Germany’s taxation of the Limited

Experiences with the use of the British limited company form in Germany have shown that in addition to the advantages of the Limited there are also many formalities which must be observed when using the foreign legal form in Germany, particular in regard to taxation.

Following decisions of the European Court of Justice (ECJ) in the cases “Centros”, “Überseering” and “Inspire Art”, many German entrepreneurs have chosen an English private company limited by shares when forming entities for their business enterprises. This is now legally possible since the ECJ decided that these entities must be recognized even when they carry out no business activities in the country of formation and maintain merely a registered office there.

Based on initial experiences with the use of the British limited company form in Germany, it has become apparent that, in addition to the much lauded advantages of the limited compared to the German GmbH form, there are many formalities which must be observed when using the foreign legal form in Germany, in particular in regard to taxation.

For example, if a limited company is exclusively active in Germany it is subject to unlimited German taxation. Of main importance in this regard is that either the statutory or the management seat of the company is located in Germany. As a result, the English limited is comparable to the GmbH specified in §1(1) Corporation Tax Act (Körperschaftsteuergesetz, KStG). The potential double taxation which arises from the fact that an English limited has its statutory seat in England, is prevented by the Germany-England double taxation treaty which specifies, in the so-called “tie-breaker” rule, that if an entity is considered domiciled in both countries, for purposes of the treaty it will be considered to be domiciled only in that country in which its seat of management is located and therefore only subject to taxation in that country.

Within 12 months following the end of its fiscal year, an English limited must submit an annual account, a tax computation and a tax return to the English inland revenue. A relinquishment of English domicile must also be notified to the inland revenue. If the conditions of the tie-breaker rule are met, the company must obtain a confirmation from the German tax authorities that the company is domiciled in Germany and therefore non-resident in England. This confirmation is then also submitted to the competent English tax authority with the result that the company will be considered non-resident in the UK and therefore no longer required to submit an annual tax return.

The fact that a limited is treated as non-resident for tax purposes does not mean, however, that the company law responsibilities to the Companies House need not be observed. The accounting, reporting and audit responsibilities under English (company) law continue to apply even after the company´s move to Germany. Such duties include the preparation of original accounting records as well as annual accounts comprised of a balance sheet and a profit and loss statement which must be audited and submitted to the Company Registry together with the auditor´s report.