Doing Business in Germany

Doing Business
in Germany
19 November 2020

PwC
Agenda
1. Introduction to German economy 03
2. Legal forms of companies in Germany 06
3. Tax aspects in Germany 12
4. Tax measures related to COVID-19 25
5. Aspects related to Transfer Pricing 29
Doing Business in Germany November 2020
2

Introduction
to German
economy

PwC
Overview of the economy and investment environment
in Germany
4
Ownership trends – a few large corporations are still in partial
state ownership
Stable economic climate and strategic business partners
Typical business is a small family-owned unit
Rule of law and legal certainty
Good infrastructure
High quality of life
Highly motivated, trained and disciplined workforce

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PwC
active in all industry and market sectors
5
Financial
Services
Industrial
production
Large public sector
Transport and
logistics
Publicly quoted companies
Health and
pharmaceuticals
Family businesses and middle market
Automotive
industry
Energy sector
Technology, media and
telecommunications
International Markets
Trade and
consumer
goods

Legal forms of
companies in
Germany

PwC
Types of legal entities
7
Aktien-
gesellschaft
(joint stock
company)
Unter-
nehmens-
gesellschaft
(limited liability
enterpreneur
partnership)
Gesellschaft
mit beschränk-
ter Haftung
(limited liability
company)
Kommandit-
gesellschaft
(private limited
partnership)
Offene
Handels-
gesellschaft
(general
partnership)
Gesellschaft
mit beschränk-
ter Haftung &
Compagnie-
Kommandit-
gesellschaft
(private limited
partnership
with a limited
liability com-
pany as a ge-
neral partner)
Kommandit-
gesellschaft
auf Aktien
(limited joint-
stock
partnership)
Type of entity
Subsidiary Branch
Companies Partnerships independent non-independent
AG UG GmbH KG
GmbH & Co.
KG
OHG KGaA

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AG (joint stock company) GmbH (limited liability company)
General • Joint Stock Company • Limited Liability Company
Shares • Shares may be publicly traded on a stock
exchange.
• Shares may not be publicly traded on a stock
exchange.
Capital
requirements
• At least €50,000 (can be provided in the form of
cash contributions or in the form of contributions
in kind)
• At least €25,000 (can be provided in the form of
cash contributions or in the form of contributions
in kind)
Shareholders • Shareholders may vote on the resolutions tabled
in shareholder‘s meetings.
• Under certain circumstances they may propose
resolutions of their own.
• Shareholders may resolve on all resolutions laid
before them and may propose resolutions of their
own.
• There is no need for a presence meeting.
Executive
organs
• Board of directors
• General meeting
• Supervisory board
• Managing director(s)
• Shareholder’s meeting
• Supervisory board must be formed
only if the number of employees
exceeds 500.
Legal entities
1/4
8
2 41 3

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Legal entities
2/4
9
UG* KG (limited partnership)
Capital • Minimum capital of €1 • No minimum capital
• But: limited partner contribution
Founding • At least one person • At least two persons
Liability • Liable only with company assets (need for an
entry in company registry)
• Possible personal liability of managing director
• General partner (liable without limitation) and
limited partner (liable within his contribution)
Represen-
tation
• Managing director
• Possible to appoint an authorized
representative (Prokurist)
• General partner
• Possible to appoint an authorized
representative (Prokurist)
Commercial
register
• Entry required • Entry required
Formal
requirements
• Written company agreement mandatory
(minimum content regulated by law,
notarial documentation required)
• Written company agreement not
necessarily needed, but recommended
Tax benefits • The income generated by the activities
of a KG is allocated to the shareholders
& they pay tax on it.
• The losses of the KG can be compensated
with the income of the shareholder.
* entrepreneur company or mini-GmbH
2 41 3

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Legal entities
3/4
10
OHG (general partnership) GbR (civil law partnership)
Capital • No minimum capital • No minimum capital
Founding • At least two people • At least two people
Liability • Company and shareholders are liable for
company‘s debts (jointly and severally).
• Company and share holders are liable for
company‘s debts (jointly and severally).
Represen-
tation
• Every shareholder has sole management
competence and exclusive power of
representation, as long as the company
agreement does not state otherwise.
• Possible to appoint authorized representative
(Prokurist)
• Joint management and representations by all
shareholders, as long as the company agreement
does not state otherwise.
Costs • Business registration and application for
registration in the commercial register: relatively
low costs
• Business registration: low costs
Commercial
register
• Entry required • Entry not required
Formal
requirements
• Written company agreement not necessarily
needed, but recommended
• Written company agreement not
necessarily needed, but recommended
2 41 3

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GmbH & Co. KG* KGaA (limited joint-stock partnership)
Capital • Minimum capital of €1 for KG
• But: additionally €25,000 for GmbH
• At least €50,000
Founding • At least two persons • At least two persons
Liability • General partner with unlimited liability is a GmbH
(limited liability company)
• Limited partner (liable within his contribution)
• At least one general partner with unlimited liability
• Limited shareholder (liable within his contribution,
has a similar status to that of shareholders in an
AG)
Represen-
tation
• General partner
• Possible to appoint an authorized representative**
• General partner
• Possible to appoint an authorized representative**
Commercial
register
• Entry required • Entry required
Formal
requirements
• Two written company agreements required:
one for KG and one for GmbH
• Written company agreement mandatory,
notarial documentation required
Tax benefits • The income generated by the activities of a GmbH
& Co. KG is allocated to the shareholders and
they pay tax on it.
• The losses of the GmbH & Co. KG can be
compensated with the income of the shareholder.
Legal entities
4/4
11
* private limited partnership with a limited liability company as a general partner; ** Prokurist
2 41 3

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Overview
13
Major types of taxes
Tax administration
Taxation of corporations
Taxation of individuals
Other taxes
Filing and payment calendar
1
2
3
4
5
6

PwC
Major types of German taxes
Income taxation
• Income tax (individuals)
• Corporation tax
• Trade tax
Transaction taxation
• Value added tax (VAT)
• Excise tax
• Insurance tax
• Real estate transfer tax
(RETT)
• Inheritance and gift tax
• No stamp duties
Withholding taxes (WHT)
• Wage tax
• Taxes on payments abroad
14

PwC
Tax administration
15
Tax administration matters General rules
Taxable period • Calendar year
Payment of taxes • Quarterly installments followed by a final settlement
• Interest on the net payable amount is applicable to certain
types of taxes (e.g. trade tax, corporation tax).
Tax audits • Statute of limitations: 4 years from the end of the year in
which the tax return was filed, may be extended under
particular circumstances.
• Audits are conducted at 4 - 5 year intervals.
• Audits of small businesses are carried out at random,
whereas those for large/multinational taxpayers – on a
regular basis.
Appeals • To the tax office that have issued the assessment notice
• To the competent regional tax court
• To the Supreme Tax Court
Tax rulings • Binding rulings in respect of the planned transactions can be
requested from tax offices.
• Advance Pricing Agreements (APAs) may be negotiated
with the Central Tax Office.

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1/5
Corporation income tax (CIT)
• Tax rate: 15%
• Solidarity levy: surcharge of 5.5% (for a
total of 15.825%)
• Tax base: net annual result adjusted by
adding back non-deductible expenses and
deducting tax free income with further
consideration of temporary or timing
differences; losses may be carried forward
for unlimited time
16
Trade Tax (TT)
• Tax rate: from 7% to 20% depending on the
region
• Tax base: adjusted CIT base (25% of all
financing costs over €200 k, including the
implicit financing costs in leasing, rental and
royalty payments are added back to taxable
income)

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2/5
Corporate income tax (CIT)
CIT = Taxable income x 15%
• The taxable income: tax balance sheet
income
+ off-balance-sheet adjustments
• Tax balance sheet income: German
GAAP balance sheet income + specific tax
law and accounting adjustments (e.g.
intangibles)
• Off-balance-sheet-adjustments:
– Add-backs: Non-deductible business
expenses, e.g.: income taxes, gifts to
non-employees exceeding €35,
donations, hidden profit distribution, etc.
– Reductions: Hidden contributions, tax-
free dividends and capital gains from the
sale of participations, etc.
17
Trade Tax (TT)
TT = Trade Tax Base x Base Rate x Municipal
Tax Rate
• Trade Tax Base: Profit to the Income Tax
Act or Corporate Tax Act
+ add-backs
– deductions for TT purposes
• Add-backs: 25% of the sum of:
– 100% of interest and similar expenses
– 20% of the rent or leasing fees paid for
the use of movable fixed assets
– 50% for immovable fixed assets
– 25% of the costs for license fees etc. as
> €200k
• Deductions: 1.2% of the taxable value of
real estate, profit from partnerships and
others etc.
• Base Rate: 3.5%
• Municipal Tax Rate: depending on where
the permanent establishments of the
business are located; in Berlin: 410%

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3/5
Group taxation
If a German parent company holds more than
50% of the voting rights in a domestic
subsidiary, such parent and the subsidiary
may conclude a formal court-registered profit
pooling agreement for at least five years.
The major specifics may be summarized as
follows
• The annual profits and losses within the
group may be offset.
• No elimination of intra-group profits
• Profits of the subsidiary can be offset
against the losses brought forward by the
parent, whereas any losses brought forward
by the subsidiary are frozen until
termination of the group.
• Losses taken into account by a group
member abroad may not be offset against
present or future income.
18
Permanent establishment and
transfer pricing considerations
• Permanent establishment (PE) – any
fixed business facility serving for the
corporate purpose (minimum six months
duration period is usually considered)
• Determination of PE profits is not straight
forward: Authorised OECD Approach to
determination of PE income has been
recently implemented.
• All transactions with foreign related parties
are subject to extensive transfer pricing
(TP) rules.

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4/5
Tax loss carry forwards (TLCF)
• The tax losses carried forward to be used in
one fiscal year are limited to €1 million plus
60% of current income exceeding that
amount
• The remaining 40% of income exceeding
€1 million is subject to trade tax and
corporate income tax at current rates (so-
called ‘minimum taxation’).
• Net operating losses are carried forward
without time limit
• For CIT (but not TT), there is an optional
carry-back to the previous year of up to
€1 million.
19

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5/5
Interest limitation rule
• Maximum allowable net interest expense
deduction:
– 30% of the relevant profit after adding
back interest expense and the amounts
for depreciation and amortization and
after deducting interest income
(offsettable EBITDA).
• Exception: The interest imitation rule does
not apply – inter alia – if the amount of net
interest expense is less than €3 million.
• “Unused” offsettable EBITDA can be carried
forward for the following five business years
(EBITDA carry forward).
• Non-deductible interest expense is carried
forward without time limit (Interest carry
forward) and increases the interest
expenditure of those business years.
Royalty limitation rule
• Expenses for the assignment of use or the
right to use rights may not be a deductible
business expenses or may only be partially
deductible.
• Included rights or use of rights: Copyrights
and industrial property rights, in trade,
technical, scientific and similar know-how,
knowledge and skills.
• The limitation will apply where:
– The recipient of the income from the
assignment of rights is a related party
vis-à-vis the debtor;
– The income in the hands of the recipient
is subject to a special preferential
regime, which does not correspond to the
OECD Modified Nexus Approach;
– The income received for the assignment
of the rights is taxed at a rate less 25%
(low taxation).
• Expenses will become proportionately
non-deductible.
20

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Income tax
• Tax base: worldwide income
(for residents), income from
German sources (for non-
residents)
• Tax rate: sliding scale
(0 - 45%); tax-free “basic
allowance” is applicable
Other taxes income
• Solidarity surcharge: 5.5%
of the income tax due
• Church tax: 8 - 9% of the
income tax charged
Inheritance and gift tax
• Tax base: current market
value of assets transferred
without consideration
• Tax free “general allowances”
are applicable depending on
the value and the degree of
the relationship between
donor and beneficiary
• Tax rate: 7 - 50%
21
Taxation of individuals

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Value-added tax (VAT)
• Applicable rules: VAT is
levied under the harmonized
EU system
• Tax rate: 19% or 7% (for
certain food items, books,
newspapers, animals, hotel
accommodation, etc.)
• VAT payable/refundable:
output VAT less input VAT
• Export: zero-rated (both
outside and within EU)
• Import: import from non-EU
countries is subject to import
VAT
Excise tax/Insurance tax
• Excise taxation object:
alcohol and alcoholic drinks,
tobacco and cigarettes,
mineral and fuel oil and their
derivatives, fuels and electric
power (to a certain extent)
• Insurance taxation object:
insurance premiums
(mechanism is similar to
excise tax)
Real estate transfer tax
(RETT)
• Tax base: sales price or other
transfer value upon each
change of ownership in land
plots and buildings
• Tax rate: 3.5% - 6.5%
22
Other taxes

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1/2
Annual tax returns
• Submission of the annual tax declaration to
the tax office no later than 31 July of the
calendar year following the end of the
financial year
• Under tax advisory submission no later than
28 February of the calendar year following
the end of the financial year
Monthly and quarterly tax returns
• Submission of monthly or quarterly tax
returns (VAT, wage tax) to the tax office no
later than the 10th day following the end of
the filing period (month/quarter).
• Quarterly tax returns are submitted
– if the withheld wage tax of the prior year
was higher than €1,080 but lower than
€5,000 (Wage tax);
– if the VAT payable of the prior year did
not exceed €7,500 (VAT).
• (Only) annual tax returns are submitted (no
advance tax return)
– if the withheld wage tax of prior year was
not higher than €1,080 (Wage tax);
– if the VAT payable does not exceed
€1,000 in the prior year.
23

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2/2
Tax payments
Quarterly tax prepayments:
• Companies with a positive taxable income
have to make CIT and trade tax quarterly
advance payments, assessed by the tax
office.
Due dates:
• CIT/solidarity surcharge: 10.03./10.06./
10.09./10.12.
• TT: 15.02./15.05./15.08./15.11.
• For VAT and wage tax purposes,
companies have to make monthly, quarterly
or annual tax payments.
• For quarterly and monthly payments, it
is possible to obtain a permanent due date
extension of one month per due date.
• Withholding tax: has to be paid no later
than the 10th day following the month in
which tax was withheld.
Annual financial statements
submission
• The annual financial statements must be
published with the Federal Gazette.
• Deadline: one year at the most, calculated
from the closing date of the financial year.
• For certain capital market-oriented
companies, a shorter deadline of only four
months applies.
• The submission period cannot be extended.
24

Tax measures
related to
COVID-19

PwC
Tax measures related to COVID-19
Corona Tax Assistance Act (1/3)
Value-added tax
Temporary reduction of VAT rates
• Reduction of the standard tax rate from 19% to
16% or 7% to 5%
– Limited from 1 July to 31 December 2020
– Applies to all deliveries, other services,
imports, intra-company acquisitions and
reverse-charge.
– Application also to down payments or
advance payments if service is performed in
the second half of 2020.
– Reduced tax rates for restaurant sales (excl.
Beverages) 5% until 31 December 2020 and
7% until 30 June 2021.
• For the determination of the applicable VAT rate,
the time of performance is decisive:
• Supply of goods and services: Transfer of
power of disposition
– Active supplies: start of transport or dispatch
– Work supplies: usually acceptance
• Other services: Date of completion
• Single purpose vouchers: Issuance of the
voucher
26

PwC
Corporate Income Tax
Adjustment of advance payments for the 2019
assessment period
• Upon request, the tax advance payments for the
year 2019 can be reduced retroactively in the
amount of the provisional loss carry-back for
2020.
• Instead of a flat-rate reduction of 30%
→ Income may be reduced by a higher amount
of recoverable loss (evidence required).
• Lump-sum reduction as well as the reduction by
a higher amount as documented by the
taxpayer is limited to a maximum
of €5 million.
Provisional lump-sum carryback into
2019/2020
• Provisional loss carryback up to €5 million
from 2020 for tax assessment period 2019:
Upon request, 30% of the total income for 2019
may be deducted as a loss carryback from 2020,
if prepayments for 2020 were reduced to €0.
• Instead of lump-sum reduction of 30%, a higher
loss carryback is also permitted (evidence
required).
• If reduction of prepayments and loss carryback
result in a subsequent CIT payment at the time
of the tax assessment for 2019, this payment
may be deferred upon request.
• Extended tax loss carryback (up to €5 million)
also available in 2021 (reg. tax assessment
period of 2020).
27

PwC
Further changes Overview
Declining balance depreciation
• For movable fixed assets acquired after 31
December 2019 and before 1 January 2022.
• Introduction of a declining balance depreciation
in the amount of 25%, up to a factor of 2.5 of the
regular linear depreciation.
Doubled amount of allowance for trade tax
add-backs
• Increase of the tax-free allowance for trade tax
add-backs (e.g. interest on debt, rental and
lease payments) from €100,000 to €200,000.
28

Aspects related
to Transfer
Pricing

PwC
TP documentation requirements
30
Thresholds • Cross border transactions only
• IC transactions values:
− goods transactions – €6m
− other transactions – €600k
Content • OECD standard + some additional elements (e.g. explanation behind losses,
price setting approach, value chain of the group and the taxpayer’s role)
Timing
requirement
• No timing regarding ordinary transactions
• Extraordinary transactions (e.g. business restructurings) – within 180 days after
fiscal year end
Filing
obligation
• Upon request of the tax authority
• Within 60 days after the request by a tax authority within a tax audit (30 days in
case of extraordinary transactions)
Language • German (English may be allowed under discretion of the tax auditor)
Penalties • Late submission of the documentation: at least €100 per day, up to a maximum of
€1m
• No submission: €0.5k - 250k

PwC
Key TP regulations
31
Penalty adjustment
Less favourable end
of the IQ range
Transfer of functions
“Transfer package”
Two sided approach
Hypothetical
arm‘s length test
APAs/MAPs

PwC
TP topics challenged by the tax authorities
Financial
transactions
32
High margins of
related parties
Services/
group
charges/
cost
allocations
Loss or low margin
of the German entity
TP Documentation
Restructurings/
Transfer of
functions
Goods
transactions
Intellectual
Property

PwC
Contact details
33
Robert Halat
Transfer Pricing | Manager |
Steuerberater
+49 21 1981-4376
+49 151 25787167
halat.robert@pwc.com
Ewa Drebes
Corporate Tax | Senior Managerin |
Steuerberaterin
+49 30 2636-5395
+49 160 5361923
ewa.drebes@pwc.com

www.pwc.de
Thank you.
© November 2020 PricewaterhouseCoopers GmbH Wirtschaftsprüfungsgesellschaft.
All rights reserved. In this document, "PwC" refers to PricewaterhouseCoopers GmbH Wirtschaftsprüfungsgesellschaft, which is a member firm of
PricewaterhouseCoopers International Limited (PwCIL). Each member firm of PwCIL is a separate and independent legal entity.

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