details on the German rules limiting interest deductions, please refer to
chapter6.2.1.4.
114

German holding companies

Table 16: Comparison of tax burden for equity and debt financing
of a German subsidiary
Type of financing
Additional financing amount

Income before tax and interest
Interest expense (10%)
Trade tax (multiplier: 400%)
Income before corporate income tax
Solidarity surcharge (5.5% of CIT)
Income after tax
Cash dividend / interest payment

Withholding tax (5%/0%)
Cash-flow after tax
Debt
2,000.00
200.00
200.00
3.501
0.00
0.00
0.00
0.00
140.35
7.18
133.17
German tax burden

1
Equity
2,000.00
200.00
0.00
28.00
200.00
30.00
1.65
140.35
66.83 (33.42%)
196.50
0.00
196.50
3.5 (1.75%)
One-fourth of the interest expenses are added back when computing income for trade tax purposes. The addback applies only where the de minimis threshold of 100,000 is exceeded.
9.3
German holding companies
Although Germany has no specific holding company regime for foreign investors, the
German corporate income tax system does have features that make Germany an attractive jurisdiction in which to base holding companies. Above all, there is a capital gains
exemption where a corporation sells shares in other corporations and a dividendsreceived exemption for intercompany dividends.
Where a corporation sells shares in another domestic or foreign corporation, any
resulting capital gain is tax-exempt under Germanys participation exemption. However, 5% of the capital gain is treated as a non-deductible business expense, thus
reducing the exemption to 95%. Conversely, losses on the sale of shares in corporations are not tax deductible. Under the dividends-received exemption, (effectively)
95% of the dividends paid by a domestic or foreign corporation to a German corporation are tax-exempt. However, any expenses connected with such dividends are fully
tax deductible.
The exemptions referred to apply for corporate income tax (and solidarity surcharge)
purposes. The capital gains exemption also applies for trade tax purposes. Dividends
received are, however, only exempt from trade tax if the parent owns at least 15% of
the shares of the German corporation so-called trade tax participation exemption
(gewerbesteuerliches Schachtelprivileg). Additionally, the dividends-received exemp-
115


tion is denied for trade tax purposes where the participation in question was not held at
the beginning of the calendar year in which the dividend is paid (minimum holding
period).
For investments in foreign corporations, the parent corporation must, in addition to
satisfying the 15% ownership and minimum holding period requirements, hold shares
in a subsidiary (i)that generates income from an active business within the meaning of
8 para. 1 nos. 1 to 6 of the German Foreign Transactions Tax Act (Auensteuergesetz
AStG) or (ii)that earns income from stakes of at least 25% held for at least twelve
months in corporations with active business income in the same country. However, the
requirement of active business income need not be met if the foreign subsidiary is
resident in another EU member state or if a tax treaty with a non-EU member state is
in place which provides for application of the exemption method for dividends.
The fact that dividend income and capital gains on the sale of corporate shares are
95% tax exempt makes Germany, in comparison with other European countries, an
attractive location for operations organized through holding companies. Since these
advantages also apply to investments of a German entity in a foreign corporation, it has
become more attractive to structure investments (both German and foreign) under a
German holding company.
Table 17 summarizes the main characteristics of German holding companies from a
tax perspective.
116

Taxation of controlled foreign corporations (CFC rules)

Table 17: Main characteristics of German holding companies
Holding company criteria
1. Normal tax rate on holding company income
2. Tax exemption for foreign dividend income
( 8b para. 1 KStG)
3. Tax exemption for German dividend income
( 8b para. 1 KStG)
4. Tax exemption for capital gains on sale of shares in foreign
corporations
5. Tax exemption for capital gains on sale of shares in German
corporations
6. Utilization of losses arising on corresponding sales
7. Capital tax on capital contributions
8. Deductibility of financing costs for investments in foreign
corporations
9. Deductibility of financing costs for investments in German
corporations
10. Tax loss carry-forwards
Subject to time limit:
Minimum taxation restrictions:
Deduction in each of the subsequent years:
fully deductible
+ exceeding income up to
11. Tax exemption for profits from foreign permanent
establishments, generally
12. Utilization of losses generated by foreign permanent
establishments (generally excluded under tax treaty)
13. Extensive tax treaty network, low treaty withholding rates
14. EU membership (e.g., no withholding tax on distributions to
corporations in other EU countries)
15. Controlled foreign corporation regime (AStG)
16. Corporate taxes on incorporation
17. Transfer tax/stamp duty on transfer of shares
18. Capital taxes levied
19. Income tax rate for employees of a holding company (max.)
1
2
3
22.83% to 32.89%1
95%
95%
95%
95%2
no
no
yes
yes
no
1 m
60%
yes
no
yes
yes
yes
no
no
no
42%3
CIT= 15% plus sol. surcharge of 5.5% on CIT; trade tax = 717.15%.
Special anti-abuse clauses may apply.
A tax rate of 45% applies to the portion of income that exceeds 250,001/500,001 (single/married).
9.4
If a German corporation, partnership, or permanent establishment (in this section

referred to as a German entity) holds an investment in a foreign corporation, Germa-
117


nys CFC rules (Hinzurechnungsbesteuerung) under the German Foreign Transactions
Tax Act (Auensteuergesetz AStG) must be considered.
Taxation in accordance with the CFC rules will apply at the level of the German entity
if the foreign corporation is deemed to be an interposed company (Zwischen
gesellschaft). Particular care must be exercised in the case of a German holding company.
CFC rules apply where the following conditions are cumulatively met:
Shareholding in the foreign corporation
Shareholders who are tax resident in Germany hold (alone or jointly, directly or
indirectly) more than one half of the shares or more than one half of the voting
rights in the foreign corporation. Shares or voting rights held in the foreign corporation by an interposed entity are taken into account pro rata ( 7 para. 2 sent. 1
and 2 AStG). The minimum investment requirement is reduced to 1% where the
foreign entity generates significant passive income with investment character
(Zwischeneinknfte mit Kapitalanlagecharakter) (e.g. interest). If more than 90%
of the foreign entitys income is passive income with investment character, no
minimum investment requirement applies, unless the foreign corporation is listed
on a recognized stock exchange.
Passive income of the foreign corporation
The foreign corporation generates passive income. Passive income is defined as
income not listed as active income in 8 para. 1 no. 19 AStG. The following
income qualifies as active income:
Agriculture and forestry;
Manufacturing and assembly of goods;
Income of credit institutions and insurance companies, unless they primarily
provide services to their German majority shareholders;
Income from trading, unless a German shareholder (or a related party) assists
in preparing, concluding, or performing the trade transactions;
Income from supply of services, unless such services are exclusively rendered
to or performed with the assistance of a German shareholder (or a related
party);
Income from rental and lease of real estate, provided that comparable income
of the shareholder would be tax exempt under a tax treaty;
118


Income from the licensing of intellectual property (e.g., rights, plans, and
knowledge), provided that any research and development activity of a German
shareholder is neither exploited nor involved;
Income from commercial rental and lease of moveable property, unless a German shareholder (or a related party ) is involved;
Interest income, provided the underlying capital is raised on foreign capital
markets and lent to enterprises which conduct active businesses as outlined
above;
Dividends received from corporations;
Capital gains from the sale of investments, gains on the liquidation of an entity
or from a reduction in capital, to the extent these gains do not result from the
sale of assets used to earn passive income with investment character.
Low rate of taxation at the level of the foreign corporation
The income of the foreign corporation is subject to low taxation. This is assumed
where the overall income tax rate is lower than 25%, unless the low level of taxation results from the offset with income from other sources. Low taxation is also
assumed where income tax of at least 25% is owed, but is not effectively collected.
Whether the above mentioned criteria are met is determined with reference to the circumstances at the end of the fiscal year of the foreign corporation. If the above criteria
are met, the passive income is imputed to the German entity on a pro rata basis and is
thus subject to taxation in Germany (corporate income tax / income tax, trade tax, and
solidarity surcharge). Any passive income derived by a lower tier subsidiary of the
foreign company will be attributed to the foreign company and consequently to the
domestic shareholder on a pro rata basis. Passive income of such lower-tier subsidiaries
will not be included if it is directly related to activities of the intermediary company
that generate active income and does not constitute passive income with investment
character.
Where income of a foreign corporation has been taxed under the CFC rules at the level
of the shareholder, dividends paid by the foreign corporation are fully exempt from
taxation, provided the shareholder can establish that the passive income has already
been imputed under the CFC rules during the last seven years. Otherwise, standard
dividend taxation applies. Dividends paid to a corporate shareholder are 95% tax
exempt. Dividends paid to an individual (or a partnership) are 50% tax exempt under
the half-income rule.
119


Since the amounts imputed under the CFC rules include the passive income of corporations resident in other EU countries, the compatibility of the CFC rules with European law has been questioned, as has the treatment of income generated by a foreign
permanent establishment which would constitute CFC income if it was a foreign corporation. Such permanent establishment income is denied any exemption which would
otherwise apply under a tax treaty. Instead, double taxation is avoided under the credit
method (treaty overriding).
In Cadbury Schweppes (decision of 12 September 2006, C-196/04), the European
Court of Justice held that CFC regimes may violate the freedom of establishment under
the EC Treaty. They are, in the courts opinion, justified only where they relate to
wholly artificial arrangements designed to avoid the payment of taxes normally due,
and where the terms of the CFC regime do not go beyond what is necessary to prevent
such tax avoidance. The intention to obtain tax relief is not in itself a sufficient basis on
which to conclude that an arrangement is wholly artificial. Moreover, CFC rules may
not be applied where the foreign company has an actual establishment for purposes of
carrying on genuine economic activities in the foreign state.
The German tax authorities reacted to the decision of the ECJ by an administrative
decree, according to which the German CFC rules in principle will continue to apply.
However, tax authorities will refrain from the application of the CFC rules to foreign
corporations resident in an EU/EEA member state where, inter alia, the foreign company is engaged in active business in the state of residence and employs regular staff to
carry out its business. By legislation entering into force from 2008, German CFC
regime has been brought in line with the decision of the ECJ (see chapter 5.1.3.4).
Therefore, an exemption from the CFC rules applies for a CFC with its registered
office or place of management in a EU/EEA member state provided the company carries on genuine economic activities in this country. Genuine economic activities
require a fully fledged business with an appropriate office, employees and technical
equipment. Generally genuine economic activities are determined by the criteria
stated by the European Court of Justice in the Cadbury Schweppes decision. Only
such income that is attributable to the genuine economic activity which is derived by
that particular activity (and only insofar as the arms length principle is observed in
respect of that income) is exempt from the CFC rules.
120

Transfer pricing
9.5
Transfer pricing
9.5.1
Transfer pricing principles
When an investor decides to carry on business activities in Germany via a German

subsidiary, the transactions between the German corporation and its foreign affiliates
may give rise to issues of how income should be allocated for tax purposes.
Based on the separate entity concept, the arms length principle has become the
accepted approach in dealing with transactions on an international level. Prices and
terms and conditions agreed on for transactions between related parties will be
accepted for tax purposes only where the terms and conditions of the transaction do
not differ from those on which unrelated parties would have agreed. The same approach
must be used to determine the acceptable level of profit mark-up under cost-plus
arrangements. The inter-company prices agreed on for the exchange of goods or services are referred to as transfer prices (Verrechnungspreise).
The standard transfer prices methods confirmed by the legislature are the comparable
uncontrolled price method, the resale price method, and the cost-plus method. The
transactional net margin method and the profit split method are also accepted transfer
pricing methods, subject to certain conditions. In the event only a range of arms length
transfer prices can be determined, the resulting range is narrowed in accordance with
applicable regulations. Where the transfer price chosen by the taxpayer is outside of
the narrowed range, a correction is generally made to the median value in the range.
A hypothetical arms length test is applied where it is not possible to determine arms
length transfer prices on the basis of an accepted transfer pricing method.
For instance, under the comparable uncontrolled price method interest expenses for
inter-company loans may not exceed the amount which banks would charge under
similar circumstances. Royalties must correspond to uncontrolled prices agreed on by
third parties.
Special rules apply for so-called base shifting (Funktionsverlagerungen), which
involves the transfer of business functions, including opportunities, risks, and assets.
As a rule, a payment in consideration of the transfer is calculated for the transfer as a
whole (transfer package). The transfer price is based on the impact of the function
shifted on the profits of the transferring and receiving companies. Where subsequent
actual developments differ substantially from the original assumptions, a (rebuttable)
presumption arises with regard to material intangible assets that uncertainties existing
at the time of contracting would have prompted uncontrolled parties dealing at arms
length to include an adjustment clause in their contract. If a substantial change in the
relevant circumstances occurs within ten years after the initial business transaction
121


and the related parties have not agreed on an adjustment clause in advance, the tax
authorities are entitled to make a one-time adjustment to the taxpayers income (commensurate with the transferees income).
9.5.2
Documentation requirements
In 2003, the Tax Preference Reduction Act (Steuervergnstigungsabbaugesetz

StVergAbG) introduced statutory transfer pricing documentation requirements. Therefore, with regard to cross-border relationships between group entities, it is necessary to
document the legal and commercial bases of transfer price arrangements and any other
business relationships subject to the arms length principle. At the request of the tax
authorities, the documentation must be presented within 60 days. Although a request
will generally be made only in the context of a tax audit, requests in other circumstances are possible. If no documentation is presented, the tax authorities are entitled
by law to assume that the profits of the German entity have been reduced because of
inappropriate transfer prices and to make appropriate adjustments to taxable income
by way of an estimate. Further, the tax authorities have the option of levying additional
payments and reversing the burden of proof, placing it on the taxpayer. The taxpayer
may avoid such sanctions by filing proper transfer pricing documentation in a timely
manner and by basing its transfer pricing arrangements on the relevant parameters.
The authorities require that the transfer pricing documentation include the following
information:
General information on the ownership relationships, the business operations, and
the organizational structure: The tax authorities require documents revealing any
interests held in related parties within the meaning of the Foreign Transactions Tax
Act, the organizational and operating group structure, and the taxpayers area of
business. Any changes in these matters must also be disclosed.
Business relationships and transactions with related parties: Taxpayers must document the nature and scope of their business dealings and their underlying contractual basis. Documents must also list the taxpayers significant intangible assets that
are involved in the related-party transactions.
Function and risk analysis: Information on the functions performed and risks
borne, the relevant contractual relations, market conditions and competition, and a
description of the supply chain within the network.
Transfer pricing analysis: Information on the transfer pricing method applied, the
basis for its application, documents describing the analyses, and the prices used for
comparison.
122

Transfer pricing
Supplemental information: Information on, inter alia, business strategies, cost
sharing arrangements including an allocation key, advance pricing agreements,
and other advance rulings from foreign tax authorities, and price adjustments
resulting from transfer pricing corrections.
In order to facilitate the preparation of transfer pricing documentation, the tax authori
ties permit aggregation of comparable business transactions and the adoption of general transfer pricing guidelines for the group.
With regard to extraordinary business events (such as reorganizations, significant
changes in functions and risks, relevant changes to business strategies, the conclusion
or modification of major long-term contracts), documentation must be created within
six months of the event (contemporaneous documentation).
Careful structuring of transfer price arrangements is particularly important for optimizing the effective tax rate of a group and avoiding double taxation as a result of
transfer price adjustments. The selection of tried and tested options (such as the resale
price method vs. the cost-plus, licensing model or cost allocation method) may help in
this respect. It is also possible to structure the organization of the group in terms of the
various functions to be performed, or by redistributing the risks and rewards within
the group. This may also be achieved, for example, by changing the sales system to a
commission basis or by establishing shared administrative service centers.
The conclusion of advance pricing agreements (APA) is possible under German tax
laws and should be considered. APAs are possible pursuant to bilateral and multilateral mutual agreement procedures.
9.5.3
Transfer pricing principles for the secondment of staff
Inbound investments in Germany often involve transferring employees from a foreign

entity to a German entity.
Expenses for seconded employees (salary and additional remuneration) may be borne
by either the transferor or the transferee entity. Where there is a wide disparity between
the tax rates of the two countries, it is possible to achieve an optimal solution from a
tax point of view by entering into contracts that stipulate which party will bear
expenses relating to the secondment.
When determining whether the costs of the seconded employees are deductible
expenses in Germany, the tax authorities, under their administrative guidance, look to
the party whose economic interests are served by the secondment.
123


The secondment is assumed to be in the interest of the transferor entity if
The salary paid to the seconded employee contains elements exceeding the salary levels applicable to the country of residence of the transferee entity;
The seconded employee performs budgeting, coordination, or control functions
for the transferor entity which are not separately remunerated;
The transferor entity will benefit, after the return of the seconded employee,
from the overseas experience gained; or
The job performed by the seconded employee is permanently carried out by an
employee seconded from the transferor entity.
The secondment is assumed to be in the interest of the transferee entity if a director
of an independent enterprise would, in a comparable situation, also have hired the
particular employee and borne the relevant costs. If the costs incurred for the seconded employee exceed the costs of a comparable employee on the German labor
market, the transferee entity must have a valid business reason for paying higher
remuneration. This should be based on the specific situation in the enterprise, on a
comparable arms length situation, or on the hypothetical arms length expense for
seconded employees.
If the secondment is deemed to be in the interest of the transferor entity, the amount by
which expenses exceed the cost for comparable employees in Germany is attributed to
the transferor entity. If the costs incurred by the transferee entity are not reimbursed or
not sufficiently reimbursed by the transferor entity, a profit adjustment will be made for
tax purposes at the level of the transferee entity in accordance with the provisions of
the German Foreign Transactions Tax Act. If the expatriate is working in the joint
interest of the transferor and transferee entities, the secondment costs must be allocated fairly according to the input involved between transferor and transferee entity. In
agreement with the tax authorities, it is possible to use a uniform allocation scheme for
employee secondments within a group.
Where employees are seconded to a German subsidiary, wage tax (Lohnsteuer) must
be withheld only if the German subsidiary constitutes an employer for wage tax purposes. Normally, the employer under German tax law is regarded as the person/entity
for which the employee is required to work and follow instructions or under whose
management the employee is ( 1 para. 2 Wage Tax Procedures Ordinance, Lohnsteuerdurchfhrungsverordnung LStDV). In case of doubt, it is possible to obtain a
binding ruling for wage tax purposes (Anrufungsauskunft) from the tax authorities
in order to avoid the risk of a wage tax liability for the German entity.
124

German REITs
9.6
German REITs
After months of lively discussion, the German legislature enacted legislation on

28 May 2007 creating the Real Estate Investment Trust (REIT) as a new asset class.
The introduction of the REIT is likely to open up significant opportunities for real
estate companies, investors in real estate, and companies with substantial real estate
holdings in Germany, in particular by providing the opportunity to transfer assets to
the capital market. REITs may help companies to unlock built-in gains and to invest
the proceeds in their core business. In all events, REITs should make it easier for foreign investors to invest in the German real estate market.
REITs are joint stock corporations (Aktiengesellschaft) organized under German law
having their registered office and principal place of management in Germany. The
shares in a REIT must be registered for trading on a public exchange in a member state
of the European Union or the European Economic Area. Their minimum stated capital
is Euro15 million. At least 25% of the shares in a REIT must be widely held at the
time of stock exchange registration as a REIT corporation. At least 15% of the shares
must be widely held at all times. Stock is considered widely held where no one shareholder holds 3% or more of the shares. No shareholder is allowed to hold directly 10%
or more of the shares in a REIT corporation.
At least 75% of a REITs assets must consist of real estate and at least 75% of its gross
revenues must be derived from the rental, leasing, or sale of real estate. However, the
REIT is not permitted to engage in trading in real estate. A REIT is considered to trade
in real estate if the REITs gross revenues from the sale of real estate within a five year
period amount to more than half of the value of its average real estate holdings during
the same period. Furthermore, a REIT must distribute at least 90% of its distributable
profits to its shareholders.
Where a REIT meets these requirements, it is exempt from German corporate income
tax, trade tax and solidarity surcharge.
The tax exemption at the level of the REIT corresponds to full taxation at the level of
the shareholder. This applies both for direct investments in foreign REITs and for indirect investments in REITs through investment funds. Dividends paid by a REIT are
subject to 25% withholding tax. For foreign shareholders, the withholding tax of 25%
constitutes final and definitive German taxation. However, many tax treaties provide
for a reduction of German withholding tax to 15%. Foreign investors would thus in
many cases be able to derive income from a German REIT with only a 15% German
tax burden (less under certain tax treaties).
125


Depending on the relevant tax treaty, capital gains on the sale of REIT stock held by
foreign investors may be exempt from German taxation as well.
The distributable profits of a REIT are determined on the basis of year-end financial
statements prepared in accordance with German GAAP. Only straight-line depreciation (2% p.a.) is allowed in determining distributable profits.
Special rules exist to encourage the reorganization of real estate holdings into REITs.
A 50% tax exemption is granted for capital gains on the sale to a REIT (or an investment fund) of certain land and buildings held as business property if the relevant purchase agreement is concluded after December 31, 2006 and before January 1, 2010
(so-called exit sale provision).
126

Legal aspects of acquisitions
10
Acquisition and restructuring

of business entities
10.1
10.1.1
Sales of business entities
In Germany, the acquisition of a business enterprise is governed by the general provisions of the German Civil Code (Brgerliches Gesetzbuch BGB) pertaining to the
sale of objects und rights. A business enterprise (Unternehmen) is regarded neither as
an object nor as a right in itself, but rather as an accumulation of the elements (tangible
and intangible assets, liabilities, business relationships, market conditions) which make
up a specific business organism.
A business entity can be acquired in its entirety either by way of an asset deal or a
share deal. Under an asset deal, assets and liabilities of the business enterprise are
directly sold and transferred by the seller to the purchaser. As the business enterprise
does not constitute an object or right in itself, an asset deal may only be accomplished
by an individual transfer of the assets and liabilities of the business enterprise by way
of singular succession. By contrast, under a share deal the purchaser acquires the
shares in the corporate entity to which the assets and liabilities of the business enterprise are attributed. The attribution of the assets and liabilities to the respective legal
entity as such remains unchanged. A share deal is therefore generally a (legally) less
complex way to transfer a business enterprise, as it involves an indirect transfer of the
entire entrepreneurial organism by way of the transfer of the shares. In the case of an
asset deal, special attention must be paid to the provisions of the BGB dealing with the
labor law consequences of the transfer of a business ( 613a BGB). Under this provision, employment relationships relating to a business or part of a business are transferred by operation of law to the acquirer of a business.
The provisions of the German Civil Code on the law of sales ( 433 ff. BGB) cover
the purchase of objects and apply mutatis mutandis to the acquisition of rights ( 453
para. 1 BGB) as well. Therefore the rules of contract law applicable to share deals and
asset deals are very similar in practice.
10.1.2
Typical steps of a business entity acquisition
The acquisition of a business entity may take a wide variety of forms, given the differences in nature, size, and organizational structure of the target and the entities involved.
127

Acquisition and restructuring of business entities

However, certain typical phases of the acquisition process can be identified: initial
contact, confidentiality agreement, letter of intent (LOI), due diligence, sale and purchase agreement, and completion.
10.1.2.1
Initial contact
The first contact between a potential vendor and a potential purchaser of a business
may take place when the interested buyer notifies the target entity of its interest in
acquiring the business. This contact is often established via agents, such as investment
brokers, investment banks, or law firms specializing in commercial clients. The initial
contact may also be initiated by the potential vendor by sending out a so-called information memorandum to companies that are seen as prospective buyers.
10.1.2.2
Confidentiality agreement
Once negotiations have been entered into, a confidentiality agreement is often concluded between the parties. During the negotiations, the buyer is often provided with
sensitive information on the sellers business. Obviously, the seller wants to avoid disclosure of such information to outsiders in case the intended acquisition does not materialize. Although the buyer is already under a pre-contractual obligation not to use any
information received in the course of the negotiations to the detriment of the seller, a
confidentiality agreement is often used to detail and clarify the rights and obligations
of the parties with respect to the information disclosed during the negotiations. A confidentiality agreement will normally cover the way in which confidential information
is to be treated, the legal consequences of a violation of the confidentiality obligation,
the persons subject to the confidentiality obligation, the treatment of documents in the
event of a violation of the agreement, the duration of the confidentiality agreement, as
well as possible contractual penalties.
10.1.2.3
Letter of intent
Letters of intent (LOI) are instruments frequently employed in Anglo-American law

that have also become common in German business life. In general terms, they serve
to express an intention to reach a particular result in the course of the negotiations.
A letter of intent usually outlines the negotiation positions of the parties, records the
results of the negotiations made to date, and fixes a schedule for future negotiations.
Whereas a LOI is generally not intended to have binding legal consequences, statements made in the LOI or the LOI as such may been seen as a binding legal agreement
under certain conditions. It is therefore advisable for the parties to stipulate whether
statements made in the LOI have binding effect or not.
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10.1.2.4
Due diligence
10.1.2.4.1 Significance and purpose in Germany
Any acquisition of a business entity should be preceded by an analysis of the target.

The scope of this analysis will vary depending on the circumstances. As part of the
due diligence process, the target entity will be closely examined by the prospective
buyer. The examination may cover all areas of the target entity, especially its legal,
financial and tax circumstances, as well as its strategic and technological position.
The vendor will often provide the prospective buyer with information on the target
entity that has been systematically prepared and is made available for review in an
examination room (data room). Before being given access to the data room, the prospective purchaser will usually have to agree to abide by specific data room rules,
especially with respect to confidentiality.
The results of the due diligence process will normally be documented in a due diligence report. The findings of the due diligence process are important for the drafting
of the purchase contract, in particular with respect to the sellers warranties.
10.1.2.4.2 Legal consequences
Liability for defects may be precluded if the purchaser was aware of the defect in the
object or right acquired when the agreement was concluded ( 442 (1) BGB). As a consequence, the protection afforded by general statutory provisions may become less
effective where a due diligence process has been carried out and defects have been
identified in the course of that process. However, it is possible to waive the application
of 442 BGB, so that the purchaser is entitled to statutory protection even if it has
knowledge of defects in the object being purchased.
10.1.2.5
Sale and purchase agreement
10.1.2.5.1 Contents of the purchase agreement
Since a business enterprise does not constitute an object as such, under an asset deal
all assets and liabilities pertaining to the business have to be transferred individually.
The purchase contract must therefore in principle list all components of the business
enterprise to be transferred to the buyer, for which purpose reference is often made to
inventories or balance sheets. A catch-all clause may also be inserted into the agreement, under which all assets and liabilities pertaining to a specific business are to be
transferred.
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A share deal, which is a mere acquisition of rights, requires only an exact identification
of the shares to be transferred. However, a share purchase agreement will often have a
complexity comparable to that of an asset purchase agreement, in particular because of
the warranties granted.
10.1.2.5.2 Statutory warranties
The acquisition of a business entity is subject to the provisions on sales contained in

the German Civil Code (Brgerliches Gesetzbuch BGB). For an asset deal, the provisions governing the sale of objects ( 433 ff.) apply, under which a vendor is in principle liable for any material defect in the thing being sold. In case of a sale of a business enterprise, a defect is assumed if the defect pertains to the enterprise as such (and
not merely to an individual asset). In contrast, a share deal is regarded as a transfer of
rights ( 453), under which the seller is in principle responsible only for the existence
of the rights as such (and not for the economic value of the enterprise embodied in the
shares). However, the acquisition of all or almost all of the shares in an enterprise may
be treated as an acquisition of objects and thus of the enterprise itself. As a result the
liability provisions for the sale of objects apply.
When the business entity acquired is not free of defects, the purchaser has a variety of
remedies. He may demand subsequent performance (Nacherfllung), which implies
the elimination of defects of the object supplied. He may further (alternatively) either
rescind the agreement, reduce the purchase price, or claim damages or reimbursement
of expenses.
10.1.2.5.3 Contractual warranty clauses
In practice, German statutory liability regulations are often not considered to give the
purchaser adequate protection and are therefore replaced by special contractual warranty clauses (representations and warranties) which take into account the specific
interests of both parties.
Technically, such warranty clauses are often agreed on as independent warranty agreements that do not form part of the purchase contract as such. Thus, the vendor assumes,
as a separate legal obligation, a guarantee for certain qualities of the object of sale
which are of importance to the buyer. The warranty clause will also deal with the legal
consequences in case of breach of warranty, such as subsequent performance and compensation payments by the seller. In view of the fact that the business entity will be
constantly changing in the course of operations, the right to rescind the contract will
only be agreed in exceptional cases.
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10.1.2.6
Completion
In practice, a certain period of time will elapse between the signing and the completion of the sale and purchase agreement, i.e. the date at which the rights and obligations attached to the business entity pass from the vendor to the purchaser (also referred
to as closing or transfer date). The contract may require a number of transactions to be
carried out during this period, such as obtaining the necessary antitrust approval for
the acquisition, passing shareholder resolutions, spinning off certain business entities,
or implementing IT solutions.
10.1.3
Antitrust law
In the European Union, antitrust rules exist at the level of both the European Union
and the member states. Under Regulation No. 4064/89 of the European Council dated
December 21, 1989 (Merger Control Regulation), all mergers in the European Union
exceeding a certain threshold must be referred for approval to the European level.
Merger control regulations are also in place at a national level, such as the German Act
Against Restraints on Competition (Gesetz gegen Wettbewerbsbeschrnkungen
GWB).
Where European merger control regulations do not apply, a merger of business entities
may be subject to German merger control procedures pursuant to 35 and 37 GWB.
Under 35 (1) GWB, this is assumed to be the case when the combined world-wide
turnover of the parties involved is more than 500 million and at least one of the parties has generated domestic turnover of more than 25 million during the financial
year preceding the merger. The combined turnover is computed using a group approach,
which extends to the turnover of all controlling or controlled entities of the parties
involved. German merger control procedures are not triggered, however, even if the
above-mentioned thresholds are exceeded, if the planned merger does not fall within
the definition of 130 para. 2 GWB, if the requirements of the de minimis clause are
met, or if the planned merger only affects an insignificant market.
Under 37 (1) no. 14 GWB, transactions that involve acquiring assets, obtaining a
controlling position, acquiring shares, or establishing a joint venture are subject to
merger control procedures when the above-mentioned criteria are met. As far as
obtaining a controlling position is concerned, the power to control an entity is not
restricted to relationships under corporate law. The power to control may also be conferred by way of rights, agreements, and other measures which together or individually allow a party to exercise a controlling influence over the business activities of
the target company, taking into account the substance and legal consequences of the
transaction.
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Any planned merger must be reported to the German Federal Cartel Office (Bundeskartellamt) before the sale and purchase agreement is implemented. The parties may
not complete the merger until the German Federal Cartel Office has issued its approval.
De facto measures may also be considered as acts of completion. The German Federal
Cartel Office may prohibit completion (Untersagung des Vollzugs), thus barring all
measures relating to the completion of the merger. Legal transactions of the parties in
contravention of the prohibition of completion are null and void.
Failure to comply with the notification requirement and actions in contravention of a
prohibition of completion are administrative offences (Ordnungswidrigkeiten) and
subject to penalties.
10.2
Tax considerations for acquisitions
In general a sellers primary interest is to minimize the tax on the capital gain realized
upon a sale or to generate a tax-exempt gain. As the preferential treatment of capital
gains only applies to capital gains on the sale of shares in corporations, the seller will
generally prefer a share deal over an asset deal.
By contrast, the purchaser will seek to structure the acquisition so as to maximize
depreciation and amortization of the purchase price for tax purposes, which is not possible when only shares are acquired.
In general, the tax structuring considerations of the parties center around the following
criteria:
Treatment of capital gains resulting from the sale
Depreciation/amortization of acquisition cost
Deductibility of refinancing expenses
Use of tax loss carryforwards of the acquired entity.
10.2.1
Asset deal
Where an acquisition is carried out by way of an asset deal, the book values of the
assets transferred are stepped up to acquisition cost in the hands of the purchaser. The
seller realizes a capital gain equivalent to the difference between the purchase price
and the tax basis of the assets. The obvious advantage of an asset deal is that the purchaser may select the assets he wants to acquire. It should be noted, however, that liabilities resulting from employment contracts may be transferred to the purchaser by
operation of law where the assets transferred qualify as a business (Betrieb) or an inde132


pendent part of a business (Betriebsteil, see 613a German Civil Code, Brgerliches
Gesetzbuch BGB). Liabilities of the seller may also be transferred to the buyer by
operation of law if the business is carried on under the former firm name ( 25 German
Commercial Code, Handelsgesetzbuch HGB), although such liability may be avoided
by a disclaimer that must be entered in the commercial register. Furthermore, there
may be liability for certain tax obligations (75 Tax Procedure Law, Abgabenordnung
AO), which may not be disclaimed.
The parties should agree on an allocation of the purchase price to the assets and liabilities acquired. Such allocation does not bind the tax authorities, but does provide a
useful starting point. Non-competition agreements entered into in the context of an
asset deal are generally treated as a part of the goodwill transferred and do not constitute separate assets.
Tangible and intangible assets are transferred to the tax accounts of the purchaser at
acquisition cost. Any excess amount is capitalized as goodwill, which is amortized for
tax purposes over a period of 15 years. Depreciable assets are depreciated over their
useful lives (based on the official tax depreciation tables). Land and participations in
other companies are not subject to scheduled depreciation.
Step-up structures involving an internal asset deal (i.e. where the business of an
acquired corporation is sold within the group by way of an asset deal) may generate
tax benefits where the seller corporation has tax loss carryforwards, in particular
where such loss carryforwards may be forfeited in the future (see chapter10.2.5.). The
seller will have to recognize hidden reserves, which are fully taxable for corporate
income and trade tax purposes and may be offset against tax loss carryforwards. However, due to the implementation of minimum taxation rules in Germany as of January
1, 2004, such transfers may still result in a tax burden, which has to be weighed against
the future tax savings resulting from the step-up received on the assets.
10.2.2
Acquisition of shares in a corporation
In the case of share deals, the book values of the assets and liabilities at the level of the
target company remain unchanged. In the past, share deals were often followed by a
conversion of the acquired corporation into a partnership (so-called conversion
model), which allowed the purchaser to transform the purchase price into (tax-deductible) depreciable assets and goodwill. However, the 2000 tax reform abolished the
conversion model. Thus, the options of stepping up the depreciable asset base by way
of a post-acquisition change in entity structure are very limited under current tax law.
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10.2.3
Acquisition of a partnership interest
The acquisition of a partnership interest is, for tax purposes, treated as a pro-rata
acquisition of the partnerships assets. Accordingly, the purchaser steps up the tax
basis of the assets of the partnership to the level of its own acquisition cost. Technically, this step-up is carried out at the level of the partnership by way of supplementary
balance sheets (Ergnzungsbilanzen). Any portion of the purchase price that cannot be
attributed to acquired assets (including self-generated intangibles such as patents or
know-how not previously recognized in the partnership balance sheet) forms part of
goodwill, which is amortized over 15 years for tax purposes.
10.2.4
Funding an acquisition
A purchaser may fund the acquisition by means of debt or equity. If financed by debt,
the buyer wants to ensure that the interest expenses incurred to fund the acquisition
may be offset against the targets future profits in order to reduce the German effective
tax rate.
10.2.4.1
Acquisition of a corporation
10.2.4.1.1 Acquisition by a corporation
Since 2004, dividends distributed by a corporation to another corporation are in principle tax exempt. However, 5% of the dividend income is deemed to constitute nondeductible business expense directly related to the tax-exempt income, in effect reducing the tax exempt portion of the dividend to 95%. In return, expenses actually incurred
related to the income (such as interest expenses) are fully deductible.
The most common techniques to enable a full offset of interest expenses against positive income are:
Tax group (Organschaft)
A common way to achieve deductibility of business expenses incurred for the
acquisition of a company is to establish a tax group (Organschaft) between the
target and the acquiring corporation. In this way, the target companys positive
income may be offset against any negative income at the level of the parent company. The main downside of a tax group is that pre-existing tax loss carryforwards
for corporate income and trade tax purposes at the level of the controlled company
may not be used for the duration of the tax group (frozen loss carry forwards).
Furthermore, rules relating to the avoidance of double consideration of losses may
apply. Under these rules, tax losses of a controlling corporation are ignored for
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German tax purposes to the extent to which they have already been taken into
account in the course of a taxation under a foreign jurisdiction.
Debt pushed down into the subsidiary
Another strategy to offset interest expenses against positive income of the target
company is to push down the debt incurred into the acquired company itself. This
is typically done by a downstream merger of the acquiring company into the target
corporation.
10.2.4.1.2 Acquisition by an individual
Since 2004, dividends distributed by a corporation to an individual have been 50%

(2009: 40%) tax-exempt. Expenses related to the income taxed under the half-income
(2009: partial-income) rule are only 50% (2009: 60%) tax deductible.
10.2.4.1.3 Thin capitalization rules
10.2.4.1.3.1 Through 2007
German thin capitalization rules must be considered where an acquisition is debt

financed. Under the thin capitalization rules, loan interest paid by an entity to its substantial shareholder (participation of more than 25%) is deemed to be a constructive
dividend where a debt-to-equity ratio of 1.5 to 1 is exceeded or the loan granted bears
hybrid interest. Since the revision of the thin capitalization rules in 2004, they also
apply to the financing of foreign corporations subject to non-resident tax liability in
Germany.
The application of the thin capitalization rules to debt provided by third parties has
been particularly controversial. According to the wording of the law, the rules extend
to loans granted by third parties where the third party has recourse against the shareholder or a related party. However, the German Federal Ministry of Finance restricted
the application of the provision so as to benefit the taxpayer. Under official guidance
issued in 2005, the thin capitalization rules do not apply to third party financing if
there is no back-to-back financing involving the shareholder or a related party. However, the burden of proof lies with the taxpayer, who has to provide evidence that no
detrimental security (such as security in form of interest-bearing funds) has been
granted by the shareholder. The evidence may be provided by way of an attestation to
be filled in by the third party entitled to the recourse. The German tax authorities have
created a sample form for this purpose.
Special rules apply to debt-financed acquisitions of shares within a group. Where a
corporation borrows funds for purposes of purchasing shares in another corporation,
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and both the seller of the shares and the lender are substantial shareholders of the
financed corporation, any interest on the loan provided will be treated as a constructive dividend. The same applies if the seller and the lender are related parties of the
shareholders, or are third parties with recourse against such parties. In such case, no
safe haven is available and no arms length exception applies.
10.2.4.1.3.2 From 2008 onwards
Effective January 1, 2008, new earnings stripping rules replaced the previous thin
capitalization rules. Unlike the thin capitalization rules, the new rules apply to all
types of debt financing (shareholder and third party debt). They also apply to all legal
entities, such as sole entrepreneurships, partnerships, corporations, and consolidated
tax groups (Organschaft).
Under the new rules, net interest expense is deductible only up to a percentage of 30%
of EBITDA for tax purposes. Interest expense is fully deductible to the extent positive
interest income is available. Net interest expense is defined as interest expense less
positive interest income. EBITDA for tax purposes is taxable income plus interest
expense, less positive interest income, and less depreciation and amortization.
Interest expense may be carried forward where it is not deductible in a particular
year.
By way of exception, interest is fully deductible in the following cases:
Net interest expense of the entity is less than 1 m.
The entity does not form part of a controlled group (Konzern). An entity forms part
of controlled group where it is or could be consolidated under IFRS, local GAAP
of an EU member state, or U.S. GAAP. Where the entity in question is a corporation, the exception for uncontrolled entities applies only if remuneration on shareholder debt accounts for no more than 10% of the net interest expense.
The entity is part of a controlled group, but proves that the equity ratio of the business in question is no more than 1% less than that of the controlled group as a
whole (equity ratio pursuant to IFRS, alternatively local GAAP of EU member
state or U.S. GAAP). Equity ratio is the respective relation of equity to the balance
sheet total. Where the entity in question is a corporation, this exception applies
only if remuneration on shareholder debt accounts for no more than 10% of the net
interest expense. Shareholder debt for purposes of this provision only includes debt
that is shown in the fully consolidated tax accounts of the relevant corporate group
and involves recourse against a shareholder of the controlled group that is not itself
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part of the controlled group. In other words, interest payments on loans inside a
consolidated group are not treated as detrimental shareholder financing for purposes of this provision.
Interest non-deductible under the earnings stripping provisions may be carried forward infinitely and may be used in future tax periods. In the event of termination or
transfer of a business, the interest carryforward will be forfeited. Where the entity in
question is a partnership, the interest carryforward is forfeited pro rata when a partner
withdraws from the partnership.
A corporate tax group (Organschaft) is treated as a single business entity for purposes
of the earnings stripping rules. The interest expense of the controlled entity and the
controlling entity are aggregated. The de minimis threshold of 1 m applies to the
aggregate interest expense of both entities.
For further details on the German rules limiting interest deduction, please refer to
chapter6.2.1.4.
10.2.4.2
Acquisition of a partnership
Under the German system of partnership taxation, interest incurred on debt used to
acquire an interest in a German partnership is tax deductible as special business
expenses of the partner (Sonderbetriebsausgaben) at the level of the partnership itself
rather than at the level of the acquisition vehicle.
If the acquisition vehicle is a foreign entity, it may be possible to deduct the interest
expense both in Germany and in the foreign jurisdiction (double dip). However, it
should be noted that the foreign acquisition vehicle may be subject to German thin
capitalization rules. Further restrictions may apply where a tax group (Organschaft) is
in place. Under the German dual consolidated loss rules, tax losses of the controlling
corporation may not be used in Germany to the extent the losses have already been
used under foreign tax law in the course of the taxation of the company.
10.2.5
Utilization of pre-acquisition tax losses
Tax losses may be carried forward for trade tax and corporation / income tax purposes.
However, since 2004 the offset of losses against future profits has been substantially
restricted. Complete offset of losses generated by a company against future profits is
only possible with respect to a base amount of 1 million. Loss carryforwards in
excess of this amount may be offset against the profits of the current or future periods
only up to 60% of the income of the respective assessment period. Tax losses may also
be carried backwards to the previous tax year, up to a maximum of 511,500.
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In addition, the utilization of pre-acquisition losses is subject to further restrictions.
10.2.5.1
Acquisition of a partnership interest
Where a partnership interest has been (directly) acquired, trade tax loss carryforwards
are forfeited in proportion to the partnership interest transferred. However, such forfeiture may be avoided by indirect acquisition of the partnership interest.
Loss carryforwards for income tax purposes may not be used since the partnership is
regarded as transparent for taxation purposes and loss carryforwards are directly
attributed to the partners.
10.2.5.2
Acquisition of corporations
Loss limitation rules may bar the use of losses of a corporation acquired (change-ofcontrol rules).
Until 2008, pre-acquisition losses were forfeited if a corporations economic identity
changed. A change of economic identity was presumed if more than 50% of the shares
in the corporation were transferred and the corporation resumed or continued its trade
or business with predominantly new assets. These rules continue to apply where more
than 50% of the shares in a corporation are transferred within a five-year period beginning prior to 1 January 2008 and predominantly new business assets are injected prior
to 1 January 2013.
New statutory rules have considerably tightened the requirements for the use of preacquisition losses. Under the new rules in force from 2008 onwards, a direct or indirect
transfer of more than 25% of a corporations shares or voting rights within a five year
period triggers a pro rata forfeiture of existing loss carryforwards. Loss carryforwards
are forfeited in their entirety where more than 50% of the shares or voting rights are
transferred. The rules also apply where shares are transferred to a group of purchasers
with convergent interests.
10.3
Legal aspects of reorganizations
10.3.1
Introduction
The reorganization and restructuring of business entities in Germany is governed principally by the German Reorganization Act (Umwandlungsgesetz UmwG), which provides a cohesive set of rules that enable German business entities to change their legal
structure efficiently to suit their needs in a changing economic environment.
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The laws main benefit is that it permits the process of reorganization to take place by
way of universal succession (Gesamtrechtsnachfolge), and thus avoids an individual
transfer of assets from entity to entity. It also aims at safeguarding the rights of shareholders (in particular minority shareholders) by mechanisms of information and
approval. The law also seeks to protect legitimate interests of creditors of an entity.
The scope of the Reorganization Act has so far been limited to reorganizations of
domestic entities. However, recent developments on the European level have put pressure on European member states to open their regimes on corporate reorganizations to
other EU resident entities. These developments include the adoption of the EU directive on cross-border mergers (2005/56/EU) that grants corporations resident in one EU
member state the right to participate in a merger with another EU resident entity, and
the decision of the European Court of Justice in the SEVIC case (C-411/03), in which
the court held that mergers between corporate entities are protected by the freedom of
establishment (Art. 43 of the EC Treaty).
To comply with the requirements set by European Cross-Border Merger Directive,
Germany enacted legislation in 2006 that permits German corporations to take part in
cross-border mergers within the European Union. Cross-border mergers are permissible for corporations that have been (i)formed in accordance with the laws of a member
state and (ii)have their statutory seat or headquarters in an EU member state. The
rules applicable to domestic mergers apply mutatis mutandis, unless otherwise expli
citly provided for in the law. In any case, a cross-border merger has to satisfy the
requirements of the legal systems of both member states involved.
However, it is unclear whether the new rules enacted fully satisfy the requirements of
the European fundamental freedoms as interpreted in the SEVIC decision. The new
rules cover only cross-border mergers of corporations, not mergers of other legal entities (such as partnerships). Furthermore, the rules relate only to mergers (Verschmelzungen), which is just one type of corporate reorganization. They do not cover other
types of corporate reorganizations such as spin-offs (Abspaltungen) or split-ups (Auf
spaltungen). Given the broad language employed by the ECJ in its SEVIC decision,
there is ample reason to believe that the rules on cross-border mergers should include
all legal entities and all types of business reorganizations.
In addition to the internationalization of the national reorganization regimes triggered
by these developments, the EU itself has adopted an EU regulation creating the Societas Europea (SE) as a truly supranational business association (Regulation of October
8, 2001, 2157/2001/EC). An SE can be established by two or more stock corporations
from at least two different EU member states and may operate throughout the EU on
the basis of a single set of rules and a unified management and reporting system.
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10.3.2
Reorganizations under the German Reorganization Act
The German Reorganization Act provides for four different forms of reorganizations:
Merger (Verschmelzung)
Division (Spaltung)
Transfer of assets (Vermgensbertragung)
Change of legal form (Formwechsel)
For these forms of transformations, the Reorganization Act provides a cohesive set of
rules, the variation of which is possible only where explicitly permitted by law. Transfers of assets (Vermgensbertragung) apply only to reorganizations involving a public entity, and are therefore not further discussed.
10.3.2.1
Merger
10.3.2.1.1 Types of mergers
A merger is a transaction by which the entire assets and liabilities of a transferring

entity (bertragender Rechtstrger) are transferred by operation of law to an absorbing entity (bernehmender Rechtstrger) without liquidation. The transferring entity
ceases to exist.
With regard to the absorbing entity, a merger may be carried out in two different ways:
It may either be carried out as a merger by absorption (Verschmelzung durch Aufnahme), where the transferring entity is merged into a pre-existing entity. Alternatively, the absorbing entity may only come into existence by the merger transaction
itself (Verschmelzung zur Neugrndung), where two or more transferring entities are
involved in the merger.
In either case, the shareholders of the transferring entity receive shares of equal value
in the absorbing entity in exchange for their cancelled interest in the transferring entity.
The shares received may be shares the absorbing entity holds in itself, or may result
from an increase of its share capital (issuance of new shares). However, the share capital of the absorbing entity may not be increased to the extent it holds shares in the
transferring entity. Thus, no new shares are issued where the absorbing entity owns
100% of the shares in the transferring company (upstream merger).
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10.3.2.1.2 Legal entities subject to merger
The provisions of the German Reorganization Act apply to partnerships (OHGs, KGs,
and GmbH & Co. KGs), corporations (GmbHs, AGs, and KGaAs), registered cooperatives (eingetragene Genossenschaften), registered associations (eingetragene Vereine)
under 21 German Civil Code (Brgerliches GesetzbuchBGB), cooperative auditing associations (genossenschaftliche Prfungsverbnde), and mutual insurance companies (Versicherungsvereine auf Gegenseitigkeit). Each of these entities may either
serve as a transferring or an absorbing entity. Economic associations (wirtschaftliche
Vereine) within the meaning of 22 BGB may only participate in a merger as a transferring entity.
10.3.2.1.3 The merger process
The principal steps of a merger process are as follows:

A merger agreement is concluded between the entities involved. The agreement is executed by the relevant representative bodies of the entities in notarized form. The agreement must contain, among other things, specific information on the share exchange
ratio and the amount of additional cash contributions.
The draft merger agreement is forwarded to the works councils (Betriebsrat) (if any)
of the entities involved no later than one month prior to the relevant shareholder meetings of each of the entities. The shareholders must approve the merger agreement by
resolution.
A merger report (Verschmelzungsbericht) is prepared by the representative bodies of
the entities involved in the merger. Its objective is to provide the shareholders with sufficient information to make a well-informed decision with regard to the merger. The
report must set out the legal and economic reasons for the contemplated merger,
describe the specific provisions of the merger agreement, and explain the reasons for
the share exchange ratio and any cash compensation. The requirement of a merger
report may be waived by unanimous resolution of the shareholders of the entities
involved or where a wholly owned subsidiary is being merged into its parent entity.
The merger agreement is examined by one or more external auditors, who are required
to submit a report as to the adequacy of the proposed share exchange ratio and cash
compensation offered. This requirement may be waived under the same conditions as
the draft of a merger report.
To approve the merger, the interest holders of the merging entities pass a merger resolution to be recorded by a public notary.
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The merger must be registered in the commercial register. A final balance sheet
(Schlussbilanz) of the transferring entity must be submitted together with the registration documents. The merger is legally effective only after registration with the commercial register.
10.3.2.1.4 Preparation of balance sheet at date of merger
The transferring entity has to prepare a final balance sheet according to German
GAAP as of the merger date. This balance sheet must be filed with the commercial
register together with the application documents. The period between the merger date
and the date of application for registration with the commercial register must not
exceed eight months.
Opening accounts are prepared if two entities are merged into a newly created entity
(Verschmelzung zur Neugrndung). Opening accounts are not required if an entity is
merged into a pre-existing entity (Verschmelzung zur Aufnahme).
10.3.2.2
Division
10.3.2.2.1 Types of divisions
A division is often referred to as a de-merger, as it is a transaction inverse to a merger.

Whereas a merger brings two entities together into a single entity, a division separates
one entity into two (or more) entities. The German Reorganization Act provides for
three types of business divisions, namely a split-up (Aufspaltung), a spin-off (Abspaltung), and a drop-down (Ausgliederung).
A split-up (Aufspaltung) is a transfer of the assets and liabilities of a transferring entity
to two or more absorbing entities by way of universal succession, whereby the transferring entity ceases to exist. The assets and liabilities may be transferred to pre-existing
entities (Aufspaltung zur Aufnahme), or may be transferred to entities newly created by
the split-up itself (Aufspaltung zur Neugrndung). The interest holders of the transferring entity are granted interests in the absorbing entities in exchange for their interest
in the transferring entity.
In contrast, under a spin-off (Abspaltung) the transferring entity does not transfer its
entire assets and liabilities to the absorbing entity, and therefore does not cease to exist
as such. The assets and liabilities may be transferred to pre-existing entities (Abspaltung zur Aufnahme) or to entities newly created by the spin-off itself (Abspaltung zur
Neugrndung). The assets and liabilities not transferred remain with the transferring
entity. Again, the interest holders of the transferring entity are granted interests in the
absorbing entities in exchange for their interest in the transferring entity.
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The difference between a spin-off and a drop-down (Ausgliederung) is that in a dropdown the interest in the absorbing entity is not granted to the interest holders in the
transferring entity, but to the transferring entity itself. The transferring entity does not
cease to exist. The assets and liabilities may be transferred to a pre-existing entity
(Ausgliederung zur Aufnahme) or to an entity formed by the drop-down itself (Ausgliederung zur Neugrndung). In the latter case, a parent-subsidiary relationship is
established.
10.3.2.2.2 Legal entities subject to division
All of the entities enumerated in 10.3.2.1.2 above (legal entities subject to merger) can
also be divided. Stock corporations (Aktiengesellschaften AGs) and limited partnerships with share capital (Kommanditgesellschaften auf Aktien KGaAs) may not be
divided unless they have been registered in the commercial register for a period of at
least two years.
10.3.2.2.3 The division process
The above comments on the merger process (under 10.3.2.1.3) apply analogously to the
division process, although some differences should be noted. Since a division involves
the allocation of assets and liabilities between different entities, the assets and liabilities to be transferred to the respective entities have to be specified by the division
agreement (Spaltungsvertrag). If the assets and liabilities are transferred to an entity
established by virtue of the division itself, a division plan (Spaltungsplan) has to be set
up by the representative body of the transferring entity.
10.3.2.2.4 Preparation of a balance sheet at the date of the division
The transferring entity has to prepare final accounts according to German GAAP as of
the division date. The final accounts have to be filed with the commercial register
together with the application documents. The period between the division date and the
date of application for registration with the commercial register must not exceed eight
months.
Opening accounts have to be prepared if an entity is divided into two newly created
entities. Opening accounts are not required if an entity is divided and assets and liabilities are transferred to an already existing entity.
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10.3.2.3
Change of legal form
10.3.2.3.1 Definition
A change of legal form involves the conversion of an entity into a different type of
business association. The identity of the entity as such remains unchanged. The change
of legal form does not involve a transfer of assets and liabilities. After the change of
legal form, the provisions relevant to the new legal form apply to the entity as such and
to its interest holders.
10.3.2.3.2 Legal entities subject to conversion
Entities may change their legal form to that of a civil law partnership (Gesellschaft
brgerlichen Rechts), a commercial partnership (Personengesellschaft), a non-commercial partnership (Partnerschaftsgesellschaft), a corporation or a registered cooperative (eingetragene Genossenschaft).
10.3.2.3.3 The conversion process
The representative body of the entity changing its legal form has to prepare a conversion report (Umwandlungsbericht), which serves to provide information on the change
of legal form to the shareholder. The report has to describe the change of legal form
and the shareholders interest in the new entity with regard to legal and economic
aspects. The report has to be supplemented by a list of all assets and liabilities presented with their fair market values (and not with their accounting values).
The interest holders of the entity have to approve the change of legal form by resolution adopted at a meeting of interest holders. The resolution must be certified by a
public notary. A draft of the resolution must be submitted to the entitys works council
(if any) no later than one month prior to the meeting of interest holders.
The change of form of the legal entity must be entered in the commercial register.
Only after registration with the commercial register does the the change of legal form
have legal effect.
10.3.3
European Company (SE)
The regulation on the Statute on the European company (Societas Europea SE)
entered into force on October 8, 2004 and provides a legal framework for the SE as a
supranational legal entity. The SE is in particular designed for companies having business operations in different member states. Furthermore, it facilitates cross-border
mergers and permits the transfer of the companys registered office.
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The SE is a limited liability company with a minimum share capital of 120,000 and
separate legal existence. The SE has to be incorporated in one of the member states, so
that one may speak of a French SE or a German SE, depending on the place of
incorporation. The SE Regulation does not constitute a comprehensive framework
covering all matters of corporate law, but leaves a wide range of subjects to be addressed
by national law. In as much, the SE is governed by different layers of law, including the
SE Regulation, SE-specific national legislation, national legislation pertaining to all
public limited liability companies, and the SE charter.
It is furthermore possible to transfer the registered office of an SE from one member
state to another. Under national law, such migration of a corporate entity is often
regarded as an event of dissolution from the perspective of the country of emigration.
By contrast, an SE is free to transfer its registered office to another member state.
However, the registered office and the place of management must always be located in
the same member state.
With regard to corporate governance, an SE is free to choose the so called dual system
(or two-tier system) followed in Germany (and various other European countries) or
the monistic system (or one-tier system) followed in Anglo-Saxon countries. Under
the two-tier system, the company has a management board (Vorstand) responsible for
the day-to-day management of the company and a supervisory board (Aufsichtsrat),
responsible for the supervision of the management board. By contrast, under the
monistic system, the company only has a board of directors as a single administrative
body. The board of directors consists of managing and non-managing directors, who
are responsible for both managing and supervising the companys activities.
Workers codetermination in the context of the formation of an SE is governed by a
separate directive (Council Directive 2001/86/EC), the intention of which is to ensure
that the codetermination rights of the labor force of the SE are not weaker than those
applying to the companies participating in the formation of the SE. The law provides
for negotiations between the SEs governing bodies and a special employee negotiating
committee to agree on the terms of co-determination within the SE.
An SE may be established only in a limited number of ways: by merger, as a holding
SE, as a subsidiary SE, and by conversion of an existing public company into an SE. In
all cases, a transnational element is required.
10.3.3.1
SEs by merger
The formation of a SE by merger requires two or more corporations, at least two of

which are governed by the laws of different EU member states. As under the German
145


Reorganization Act, this may be accomplished by a merger of one participating corporation into the other or by the merger of both corporations into a corporation established by virtue of the merger. The management and administrative bodies of the corporations involved have to draw up draft terms of the merger and a merger report. The
merger report is reviewed by the merger auditors. The merger plans must be disclosed
and filed with the commercial register. The employees representative bodies have to
be informed and given the opportunity to form a special negotiating committee. After
the general meeting of shareholders has approved of the merger plans and the creditors
have been provided with any necessary security, the SE may apply for registration with
the commercial register. Upon registration, the merger takes effect and the SE acquires
legal status.
10.3.3.2
Holding SEs
In the formation of a holding SE, the shareholders of the participating corporations

contribute their shares in these corporations to the newly formed holding SE. Private
limited liability companies (such as GmbHs) as well as stock corporations may act as
participating companies. At least two of the participating entities have to be governed
by the laws of different member states or must have had for at least two years a subsidiary company governed by the law of another member state or a branch situated in
another member state.
The representative bodies of the companies must draw up draft terms of incorporation
of the holding SE. These must, among other things, fix the minimum proportion of the
shares in each of the participating companies to be contributed into the SE.
The draft terms of formation must then be disclosed and examined by independent
experts. Finally, the general meeting of shareholders of each company promoting the
operation has to approve the draft terms of formation of the holding SE.
10.3.3.3
Subsidiary SEs
Two or more companies may form a subsidiary SE, provided at least two of them are
governed by the law of different member states, or have for at least two years had a
subsidiary company governed by the law of another member state or a branch situated
in another member state. All companies within the meaning of Article 48 of the EC
Treaty and other legal bodies governed by private law may participate in the formation
of a subsidiary SE. The formation of a subsidiary SE is accomplished by the subscription of the shares in the subsidiary SE. If the subsidiary SE has its registered office in
Germany, this process is governed by 23 ff. Stock Corporation Act (Aktiengesetz
AktG).
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Tax issues arising from corporate restructuring

10.3.3.4
SE by conversion
A stock corporation may be converted into an SE if it for at least two years has had a
subsidiary company governed by the law of another member state. The conversion is
accomplished without changing the entitys legal identity and involves neither the dissolution of the old corporation nor the formation of a new legal entity. Draft terms of
conversion and a conversion report have to be prepared. After approval of the conversion by the general meeting of shareholders, the application for the conversion is filed
with the commercial register. The conversion is legally effective upon entry in the
commercial register.
10.4
The German Reorganization Tax Act (Umwandlungssteuergesetz UmwStG) was

recently amended to cover cross-border reorganizations (Gesetz ber steuerliche
Begleitmanahmen zur Einfhrung der Europischen Gesellschaft und zur nderung
weiterer steuerlicher Vorschriften SEStEG). The amendments were made in the context of recent developments in primary and secondary European law which have led to
a certain opening of the corporate regimes of the European member states to foreign
entities (see above 10.3.1.).
Under the new rules, non-recognition treatment has been extended to cross-border
mergers involving EU or European Economic Area (EEA) entities. Whereas reorganizations in principle are carried out at fair market value, a tax-neutral transfer of assets
and liabilities at book value (or any intermediate value) is now possible provided Germanys right of taxation with respect to the assets transferred is not restricted. On the
other hand, taxpayers not wishing to reorganize at book value may also do so at fair
market value. The transferring entity is no longer bound to German generally accepted
accounting principles in its closing accounts, which strictly prescribe accounting at
acquisition cost. Thus, a reorganization profit may be generated at the level of the
transferring entity, which can within the limits of the minimum taxation rules be
offset against a potential tax loss carryforward.
The rules governing corporate contributions were also revised in connection with the
corporate reorganization amendments. Contributions may be made to or by an entity
resident in another EU/EEA state without recognition of capital gain. Furthermore, the
regime on tainted shares has been fundamentally redesigned.
The tax consequences of a specific reorganization depend both on the general principles applying to all reorganizations and on those applying to the legal form of the entities involved. In principle, a corporate reorganization may have tax consequences at
147


the level of all entities involved in the reorganization, such as the transferring entity,
the absorbing entity, and the shareholders.
10.4.1
Mergers and contributions
10.4.1.1
Mergers of corporations
A corporate merger is, in principle, carried out at fair market value. On application, a
tax-neutral transfer at book value or at any value intermediate between fair market
value and book value is possible where Germanys right to tax any built-in gains of the
assets transferred is preserved and no cash consideration is granted. A reorganization
gain resulting from a value above acquisition cost in the closing tax accounts is fully
subject to corporate income tax and trade tax on income (unless an offset against existing tax loss carryforwards is available).
The closing accounts have to be prepared by the transferring corporation with effect as
of the transfer date of the reorganization for taxation purposes (steuerlicher bertragungsstichtag), which precedes the transfer date for corporate law purposes (Umwandlungsstichtag). The transfer date may be set at up to eight months prior to the filing of
the merger in the commercial register. The income earned by the transferring corporation between the transfer date for tax purposes and the registration of the reorganization with the commercial register is attributed to the absorbing corporation with retroactive effect.
The absorbing corporation takes the assets and liabilities of the transferring corporation at the unchanged book values as shown in the closing accounts of the transferring
corporation. Profits arising from the merger at the level of the absorbing corporation
are in principle tax exempt under the general participation exemption. Loss carryforwards at the level of the transferring corporations are not transferred to the absorbing
corporation.
The absorbing corporation steps into the legal position of the transferring corporation,
in particular with regard to the book values of the assets transferred, depreciation, and
untaxed reserves. Corporate income tax credits, untaxed reserves, and the contribution
account for tax purposes of the transferring corporation are added to the respective
amounts of the absorbing corporation.
By the merger, the shareholders of the transferring corporation are deemed to have
sold their shares in the transferring corporation and to have acquired the newly issued
shares of the absorbing corporation at fair market value. If Germany is entitled to tax
capital gains on the sale of the shares in the absorbing corporation, the transaction is
deemed to be carried out at book value.
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10.4.1.2
Merger of a corporation into a partnership
A merger of a corporation into a partnership is, in principle, carried out at fair market
value. On application, a tax-neutral transfer at book value or any value intermediate
between fair market value and book value is possible where Germanys right to tax any
built-in gains of the assets transferred is preserved and no cash consideration is granted.
The corporate income tax liability of the transferring corporation for the assessment
period of the merger is increased or decreased by the tax refund which would result
from a full distribution of the corporations reserves on the transfer date (notional distribution for tax purposes).
At the level of the absorbing entity, a reorganization result (profit or loss) arises in the
amount the difference amount between the value of the absorbed assets in the closing
tax accounts of the transferring corporation and the tax book value of the shares in the
transforming corporation. The reorganization result is established separately for each
member of the partnership (being either a corporation or an individual). A reorganization profit is in principle tax-exempt to the extent the reorganization result is attributed
to a corporation as a partner, except for 5% of the reorganization profit, which is
treated as non-deductible business expense. The reorganization profit is 50% tax
exempt to the extent that the reorganization result is attributed to an individual. A
reorganization loss is not tax deductible for corporate partners and 50% tax deductible
for individuals (subject to certain limitations).
The new rules provide for a split computation of the reorganization result at the level
of the absorbing entity. Open reserves existing at the transferring corporation no longer form part of the reorganization result and are instead treated as deemed dividends
distributed to the shareholders; they are thus subject to German withholding tax. This
is of particular relevance for non-German resident shareholders, who are subject to
German taxation by way of withholding at source (unless the shares are held in a German permanent establishment), and for whom withholding tax is definitive.
The absorbing entity steps into the legal position of the transferring corporation, in
particular with regard to the book values of the assets transferred, depreciation, and
untaxed reserves. As for the merger among corporations, an existing loss carryforward
of the transferring corporation may not be carried over to the partnership or its partners.
10.4.1.3
Contributions to corporations
Unlike mergers, which generally involve the disappearance of the transferring entity
and the grant of shares in the absorbing entity to the shareholders of the disappearing
149


entity, contributions are transactions in which the transferor takes shares in the absorbing entity in exchange for the contribution.
10.4.1.3.1 Contribution of assets
Contributions of business assets (entire businesses, branches of activity, and interests

in trading partnerships) to a corporation must in principle be made at fair market value.
The contributing entity transfers and the absorbing entity takes the assets at fair market value. A contribution gain is triggered at the level of the contributing entity.
However, a contribution may be accomplished on a non-recognition basis where the
assets are contributed to an EU/EEA resident entity, Germanys right of taxation with
respect to the assets is not restricted, and the assets have a positive accounting value
for tax purposes. The absorbing corporation may grant consideration other than shares
(boot) up to the book value of the assets contributed without jeopardizing the tax-neutrality of the contribution. Non-recognition treatment is therefore available for domestic as well as cross-border contributions. However, non-recognition treatment is not
extended to entities not resident in the EU/EEA. An exception exists for contributions
by which Germanys right of taxation with respect to the granted shares is not restricted
(this applies above all where the granted shares are held in a German permanent establishment).
Capital gains resulting from a disposal of shares taken in return for a tax-neutral contribution of assets (tainted shares) are not fully tax exempt where the shares are sold
within a period of seven years after the contribution. Formerly, capital gains resulting
from the sale of tainted shares were fully taxable. Under the new rules (established by
the SEStEG), the unrealized gains existing at the time of the contribution and those
built up between the contribution and the share disposal are treated differently. Full
taxation pertains only to the unrealized gains existent at the time of the contribution,
whereas those built up after the disposal qualify for the capital gains exemption. Furthermore, the taxable portion of the unrealized gains declines pro rata temporis over a
period of seven years. To the extent that a capital gain from a share disposal within the
seven year period is fully taxable, the absorbing corporation can step up the basis of
the assets contributed.
10.4.1.3.2 Contribution of shares (share-for-share exchange)
Contributions of shares to a corporation must in principle be made at fair market value.

The contributing entity transfers and the absorbing entity takes the shares at fair market value. A contribution gain is triggered at the level of the contributing entity.
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However, a contribution may be accomplished on a non-recognition basis if the contribution causes the absorbing corporation to acquire a majority of the voting rights in
the corporation whose shares are transferred (qualified share-for-share exchange). The
absorbing corporation may grant consideration other than shares (boot) up to the book
value of the assets contributed without jeopardizing the tax-neutrality of the contribution.
Under current law, a contribution gain is triggered at the level of the contributing entity
where Germanys right of taxation with respect to the shares given or taken in the contribution is restricted. This in particular applies where shares are contributed to a foreign entity or where the shares taken in exchange for the contribution are issued to a
foreign shareholder. However, non-recognition treatment is still available if a qualified
share-for-share exchange occurs and Germanys right of taxation with respect to the
shares received from the share-for-share exchange is not restricted. Thus, contributions to a foreign corporation may be accomplished on a non-recognition basis if the
contributing entity is resident in Germany for tax purposes or if the shares received are
held in a German permanent establishment. However, non-recognition treatment
always requires the acquiring corporation to be a EU/EEA resident.
Where shares are contributed by individuals to a corporation, capital gains from the
disposal of the shares do not fully qualify for the capital gains exemption. Where the
contributed shares are disposed of within a period of seven years, the disposition triggers retroactive taxation of the built-in gains existing at the time of the contribution at
the shareholder level. The taxable built-in gains are phased out pro rata temporis over
the seven-year holding period. The historical cost of the contributed shares is stepped
up accordingly in the event of a disposal by the absorbing corporation during the holding period.
10.4.1.4
Contribution to a partnership
A contribution to a partnership must in principle be carried out at fair market value. A

contribution at book value is possible if Germanys right of taxation with respect to the
contributed assets is not restricted. The contributing entity is deemed to have transferred the assets to the absorbing partnership at a sales price equal to the value of
contributed assets in the tax accounts of the absorbing partnership. Thus, a contribution gain is triggered where the assets are contributed at fair market value.
10.4.2
Divisions
A division in the form of a split-up or a spin-off is often referred to as a de-merger

because part of a legal entity is transferred to another entity by way of universal suc151


cession (Universalsukzession). Therefore, the rules for mergers apply mutatis mutandis to divisive reorganizations.
In addition, there are special requirements that must be met to ensure non-recognition
treatment of a de-merger.
10.4.2.1
Split-up of a corporation
A split-up of a corporation (Aufspaltung) may only be carried out at book value where
the assets transferred qualify as a branch of activity (Teilbetrieb). Under the case law
of the German Federal Tax Court (Bundesfinanzhof BFH), a business division is an
organically self-contained part of an enterprise enjoying a certain degree of independence which, when viewed separately, has all (or almost all) of the characteristics of a
business unit and is viable as such. Interests in partnerships and 100% holdings in
corporations are deemed, in principle, to be business divisions.
Equity components which are fiscally unencumbered and the contribution account for
tax purposes should be apportioned to the entities involved in the de-merger based on
the ratio of the transferred assets to the assets of the transferor corporation prior to the
de-merger.
Far-reaching anti-avoidance clauses exist to combat abuse of the rules allowing for
non-recognition treatment of a de-merger. Non-recognition treatment is for instance
denied where the de-merger results in a sale to third parties or it serves to prepare such
a sale. The de-merger is deemed to serve to prepare such a sale where shares of a company involved in the split-up are sold within five years of the transfer date for tax purposes, provided these shares amount to more than 20% of the shares in the de-merging
entity before the split-up took effect. If the prerequisites for the anti-avoidance clause
are met the, assets are transferred to the absorbing corporation at their fair market
value. The other legal consequences of the de-merger are not affected.
If a split-up does not enjoy non-recognition treatment, it is taxed as a liquidation of the
transferor entity according to general rules. The assets of the transferring corporation
are distributed in kind at fair market value to the shareholders of the transferring corporation, who are deemed to contribute them into the absorbing corporation.
10.4.2.2
Spin-off of a corporation
The requirements for non-recognition treatment of a split-up (Aufspaltung) apply

mutatis mutandis to a spin-off (Abspaltung). A spin-off may only be carried out at
book values where the assets transferred qualify as a separate business division (Teil
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Tax due diligence review

betrieb). As a further prerequisite, the assets remaining at the level of the transferring
entity must also qualify as a separate business division.
10.4.3
Change in legal form
Conversion of a corporation into another type of corporation or conversion of a partnership into another type of partnership does not trigger adverse tax consequences.
The conversion of a corporation into a partnership is treated the same way as a merger
of a corporation into a partnership. Please see the comments on mergers in chapter10.4.1.2.
The conversion of a partnership into a corporation is treated as a contribution to the
corporation. Please see the comments on the merger of a partnership into a corporation
in chapter10.4.1.3.
10.5
Tax due diligence review
A tax due diligence exercise is often carried out prior to a transaction . The scope and
depth of a tax due diligence will vary according to the size and complexity of the
transaction.
A tax due diligence may include:
Establishment of the tax status of the target
Identification of tax risks
Establishment of the effective tax rate of the target
Support of cash-modelling
Analysis of tax policy
The findings of the due diligence may have an effect on the warranties granted under
the sale and purchase agreement or on the purchase price itself. They also serve to
establish the factual basis for the optimization of the transaction structure.
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Overview
11
Taxation of individuals
11.1
Overview
The taxation of individuals in Germany is based on the principle of the taxpayers ability to pay taxes. The German constitution (Grundgesetz GG) only permits the state
to tax the income of individuals if, after taxation, that individual has adequate economic means to maintain a minimum livelihood.
An individuals income is subject to income tax (Einkommensteuer) plus a solidarity
surcharge (Solidarittszuschlag) (see chapter11.7 below). Church tax (Kirchensteuer)
is collected if the individual belongs to one of the recognized churches (see chapter11.8 below). Income generated by an individual from a trade or business is also
subject to trade tax (Gewerbesteuer) (see chapter6.2.2).
Increases in wealth from inheritance or gifts are not classified as income; proceeds
from theses sources are, however, subject to inheritance tax (Erbschaftsteuer) and gift
tax (Schenkungsteuer) (see chapter11.9 below).
Value added tax (Umsatzsteuer) regulations apply if individuals operate a business
(see chapter7.1.1). Individuals are also affected by real estate transfer tax (Grund
erwerbsteuer), which arises whenever real property is transferred for consideration.
While several other European countries still have taxes on capital, Germanys net
worth tax (Vermgensteuer) has not been levied since January 1, 1997. The Federal
Constitutional Court (Bundesverfassungsgericht BVerfG) held in 1995 that certain
aspects of the net worth tax were unconstitutional and that collection of the tax must
cease at the end of 1996 if the defects were not remedied. The legislature has, however,
intentionally failed to act. Accordingly, there is at present no legal basis to levy net
worth tax in Germany.
Municipalities continue to levy a tax on real estate (real estate tax, Grundsteuer).
11.2
Basic principles of an individuals liability to tax
11.2.1
Distinction between unlimited and limited tax liability
As in most other European countries, the German income tax system is based on the
criterion of residency (Ansssigkeit). Citizenship is not a relevant factor. According to
the concept of unlimited tax liability (unbeschrnkte Steuerpflicht), individuals resi-
155

dent in Germany are subject to income tax on their worldwide income. The status of
unlimited tax liability is also relevant for various tax allowances and filing options
(e.g. joint returns for married people, child benefit payments, and child allowances).
For the purpose of income tax, an individuals residence is presumed to be the place
where an individual is domiciled or has his customary place of abode (gewhnlicher
Aufenthalt). The term domicile (Wohnsitz) involves more than having a dwelling
place (Wohnung) in Germany. In order to be liable for tax as a resident, the taxpayer
must actually use the dwelling place or, at a minimum, it must be evident from the
specific circumstances that there is an intention to use it on a long-term basis. If the
individual does not have a dwelling place or if the intention to use it on a long-term
basis is not evident, then resident tax status applies if the individual does in fact reside
in Germany. However, the facts and circumstances must indicate that the physical
presence is other than of a temporary nature. Physical presence for more than six
months will result in deemed residence. Short interruptions, such as holidays in foreign countries, are not relevant and therefore count towards the six month period.
Non-residents are subject to taxation only on certain income from German sources.
This is known as the concept of a limited tax liability (beschrnkte Steuerpflicht). If an
individual has no German-source income, no taxes are levied. Consequently, unlimited tax liability (resident tax status) is based more on the individual, whereas limited
tax liability (non-resident tax status) is based more on the source of the income.
11.2.2
Special forms of tax liability
Besides the standard categories of unlimited and limited tax liability, there are a number of specific cases where individuals not resident in Germany may also be subject to
unlimited tax liability:
German citizens working for German governmental organizations abroad, to the
extent such persons only have limited tax liability in the other country.
Individuals who are not resident in Germany, but who earn the vast majority of
their income in Germany and elect to be taxed on their German income only on a
resident basis. For further information, see chapter11.3.11 below.
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Taxation of income
11.3
Taxation of income
11.3.1
Taxation of resident individuals
Resident individuals are subject to income tax on their aggregated worldwide income
falling into one or more of the following seven categories of income:
Income from agriculture and forestry;
Income from a trade or business;
Income from self-employment;
Income from employment;
Income from capital investment;
Rental income from real estate and certain other tangible property and royalties;
Other income (of specific types).
Other income includes annuities, certain capital gains, and certain non-recurring
income. Income, which does not fall into one of the seven categories is not taxable.
11.3.2
Computation of taxable income
The tax year for income tax purposes is the calendar year.
In order to determine the total amount of taxable income, the amounts of income from
the different categories must be calculated separately. For the first two categories of
income (income from agriculture and forestry, and income from a trade or business),
the normal method of computing the gross income relevant for income taxation is the
net worth comparison method, under which the relevant gross income is the difference between the net worth of the assets pertaining to each category of income at the
end of the preceding assessment period compared to the current assessment period.
The net worth comparison method is mandatory for income from agriculture and
forestry or trade or business where the annual profits exceed 30,000 and sales revenue exceeds 500,000. Where income is below these thresholds, the net income
method may be used. Under this method, taxable income is computed by reducing
gross income by income-related expenses in accordance with cash receipts and disbursements. Business-related expenses are generally deductible under both methods.
In the case of income from self-employment, the taxpayer can choose between the net
worth comparison method and the net income method.
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Net income from employment, investment income (for further details see also chapter11.5.1 below), rental income, and certain other income is determined by deducting
any expenses incurred to produce, maintain, and safeguard that income (incomerelated expenses, Werbungskosten) from gross receipts. For employees, these expenses
include commuting expenses, tools, work clothes, certain membership dues, and certain away-from-home expenses. In the case of rental income, interest expenses, depreciation, and other related expenses can be deducted.
From 2009 on, there will be a flat tax for income from capital and capital gains. Income
from those categories will be taxed at a fixed rate of 25% and will not be included in
the calculation of the gross income (for further information, see chapter5.1.1.7 and
chapter11.4 and 11.5 below).
The basic level of tax-exempt income (Grundfreibetrag) is 7,664 from 2004 onwards.
For married taxpayers (joint return, Zusammenveranlagung), the basic level of taxexempt income is doubled.
11.3.3
Standard deductions for income-related expenses
The following standard annual deductions for income-related expenses are allowed
unless higher expenses can be itemized:
For employment income:
920
For investment income, for individuals: 51

For married individuals filing jointly:
102
For annuities:
102
An additional allowance of 750 (1,500 for married individuals filing jointly) can be
deducted from investment income (Sparerfreibetrag). Due to the introduction of the
flat tax for income from capital and capital gains in 2009, the standard deductions for
investment income will be abolished. Moreover, the Sparerfreibetrag will be replaced
by an overall allowance (Sparer-Pauschbetrag) of 801 for single taxpayers and
1,602 for married taxpayers who file a joint income tax return. Higher expenses will
no longer be deductible (see also chapter5.2.1.7, with regard to exemption option, see
chapter5.2.3.4).
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Taxation of income
11.3.4
Itemized deductions
The following itemized deductions are applicable:

Foreign income taxes that do not qualify for foreign tax credit treatment or where
a deduction is elected instead of tax credit.
Special expenses (Sonderausgaben), which are private expenses rather than
income-related expenses: They include certain alimony and maintenance payments; premiums for life insurance and accident insurance, and compulsory social
security payments, subject to limitations; expenses for vocational education, subject to limitations; and certain expenses for professional tax advice. Taxpayers who
do not itemize and earn employment income, can alternatively claim a provisional
lump sum of the employment income (Vorsorgepauschale) as a deduction. Following revisions of the treatment of retirement income beginning as of January 1,
2005, which will apply the concept of deferred taxation to the public pension insurance system as well, the provisional lump sum is to be calculated as follows:
(a) An amount, which, when measured against wage income, is equal to 50% of
the contribution to the public pension insurance system, and
(b) 11% of wage income, capped at 1,500.

The efforts to completely take into account employee pension contributions as

described in (a), above, will not be fully effective until 2025 due to the phased
introduction of the deferred taxation model.
A provisional minimum lump sum deduction of 36 is always deductible.
For joint returns, the amounts mentioned above are doubled (i.e. 3,000 and 72
respectively).
Individuals who are not subject to the public pension system (e.g. general managers) may only deduct special expenses of 11% of employment income, limited to a
maximum amount of 1,500 (doubled in case of married individuals filing
jointly).
Extraordinary expenses (auergewhnliche Belastungen): Where a taxpayer incurs

unusually high, unavoidable expenses due to extraordinary circumstances or hardship, relief may be granted by allowing as a deduction the excess of such expenses
over a reasonable burden. The definition of a reasonable burden is based on the
net income before special expenses and on the number of children, and ranges
from 1% to 7% of net income before special expenses. Certain expenses may be
allowed subject to an absolute rather than a percentage-of-income limitation.
159

Finally, other allowances may apply under the following circumstances: old age
(Altersentlastungsbetrag; 65 and older: 36.8% of total income but not more than
1,748 in 2007 (in 2008: 35.2% and 1,672); to be reduced by 1.6% annually
until 2020 and thereafter by 0.8% after 2021 with corresponding reductions in the
total allowable amount); and allowance for single parents (Entlastungsbetrag fr
Alleinerziehende; 1,308).
Retirement benefits from an earlier employment relationship will remain tax free
as a tax-exempt retirement plan (Versorgungsfreibetrag), 36.8% of retirement benefits but not more than 2,760 in 2007 (2008: 35.2% and 2,640). Until the complete abolition of the tax relief in 2040, the total allowable amount will be phased
out corresponding to the allowance for old age (see previous bullet point above).
11.3.5
Child benefit payments, child allowances
The deductibility of expenses incurred by parents for their children is subject to special rules. In order to maintain a minimum livelihood for children (who themselves
have unlimited tax liability), a system is in place which differentiates between child
benefit payments and child allowances. Tax-exempt child benefits are paid upon filing
an application with the family welfare office (Familienkasse). This comprises a
monthly amount of 154 for the first, second, and third child, and 179 for the fourth
and each further child. The child allowance, on the other hand, amounts to 1,824
(3,648 jointly filing) p.a. for each child (as a deduction against taxable income), plus
an additional allowance of 1,080 (2,160 jointly filing) p.a. for each child for care,
education, and training expenses. In most cases, however, the child allowances are not
applied, because the payment of child benefits is more advantageous for most taxpayers. The tax office automatically applies the more favorable alternative. Furthermore,
foreign employees working in Germany may take advantage of the child benefit if they
are subject to social insurance contributions. However, they are entitled to the child
allowance if they have unlimited tax liability.
Since 2006 certain expenses for child care (Kinderbetreuungskosten) due to employment of the parents are deductible. Additionally, expenses for child care due to the age
of the child (3 to 5 years old) or to vocational training or illness of the parents are
deductible as special expenses. Limitations apply in both cases.
11.3.6
Private pension savings
Since 2002, the German Income Tax Act (Einkommensteuergesetz EStG) has
included provisions that are intended to encourage individuals to save more for their
retirement. Tax benefits for additional private pension savings are granted by payment
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Taxation of income
of a retirement savings subsidy (Altersvorsorgezulage) to the individual. In order to
qualify for this subsidy, the taxpayer must conclude a certified retirement pension contract and contribute an amount, the minimum level of which is specified in detailed
regulations. The retirement savings subsidy initially comprises an annual fixed amount
of 114 in 2007 and 154 in 2008 and thereafter. For married couples filing jointly,
these amounts are doubled. If the taxpayer entitled to this subsidy has children and
also draws child benefits for them, a subsidy amount is also paid for each child (2007:
138; from 2008 onwards: 185).
Alternatively, a taxpayer entitled to the subsidy can apply for an additional deduction
of special expenses (2007: 1,575; from 2008 onwards: 2,100). The tax office automatically applies the more favorable alternative.
11.3.7
Homeowner subsidies
Since 1996, taxpayers acquiring or constructing a new house or apartment used by

themselves for residential purposes were granted homeowner subsidies (Eigenheimzulagen) upon application.
After lengthy political discussions, the homeowner subsidy was repealed as of January
1, 2006. The repeal applies, however, only to new cases. For taxpayers currently receiving benefits under the old subsidy, payments will continue to be made as scheduled.
11.3.8
Utilization of losses
Complicated rules concerning loss offset between the various income categories were
repealed as of the 2004 tax assessment period. Income and losses from different
income categories can be fully offset against each other without limitations during any
given tax assessment period. Certain exceptions continue to exist for special types of
income such as losses from livestock breeding businesses or losses from private sales
transactions, however.
If, after offset between the various income categories, a net loss results for an assessment period, it can be used to offset income in other assessment periods.
The first option is to carry the losses back to the preceding year. There is a ceiling
of 511,500 (1,023,000 for married couples filing jointly).
If a loss still remains after the carryback, it can be carried forward to future assessment periods indefinitely. Since 2004, however, there are so-called minimum taxation rules, under which loss carryforwards may be fully offset against net income
only up to a maximum of 1 million. Loss carryforwards in excess of this amount
161

may be offset against only 60% of the total net income exceeding that 1 million
threshold.
In addition to the general rules relating to the utilization of tax losses, income tax legislation also contains specific provisions on cross-border transactions. Losses not
deductible under certain circumstances include without limitation the following: losses
from a foreign permanent establishment; losses arising from the lease of property or
relating to agricultural or forestry activities based outside Germany; losses arising in
connection with income which is tax-exempt in Germany.
11.3.9
Determination of tax liability
Individual income tax is imposed at progressive tax rates as summarized in the following tables for 2007/2008:
Table 18: Single individuals
Annual taxable income
Marginal tax rate
Tax due
up to 7,664
7,665 12,739
12,740 52,151
52,152 250,000
over 250,000
0%
15.00% 23.97%
23.97% 42.00%
42.00%
45.00%
0
1 988
989 13,989
13,990 97,086
at least 97,086
Table 19: Married couples filing jointly

Annual taxable income
Marginal tax rate
Tax due
up to 15,328
15,329 25,479
25,480 104,303
104,304 500,000
over 500,000
0%
15.00% 23.97%
23.97% 42.00%
42.00%
45.00%
0
2 1,977
1,978 27,978
27,980 194,172
at least 194,173
The rates and amounts outlined above are calculated according to the formula defined
by the German Income Tax Act for 2007 and onwards.
The tax liability for married taxpayers filing jointly is determined by doubling the tax
taken from the basic tax table that would have been due on one half of the taxable joint
income. Taxes withheld at the source, such as on employment income, on dividends,
and on interest paid by a domestic bank can be credited against the income tax liability.
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Taxation of income
In addition to the income tax itself, a solidarity surcharge of 5.5% is also levied on the
income tax amount assessed.
11.3.10
Relief from double taxation
11.3.10.1 Unilateral relief
Foreign income taxes that are substantially similar to German income tax may be
credited against the German tax liability, limited to the amount of income tax actually
paid (equivalent to German income tax) in the other country. Per country limitations
also apply. Alternatively, foreign income tax can be deducted from the taxable
income.
11.3.10.2 Tax treaty relief
Tax treaties are agreements under international law between two countries. The purpose of such agreements is to avoid double taxation. Tax treaties are generally based
on one of two systems: either (i) the country of the taxpayers residence does not levy
taxes on income having its source in the other treaty country (exemption system); or
(ii)the country of residence taxes such income, but credits the taxes paid in the source
country against its own income tax liability (credit system). Under credit systems, per
country limitations normally apply. Germany may also credit notional foreign withholding taxes if so provided for in the relevant tax treaties. Provisions of this nature are
included in a few tax treaties with industrially less developed countries, normally as an
incentive for German companies to invest in those countries.
The treaty relief described above generally applies to resident individuals as well as to
corporations. If income is exempt from tax under a treaty, Germany retains the right to
take account of this income for purposes of determining the applicable average tax
rate on other taxable income in Germany (progression clause, Progressionsvorbehalt).
In addition to the treatment under tax treaties outlined above, the following principles
generally apply to income from employment and self-employment:
Remuneration paid to a resident of Germany for employment exercised in the other
treaty country is normally taxed in that other country, unless (i)the recipient is
present in the other country for not more than 183 days during the year, (ii)the salary is paid by an employer who is not a resident of the other country, and (iii) the
salary is not borne by a permanent establishment of the employer in the other
country. The tax treaties between Germany and a number of neighboring countries
contain specific regulations for cross-border commuters. Under these regulations,
the country of residence retains the right to tax the employment income of the
163

cross-border commuter under certain circumstances, even if the 183 day threshold
is exceeded.
Income from self-employment is usually taxable in the country of residence unless
the individual has a fixed base regularly available to him in the other country for
the purpose of performing his activities. Some treaties, however, apply the provisions for income from employment rather than the fixed base criterion.
11.3.11
Non-resident individuals
Non-residents are subject to income tax on certain categories of income from German
sources. To trigger German income tax, the income of the non-resident must have a
specific connection with Germany. This includes:
Income from agriculture and forestry activities in Germany;
Business income derived through a permanent establishment or a permanent representative in Germany;
Capital gains from the sale of shares in a resident corporation, provided the non
residents investment is more than 1%;
Income from self-employment or employment (to the extent that the work is performed or used in Germany);
Dividend income where the entity paying the dividend is resident in Germany;
interest on mortgages and bonds issued by German borrowers;
Rental income, where the real estate or other tangible or intangible property is
located or registered in Germany;
Certain other income, including gains on the sale of German real estate.
Non-resident individuals are in some respects treated differently from residents. As
outlined above, non-residents are subject to German income tax only with regard to
certain categories of income from German sources. Depending on the type of income,
the German source income of non-residents may be subject to tax either through withholding at the source (at graduated rates in the case of amounts deducted from wages
and salaries by the employer, or at a flat rate on gross income such as dividends), or by
direct assessment upon filing of an income tax return. Business expenses or other
income-related expenses are only deductible to the extent that they are economically
related to the relevant income. Losses from one category of income may only be offset
against income from another if both categories are subject to tax through direct assessment rather than the withholding tax procedure.
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Capital gains
The tax withheld on investment income is deemed to fully discharge the tax liability
on that income unless it is derived through a permanent establishment in Germany, in
which case the withholding tax is credited against the income tax payable upon direct
assessment.
These rules generally place taxpayers with limited tax liability in Germany at a disadvantage compared to taxpayers with unlimited tax liability in Germany. Therefore,
such rules may not withstand scrutiny in light of the underlying European rights. As a
reaction to various rulings by the European Court of Justice, the German legislature
has already eliminated a number of inconsistencies in the treatment of non-residents in
Germany. One example of this is the introduction of a notional elective unlimited
tax liability for non-residents, including the ability to claim allowances or deduct
expenses incurred for family members living in the EU and who are not subject to
unlimited tax liability in Germany.
11.4
Capital gains
11.4.1
Sales of business assets
Gains on the sale of business assets are generally included in taxable income and taxed
at ordinary rates. However, gains on the sale or disposal by an individual of his entire
business, or an autonomous part thereof, or his partnership interest, are treated as
income from a trade or business. An allowance of up to 45,000 (under certain circumstances) is granted if the seller is 55 years of age or older. The amount remaining
after this deduction is subject to a reduced tax rate (applicable to extraordinary income,
auerordentliche Einknfte). The rationale for this is that it avoids the disadvantages
of the progressive tax rate system, e.g. when a one-time gain is generated in return for
assets which have been earned over a long period. The reduced tax rate is based on
notional spreading of the capital gain over a period of five years (called the 1/5 rule). If
the capital gain does not exceed the ceiling of 5million, older taxpayers (55 and
older) may alternatively apply for a reduced tax rate. The reduced tax rate is 56% of
the average tax rate. The minimum tax rate is 15%.
11.4.2
Sales of investments held as private assets
Capital gains on the sale of investments in a corporation held as private assets are subject to tax if the individual is deemed to own a certain ownership percentage in the
corporation. A certain ownership percentage is assumed if the individual has owned a
minimum interest of 1% within the preceding five years.
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The capital gain is subject to tax if it exceeds an allowance of up to 9,060 (pro-rated
according to the interest held in the corporation).
The half-income rule (from 2009 on: part-income rule) applies to the remainder of
the gain; in other words one half (from 2009 on: 40%) of the capital gain (less allowance) is tax-exempt. It should be noted, however, that expenses cannot be deducted for
the portion of the gain which is tax-exempt.
11.4.3
Other private capital gains
Gains derived by an individual from the disposal of capital assets not used in a trade or
business (private Veruerungsgeschfte) are not subject to taxation, except in the following two cases:
A sale is taxable if the holding period is
Less than ten years in the case of real estate, or
Less than one year in case of other property e.g., securities, or if the sale occurs
before the acquisition (short sale). Gains on the sale of investments in corporations
are also taxable under these provisions. The law on private disposal transactions
has priority over the taxation of capital gains described under chapter11.4.2. From
2009 on, the non-taxation of gains from the disposal of other property beyond the
one year holding period will be abolished. As a result, every such gain will be
taxed irrespective of any holding period. Prior law will remain applicable to property purchased before January 1, 2009.
The total net gain from a disposal of capital assets not used in a trade or business is
subject to income tax at ordinary rates if it exceeds an allowance of 512 (from 2009
on: 600) per calendar year. The half-income rule applies. Losses from the disposal of capital assets not used in a trade or business can only be offset against gains
from such transactions within the same year. Losses on such gains, which cannot be
offset with capital gains in the same calendar year can be carried back and forward in
accordance with the general rules for loss carrybacks and carryforwards (see 11.3.8
above).
11.5
Special issues relating to investment income
With respect to the taxation of investment income, some of the procedures differ from
the general principles described above.
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Special issues relating to investment income

11.5.1
Half-income rule
The half-income rule applies not only to capital gains (see chapter11.4.2 and 11.4.3
above), but also as a general rule to dividends paid to individuals. In this situation,
however, only one half of the income-related expenses can be claimed as a deduction.
Upon introduction of the flat tax for income from capital and capital gains in 2009, the
modified part-income rule will be no longer a general rule. It will apply only to business-related capital gains.
11.5.2
Withholding tax on investment income
Investment income, in particular interest and dividend income, is subject to a withholding tax (Kapitalertragsteuer) at a rate between 20% and 30%; other rates apply in
special cases. The withholding tax is levied on the gross amount of investment income,
i.e. before any deduction of income or business-related expenses, special expenses, or
taxes, and must be withheld by the payor. As a result of specific tax directives, withholding tax is also levied where only one half of the investment income is subject to
tax or where the investment income is tax-exempt or where, under tax treaty provisions, the ultimate taxation will be reduced or even eliminated entirely. Under certain
circumstances, it is possible to claim a refund of the income tax withheld on taxexempt income.
In the case of interest paid by a domestic bank, the interest withholding tax (Zinsabschlagsteuer) is normally 30%. However, this withholding tax on interest is not levied,
if:
The creditor of the interest is a domestic bank (inter-bank privilege).
The interest is paid to an individual not resident in Germany.
If an individual cashes in an interest certificate with a domestic bank (so-called overthe-counter transactions), i.e. delivers a certificate embodying an interest claim to a
domestic bank in return for a cash payment, the interest withholding tax is increased
from 30% to 35%.
The 30% withholding tax need not be deducted at the source (i.e. the gross interest
can be paid out) if:
The total interest on an annual basis does not exceed the allowance of 750 plus
the 51 standard deduction (1,500 plus 102 for married couples filing jointly).
(For changes in 2009 see also chapter11.3.3);
167

Circumstances indicate that the recipient of the interest is not required to file a
German tax return;
The bank holds written instructions from the customer directing it to take account
of the allowances of 750/1,500 (certificate of exemption, Freistellungs
bescheinigung), or (in case of the second alternative) the bank holds a certificate
from the tax authorities certifying that the recipient is not required to file a German tax return (Nichtveranlagungsbescheinigung).
The introduction of the flat tax for income from capital and capital gains in 2009 also
has technical effects in the area of withholding tax. In most cases, the withholding tax
rate will be 25%. Where income from capital is subject to withholding tax, the income
tax liability is deemed to be satisfied by the tax withheld. The flat rate tax is not levied
in addition.
11.6
Filing requirements and payment of tax
In general, income tax, church tax, and (since 1995) a solidarity surcharge are assessed
upon filing of an income tax return (Einkommensteuererklrung).
Domestic taxpayers are required to file an income tax return if income for a particular
assessment period exceeds 7,664 and the income has not been subject to tax withholding. Specific provisions apply to income tax returns filed jointly by married couples. With regard to income from employment, there is often no requirement to file an
income tax return since the withholding of wage tax will already have ensured that the
income has been subject to taxation. In such cases, a special annual wage tax adjustment (Lohnsteuerjahresausgleich) is performed by the employer. Hence the amount of
taxes for the year is settled as soon as possible. A non-resident individual must file an
income tax return whenever he/she has German-source income unless the tax liability
is deemed to be satisfied by withholding at the source.
Returns must be filed with the local tax office by May 31st for the preceding calendar
year. An extension until December 31st may be granted if the return is prepared by a
professional tax advisor. Further extensions may be available upon request.
The tax is not payable with the return. Rather, the tax authorities will issue a final
assessment notice after receipt of the return. Any balance due is payable within 30 days
after receipt of the assessment notice.
The tax office will assess quarterly prepayments based on the prior years tax or on
estimates on income not subject to withholding taxes. These prepayments are due on
March 10th, June 10th, September 10th, and December 10th.
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The tax authorities are entitled to impose interest for late payment of tax, which applies
to income, corporation, trade and value added tax claims. The interest rate is 6.0%
p.a. or 0.5% per month.
Any taxpayer subject to unlimited tax liability who is not specifically required to file
an income tax return may nevertheless do so in order to be assessed for income tax.
This can be useful, for instance, where high income-related or business-related
expenses are incurred or if income is earned for only a part of the assessment period.
The deadline for filing an income tax return is the end of the second year following the
assessment period e.g., for 2006 it is December 31, 2008.
11.7
The solidarity surcharge (Solidarittszuschlag) is levied as a supplement to income

and corporate income tax and currently is at a rate of 5.5% of the assessed amount of
income and corporate income tax (see chapter6.2.1.13). It applies to taxpayers with
unlimited tax liability and to the German-source income of taxpayers with limited tax
liability.
11.8
Basic principles of church tax
Church tax (Kirchensteuer) is levied by recognized churches in Germany that have

been granted the right to impose a tax on their members. Recognized churches are
inter alia the Roman Catholic Church (rmisch-katholische Kirche), the German Pro
testant-Lutheran Church (evangelisch-lutherische Kirche), the Reformed Church
(reformierte Kirche), and Jewish parishes (jdische Kultusgemeinden). It does not
apply to foreign churches. Depending on the German state of residence, the tax
amounts to 8% or 9% of the wage tax withheld and is remitted by the employer to the
local tax office or the church tax office. For income not subject to wage tax withholding, quarterly prepayments and final payments are made along with the relevant income
tax payments. In this case, the church tax is calculated on the assessed income tax (or
on the prepayments). Church tax is a deductible (special) expense for income tax purposes. Foreign employees working in Germany are subject to church tax if they are
members of the Roman Catholic Church since this church defines itself as a worldwide
church.
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11.9
Basic principles of inheritance and gift tax
Inheritance and gift tax (Erbschaft- und Schenkungsteuer) is levied on transfers of

property by reason of death (inheritance tax), gifts during lifetime and transfers for
certain specified purposes (gift tax), as well as on the net worth of certain family foundations or trusts (at intervals of 30 years).
The transfer of domestic property valued according to the provisions of the German
Valuation Act (Bewertungsgesetz) is subject to inheritance and gift tax, regardless of
whether the transferor and/or the transferee are residents of Germany. The transfer of
foreign property is subject to inheritance and gift tax only if the decedent or donor is a
resident of Germany at the time of death or at the time when the gift is made, respectively, or if the beneficiary or donee is a resident at the time when the tax liability
arises, or if either the decedent/donor or the beneficiary/donee is a German citizen and
emigrated within a five-year period preceding the taxable event.
The tax is generally assessed on the net worth (gross values less liabilities) of the property transferred after deducting certain exemptions (e.g. an exemption allowance for
business assets of 225,000 plus a 35%-exemption of the net value of the business
assets after allowance). In the case of a resident transferor or of a resident transferee,
personal exemptions depend on the family relationship of the respective individuals.
The three classes of relationships and the respective personal exemptions for inheritance and gift tax purposes are:
Table 20: Classes of relationship
Class Relationship
I
II
III
Exemption
Spouse
307,000
(Step-) Children and Grand (step-) children of deceased (step-)
children
205,000
Grand (step-) children and (Grand-) Parents (in the event of transfers
at death)
51,200
(Grand-) Parents (for gifts), siblings and their children (first degree),
step-parents, children-in-law, parents-in-law, and divorced spouse
10,300
All others
5,200
If neither the transferor nor the transferee is a resident, an allowance of 1,100 applies
throughout. In addition, there is a surviving-spouse exemption of 256,000 less any
survivors benefits not subject to inheritance tax, and special exemptions for children
ranging from 10,300 to 52,000 depending on their age. Other exemptions from tax
may be allowed under certain circumstances.
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Basic principles of inheritance and gift tax

Taxable transfers of property are subject to inheritance tax at graduated rates, depending on the value of the property and the classes of family relationship mentioned above.
The tax rates can be illustrated as follows:
Table 21: Inheritance and gift tax classes
Net worth of inheritance/gift
up to
over
52,000
256,000
512,000
5,113,000
12,783,000
25,565,000
25,565,000
II
III
7%
11%
15%
19%
23%
27%
30%
12%
17%
22%
27%
32%
37%
40%
17%
23%
29%
35%
41%
47%
50%
For purposes of determining the applicable tax rate, transfers within a period of ten
years are accumulated, and any inheritance tax which should have been previously
levied on the transfers is credited against the resulting entire tax liability. Accordingly,
the personal exemptions are available every ten years.
Further major reform of the German inheritance and gift tax system is expected in the
near future due to the Federal Constitutional Court decision of November 7, 2006. In
this decision, the court held that the current rules by which property is valued for
inheritance and gift tax purposes violate the principle of equality before the law and
are therefore unconstitutional. The court allowed the legislature until December 31,
2008 to remedy the constitutional defects. After considerable political debate, draft
legislation was approved by the government on December 12, 2007 that would reduce
taxation in situations involving family members. Relief would be granted in particular
for transfers of business property between family members (see Chapter 5.3.3 above).
The bill is expected to be enacted in the end of 2008.
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European investment grants
12
Opportunities for international investors
Many regional, federal and European Union programs exist to promote investment in
Germany. In particular, programs are designed to promote states in eastern Germany
and investments by small and medium-sized businesses (especially within the framework of the so called Mittelstandsinitiative). The aim of the various promotional programs is to attract investments to Germany. The level of grants available depends principally on the size of the enterprise and the number of new jobs created. It should be
remembered that the programs are subject to change.
12.1
European investment grants
For the 2003 2005 grant period, Germany had approx. 4.7 billion available in EU
funding for purposes of promoting companies investments and 2.8 billion for infrastructure investments. The Financial Framework for 2007 2013 provides Germany
with approx. 26 billion for structural actions.
In principle, there are a number of ways to obtain grants from EU institutions. However, support for enterprises is usually given indirectly through the provision of federal
and regional grants funded by EU capital.
Sometimes, it is possible to apply directly to international institutions for funding.
Public invitations to apply for this type of funding may be found in the Official Journal
of the European Union. Assistance from European funds may be given in the form of
subsidies, loans at concessionary rates of interest, equity investments, or the provision
of venture capital.
Especially for small and medium-sized enterprises (SMEs) from Member States, the
EU provides assistance in different forms such as grants, loans and, in some cases,
guarantees. Support is available either directly or indirectly through the EUs Structural Funds, which are managed at the national level (see also chapter12.3 below).
SMEs can also benefit from a series of non-financial assistance measures in the form
of programs and business support services.
12.2
Investment subsidy
The investment subsidy (Investitionszulage) may be claimed in certain cases for initial
investment in states in eastern Germany (Brandenburg, Mecklenburg-Western Pomer173


ania, Saxony, Saxony-Anhalt, and Thuringia as well as special areas of Berlin). These
investment grants are available for the acquisition or manufacture of new depreciable
movable fixed assets or for the purchase or construction of buildings, provided the
investment is made
a) To found a business,
b) To extend an existing business,
c) To implement fundamentally new production methods,
d) To diversify the production for additional products,
e) On or after the purchase by an outside investor of a business that was closed or
would otherwise have been closed.
For movable fixed assets, an investment subsidy of up to 12.5% (or 15% in certain
border territories) of the acquisition or manufacturing cost is granted. The rate applicable for small and medium-sized companies increases to 25% (or 27.5% in certain
border territories). Special rates apply for investments in Berlin. The purchase or construction of new buildings attracts a standard grant rate of up to 15% of the purchase
or building cost. These tax incentives do not apply to acquisitions of low-value assets
(where the unit costs do not exceed 410) or to aircraft or motorcars. Should the maximum amount of public grants (including other subsidies) be exceeded, the investment
grant is reduced.
The movable assets must belong to the fixed assets of the business applying for the
subsidy and must remain in this business for at least five years. For SMEs this period
is shortened to at least two years. Private use of the assets, especially where this results
in constructive dividends, must not exceed 10%. Assets for which an investment subsidy is claimed must be used during the five-year period to engage in manufacturing
processes or to provide production-related services. In the event the subsidized asset is
withdrawn from the business or factory prior to the expiration of the five-year period,
the subsidy may nevertheless be retained if a comparable substitute asset is procured.
If the useful life of the asset is less than five years, then the asset must remain in the
business or factory only for this period of time.
The investment subsidy should be applied for through the relevant tax office and is
exempt from income tax, corporate income tax, and trade tax.
The 2005 Investment Subsidy Act (Investitionszulagengesetz InvZulG 2005) ceased
to apply at the end of 2006. However, the 2007 Investment Subsidy Act (InvZulG
2007) legislation which continues these tax incentives for certain investments made
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Federal and regional investment grants

between January 1, 2006 and December 31, 2010 entered into force on July 20, 2006.
The 2007 legislation made only slight changes in the subsidy requirements. Except for
some areas of the state of Berlin, the rates of investment subsidies remained
unchanged.
12.3
12.3.1
Measures to promote investment
Financial assistance from the German federal government and regional governments
is usually provided in the following ways:
Subsidies (some of which are repayable under certain conditions),
Loans at concessionary interest rates,
Guarantees.
The most important federal and regional measures to promote investment are detailed
below.
12.3.1.1
Subsidies
Subsidies may be irrecoverable, i.e. non-repayable, or repayable under certain conditions. Subsidies which are repayable under certain conditions may lead to repayment
claims being made by the provider of the subsidy if the investment is successfully
completed.
Investment subsidies are provided within the framework of the Improvement of
Regional Economic Structures joint initiative. In principle, an investment project may
qualify for a subsidy if it contributes directly and permanently to the creation of additional income in that particular region.
The conditions and the amount of the grant are approved each year in a strategic plan.
The current 36th strategic plan applies to the period from 2007 to 2010.
A condition attached to the granting of investment subsidies is that the created permanent jobs have to be maintained over a period of at least five years after the completion
of the investment project.
Investments, which may qualify for subsidies, include:
The setting up, expansion, reorganization, or fundamental rationalization / modernization of a manufacturing facility,
175


The acquisition, by an external investor at market conditions, of a manufacturing
facility which has been closed down or is threatened with closure, and
The creation of telecommuting jobs.
The investor is required to provide an appropriate portion of the equity (at least 25%)
to qualify for the grant. Investment subsidies are generally granted only if the project
will be completed within 36 months.
Those entitled to apply may choose between subsidies for capital equipment or for
labor costs.
In the case of subsidies for capital equipment, the relevant costs include:
The purchase cost or manufacturing cost of the fixed assets acquired,
The acquisition cost of intangible assets, to the extent that these have been acquired
for consideration (excluding the purchase of affiliated companies), provided these
assets are used exclusively in the business obtaining the subsidy,
The cost of leased assets, if capitalized in the books of the lessee.
All assets attracting subsidies must remain in the manufacturing facility claiming the
grant for at least five years.
Investment projects not qualifying for subsidies include:
Replacement investments,
Financing costs entered as an asset,
The purchase or manufacture of various types of vehicles, or
The purchase of second-hand assets, unless these arise from the acquisition of
manufacturing facilities which have been closed down or are threatened with closure.
The maximum level of costs that are capable of attracting subsidies is currently
500,000 for the creation of new jobs and 250,000 for the protection of existing
jobs. Under their own regulatory authority, most of the states (Lnder) have had to
further reduce this maximum subsidy level because of their poor fiscal condition.
In the case of subsidies for labor costs, the relevant costs include payroll costs (including social insurance contributions) incurred over a two-year period. The jobs subsidized must generate real net output and last for at least five years. The predominant
part of the jobs subsidized must fulfill the following criteria:
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Jobs requiring superior qualifications,
Jobs creating notable added value,
Jobs in a department of superior innovational potential.
The level of the subsidy depends on the investment location. The regional development
areas were revised on the basis of the Guidelines for Subsidies with Regional Scope
2007 2013 of the European Commission (Regional Guidelines). The joint initiative
now distinguishes between four different grades of development areas. The former B
Development Areas were classified as A or C Development Areas.
The A Development Areas comprise all states in eastern Germany except Berlin (i.e.
Brandenburg, Mecklenburg-Western Pomerania, Saxony, Saxony-Anhalt, and
Thuringia) as well as certain areas in Lower Saxony (Uelzen, Lchow-Dannenberg).
The C and D Development Areas include Berlin as well as regions in western Germany with poor infrastructure, e.g. Passau, Bad Kissingen (Bavaria), Bremerhaven,
Bremen (Bremen), Werra-Meiner, Kassel (Hesse), Emden, Braunschweig (Lower
Saxony), Dortmund, Moenchengladbach (North Rhine-Westphalia), Kaiserslautern,
Bad Kreuznach (Rhineland-Palatinate), Saarbruecken (Saarland), Flensburg, Kiel
(Schleswig-Holstein). The area ranked first belongs to the C, the one mentioned second
(if there is one) to the D Development areas.
In addition, E Development Areas were implemented as of January 1, 2004 in order to
relieve tensions between the areas with high promotional preference and the areas with
low or even no promotional preference, such as Schwandorf (Bavaria), Fulda (Hesse),
Wolfenbttel (Lower Saxony), Herzogtum Lauenburg (Schleswig-Holstein).
A general map of the Development Areas is included in Appendix 14.2. It shows the
different Development Areas in Germany distinguished between Areas A to E. The
following table summarizes the maximum rates of subsidy for these Development
Areas.
Table 22: Summary of maximum subsidy rates
Development Areas
A
C
D
Small enterprises
Medium-sized
enterprises
Other
50%
35%*
15%
40%
25%*
7.5%
30%
15%*
7.5%;
200,000 maximum
over three years
local variances possible
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Medium-sized enterprises are defined as enterprises
with fewer than 250 employees, and
with either turnover not exceeding 50 million or a balance sheet total not exceeding 43 million, and
in which less than 25% of the enterprise is legally or beneficially owned by one or
more enterprises that do not comply with this definition.
Small enterprises are defined as enterprises
with fewer than 50 employees, and
with turnover or a balance sheet total not exceeding 10million, and
in which less than 25% of the enterprise is legally or beneficially owned by one or
more enterprises that do not comply with this definition.
The above conditions must be cumulatively met in order to qualify for the investment
subsidy.
The applications for subsidies have to be addressed to the appropriate office before the
commencement of the project. Even if all requirements are met the investment subsidy
cannot be enforced at law as a legal right. Once the investment project has been completed, a statement showing how the funds have been applied should be prepared. If
there has been improper use of the funds provided, the subsidies may be recaptured.
12.3.1.2
Loans at concessionary interest rates
Loans at concessionary interest rates are granted by various public credit institutions,
such as the Kreditanstalt fr Wiederaufbau KfW (i e. KfW-Mittelstandsbank, KfWFrderbank). The application for funds must be made by a private credit institution.
The loans generally have maturities of between ten and twenty years. The maximum
amount of the loan is between 500,000 and 10 million, depending on the subsidy
program. Loans are granted, for example, for the following purposes:
Projects relating to permanent employment for unemployed individuals,
Investments by SMEs,
Cash assistance to deal with immediate liquidity problems in SMEs,
Leasing of industrial property,
Investments in environmental protection,
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Construction or expansion of photovoltaic plants,
Investments in renewable energy sources (biomass, biogas, geothermal, and hydroelectric power plants),
Development and launch of innovations,
Capital Resources Aid (under various conditions).
Loans are also available for business start-ups. Interest-subsidized loans are currently
available for amounts between 25,000 and 2.0 million.
12.3.1.3
Guarantees
Guarantees may be provided for investments in projects and equity interests if the
required loan financing cannot be guaranteed using the enterprises own customary
bank surety and if the project would otherwise not materialize due to insufficient
surety.
Some of the guarantees are extended by public credit institutions and some by private
guarantee banks. The extent of the guarantees or surety arrangements varies. In many
cases, up to 80% of the loan amount is guaranteed. All applications for guarantees
should be made through a private credit institution to the guarantee bank concerned.
12.3.2
Key areas for grants
12.3.2.1
Research and development
R&D grants are available in selected fields of technology through specialized programs run by the German Federal Ministry for Education and Research. Support is
given in this way for projects which are of considerable interest and are associated
with a high level of technical and economic risk. Currently, the grants apply to six
fields of research:
Research in natural sciences including climate and environmental research and
energy research,
New technologies,
Information and communications technology,
Biotechnology, health research, job organization, and design,
Transport, space travel, construction,
Innovations in states in eastern Germany.
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Those entitled to apply are industrial enterprises, research institutes, and higher education establishments. The R&D grants are targeted particularly at small and mediumsized businesses that have the personnel and resources needed to carry out corresponding research and development work.
Grants (which are project-linked and non-repayable) of up to 50% of the eligible costs
require expert approval prior to the commencement of the project.
12.3.2.2
Human resource development
Investment in human resource development is subsidized by the European Social Fund

(ESF) and is reflected in a number of federal and regional development programs.
Grants are given to programs that develop the professional skills of individuals, particularly those of individuals who have difficulty finding or keeping a job or are returning to work after a career break. Moreover, the European Social Fund supports Member States in their efforts to develop and introduce new, active policies and strategies to
combat the causes of unemployment and to improve professional qualifications.
12.3.2.3
Environmental protection
Loans at concessionary rates of interest are granted to most development programs

where the main purpose is to promote investment in environmental protection on a
large scale. Such assistance is given for programs in the following areas:
Air pollution control,
Noise abatement,
Water pollution control / Sewage water treatment,
Waste disposal / Reclamation of contaminated industrial sites,
Energy conservation / Renewable energy sources.
Some investment in the field of innovative environmental technology is subsidized
directly. Interest subsidies may also be given to reduce the cost of loans.
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13
Labor Law
13.1
A foreign national who intends to work in Germany for a resident or a non-resident

employer generally requires a residence permit and a work permit (see chapter1.6.1).
He or she also needs a tax card (Lohnsteuerkarte) and a social security number (Sozialversicherungsnummer).
13.2
Employment
13.2.1
Employment contract
Employment contracts should be entered into, or confirmed by the employer, in writing

(Nachweisgesetz). However, a lack of written form does not render the contract void or
unenforceable. An employment contract can be concluded for an indefinite period or a
limited period (fixed-term contracts). A clause limiting the term of an employment
contract (fixed-term contract) is enforceable if an acceptable justification for the time
limitation exists, e.g. work on a temporary project. In addition, fixed-term contracts
are also valid without objective justification in three primary cases, provided the duration of the contract is fixed according to the calendar. (i)Fixed-term employment for
periods of up to two years is permissible if the employee did not previously work for
the same employer. (ii)Fixed-term employment is permissible in the first four years
after the formation of a company (start-up period). (iii)Fixed-term employment is permissible for periods of up to five years for employees who are 52 years of age or older
at the time of hiring and have been unemployed for at least four months immediately
prior to commencement of the fixed-term contract. This exception also applies to
employees who meet the age requirement, but were not technically unemployed
because they were drawing certain transitional benefits or held a publicly subsidized
job. Time limitations are unenforceable unless in writing. Employees wishing to challenge a time limitation in their employment agreement must file an action in the labor
court for declaratory judgement that the employment relationship continues despite
expiration of the specified deadline. The filing deadline is three weeks from the date of
termination according to the contract.
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Labor Law
13.2.2
Terms of employment
The employer and the employee are generally free to agree on the terms of the employment contract. However, this right is limited by mandatory provisions of the law and
by collective bargaining agreements (Tarifvertrge) and works council agreements
(Betriebsvereinbarungen).
13.2.2.1
Working hours
Generally, the German work week is between 35 and 40 hours. The maximum work
week allowed by law is 48 hours (Arbeitszeitgesetz).
13.2.2.2
Paid vacation
The statutory minimum vacation entitlement is 20 days per calendar year, based on a
normal five day working week (at least four weeks of paid vacation annually).
13.2.2.3
Continued payment of salary in the event of illness
The law requires employers to continue to pay employees during the first six weeks of
absence from work due to illness (see chapter13.4.2.1).
13.2.2.4
Discrimination
In 2006, the German parliament enacted general anti-discrimination legislation (Allgemeines Gleichbehandlungsgesetz AGG). This new legislation is based on EU equal
treatment and anti-discrimination directives and is commonly referred to as the antidiscrimination law. The new bill prohibits discrimination based on race or ethnic origin, gender, religion, disability, age, or sexual identity. The AGG enables employees to
sue their employers for punitive damages if the employers fail to protect them against
discrimination in the workplace.
13.2.2.5
Requests to work part-time
Any full-time employee who has been employed for more than six months by the same
employer may request that he or she be employed on a part-time basis instead, provided the employer employs more than 15 persons. The employer must grant this
request unless it is unfeasible for operational reasons, e.g. because the reduction of
working time would have a negative impact on the organization, work flow, or safety,
or would lead to excessive costs. Other acceptable reasons for refusal may be specified
by collective bargaining agreements.
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Employment
13.2.2.6
Maternity and parental leave
For the last six weeks of pregnancy and the first eight weeks after giving birth, mothers are not permitted to work (maternity leave, Mutterschaftsurlaub). The law requires
employers to continue to pay mothers during their maternity leave. Furthermore, the
mother or the father may elect up to three years special postnatal leave to care for and
raise the new-born child (parental leave, Elternzeit). For a period of 12 months, the
parent who stays at home receives a monthly tax-free allowance amounting to 67 percent of his or her last net take-home pay or 1,800, whichever is less. The allowance is
paid by the federal government. The contractual relationship between the employer
and the employee is suspended during parental leave. Once parental leave has ended,
the parent has the right to resume his or her former job or a similar position with the
same employer.
13.2.3
Termination of employment
Employment contracts can be terminated by either party by giving notice of termination (Kndigung) to the other contracting party. The notice of termination must be in
writing in order to be effective. German labor law distinguishes between ordinary
termination (discretionary dismissal without cause effective at the end of a notice
period) and extraordinary termination (dismissal for cause with immediate effect).
Minimum periods of notice are stipulated by the law (Brgerliches Gesetzbuch). Generally, a statutory notice period of four weeks applies. The statutory notice period for
termination by the employer increases with the length of the employment (for instance,
employment of five years extends the notice period to two months). Statutory notice
periods are minimum notice periods and can be shortened only by collective bargaining agreements. When concluding an employment contract, the parties often agree on
a probationary period (Probezeit) of up to six months. During this period, the employer
and the employee can terminate the employment on only two weeks notice.
Extraordinary dismissal is permissible if there is reasonable cause (wichtiger Grund)
for immediate termination. In order to constitute reasonable cause, the circumstances
must be such that continuing the employment until the end of the regular notice period
(or, for fixed-term contracts, until the contractual expiration date) would be unreasonably burdensome (unzumutbar) for the employer. Criminal acts against the employer
or colleagues are examples of reasonable cause. Extraordinary dismissal is only possible within two weeks of the time the employer learns the facts on which the termination is based.
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Labor Law
Fixed-term contracts terminate automatically at the end of their agreed term. They are
subject to termination without cause (ordinary termination) only if this has been
agreed in the individual agreement or the applicable collective bargaining agreement.
Employees wishing to challenge the validity of their dismissal must file a complaint
before a labor court within three weeks of the date on which they have received the
notice of dismissal.
Certain groups of employees, such as works council members, disabled employees,
pregnant women, and employees on parental leave, have special protection against
dismissal.
If a works council (Betriebsrat) exists, the employer is obliged to consult it in every
case before dismissing an employee, even though the councils response does not bind
the employer. Termination without proper hearing of the works council is ineffective.
13.2.4
Job security legislation
The right of the employer to terminate employment contracts without cause (ordinary
termination) is severely restricted by the Employment Protection Act (1951
Kndigungsschutzgesetz KSchG, last amended in 2006). In general, it applies to all
employees who have worked for the employer for more than six months, provided the
employer has more than ten employees (five employees for persons who have held their
job since December 31, 2003). Discretionary termination of an employment contract
with an employee covered by the Act is ineffective unless the employer can prove that
the termination is socially justified. As a rule, social justification is deemed to
exist only if the termination is occasioned by reasons relating to the person or the
behavior of the employee or by urgent business reasons that prevent the continuation of
the employment. For terminations based on business reasons, the employer has to take
social factors into consideration in selecting the employees to be discharged (Sozialauswahl). These social factors include the duration of employment, the employees
age, spousal and child support obligations, and disabilities.
13.3
Labor regulations
13.3.1
Collective bargaining agreements
In Germany, there are numerous legal provisions which establish a general framework
for wages and salaries, as well as for other terms and conditions of employment. The
detailed terms and conditions (e.g. the amount wages and salaries and their constituent
elements, working hours, notice periods, holidays, and non-mandatory social insur-
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Labor regulations
ance payments made on the employees behalf) are generally agreed in the course of
collective negotiations between the trade unions (Gewerkschaften) and the employer
associations (Arbeitgeberverbnde). The individual trade union enters into collective
bargaining agreements (Tarifvertrge) through collective bargaining with the employer
or employer association either at the national, regional or local level, or at the company
or industry sector level. Each collective agreement consists of two parts: The first part
deals with the rights and duties of the contractual partners. The parties two main obligations are to maintain the industrial peace and to use all available means to ensure
that their members abide by the agreement. The second part sets forth rules related to
labor contracts, to operational questions, and to the works constitution within the
meaning of the Works Constitution Act. Only members of the trade union and members of the employer association are actually bound by the agreements. In practice,
there is rarely any discrimination against employees who are not trade union members
because the employers wish to avoid further organization of employees in trade unions.
The German Federal Ministry of Labor and Social Affairs (Bundesministerium fr
Arbeit und Soziales) may, at the request of one of the negotiating parties, declare a collective bargaining agreement to be universally binding. If such a declaration is made,
the agreement applies to all employees in the industry sector and geographic region,
even if their employer is not a member of the respective employer association.
In principle, the terms and conditions of employment for executive staff (leitende Ange
stellte) are not covered by collective bargaining agreements, but are subject to individual agreements instead. Executive staff is defined under the German Works Constitution Act (Betriebsverfassungsgesetz BetrVG, see below) as those employees who
are entitled independently to hire and dismiss employees in the company, have full
power of attorney or procuration (Prokura), or regularly make management decisions.
The Confederation of German Employer Associations (BDA) is a national umbrella
organization, consisting principally of employer associations classified by industry
sector. The BDA formulates and represents the interests of employers at the national
and international level, for example by developing financial, employment, social and
training policies.
The German Trade Union Federation (DGB) is an umbrella organization which coordinates the positions of eight trade unions from all fields of industry in their dealings
with the political decision-makers. The DGB defends the interests of the employees
who are members of its member trade unions.
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Labor Law
13.3.2
Co-determination and works councils
Employee participation, i.e. the ability and right of employees to influence company
decision-making processes, takes place in Germany mainly through the works council
(Betriebsrat) (at the operational level) and the supervisory board (Aufsichtsrat) (at the
company level).
At the company level, the Coal, Steel, and Iron Industry Co-Determination Act (MontanMitbestG 1951, last amended in 2004) requires stock corporations (AGs) and limited liability companies (GmbHs) in the coal, steel, and iron industry with more than
1,000 employees to grant employees equal representation in the Supervisory Board,
meaning that the Supervisory Board consists of an equal number of shareholder and
employee representatives. To avoid stalemates, the Supervisory Board also has a neutral member who has no allegiance to either the employees or the shareholders. Furthermore, a human resource director, who may not be elected without a majority of the
votes cast by the employee representatives, is appointed to the management board and
is ranked equally with other board members.
The Act on the Co-Determination of Employees (MitbestG 1976, last amended in
2005) requires stock corporations (AGs), limited partnerships with share capital
(KGaAs), and limited liability companies (GmbHs) with more than 2,000 employees to
have equal representation for the employees and the owners of the company. In stalemate situations, the Chairman of the Supervisory Board, who generally represents the
interests of the owners, has a double vote. The human resource director is appointed to
the management board and is ranked equally with other members of that board. In
contrast to the rules set out in the Coal, Steel, and Iron Industry Co-Determination Act
(MontanMitbestG) referred to above, this appointment can be made without a majority
vote from the employee representatives.
The One-Third Participation Act (DrittelbG 2004, replacing identical provisions in the
BetrVG) requires one third of the members of the Supervisory Board to be employee
representatives in the case of all AGs, KGaAs, and GmbHs with more than
500 employees, and in the case of all AGs and KGaAs which were entered in the commercial register prior to August 10, 1994 but are not family-owned companies.
Co-determination at the operational level is governed principally by the German
Works Constitution Act of 1972 (Betriebsverfassungsgesetz BetrVG 1972, last
amended in 2004). This law applies irrespective of the legal form of the company. In
all enterprises with more than five permanent employees who are entitled to vote, an
elected works council (Betriebsrat) must be established at the employees request. The
main function of the works council is to monitor all laws, regulations, collective bar-
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Labor regulations
gaining agreements, and works council agreements (Betriebsvereinbarungen) applicable to the employees. Works council agreements are agreements between the works
council and the employer which are binding on the enterprises workforce and consist
of detailed regulations governing the terms and conditions of employment (e.g., working hours, the timing of breaks, and safety issues). However, wages and other working
conditions which are regulated or normally regulated by collective bargaining agreements are not permitted to be the subject of a works council agreement. The works
council may also play a role in training, perform consultation and advisory duties, and
have nomination rights, participation rights and co-determination rights in personnel,
organizational, and economic matters. The number of works council members within
an enterprise increases with the number of its permanent employees.
A central works council (Gesamtbetriebsrat) must be established in companies with
multiple works councils at different business locations (Betriebssttten). The local
works councils are not subordinate to the central works council. Rather, the central
works council is responsible for dealing with matters which relate to the company as a
whole or to several business locations and which cannot be settled by the local works
councils or which require uniform resolution throughout the entire company.
In a consolidated group (Konzern) in which there are works councils in more than one
company, a group works council (Konzernbetriebsrat) can be established in order to
represent the interests of all employees of the company group. The group works council is responsible for dealing with matters which relate to the group or to several group
companies and cannot be settled by the individual works councils (e.g. welfare services with group-wide effect) or which require uniform resolution throughout the
entire group.
In the case of enterprises operating throughout the European Union, the European
Works Councils Act (Gesetz ber Europische Betriebsrte EBRG 1996, last
amended in 2000 transposing the European Works Councils Directive of September
22, 1994 into German law) requires a European Works Council to be set up by means
of an agreement if the employees so request. If no agreement can be reached, the European Works Council is established by law. An enterprise operating throughout the
European Union is defined as an enterprise which has at least 1,000 employees in the
member states of the European Union and has at least 150 employees in each of at least
two different member states. The European Works Council consists of employees of
the enterprise operating throughout the European Union, i.e. one representative from
each member state in which the enterprise operates. Once every calendar year, the
European Works Council should be informed and consulted by the management of the
enterprise operating throughout the European Union about business developments and
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Labor Law
future prospects of the enterprise, and should be provided with the necessary documents relating to these topics on a timely basis. Furthermore, the European Works
Council has to be informed and on demand consulted regarding extraordinary matters, e.g. cross-border production outsourcing.
The Societas Europaea Act (SEEG Gesetz zur Einfhrung der Europischen Gesellschaft, 2004) enables companies to merge into a so-called Societas Europaea (SE).
The SE is the first corporate entity to be uniformly available in all EU member states.
The details of the co-determination system applicable to the employees of an SE are
basically subject to negotiation between a special committee acting on behalf of the
employees of the merging companies and the management of those companies. If a
consensus cannot be achieved, an SE-works council is established by law. Furthermore, if a German corporation is involved, the German co-determination rules apply.
The number of employee representatives in the SEs Supervisory Board or Board of
Administration (Verwaltungsrat) is equal to the highest number of employee representatives in any of the merging companies. Since the German co-determination rules
provide for equal representation or one-third representation for employees (depending
on the number of employees of the company), the German co-determination rules typically determine the number of employee representatives in an SE where a German
corporation is involved.
New rules for cross-border mergers are set out in the Employee Participation Act
(MgVG Gesetz ber die Mitbestimmung der Arbeitnehmer bei einer grenzberschrei
tenden Verschmelzung, 2006). The system of employee participation is very similar to
that which applies when establishing an SE by way of a merger. However, there are
some important differences. Unlike the rules governing employee participation in an
SE, the Employee Participation Act provides for employee participation only at the
board level, not at the operational level.
13.4
Labor costs
13.4.1
Wage regulation
Employment contracts normally provide for salary or wages payable on a monthly

basis. When employment contracts are subject to universally binding collective bargaining agreements (allgemeinverbindliche Tarifvertrge) specifying a particular
minimum payment, the salary or wages must equal or exceed the minimum amount
for the relevant job.
In the past, Germany was one of only five European Union countries without a statutory minimum wage. In autumn 2007, the introduction of a statutory minimum wage
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Labor costs
became the subject of political controversy. As an initial result, minimum wage legislation was enacted for Germanys postal sector effective January 1, 2008.
13.4.2
Social insurance system
The German public social insurance system provides for pension insurance, health
insurance, nursing care insurance, unemployment insurance, and accident insurance.
In general, social insurance coverage is mandatory for all employees working in Germany, regardless of their citizenship or the residence of their employer. Employees
temporarily transferred by a foreign employer to a German branch of the same enterprise are generally exempt from German social insurance contributions. In order to
qualify for the exemption, employees must be able to prove their intention to return to
their home country, and the foreign employer must retain the essential functions of an
employer, such as decisions about salaries, promotion, transfers, etc. The critical factor
for the German authorities is whether the employee remains on the non-German payroll.
The employer and the employee in general pay equal contributions to the insurance
system, except for statutory accident insurance, which is borne entirely by the employer.
The employers portion of social insurance contributions does not constitute taxable
income for the employee. The employer is liable for remitting its contributions as well
as those of the employee and generally deducts the employees portion from wages or
salaries.
13.4.2.1
Health insurance and nursing care insurance systems
Health and nursing care insurance is mandatory for employees. Contributions are
computed as a percentage of earnings and are generally shared equally by the employer
and employee. The current rates for health insurance are around 14% (shared equally
by the employer and employee), with a 0.9% supplement paid solely by the employee.
The current rate for nursing care insurance is 1.95%. A childless employee must pay
an additional contribution of 0.25% to the nursing care insurance system.
The wage and salary amount that is subject to insurance contributions is capped. In
2008, the applicable ceilings for health and nursing care insurance contributions are
43,200 per year or 3,600 per month. Wages and salaries in excess of these amounts
are not counted when calculating health and nursing care insurance contributions.
Employees may opt for private health insurance instead of public insurance if they can
show that their gross annual salary in 2008 exceeds 48,150 and that their gross
annual salary exceeded the respective upper income limit in the last three years as
well. Employees who opt for private health insurance are usually legally entitled to a
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Labor Law
tax-free reimbursement from the employer of 50% of the respective premiums, up to
one half of the maximum contribution payable under the public system.
In general, the public health insurance system covers the employee and his or her family and provides benefits that include medical and dental treatment, prescription medicines, and under certain conditions, glasses (i.e. for children under 18 years), preventive examinations, maternity care, hospitalization, and surgery. However, some restrictions do apply. The nursing care insurance system provides long-term care benefits.
If an employee is ill, the employer is required to continue paying the employee 100%
of his or her normal income for a period of six weeks. Once the six-week period has
elapsed, the employee receives payments from the health insurance system. The government scheme will pay a percentage of ones income up to a maximum of approximately 2,520 per month as statutory sick pay. This sick pay is generally not subject to
a time limit, although it cannot exceed 78 weeks in the case of one and the same illness
within a period of three years.
13.4.2.2
Public pension insurance system
Combined employer and employee pension contributions currently amount to 19.9%

of the employees gross monthly earnings. For 2008, pension insurance contributions
are calculated on the basis of monthly earnings up to 5,300 (4,500 in the East German states).
The annual ceiling amount for the calculation of pension insurance contributions is
63,600 (54,000 in the East German states). The ceiling amounts are generally
increased annually.
The public pension system provides for old age, disability, survivors, and orphans
pensions, and some rehabilitation treatments. Old-age benefits are normally available
from age 65. However, in March 2007 the Bundestag increased the statutory retirement age from 65 to 67. The statutory retirement age will be raised incrementally
starting in 2012 and reach age67 in 2029 for those born in 1964 or later. The minimum vesting period for old age, disability, and survivors pensions is five years. Pensions are computed on the basis of a formula which takes account of factors such as the
insureds gross income, the average income of all the persons insured by the system,
and the recognized period of coverage. Pensions are generally adjusted annually
depending on the development of the general earnings level. In 2005, the ratio of the
number of retired persons to the number of contributors was added as a supplementary
pension adjustment factor (Nachhaltigkeitsfaktor). Since then, pensions have not risen
as fast as wages and salaries as a consequence.
190

Labor costs
The taxation of public pensions was radically changed in 2005. Until 2004, beneficiaries paid tax only on the income portion of their pension payments. The taxable portion varied depending on the age of the recipient at the time of the first pension payment (e.g. 27% for persons retiring at age 65). Starting in 2005, the taxable portion of
the pension depends solely on the calendar year in which the first payment occurs; the
beneficiarys age is irrelevant. Under the new regime, full taxability of pension payments is phased in over a transition period that begins in 2005 and ends in 2040. For
pensions first drawn in the years 2005 ff., a tax-exempt amount is determined by applying a percentage the so-called exemption quota to the monthly pension in the initial
year. The amount so determined remains fixed for the duration of the pension; hence
subsequent increases in the pension amount do not alter the amount of the exemption.
For pensions commencing in 2005, the exemption quota is 50%. For pensions commencing in subsequent years, the exemption quota decreases in steps of 2% annually
through 2020, then 1% from 2021 to 2040, so that pensions commencing in 2040 or
thereafter are fully taxable.
13.4.2.3
Unemployment insurance system
As of January 1, 2008, unemployment insurance contributions are calculated as 3.3%

of an earnings base that is capped at 63,600 annually or 5,300 monthly. For the
East German states, the ceiling is 54,000 annually or 4,500 monthly. The employer
and the employee each pay half of the contribution. Unemployment insurance provides
benefits in the event of termination of employment, layoffs due to weather conditions
(e.g. in the construction industry), and temporary layoffs due to reduced production
levels.
In addition, this type of insurance is used to fund a broad range of vocational training
courses designed to help former employees find alternative employment.
13.4.2.4
Statutory accident insurance
Contributions to the cooperative associations for statutory accident insurance and

accident prevention (Berufsgenossenschaften) are determined on the basis of a rating
of the risks applicable to each individual enterprise. This rating depends, in turn, on
the industry sector in which the enterprise operates. The contribution will typically
range from 0.5% to 4% of the total payroll amount. The cost is borne solely by employers, who are mandatory members of the cooperative associations for their particular
industry.
The cooperative associations provide benefits in case of occupational diseases, as well
as for injuries suffered at work or on the way to or from work. The benefits include
191

Labor Law
medical and hospital treatment, rehabilitation therapy, sick pay, as well as disability,
survivors, and orphans pensions.
13.4.2.5
International agreements
The European Union has established regulations on social insurance which provide for
reciprocal coverage among the member states of the EU and the European Economic
Area (EEA). With the eastward expansion of the EU, the European regulations regarding social insurance have also been applicable to the following countries since May 1,
2004: the Czech Republic, Cyprus (Greek part), Estonia, Hungary, Latvia, Lithuania,
Malta, Poland, Romania, Slovak Republic, Slovenia; and since January 1, 2007 to
Romania and Bulgaria. Additionally, Germany has entered into social insurance agreements with Australia (on pension insurance only), Bosnia and Herzegovina, Bulgaria,
Canada (on pension insurance only), Chile (on pension insurance only), China (on pension insurance only), Croatia, Israel, Japan (on pension insurance only), Korea (on pension insurance only), Macedonia, Morocco, Serbia and Montenegro, Switzerland,
Tunisia, Turkey, and the United States (on pension insurance only). In general, these
agreements provide that an expatriate continues to contribute only to the social insurance plan in his or her home country if the stay in the other country does not exceed 12
to 24 months. In most cases, an extension can be applied for. Generally, people can
choose between the social security systems of the two countries. According to the
agreements, past work credits from both countries are combined for the purpose of
determining eligibility for social security benefits under one of the two systems.
Under German domestic law, in principle no pension payments are made to non-resident aliens. However, an expatriate leaving Germany may apply for a refund of the
employee portion of the contributions made to the German pension system at any time
once two years have passed since the last contributions were payable.
The social insurance agreements that Germany has concluded generally allow pension
payments to foreigners living abroad. Most agreements provide for a voluntary continuation of contributions once a foreigner lives abroad, but do not permit a one-time
refund.
192

Table of withholding tax rates
14
Appendix I
14.1
Country
Argentina
Armenia
Australia
Austria
Azerbaijan
Bangladesh
Belarus
Belgium
Bolivia
Bosnia-Herzegovina
Bulgaria
Canada
China (Peoples Rep.)
Croatia
Cyprus
Czech Republic
Denmark
Ecuador
Egypt
Estonia
Finland
France
Georgia
Greece
Hungary
Iceland
India
Indonesia
Iran
Ireland
Israel
Italy
Ivory Coast
Jamaica
Japan
Kazakhstan
Dividends
Individuals,
Qualifying
companies
companies1
(%)
(%)
15
15
15
15
15
15
15
15
10
15
15
15
10
15
15
15
15
15
15
15
15
15
15
25
15
15
10
15
20
10
25
15
15
15
15
15
15
15
15
52
5
15
5
152
10
15
152
5
10
5
102
52
52
15
15
52
102
52
15
252
52
5
10
10
15
102
25
102
15
10
15
5
193
Interest
Royalties
(%)
(%)
10/15
5
10
03
10
10
5
0/153
15
0
06
0/10
10
0
103
03,4
03
10/15
15
103
03
03
5
103
03
0
10
10
15
03
15
0/103
15
10/12.5
10
10
15
0
10
03
5/10
10
3/5
03
15
10
56
0/10
7/10
0
0/53
53
03
15
15/25
5/103
0/53
03
0
03
03
0
10
7.5/10/15
10
03
0/5
0/5
10
10
10
10

Appendix I
Country
Kenya
Korea (Rep.)
Kuwait
Kyrgyzstan
Latvia
Liberia
Lithuania
Luxembourg
Macedonia
Malaysia
Malta
Mauritius
Mexico
Moldova
Mongolia
Morocco
Namibia
Netherlands
New Zealand
Norway
Pakistan
Philippines
Poland
Portugal
Romania
Russia
Serbia
Singapore
Slovak Republic
Slovenia
South Africa
Spain
Sri Lanka
Sweden
Switzerland
Tajikistan
Thailand
Trinidad and Tobago
Tunisia
Turkey
Turkmenistan
Dividends
Individuals,
Qualifying
companies
companies1
(%)
(%)
15
15
15
15
15
15
15
15
15
15
15
15
5
5
5
52
10
52
102
15
5
52
15
15
15
10
15
15
15
15
15
15
15
15
15
15
15
15
15
15
15
15
15
15
15
0/5/15/30
15
20
20
15
20
15
5
5
15
5
5
10
102
15
0
10
10
52
152
52
5
15
5
52
52
7.5
102
15
02
0
5
15
10
10
15
15
194
Interest
Royalties
(%)
(%)
15
0/10
0
5
0/103,4
0/10/20
0/103,4
03
0
15
03
0/unlimited
0/10/15
0/5
10
10
0
03
10
0
10/20
0/10/15
0/53
10/153
0/37
0
0
0/8
03,4
0/53
10
103
10
03
0
0
0/10/25
10/15
10
15
5
15
2/10
10
10
5/103,4
10/20
5/103,4
53
10
10
03
15
10
0
10
10
10
03
10
0
10
10/15
53,4
103
37
0
10
8
53
53
0
53
10
03
0
5
5/15
0/10
10/15
10
0


Country
Ukraine
United Arab Emirates
United Kingdom
United States of America
Uruguay
Uzbekistan
Venezuela
Vietnam
Zambia
Zimbabwe
1
3
4
5
6
7
8
Dividends
Individuals,
Qualifying
companies
companies1
(%)
(%)
10
15
15
15
15
15
15
15
15
20
5
5
152
58
15
5
5
55/10
5
10
Interest
Royalties
(%)
(%)
2/5
0
03
0
15
5
5
0/10
10
10
0/5
0
03
0
10/15
3/5
5
7.5/10
10
7.5
The rates in this column apply if the holding is at least 25% of the German companys capital or voting power
(Austria, Canada, Denmark, France, Kuwait, Malta, Mexico, Mongolia, Namibia, Poland, Romania, Russia,
Sweden, Tajikistan, Turkey, USA, United Arab Emirates: 10%, Morocco, Pakistan, Switzerland, Ukraine:
20%).
Upon request dividend payments to qualifying EU companies are exempt from withholding tax (see chapter6.2.1.8.1). Notwithstanding the foregoing, dividends are allowed to be taxed at the source in Estonia until
Dec. 31, 2008 if there is no taxation when profits are retained.
Upon request interest and royalty payments to qualifying EU companies are exempt form withholding tax (see
chapter6.2.1.8.3).
For these countries there is a transitional period of up to 6 years (May 1, 2010) for royalties or interest or
both.
The lower rate applies if the holding is at least 70% of the share capital in the German company.
For Bulgaria there is a transitional period up to 9 years (December 31, 2014) for royalties or interest or
both.
For Romania there is a transitional period up to 4 years (December 31, 2010) for royalties or interest or
both.
Complete elimination of taxation at the source on cross border dividend distributions, provided the recipient
company holds at least 80% of the voting rights in the distributing company and meets one of the requirements listed in Article 28 Tax Treaty between Germany and the United States.
195

Appendix I
14.2
Map of development areas in Germany
Vorschlag: Karte deutscher Regionalfrdergebiete 2007 - 2013

(Beschluss Bund-Lnder-Planungsausschuss der GA vom 20.02.2006,
vorbehaltlich der Notifizierung durch die EU-Kommission)
GRW-Frdergebiete
&LENSBURG
3CHLESWIG
.ORD
FRIESLAND &LENSBURG
2GEN
2ENDSBURG
%CKERNFRDE
3#(,%37)'
ZU0INNEBERG
3TEINBURG
#UXHAVEN
7ITTMUND
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7ILHELMS
HAVEN
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&RIESLAND
7ESER
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,EER
!MMERLAND
/SNABRCK
Amsterdam
/SNABRCK
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"AD$OBERAN
$EMMIN
7ISMAR
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(ERZOGTUM
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(ARBURG
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7ALDSHUT
7OLFRATS
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/STALLGU
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0ARTENKIRCHEN
/BERALLGU
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(AMELN
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!.(!,4
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3!#(3%.
4(2).'%.
Lige
(%33%.
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Luxembourg
0&!,:
"!9%2.
"!$%.
7244%-"%2'
100 km
Zrich
BBR Bonn 2006
Strasbourg
Innsbruck
Gemeinden, Stand 31.12.2003
Datenbasis: Beschluss Bund-LnderPlanungsausschuss der GA vom
20.02.2006
Frdergebiete der Gemeinschaftsaufgabe Verbesserung

der regionalen Wirtschaftsstruktur 2007 - 2013
in gemeindescharfer Abgrenzung
A - Frdergebiet
D - Frdergebiet
C - Frdergebiet
D - Frdergebiet (davon Stdte/Gemeinden teilweise)
C - Frdergebiet (davon Stdte/Gemeinden teilweise)
Teilweise C - Frdergebiet, teilweise E - Gebiet
Teilweise C -, teilweise D - Frdergebiet
Teilweise C - Frdergebiet (keine Frderung

von Grounternehmen/Groinvestitionen)
E-Gebiet (Schutzklausel/Einvernehmensregel)
keine Frderung
Annotation to legend: Frdergebiete = development areas.

The above map of German regional development areas for the years 2007 2013 is based on a resolution adopted
on February 20, 2006 by the German Federal-State Planning Committee (Bund-Lnder-Planungsausschuss) for
the Joint Task Improving the Regional Economic Structure (Gemeinschaftsaufgabe Verbesserung der regionalen Wirtschaftsstruktur GA). The map was approved by the European Commission on November 8, 2006.
196

KPMG
15
Appendix II
15.1
KPMG Deutsche Treuhand-Gesellschaft Aktien

gesellschaft Wirtschaftsprfungsgesellschaft
National Office
Klingelhferstrasse 18
10785 Berlin

15.2
Post Box 303453

10728 Berlin
T +49 30 2068-0
F +49 30 2068-2000
KPMGs regional tax offices in Germany
Region North

Bremen
Hamburg
Hanover

Regional office
Michaelis Quartier
Ludwig-Erhard-Strasse 1117
20459 Hamburg
Post Box 111285
20412 Hamburg
T +49 40 32015-0
F +49 40 32015-5000
Frank W. Grube
T +49 40 32015-5610
F +49 40 32015-5608
fgrube@kpmg.com
Region West

Bielefeld
Cologne
Dortmund
Dsseldorf
Essen

Regional office
Tersteegenstrasse 1931
40474 Dsseldorf
Post Box 300564
40405 Dsseldorf
T +49 211 475-7000
F +49 211 475-6000
197

Appendix II
Klemens Mller
T +49 211 475-7318
F +49 211 475-6000
kmoeller@kpmg.com
Region East

Berlin
Dresden
Jena
Leipzig

Regional office
10785 Berlin
Post Box 303453
10728 Berlin
T +49 30 2068-0
F +49 30 2068-2000
Stefan Kiesewalter
T +49 30 2068-4460
F +49 30 2068-2000
skiesewalter@kpmg.com
Region Central

Bad Homburg
Frankfurt
Mainz
Saarbrcken

Regional office
Marie-Curie-Strasse 30
60439 Frankfurt
Post Box 500520
60394 Frankfurt
T +49 69 9587-0
F +49 69 9587-1050
Dr. Helmut Rehm

T +49 69 9587-4900
F +49 69 9587-1050
hrehm@kpmg.com
198

KPMGs regional tax offices in Germany

Region Southwest

Freiburg i.Br
Mannheim
Stuttgart

Regional office
Hebrhlstrasse 21
70565 Stuttgart
Post Box 800625
70506 Stuttgart
T +49 711 9060-0
F +49 711 9060-199
Dr. Frank Wiesmann

T +49 711 9060-442
F +49 711 9060-199
fwiesmann@kpmg.com
Region South

Augsburg
Munich
Nuremberg
Regensburg

Regional office
Ganghoferstrasse 29
80339 Munich
Post Box 201144
80011 Munich
T +49 89 9282-00
F +49 89 9282-2000
Wilfried Arbes
T +49 89 9282-1040
F +49 89 9282-2000
warbes@kpmg.com
199

Appendix II
15.3
KPMG tax services in Germany
KPMG offers a wide range of tax services. From locations throughout Germany professionals provide tax services in the following service lines:
Corporate Tax Services
Providing tax advice to businesses is our primary area of focus. We offer our clients a
broad range of services, from tax compliance services, the preparation of tax returns
and global tax outsourcing services, to support and advice during corporate tax audits,
to offering tax advice during legal proceedings. Corporate Tax Services also include
support to develop and implement tax strategies for your business. We offer support
integrating the tax strategies you have selected into your overall business strategy.
Ernst Grbl (Member of the Board) T +49 89 9282-1464

Ganghoferstrasse 29
F +49 89 9282-2000
80339 Munich
egroebl@kpmg.com
Contact for Corporate Tax Compliance Services
Hans-Gerd Steenweg
60439 Frankfurt
T +49 69 9587-2159
F +49 69 9587-2233
hsteenweg@kpmg.com
Financial Services Tax
The Financial Services Tax Team specializes in providing tax advice to financial institutions particularly in the banking, insurance and investment management area.
Hans-Jrgen A. Feyerabend
T +49 69 9587-2348
F +49 69 9587-2154
60439 Frankfurt
hfeyerabend@kpmg.com
Global Transfer Pricing Services
The Global Transfer Pricing Services Team develops concepts for the implementation
of tax-optimized intra-group transfer pricing systems. When foreign subsidiaries and
foreign permanent establishments are formed, the resulting intra-group flow of products and services needs to be properly structured and documented. For this purpose,
we conduct margin analyses, make royalty computations, and provide assistance parti
cularly in the creation of transfer pricing documentation systems.
200

KPMG tax services in Germany
Christian Looks
T +49 69 9587-2259
F +49 69 9587-1050
60439 Frankfurt
clooks@kpmg.com
Indirect Tax Services
Our team of specialists supports you in the diverse areas of VAT and Customs &
Trade. Complicated VAT and customs questions are increasingly common even for
companies without a high level of international operations. Our specialists advise you
how to minimize VAT and customs risks, optimize national and international flows of
goods and services, and identify excise tax savings opportunities.
Wilfried Arbes
Ganghoferstrasse 29
T +49 89 9282-1040
F +49 89 9282-2000
80339 Munich
warbes@kpmg.com
International Corporate Tax Services
The International Corporate Tax Services team provides the global tax planning
required by global companies. From in-bound and out-bound investment to hybrid
financing strategies and post-merger integration, our professionals have the technical
knowledge and practical experience needed to assist multinational clients at every
stage of global growth to achieve tax efficiency in their international operations.
Dr. Martin Lenz

T +49 211 475-7385

F +49 211 475-6384
40474 Dsseldorf
mlenz@kpmg.com
International Executive Services
The International Executive Services Team provides you with comprehensive advice
regarding the international placement of employees (expatriates) particularly with
respect to questions of taxation, social security, and international personnel issues.
Karl-Wilhelm Hofmann
T +49 69 9587-2237
F +49 69 9587-1050
60439 Frankfurt
khofmann@kpmg.com
201

Appendix II
People Services, Pensions
The Pensions team combines actuarial and legal skills to provide commercially
focused and pragmatic advice on all aspects of pension plan design in the context of
total rewards, funding, governance and risk management in Germany and abroad. Our
fast growing team includes senior well known German industry players as well as
actuaries from other European countries.
Roger Diener
Theodor-Heuss-Anlage 12
T +49 621 4267-410

F +49 621 4267-444
68165 Mannheim
rdiener@kpmg.com
Mergers & Acquisitions Tax Services
The purchase or sale of any business gives rise to complicated tax issues. Our advisors
lead you through this process and accompany you during the integration of the target
business. In addition to advice on the most tax efficient structure for the transaction,
we also provide support when conducting due diligence. To enable us to provide integrated advice for every form of transaction, we work closely with our colleagues from
Corporate Finance and Transaction Services.
Christian Jnisch
T +49 69 9587-2293
F +49 69 9587-2584
60439 Frankfurt
cjaenisch@kpmg.com
Tax Management Services
Increasing internal and external tax reporting requirements including the financial
statements according to IFRS and US GAAP as well as good relationships with the
fiscal authorities besides the compliance with corporate governance rules have become
key indicators to the measurement of the performance of the tax function. Our core
offerings are helping to manage and monitor tax as a business issue with a focus on tax
process consulting, audit and accounting related tax services, tax settlements and tax
technology.
Christoph Kromer
T +49 69 9587-2587
F +49 69 9587-1050
60439 Frankfurt
ckromer@kpmg.com
Frank W. Grube
Ludwig-Erhard-Strasse 1117
20459 Hamburg
T +49 40 32015-5610
F +49 40 32015-5608
fgrube@kpmg.com
202

KPMGs Country Specialists
15.4
Brazil
Thorsten Amann
10785 Berlin
T +49 30 2068-1144
F +49 30 2068-4479
tamann@kpmg.com
China
Thorsten Amann
10785 Berlin
T +49 30 2068-1144
F +49 30 2068-4479
tamann@kpmg.com
France
Dr. Dagmar Weier

40474 Dsseldorf
T +49 211 475-8362
F +49 211 475-6000
dweier@kpmg.com
Ralf Zender
40474 Dsseldorf
T +49 211 475-7440
F +49 211 475-6000
rzender@kpmg.de
India
Amitabh Thakur
60439 Frankfurt
T +49 69 9587-3323
F +49 69 9587-1050
athakur@kpmg.com
203

Appendix II
Italy
Brigitte Romani
60439 Frankfurt
Tel. 49 69 95 87-2221
Fax 49 69 95 87-1050
bromani@kpmg.com
Japan
Andreas Glunz
40474 Dsseldorf
T +49 211 475-7127
Korea
Bernhard Schraut
60439 Frankfurt
T +49 69 9587-2022
F +49 69 9587-2386
bschraut@kpmg.de
Brian Yoo
60439 Frankfurt
T +49 69 9587-3228
F +49 69 9587-1050
brianyoo@kpmg.de
Mexico
Alexander Eichstaedt
Osterstrasse 40
30159 Hannover
T +49 511 8509-5268
F +49 511 8509-5180
alexandereichstaedt@kpmg.de
Netherlands
Ton te Dorsthorst
40474 Dsseldorf
T +49 211 475-7296
F +49 211 475-6000
ttedorsthorst@kpmg.de
204

Russia
Lars Erik Bertram

60439 Frankfurt
T +49 69 9587-2731
F +49 69 9587-1050
lbertram@kpmg.com
South Africa
Thorsten Amann
10785 Berlin
T +49 30 2068-1144
F +49 30 2068-4479
tamann@kpmg.com
German Tax Center

of Excellence
Switzerland Christopher E. Steckel
c/o KPMG Zurich
Badenerstrasse 172
8026 Zurich
Switzerland
T +41 44 249-2270
F +41 44 249-2754
christophersteckel@kpmg.com
Turkey
Ergn Kis
40474 Dsseldorf
T +49 211 475-7857
F +49 211 475-6000
ekis@kpmg.com
USA
Bruno Wallraf
40474 Dsseldorf
T +49 211 475-7246
F +49 211 475-6000
bwallraf@kpmg.com
205

Appendix II
German Tax Center

of Excellence in New York

Vietnam
Eckart Nuernberger
c/o KPMG New York
345 Park Avenue
New York, NY 101540102
USA
T +1 212 954-7950
F +1 212 954-5126
eckartnuernberger@kpmg.com
Thorsten Amann
10785 Berlin
T +49 30 2068-1144
F +49 30 2068-4479
tamann@kpmg.com
206

KPMG is a global network of legally independent professional firms with about

123,000 employees in 145 countries.
In Germany too, KPMG is one of the leading auditing and advisory firms and has
about 8,000 employees at over 20 locations. Our services are divided into the following functions: Audit, Tax and Advisory. Our Audit services are focused on the auditing
of consolidated and annual financial statements. The Tax function incorporates the tax
advisory services provided by KPMG. Our high level of specialist know-how on business, regulatory and transaction-related issues is brought together within our Advisory
function.
We have established teams of interdisciplinary industry specialists for key sectors of
the economy. These pool the experience of our specialists around the world and further enhance the quality of our advisory services.
207

2008 KPMG Deutsche Treuhand-Gesellschaft Aktiengesellschaft Wirtschaftsprfungsgesellschaft, a subsidiary

of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with
KPMG International, a Swiss cooperative. All rights reserved. Printed in Germany.
KPMG and the KPMG logo are registered trademarks of KPMG International.
The information contained herein is of a general nature and is not intended to address the circumstances of any
particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no
guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the
future. No one should act on such information without appropriate professional advice after a thorough examination
of the particular situation.
mauritius images / age fotostock
Dome of the Reichstag Building, Berlin Seat of the German Parliament
208
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 

2008 KPMG Deutsche Treuhand-Gesellschaft Aktiengesellschaft Wirtschaftsprfungsgesellschaft, a subsidiary of KPMG Europe

2008 KPMG Deutsche Treuhand-Gesellschaft Aktiengesellschaft Wirtschaftsprfungsgesellschaft, a subsidiary of KPMG Europe

2008 KPMG Deutsche Treuhand-Gesellschaft Aktiengesellschaft Wirtschaftsprfungsgesellschaft, a subsidiary of KPMG Europe

Dr. Martin Ribbrock

2008 KPMG Deutsche Treuhand-Gesellschaft Aktiengesellschaft Wirtschaftsprfungsgesellschaft, a subsidiary of KPMG Europe

2008 KPMG Deutsche Treuhand-Gesellschaft Aktiengesellschaft Wirtschaftsprfungsgesellschaft, a subsidiary of KPMG Europe

2008 KPMG Deutsche Treuhand-Gesellschaft Aktiengesellschaft Wirtschaftsprfungsgesellschaft, a subsidiary of KPMG Europe

2008 KPMG Deutsche Treuhand-Gesellschaft Aktiengesellschaft Wirtschaftsprfungsgesellschaft, a subsidiary of KPMG Europe

Geography and climate. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 

2008 KPMG Deutsche Treuhand-Gesellschaft Aktiengesellschaft Wirtschaftsprfungsgesellschaft, a subsidiary of KPMG Europe

Limited liability companies and stock corporations. . . . . . . . . . . . . 

2008 KPMG Deutsche Treuhand-Gesellschaft Aktiengesellschaft Wirtschaftsprfungsgesellschaft, a subsidiary of KPMG Europe

Accounting and reporting. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 

German accounting principles. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 

Recent and proposed changes in fiscal policy . . . . . . . . . . . . . . 

2008 KPMG Deutsche Treuhand-Gesellschaft Aktiengesellschaft Wirtschaftsprfungsgesellschaft, a subsidiary of KPMG Europe

Comparison of legal forms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 

2008 KPMG Deutsche Treuhand-Gesellschaft Aktiengesellschaft Wirtschaftsprfungsgesellschaft, a subsidiary of KPMG Europe

6.2.1.14 Binding rulings (verbindliche Auskunft). . . . . . . . 

Value added tax (VAT) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 

2008 KPMG Deutsche Treuhand-Gesellschaft Aktiengesellschaft Wirtschaftsprfungsgesellschaft, a subsidiary of KPMG Europe

Other taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103

7.1.4.3 Intra-EC movements of goods. . . . . . . . . . . . . . . .  94

Taxation of inbound investments. . . . . . . . . . . . . . . . . . . . . . . . .  107

Choice of legal form and location. . . . . . . . . . . . . . . . . . . . . . . . . . .  107

2008 KPMG Deutsche Treuhand-Gesellschaft Aktiengesellschaft Wirtschaftsprfungsgesellschaft, a subsidiary of KPMG Europe

Financing of inbound investments. . . . . . . . . . . . . . . . . . . . . . . . . . .  112

10 Acquisition and restructuring of business entities . . . . . . . . . .  127

Legal aspects of acquisitions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 

2008 KPMG Deutsche Treuhand-Gesellschaft Aktiengesellschaft Wirtschaftsprfungsgesellschaft, a subsidiary of KPMG Europe

10.2.4.2 Acquisition of a partnership. . . . . . . . . . . . . . . . . . 

2008 KPMG Deutsche Treuhand-Gesellschaft Aktiengesellschaft Wirtschaftsprfungsgesellschaft, a subsidiary of KPMG Europe

10.4.2.2 Spin-off of a corporation. . . . . . . . . . . . . . . . . . . .  152

11 Taxation of individuals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  155

12 Opportunities for international investors. . . . . . . . . . . . . . . . . .  173

12.1 European investment grants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 

2008 KPMG Deutsche Treuhand-Gesellschaft Aktiengesellschaft Wirtschaftsprfungsgesellschaft, a subsidiary of KPMG Europe

Residence and work permits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 

Table of withholding tax rates. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  193

2008 KPMG Deutsche Treuhand-Gesellschaft Aktiengesellschaft Wirtschaftsprfungsgesellschaft, a subsidiary of KPMG Europe

Map of development areas in Germany. . . . . . . . . . . . . . . . . . . . . . .  196

15 Appendix II. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  197

KPMG Deutsche Treuhand-Gesellschaft Aktiengesellschaft

2008 KPMG Deutsche Treuhand-Gesellschaft Aktiengesellschaft Wirtschaftsprfungsgesellschaft, a subsidiary of KPMG Europe

List of tables and figures

German population in relation to the European Union . . . . . . . . . . 

Figure 1: German stock indices. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 

2008 KPMG Deutsche Treuhand-Gesellschaft Aktiengesellschaft Wirtschaftsprfungsgesellschaft, a subsidiary of KPMG Europe

Geography and climate

Geography and climate

History and political system

Under the German constitution, the Federal Republic of Germany is a parliamentary

2008 KPMG Deutsche Treuhand-Gesellschaft Aktiengesellschaft Wirtschaftsprfungsgesellschaft, a subsidiary of KPMG Europe

Population and language

German population in relation to the European Union

German State (Land)

Source: Eurostat/U.S. Bureau of the Census/German Federal Statistical Office, 2008

2008 KPMG Deutsche Treuhand-Gesellschaft Aktiengesellschaft Wirtschaftsprfungsgesellschaft, a subsidiary of KPMG Europe

European influence on the economy and currency

European influence on the economy and currency

General European background

2008 KPMG Deutsche Treuhand-Gesellschaft Aktiengesellschaft Wirtschaftsprfungsgesellschaft, a subsidiary of KPMG Europe

The economy and currency

Geography and climate. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Limited liability companies and stock corporations. . . . . . . . . . . . .

Accounting and reporting. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

German accounting principles. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Recent and proposed changes in fiscal policy . . . . . . . . . . . . . .

Comparison of legal forms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

6.2.1.14 Binding rulings (verbindliche Auskunft). . . . . . . .

Value added tax (VAT) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Other taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103

7.1.4.3 Intra-EC movements of goods. . . . . . . . . . . . . . . . 94

Taxation of inbound investments. . . . . . . . . . . . . . . . . . . . . . . . . 107

Choice of legal form and location. . . . . . . . . . . . . . . . . . . . . . . . . . . 107

Financing of inbound investments. . . . . . . . . . . . . . . . . . . . . . . . . . . 112

10 Acquisition and restructuring of business entities . . . . . . . . . . 127

Legal aspects of acquisitions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

10.2.4.2 Acquisition of a partnership. . . . . . . . . . . . . . . . . .

10.4.2.2 Spin-off of a corporation. . . . . . . . . . . . . . . . . . . . 152

11 Taxation of individuals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 155

12 Opportunities for international investors. . . . . . . . . . . . . . . . . . 173

12.1 European investment grants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Residence and work permits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Table of withholding tax rates. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 193

Map of development areas in Germany. . . . . . . . . . . . . . . . . . . . . . . 196

15 Appendix II. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 197

German population in relation to the European Union . . . . . . . . . .

Figure 1: German stock indices. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .