Foreign investors plan to conduct business

If foreign investors plan to conduct business on an ongoing
basis in Germany, it might make sense to set up a company in
Germany with a view to intended business activities. Foreign
investors can choose between different legal forms which are
typically divided into corporations (Kapitalgesellschaften) and
partnerships (Personengesellschaften). Liability and allocation of
proft are vital parameters infuencing investors’ decisions.

Establishing a corporation gives investors the opportunity to limit
liability to the so-called liable equity capital (registered share
capital – Grund-/Stammkapital) in order to limit their business
risk.

It is only with
corporations that contractual relationships between the company
and its shareholders are recognized for tax purposes, provided
that said relationships comply with the arm’s length principle.

Furthermore, corporations
with registered offce or management in Germany are deemed
separate legal persons and are thus subject to resident tax liabil-
ity and must pay corporate income tax (plus solidarity surcharge)
and trade tax, irrespective of their shareholders. In tax terms, a
clear line has to be drawn between the level of the corporation
and the level of its shareholders.

Being separate legal persons,
corporations may retain earnings, thus ensuring that the share-
holder’s country of residence is unable to tax said earnings.
Typically, only corporations are entitled to treaty benefits .

There are several types of
German corporations: the limited liability company (Gesellschaft
mit beschränkter Haftung – GmbH), the business company
(Unternehmergesellschaft – GmbH UG), the stock corporation
(Aktiengesellschaft – AG), and the limited partnership with share
capital (Kommanditgesellschaft auf Aktien – KGaA).