By Thomas Busching and Stefan Peters in Squire Sanders’ Frankfurt office.
In the December 2006 issue of China Outbound, we provided several reasons why Germany has become the number one destination for Chinese companies establishing operations in Europe and described some of the main legal parameters for German M&A investment by a Chinese investor. This article concludes our overview of investment in Germany by outlining shareholder capital payments, compliance with publicity regulations, the internal organization of GmbHs, the German corporate tax system and the structure of German limited liability partnerships (GmbH & Co. KGs) and public limited companies (AGs).
5. Capital Payments
The capital payments of a shareholder can be made in form of cash or assets. In case of an asset payment, the shareholder must prepare and submit an asset valuation report in order to demonstrate that the capital has been paid up. Consequently, there is no principal need for external appraisal of the value of the asset payment.
The minimum share capital is €25,000, whereby each minimum shareholder’s stake is €100 or if higher, in multiples of €50. Any increase or decrease in the registered capital as well as any other changes of the articles of association of the GmbH must be certified by a notary public and registered in the commercial register.
6. Compliance with Publicity Regulations
Similar to a company in China, a GmbH does not commence to exist as a legal entity until it is registered in the commercial register. However, "shelf companies" are readily available. The entries in the commercial register will be published electronically on the official website that is run by the state of the relevant register.
7. Internal Organization Structure of a GmbH
A GmbH has two main corporate bodies: one or more general managers and the assembly of the shareholders; i.e., ordinary and extraordinary shareholders’ meetings. The memorandum and articles can stipulate additional corporate bodies; e.g., a supervisory board with regular meetings – usually in order to assist the management more often than via the annual shareholders’ meetings.
A. General Manager
A general manager must be an individual who may also be a shareholder of the GmbH. The general manager is the legally authorized representative of the GmbH who acts on behalf of the company and whose actions are binding for the GmbH. Therefore, the name of the general manager must be registered in the commercial register. The citizenship or the residence of a general manger is irrelevant. In principle, a general manager does not require any specific proof of professional qualifications. The exceptions are for regulated industries such as banks or insurance companies, in which the general manager needs to demonstrate certain professional qualifications.
From a corporate law perspective, a general manager may be dismissed at any time without notice. However, specifically in the case of an external general manager, the manager is most likely also an employee of the company based on an employment agreement. This agreement will stipulate a notice period and other common employment clauses. Therefore, while the general manager may be dismissed from his or her role as representative of the company, there will be a notice period in his or her role as employee that needs to be considered. General managers are not protected by the "Act Regarding Unfair Dismissal" that is binding for non-executive employees. As with the manager’s appointment, the dismissal of the general manager in the role of corporate representative must be registered with the commercial register.
The representative powers of a general manager to act for the company vis-à-vis third parties are unlimited. However, general managers are obliged to follow internal instructions given by the shareholders. If a general manager is in breach of his or her obligations or is not acting in accordance with such internal instructions, he or she may be held personally liable.
B. Shareholders’ Meetings
Shareholders normally reach their decisions in shareholders’ meetings. In the absence of any contrary provisions in the memorandum and articles, votes are cast on the basis of the respective number of shares of each shareholder. The shareholders are responsible for the approval of the financial statements and for deciding on matters including the distribution of profits, appointment and dismissal of general managers, measures to control and monitor general managers and appointment of executive managers (Prokuristen). All shareholders have the right of information regarding any business transaction and a general manager must give them access to books and other documents relating to the GmbH.
C. Other Corporate Bodies
The appointment of a supervisory board is advisable by law but is usually not mandatory. However, in specific cases a GmbH must appoint a supervisory board; for example, if the GmbH has more than 500 employees.
In principle, German companies or German branches of foreign companies are subject to the following taxes:
A. Profit Taxes
The profits of a GmbH are subject to corporate tax at the current rate of 26.375%. In addition, there is a local trade tax, usually between 10% and 15% of profits. In total, profit taxation adds up to roughly 40%. Note that the German government recently announced its intentions to lower overall profit taxation from the current level of 40% to under 30% as of 2008.
Dividend withholding tax on profits distributed to Chinese shareholders is limited to 10% of the dividends. According to China and Germany’s tax treaty, the 10% withholding tax will be credited to Chinese shareholders. In addition, Chinese corporate shareholders that hold at least 10% of the shares in a GmbH will also be entitled to a tax credit of the German tax paid by the GmbH – a very beneficial tax treatment from an international perspective. This will eliminate double taxation almost entirely, so the tax burden for domestic investments in China and foreign investments in Germany will be nearly the same.
B. Profit Tax Base
In line with international standards, most business expenses are deductible. However, there are limitations regarding interest expenses for shareholder loans should these exceed 1.5 units of shareholder loan for every unit of equity. Dividend income of companies is tax exempt at 95%, making Germany a beneficial location for an EU holding company. Losses may be carried forward indefinitely. The acquisition of a company with losses carried forward needs to be structured carefully, as there are regulations restricting the utilization of the losses for the share purchaser.
C. Value Added Tax (VAT)
Goods and services supplied by a business are subject to VAT at a standard rate of 19%. A reduced rate of 7% applies in particular to food products. The export of goods and services to other countries is exempt from VAT. VAT incurred by businesses is credited and will be deducted from the VAT collected from customers or returned to the business. Therefore, VAT is just a transitory item for fully taxable businesses with no effects on profit and loss.
9. Other Company Forms
A. Limited Liability Partnerships
In addition to a GmbH, the other common corporate structure in Germany is that of a GmbH & Co. KG. This is a partnership consisting of a general partner with unlimited liability and one or more partners with limited liability. In Germany it is permissible for a limited liability company such as a GmbH to become the general partner with – in principle – unlimited liability in a partnership. The effect is that while the general partner is subject to unlimited liability on the partnership level, that partner is ultimately subject only to limited liability as a GmbH on the level of the other partners. Small and medium-sized companies are very often established in this form. It is particularly popular because it combines the advantages of a capitalbased company like the GmbH with those of a partnership. A GmbH & Co. KG provides its partners with the ability to avoid all personal liability, even though the KG is a tax transparent entity for profit tax purposes. Thus, a KG is tax exempt. Only the partners are subject to income or corporate tax.
B. Public Company
A public limited company (AG) is a company with its own legal personality. Only the corporate assets are liable to creditors for debts incurred. It has share capital divided up in the form of shares. Usually the shares of an AG, unlike those of a GmbH, can be transferred freely.
The AG provides the option of acquiring substantial sums of capital through a large number of shareholders or through respective capital market transactions. Another important feature of an AG is that its shares can be transferred easily – via the stock market if the AG is listed on the stock market. Because of this, the AG is the preferred corporate structure for large German businesses. The German legislature has limited the risks and disadvantages of the legal form of AG for creditors and shareholders by enacting strict rules for the internal structure of an AG, such as corporate governance. These complex rules make the AG suitable only for bigger businesses that require access to capital markets.
To read Part I of this article, please click on the ‘Previous Page’ link below.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.