The German GmbH

What is a GmbH – Overview

The ‘Gesellschaft mit beschränkter Haftung’ (Limited Liability Company), short GmbH, is one of the most popular forms to run a business in Germany. It combines limited personal responsibility with comparatively low requirements in terms of capitalization and regulation and thus lends itself to running a small or medium sized business.

There are two types of GmbH: The standard GmbH and the Unternehmergesellschaft (UG), often referred to as ‘mini-GmbH’. They differ mainly in terms of capitalization requirements. The standard GmbH has a share capital of 25.000 €; the ‘mini-GmbH’ can be created with a share capital of 1 €. Apart from that, they are largely subject to the same rule.

This guide aims to explain in detail how a GmbH is created, how it operates, and what specific considerations apply, particularly for founders from abroad.

Creation

Entry in commercial register

The GmbH has its own legal personality. As a legal personality, it starts to exist the moment it is registered in the commercial register (Handelsregister). 

The commercial register is a public register maintained by the local district courts across Germany (Amtsgerichte).  Its primary function is to record legally relevant facts concerning commercial enterprises. For a GmbH, this includes its name, registered office, capital, managing directors, and the date of its registration. The public availability of this information aims to increase transparency and reliability. Persons and corporations are able to obtain information about the GmbH before entering a business relationship with the GmbH.

A judge of the district court is mandated to check whether all requirements are met to enter the GmbH into the register.

This formal registration process makes the founding of a GmbH inherently more lengthy and more bureaucratic when compared to simpler business forms. 

In fact, this perceived burden is also  a strength. It adds to the trust and credibility that the GmbH as a form of corporation enjoys. Potential business partners, creditors, and customers have the assurance that the requirements set out in law were fulfilled when the GmbH was founded. This reduces uncertainty and fosters greater confidence in commercial dealings with a GmbH.

Furthermore, the publication in the commercial register makes the GmbH highly transparent. Essential information about the company is publicly accessible, allowing anyone to verify key details about the company’s structure and management. This transparency is another factor contributing to the GmbH’s excellent reputation.

Articles of Association

In order to be created, the GmbH must have articles of association (Gesellschaftsvertrag). The articles of association are essentially a contract which sets out essential points of how the GmbH operates, for example how decisions are made and how profits are distributed.  

The founders (or the founder, see below) enjoy wide discretion regarding the content of the articles of association; but certain minimum requirements must be covered. The articles of association must contain:

  • The name (Firma) and seat (Sitz) of the GmbH: The company’s official name and its registered address.
  • Its subject (Gegenstand): A description of the type of business or activities the GmbH will conduct.
  • The amount of its share capital (Stammkapital): The total nominal capital of the company.
  • The number and nominal value of shares each shareholder owns: How the total share capital is divided among the founders.

For individuals planning to create a GmbH, there are two primary possibilities for obtaining the articles of association:

  1. Custom Drafting: They can draft their own articles of association. In practice, this often means having them expertly drafted by a specialized attorney or a notary. This option provides the greatest flexibility and allows for complex or unique provisions tailored to multi-shareholder companies, specific governance rules, or unique profit distribution mechanisms.
  2. Using a Template (Musterprotokoll): The German legislator introduced a simplified option by appending a standardized template (Musterprotokoll) to the GmbH Act, the piece of legislation governing GmbHs (GmbH-Gesetz). This template is designed to make the founding process easier and less costly, especially for smaller ventures. However, this possibility is only available in very specific and straightforward cases, specifically where the GmbH has:
    • Up to three shareholders, and
    • One managing director.

The template reflects only the absolute minimum legal requirements. While it reduces initial costs and complexity, founders should carefully consider whether this template is truly sufficient for their long-term purposes. In many cases, particularly as the business grows, or if there are specific arrangements desired between shareholders, the template will prove too restrictive. Founders will often be well advised to obtain legal advice to ensure their articles of association are robust, comprehensive, and tailored to their specific business needs, thereby preventing future disputes or legal complications.

Regardless of whether custom articles are drafted or a template is used, the articles of association must be notarized. This crucial step is explained in more detail in the next section. While the articles of association can be drafted in English for internal understanding and agreement, a certified German version (or a certified translation) must always be submitted to the district court for registration purposes.

Number of Shareholders

While the term “association” in “Limited Liability Company” suggests the involvement of multiple partners, a significant feature of the German GmbH is that it can be founded and run by a single person. 

This single-shareholder GmbH, often referred to as the “one-person-GmbH” (Ein-Personen-GmbH), is very popular and widely prevalent across Germany. It offers the same benefits of limited liability and professional reputation to solo entrepreneurs who wish to shield their private assets from business risks.

Notarization

What is notarization?

The law requires the notarization of its Articles of Association. This means, they have to be authenticated by a notary public (Notar). A notary public is a legally trained professional who exercises a public office in an impartial manner. 

In Germany, notaries public have more extensive legal powers and responsibilities than notaries public in many common law countries. They play a crucial role in many areas such as corporate law, real estate law and inheritance law. 

This process involves a German notary public (Notar), a highly trusted, impartial, and legally trained professional whose function is vital to the German legal system, particularly in areas like corporate law, real estate, and inheritance.

Notaries public are entrusted with certifying the authenticity of documents and transactions, advising parties impartially, and ensuring that legal formalities are observed. 

When a notary notarizes the Articles of Association, they are confirming several key aspects:

  • The identity of all individuals signing the document.
  • Their legal capacity to enter into the agreement.
  • Their true intent and understanding of the document’s content.
  • That the document complies with all legal requirements.
    The notary plays a critical role in guiding the founders through the process, explaining the legal implications, and drafting the necessary resolutions if custom articles are chosen.

Advantages and disadvantages of notarization

The mandatory involvement of a notary public has advantages and disadvantages. Among the advantages is that it ensures that important legal requirements are observed, which increases the trustworthiness of the GmbH, the transparency of its creation and the way it operates.

Business partners can be confident about the identities of the shareholders and managing directors, the company’s legal existence, and that the initial capital requirements have been met. This reduces uncertainty and fosters greater confidence in commercial relationships.

At the same time, the notarization requirement does come with certain disadvantages. It introduces a higher degree of formality into the founding process. Founders have to make appointments, prepare documents, which have to be checked and submitted to the commercial register. This prolongs the creation process.

The involvement of a notary entails additional costs. Notary fees are statutory and depend on the value of the transaction.

This is a significant disadvantage compared to other forms for running a business – e.g. as a sole proprietor – which do not require the registration in a public register and the involvement of a notary public. 

Possibility to notarize online

To adapt to modern digital practices and streamline the process, German law introduced the possibility to notarize online in August 2022. This allows founders to complete the notarization of the articles of association via video conference with a notary, eliminating the need for a physical, in-person appointment. This can be particularly beneficial for international founders  and can reduce travel time and costs.

However, certain technical requirements must be met for identity verification and other necessary procedures.” If these requirements are not satisfied, the notary public must refuse the notarization.

If meeting these technical requirements proves difficult, an alternative is to grant power of attorney to a representative in Germany to attend the notarization on your behalf

For mor details on the possibility to notarize online, see this post.

Language of notarization

It’s important to note that while the Articles of Association can be drafted in English for internal understanding and agreement, the notarization process itself typically takes place in German. The official document submitted to the commercial register must be in German. If the founders do not speak German, an official interpreter must be present during the notarization appointment to ensure that all parties fully understand the contents and implications of the document being signed. This also adds to the cost and complexity, but it is essential to ensure legal validity and understanding.

Share Capital

The share capital (Stammkapital) is a defining feature of the GmbH and plays a crucial role in its legal framework and public perception.

The standard GmbH: Capital requirement: €25,000

Minimum share capital

For a standard GmbH, German law mandates a minimum share capital of €25,000. This amount must be formally committed by the shareholders. But the shareholders do not have to pay this sum in full immediately. 

At the time of registering the GmbH in the commercial register, at least half of this nominal capital, i.e., €12,500, must be freely available to the GmbH. The shareholders may foresee in the articles of association that they pay the remaining € 12.500 later, though it is usually paid in full from the start.

Proof of capital

As mentioned, the share capital must be freely available to the GmbH.  A limited liability company only acquires its full legal personality as a ‘legal entity’ with the associated limitation of liability upon successful entry in the commercial register. Strictly speaking, before this entry, the company cannot have its own bank account as it doesn’t yet fully exist as an independent legal entity.. At the same time the commercial register requires proof of payment of the share capital for the registration. This creates a seemingly circular problem: no account without registration, no registration without proof of capital in the account. 

The solution lies in the fact that the GmbH already enjoys a certain legal recognition before its registration in the commercial register. The process of creating a GmbH involves several steps. Initially, shareholders discuss the foundation and agree on articles of association. During this preliminary phase, German law treats them as a partnership with full liability. 

Next, the articles of association are notarized. From that moment on, the partnership is considered a “GmbH in Gründung” (limited liability company in creation) or pre-company. Although not yet a legal entity with limited liability, the GmbH in Gründung is recognized as a provisional legal entity that can take certain actions.

In particular, it can open a bank account. It is common practice for founders to open a bank account for the ‘GmbH in Gründung’ immediately after the notarization of the articles of association and deposit the share capital. 

Many German banks offer special kinds of accounts for this purpose. Often, the possibility to spend the money deposited in such accounts is limited to ensure that the share capital remains at the disposition of the GmbH as required by law. Usually, only direct founding expenses such as fees of the notary public or fees for the commercial register can be paid from this account until the GmbH is registered. 

Once the money is deposited, the bank issues a bank statement confirming payment of the share capital. The notary public verifies the bank statement and notifies the commercial register of the payment of the share capital.

When the commercial register has processed the registration request and the GmbH is registered, the GmbH begins to exist as a legal entity. From that moment on, the bank account can be fully utilized as the GmbH’s operational account.

The funds in the account can now be used for purposes of the business without limitation. A common misconception among founders is that the share capital must remain untouched in the company’s bank account indefinitely. 

This is not true. Once the required capital has been demonstrably paid into the company’s bank account, it becomes part of the GmbH’s assets and is freely available for the operational purposes of the business. This means the company can use this money to cover initial expenses, purchase equipment, pay salaries, or invest in business development. It is working capital, not a frozen deposit.

Exception: UG (Unternehmergesellschaft haftungsbeschränkt), the so-called “mini-GmbH”

The initial requirement for a share capital of €25,000 was partly intended to demonstrate the founders’ commitment and seriousness. By investing this amount, founders signaled their confidence in their business ideas.

However, for some entrepreneurs, this €25,000 threshold posed a significant barrier. To make founding a limited liability company more accessible, especially for start-ups and small businesses, the German legislator introduced a special type of GmbH in 2008: the Unternehmergesellschaft (Entrepreneurial Company), in short UG, It is often referred to as ‘mini-GmbH.’

An UG can be established with a minimum share capital of just €1. While it operates under the same fundamental rules as a standard GmbH—meaning it’s a separate legal entity with its own assets and liabilities distinct from those of its shareholders, and must adhere to the same fiscal, accounting, and transparency obligations—there are crucial specifics to note:

For the sake of transparency, the UG must be designated as such in its name by adding ‘Unternehmergesellschaft (haftungsbeschränkt)’ or ‘UG (haftungsbeschränkt)’. Potential business partners shall know who they are dealing with. 

The UG is specifically designed for founders who wish to start small. The underlying concept is that the business will grow and eventually transition into a standard GmbH. To facilitate this, the legislator mandated a capital accumulation requirement. An UG must retain at least 25% of its annual net profits in a statutory reserve until its share capital reaches the standard €25,000 of a regular GmbH. Once this threshold is met, the UG can officially convert into a full GmbH, dropping the “(haftungsbeschränkt)” suffix. This mechanism ensures the company gradually builds a solid financial foundation.

Managing Director

Legal requirement

Every GmbH, by law, must have one or more managing directors (Geschäftsführer). The managing director is the operational head of the company, responsible for its day-to-day management and external representation. 

In many cases, the managing director is a shareholder of the company. But it is also frequent that external individuals are hired as managing directors. At any rate,it is advisable to conclude a contract between the GmbH and the managing director. This contract, distinct from the Articles of Association, defines the terms of their engagement, including salary, benefits, vacation, termination clauses, and specific areas of responsibility. 

While the Articles of Association or a shareholder resolution governs their appointment as an organ of the company, the employment contract governs their working relationship with the company. This contract should be carefully drafted to clarify rights and duties, manage expectations, and provide a clear framework for the professional relationship.

The law sets out many responsibilities of the managing director. But it can be in the interest of the parties to clarify certain points  to establish internal safeguards. For instance, while a managing director may have the capacity to conclude contracts regardless of their value, a contract can require the managing director to consult with shareholders if a transaction exceeds a certain threshold. 

Many obligations, personally responsible

The role of a managing director comes with extensive and serious obligations and responsibilities. These are not merely suggestions but legally binding duties that stem directly from the GmbH Act and other relevant German laws (e.g., commercial law, tax law, social security law). The managing director is expected to apply the diligence of a prudent businessperson (Sorgfalt eines ordentlichen Geschäftsmannes) in all affairs of the company.

Key obligations include:

  • Proper Management: Leading the company in accordance with its business purpose, the Articles of Association, and shareholder resolutions.
  • Financial Oversight: Ensuring proper bookkeeping, preparing annual financial statements, and maintaining the company’s capital. This also includes monitoring the company’s financial health and taking action if signs of crisis or insolvency emerge.
  • Compliance: Adhering to all legal and regulatory requirements, including tax obligations, social security contributions for employees, and environmental regulations.
  • Information Duties: Providing shareholders with requested information about the company’s affairs and allowing access to company records.
  • Capital Preservation: Ensuring that the company’s assets required to maintain its share capital are not improperly paid out to shareholders.
  • Timely Filings: Submitting all necessary declarations, registrations, and reports to relevant authorities (e.g., tax office, commercial register, transparency register).

The managing director is personally responsible for fulfilling these duties. This personal responsibility is a significant aspect of their role, differentiating them from mere employees.

Liability for mistakes, criminal responsibility possible

A critical aspect for any managing director to understand is the potential for personal liability. If a managing director breaches their duties – whether intentionally, through gross negligence, or sometimes even through simple negligence – they can be held liable for damages caused to the GmbH. This means that if their actions (or inactions) lead to financial harm for the company, they might be personally obligated to compensate the company for these losses.

Beyond civil liability, managing directors can also face criminal responsibility in certain situations. Examples include:

  • Insolvency Offenses: Failing to file for insolvency in a timely manner when the company is over-indebted or illiquid.
  • Tax Evasion: Deliberately withholding or misrepresenting tax-relevant information, or failing to pay taxes.
  • Social Security Contributions: Failing to properly remit social security contributions for employees.
  • Fraud or Embezzlement: Engaging in criminal activities that harm the company or its stakeholders.

Given these extensive responsibilities and potential liabilities, managing directors often secure Directors and Officers (D&O) liability insurance. This type of insurance can protect them financially against claims arising from breaches of duty, covering legal defense costs and potential damage payments (though typically not for intentional criminal acts).

What else should be done

Even after the core steps of notarization and commercial register entry are completed, there are several crucial administrative tasks that need to be addressed to ensure the GmbH is fully operational and compliant with German law.

Name should be checked

Before the notarization of the Articles of Association, it is highly recommended to have the chosen company name (Firma) checked. This is typically done by contacting the local Chamber of Industry and Commerce (IHK) or Chamber of Crafts (HWK), depending on the business type. The IHK/HWK can provide an opinion on whether the proposed name is:

  • Permissible: Complies with naming regulations (e.g., clearly indicating legal form).
  • Distinguishable: Not identical or confusingly similar to an existing registered company in the same locality, which could lead to registration issues or trademark disputes.
    This pre-check can save significant time and costs by avoiding rejections from the commercial register.

Information of tax authorities (Finanzamt)

Once the GmbH is registered in the commercial register, it must be officially registered with the competent tax authorities (Finanzamt). This involves completing and submitting the “Questionnaire for Tax Registration” (Fragebogen zur steuerlichen Erfassung). This comprehensive questionnaire requires detailed information about the company, its business activities, estimated revenues, and whether it will be subject to VAT. Upon successful submission, the GmbH will receive its tax number (Steuernummer) and, if applicable, a VAT identification number (Umsatzsteuer-Identifikationsnummer or USt-ID-Nr), which is essential for conducting business within the EU.

Information of Gewerbeamt (Trade Office)

Simultaneously or shortly after commercial register entry, the GmbH must also be registered with the local Trade Office (Gewerbeamt) in the municipality where its registered office is located. This is a general business registration required for most commercial activities in Germany. The Gewerbeamt will require basic information about the company and its business purpose. In many cases, the commercial register automatically forwards the necessary data to the Gewerbeamt, but it’s crucial for founders to verify this and ensure the registration is complete. The Gewerbeamt might then inform other relevant authorities, such as the IHK/HWK or specific professional associations (Berufsgenossenschaften) if the business involves employees.

Other important steps after registration can include:

  • Opening Balance Sheet (Eröffnungsbilanz): The GmbH must prepare an opening balance sheet as of its date of formation, which serves as the basis for its ongoing accounting. This is usually prepared by a tax advisor.
  • Transparency Register (Transparenzregister): The managing directors must ensure that the ultimate beneficial owners of the GmbH are registered in the Transparency Register. Non-compliance can lead to significant fines.
  • Business Papers and Impressum: Official business papers (letterheads, invoices, etc.) and the company’s website (if any) must contain specific mandatory information, including the company name, legal form, registered office, registration court, commercial register number, and the names of all managing directors.
  • Social Security Registration (if employees): If the GmbH plans to hire employees, it must register with the Federal Employment Agency (Bundesagentur für Arbeit) to obtain an operating number (Betriebsnummer) and register employees with their respective health insurance funds (Krankenkassen) for social security contributions.
  • Industry-Specific Registrations/Permits: Depending on the nature of the business, additional permits, licenses, or registrations with specific regulatory bodies might be required (e.g., for hospitality, financial services, healthcare).

Cost of Founding

The founding of a GmbH, while offering significant benefits, also entails various costs. These costs can be broadly categorized and should be thoroughly budgeted for by prospective founders.

Different types of cost (notary, fees for registration)

The overall founding costs typically range from approximately €1,000 to €3,000, excluding the required share capital of €25,000 (or the initial capital for a UG). Key cost components include:

  1. Notary Costs: These are statutory fees regulated by the Court and Notary Costs Act (Gerichts- und Notarkostengesetz – GNotKG). They vary depending on the amount of the share capital and the complexity of the Articles of Association.
    • For a standard GmbH with €25,000 capital, notary fees for the notarization of the Articles of Association and the Commercial Register application typically range from €400 to €800, plus VAT and minor expenses (e.g., for copies, postage).
    • Using the simplified Musterprotokoll (template) can significantly reduce notary fees, potentially bringing them down to around €230 – €300 for the notarization itself, as it involves less drafting effort from the notary.
    • Online notarization may also have slightly different cost structures.
  2. Commercial Register Fees: The entry of the GmbH into the commercial register incurs a court fee. This fee is generally around €150 for a standard cash foundation. If non-cash contributions (Sacheinlagen) are involved, the fee can be higher, e.g., €240.
  3. Gewerbeamt Fees (Trade Office): Registering the business with the local trade office (Gewerbeamt) is usually a minor cost, typically ranging from €20 to €60, depending on the municipality.
  4. Tax Advisor/Attorney Fees: While not always mandatory, legal and tax advice during the founding phase is highly recommended to ensure a legally sound and tax-efficient setup.
    • Drafting individual Articles of Association by an attorney can be costly, potentially in the range of several thousand Euros, depending on complexity.
    • For the mandatory opening balance sheet (Eröffnungsbilanz), a tax advisor’s fee can range from €85 to €150 or more.
    • General consultation fees vary widely depending on the scope of advice.
  5. Transparency Register Fees: There is an annual fee for registration in the German Transparency Register (Transparenzregister), currently around €19.80 per year. The initial registration is usually handled by the notary.
  6. Other Potential Costs: These can include fees for name checks with the Chamber of Industry and Commerce (IHK) or Chamber of Crafts (HWK), costs for opening a business bank account, and potentially fees for specific permits or licenses required for the business activity.

It’s important to remember that these costs are separate from the minimum share capital itself, which is deposited into the company’s account and serves as its operational asset.

Duration of Founding

The time it takes to found a GmbH in Germany is a frequent topic of discussion and, at times, criticism, especially when compared to some other countries.

Germany often criticized because too long

Indeed, the process of founding a GmbH is more formal and, consequently, often more time-consuming than establishing simpler business forms. The necessity of a notary appointment, the time required for the notary to prepare and submit documents, and critically, the processing time at the commercial register of the district court (Amtsgericht), can collectively lead to a duration of several weeks, typically ranging from 4 to 8 weeks from the initial notarization to the final entry in the commercial register. In some courts or during peak times, it can even take longer. This timeframe is often cited as a bureaucratic hurdle.

On the other hand: Founding should be considered carefully

However, it’s essential to view this duration through the lens of the German legal system’s emphasis on legal certainty and thoroughness. The seemingly protracted process ensures that:

  • All legal requirements are meticulously met: The rigorous checks performed by the notary and the commercial register judge minimize the risk of legal defects or future disputes.
  • Founders have ample time for careful consideration: The various steps and waiting periods can actually serve a beneficial purpose, allowing founders to thoroughly review their business plan, financial projections, and legal arrangements. It provides an opportunity for reflection and final adjustments before the company is legally established. This deliberation can lead to a more robust and sustainable business setup.
  • High trustworthiness is built: As discussed, the thoroughness of the process contributes significantly to the high reputation and trustworthiness of the GmbH, which benefits the company in its dealings with banks, investors, and business partners.

While a speedy foundation is often desired, a well-considered and legally sound establishment through the German GmbH process can be a greater asset in the long run. For those seeking immediate operational capability, options like acquiring a ready-made “shelf company” (Vorratsgesellschaft) already registered in the commercial register exist, but these come with their own considerations and costs.

Taxes

Understanding the tax landscape is paramount for any entrepreneur in Germany, and especially for a GmbH. As a distinct legal entity, a GmbH is subject to its own set of taxes, different from those applied to sole proprietorships or partnerships. The German tax system is intricate, and while this overview will cover the main taxes, it is highly advisable for all GmbH founders to consult with a qualified tax advisor (Steuerberater) to optimize their tax obligations and ensure full compliance.

Here are the primary taxes a GmbH will encounter:

  1. Corporate Income Tax (Körperschaftsteuer – KSt)
    • What it is: This is the equivalent of income tax for corporations. The GmbH itself, as a legal entity, is taxed on its profits.
    • Rate: Corporate income tax is levied at a uniform federal rate of 15% on the company’s taxable income.
    • Solidarity Surcharge (Solidaritätszuschlag – Soli): In addition to the 15% corporate tax, a solidarity surcharge of 5.5% of the corporate tax amount is also levied. This effectively increases the corporate tax burden slightly.
    • Basis: The tax is calculated on the GmbH’s taxable profit, which is determined after deducting all allowable business expenses from revenues.
    • Payment: GmbHs typically pay corporate tax in advance on a quarterly basis, with an annual corporate tax return submitted after the end of the calendar year. The tax office then determines the final liability and adjusts advance payments accordingly.
  2. Trade Tax (Gewerbesteuer – GewSt)
    • What it is: Trade tax is a municipal tax levied on commercial enterprises in Germany. Most GmbHs, by virtue of their commercial activity, are subject to this tax.
    • Rate: Unlike corporate tax, the trade tax rate is not uniform nationwide. It depends on the municipal assessment rate (Hebesatz) set by the specific city or municipality where the GmbH has its registered office. The national basic rate is 3.5%, but this is then multiplied by the local Hebesatz. Municipal Hebesätze can vary significantly, typically leading to effective trade tax rates ranging from around 8.75% to over 20% of the trade income.
    • No Allowance for GmbHs: Crucially, while sole proprietorships and partnerships benefit from a trade tax allowance (tax-free amount), GmbHs (and other corporations) do not receive this allowance. Their entire commercial profit is subject to trade tax.
    • Payment: Like corporate tax, trade tax is usually paid in quarterly advance payments to the municipality.
  3. Value Added Tax (Umsatzsteuer – USt, commonly known as VAT)
    • What it is: VAT is a consumption tax applied to most goods and services sold in Germany and the EU. Businesses charge VAT on their sales and can typically reclaim VAT paid on their purchases (known as input tax, Vorsteuer).
    • Rates: The standard VAT rate in Germany is 19%. A reduced rate of 7% applies to certain essential goods and services (e.g., basic foodstuffs, books, local public transport).
    • Mechanism: The GmbH acts as a collector of VAT for the tax authorities. It collects VAT from its customers on its sales and pays this to the tax office. Simultaneously, it can deduct the VAT it has paid to its suppliers on its purchases. The net difference is remitted to or refunded by the tax office.
    • Returns: VAT returns (Umsatzsteuervoranmeldung) are generally filed monthly or quarterly, depending on the previous year’s VAT liability, and an annual VAT return is mandatory.
    • Small Business Exemption (Kleinunternehmerregelung): While less common for GmbHs, small businesses meeting specific turnover thresholds (currently, net turnover of less than €22,000 in the previous calendar year and not exceeding €50,000 in the current year) can opt to be exempt from collecting and remitting VAT. However, they cannot then reclaim input tax.
  4. Capital Gains Tax (Kapitalertragsteuer)
    • What it is: When a GmbH distributes profits (dividends) to its shareholders, these distributions are subject to capital gains tax. This tax is withheld directly by the GmbH (as the “paying agent”) from the dividend amount before it is paid out to the shareholder and then remitted to the tax office. It functions as a final withholding tax (Abgeltungsteuer).
    • Rate: The rate is 25%, plus the 5.5% solidarity surcharge on this tax. Additionally, if the shareholder is a member of a recognized church, church tax (Kirchensteuer) (8% or 9% of the capital gains tax) may also be withheld.
    • Double Taxation Avoidance: While the GmbH’s profits are taxed at the corporate level (Corporate and Trade Tax), distributions to natural person shareholders are then subject to this capital gains tax. This effectively means that the same profits are taxed twice, once at the company level and once at the shareholder level. However, for shareholders holding a significant interest (e.g., 1% or more of the shares), a “partial income system” (Teileinkünfteverfahren) may apply, where only 60% of the dividend income is subject to their personal income tax rate, and 40% is tax-free.
  5. Payroll Tax (Lohnsteuer) and Social Security Contributions (Sozialversicherungsbeiträge)
    • If employees: If the GmbH employs staff, including its managing director if they are employed by the company, it becomes responsible for withholding payroll tax and remitting social security contributions.
    • Payroll Tax: This is the income tax on employees’ salaries, withheld by the employer and remitted to the tax office. Rates are progressive, depending on income and tax class.
    • Social Security: Both the employer and employee contribute to Germany’s comprehensive social security system (pension, health, unemployment, and long-term care insurance). Contributions are generally shared equally between employer and employee, up to certain income ceilings. The employer is responsible for deducting the employee’s share and remitting both shares to the relevant social security institutions.
    • Church Tax: If an employee is a registered member of a recognized church, the employer is also responsible for deducting and remitting church tax.
  6. Other Taxes (Situational)
    • Real Estate Transfer Tax (Grunderwerbsteuer): If the GmbH acquires real estate, this one-time tax is levied on the purchase price. The rate varies by federal state, typically between 3.5% and 6.5%.
    • Property Tax (Grundsteuer): If the GmbH owns developed or undeveloped land, it will be subject to ongoing property tax, levied by the municipality.

Conclusion on Taxes:

The taxation of a GmbH is a multi-faceted area. While it involves various types of taxes and compliance requirements, the GmbH structure can offer significant tax advantages, especially for reinvesting profits within the company. For example, profits retained within the GmbH are only subject to corporate and trade tax (approx. 30%), significantly lower than the top personal income tax rates which can go up to 45% for sole proprietors. This makes the GmbH particularly attractive for businesses planning to reinvest a large portion of their earnings.

Given the complexity, professional tax advice is not just recommended, but essential. A competent tax advisor can help structure the GmbH optimally, ensure all tax obligations are met, identify potential tax savings, and prepare the necessary tax declarations and financial statements.

Annex: Templates for creation via video link 

Introduction

As mentioned, the German legislator provides templates for articles of association available, which are designed to simplify or reduce the cost of forming a GmbH. 

These templates are contained in an annex to the German Act on GmbH; they are copied below.

These provisions reflect the minimum requirements for articles of association. It should be noted, though, that they will not be suitable in many cases. However, it’s important to note that they often prove unsuitable for many situations. Founders should therefore seek legal advice and carefully consider whether to use a template or draft custom articles of association instead.

Template for the formation of a GmbH with one-shareholder via video-link

Register No. ………. 

On this day, the …………………………………………………………………………………………., the following person appeared via video link before me, …………………..………………….., notary with offices in ………………………………………………………………………………. : Mr/Mrs/Ms1) …………………………………………………………………………………………………………… …………….………………………………………………………………………………………………….. . 2) 1. In accordance with section 2 (3) of the Limited Liability Companies Act, the person appearing before me hereby, by way of notarial recording via video link under section 16aff. of the Notarial Recording Act, founds a company with limited liability under the company name …………………………………… ……………………………………………………………………………………………. with registered office in …………………………………………………………………………….. 2. The object of the company is ………………………………………………………… . 3. The company’s share capital amounts to € ……………………………………….… (in words: …………………………. euros), which is to be subscribed to in full by Mr/Mrs/Ms1) …………………………………………………………… (Share No. 1). The capital contribution is to be made in money, without delay in the full amount/50 per cent immediately and the remainder as soon as the meeting of shareholders passes a resolution to call in the amount.3) 4. The following is hereby appointed as director/are hereby appointed as directors4) of the company: Mr/Mrs/Ms4) ……………………………………………………………………….……., date of birth: …………………, place of residence: ………………………………….. ………………………………………………………………………………………….., Mr/Mrs/Ms4) ……………………………………………………………………….……., date of birth: …………………, place of residence: ………………………………….. …………………………………………………………………………………………. . 5) The director is/The directors are4) exempted from the restrictions set out in section 181 of the Civil Code. Where only one director is appointed, he or she is the company’s sole representative. Where several directors are appointed, the company is represented jointly by two directors or by one director jointly with a person vested with general commercial power of representation (Prokurist). 5. The company carries the costs associated with its foundation up to a total of €600, but at most up to the amount of its share capital. Costs over and above that amount are carried by the shareholder. 6. The shareholder receives a copy of this document, the company and the court of registration receive certified photocopies (in electronic form) and the Tax Office (Office for Corporations) receives a simple copy. 7. The notary in particular pointed out the following to the person appearing: ……………………………………………………………………………..………………. . NB 1) Delete as appropriate. Delete ʻMr/Mrs/Msʼ in the case of legal persons. Service provided by the Federal Ministry of Justice and the Federal Office of Justice ‒ www.gesetze-im-internet.de Page 37 of 38 2) In addition to the name of the shareholder and information regarding the notarised establishment of their identity, where applicable the matrimonial property regime, the spouse’s consent and information regarding any possible representation are to be included. 3) Delete as appropriate. In the case of an entrepreneurial company (Unternehmergesellschaft), the second alternative must be deleted. 4) Delete as appropriate. 5) Further directors may be added. 

Template for the formation of a GmbH with several shareholders via video-link

Register No. ………. 

On this day, the ………………….………………………………………………………………………, the following persons appeared via video link before me, ………….……………………………., notary with offices in …………………………………………………….………………………… : Mr/Mrs/Ms1) ………….…………………………………………………………………………………………….….., 2) Mr/Mrs/Ms1) ..…..……………………………………………………………………………………………….……….., 2) Mr/Mrs/Ms1) .…………………………………………………………………………………………………….……. . 2) 1. In accordance with section 2 (3) of the Limited Liability Companies Act, the persons appearing before me hereby, by way of notarial recording of the articles of association via video link under section 16aff. of the Notarial Recording Act, found a company with limited liability under the company name …………………………………………………………………………………………………………. ………………………………………………………………………………………….. with registered office in …………………………………………………………………………. . 2. The object of the company is ……………………………………………….…………….. . 3. The company’s share capital amounts to € …………………………………………….… (in words: ………………………..… euros), which is to be subscribed to as follows: Mr/Mrs/Ms3) ……………………………………………… subscribes to a share with a nominal value in the amount of € ……………………………………………………………….. (in words: ……………………………………………………………. euros) (Share No. 1), Mr/Mrs/Ms3) ……………………………………………… subscribes to a share with a nominal value in the amount of € ……………………………………………………………….. (in words: ………………………………………………………..……. euros) (Share No. 2), Mr/Mrs/Ms3) ……………………………………………… subscribes to a share with a nominal value in the amount of € ……………………………………………………………….. (in words: ……………………..……………………………………. euros) (Share No. 3). The capital contributions are to be made in money, without delay in the full amount/50 per cent immediately and the remainder as soon as the meeting of shareholders passes a resolution to call in the amount.4) 4. The following is hereby appointed as director/are hereby appointed as directors3) of the company: Mr/Mrs/Ms3) ………………………

date of birth: ……………………………, place of residence: ………………………….…. ………………………………………………., Mr/Mrs/Ms3) ……………………………………………………..……………………..…., date of birth: ……………………………, place of residence: …………………………….. …………………………………………………………………………………………………………. . 5) The director is/The directors are3) exempted from the restrictions set out in section 181 of the Civil Code. Where only one director is appointed, he or she is the company’s sole representative. Where several directors are appointed, the company is represented jointly by two directors or by one director jointly with a person vested with general commercial power of representation (Prokurist). 5. The company carries the costs associated with its foundation up to a total of €600, but at most up to the amount of its share capital. Costs over and above that amount are carried by the shareholders in proportion to the nominal values of their shares. 6. Each shareholder receives a copy of this document, the company and the court of registration receive certified photocopies (in electronic form) and the Tax Office (Office for Corporations) receives a simple copy. 7. The notary in particular pointed out the following to the persons appearing: ………………………….………………………………………………………………..…… . NB 1) Delete as appropriate. Delete ʻMr/Mrs/Msʼ in the case of legal persons. 2) In addition to the name of the shareholder and information regarding the notarised establishment of their identity, where applicable the matrimonial property regime, the spouse’s consent and information regarding any possible representation are to be included. 3) Delete as appropriate. 4) Delete as appropriate. In the case of an entrepreneurial company (Unternehmergesellschaft) the second alternative must be deleted. 5) Further directors may be added.