Steuerberatung und Wirtschaftsprüfung für den Mittelstand +49-69-25622760

Steuerberatung und Wirtschaftsprüfung für den Mittelstand +49-69-25622760

We are often asked which is better: a branch office or a limited company.

Two facts are usually misjudged:

  1. Many believe that the effort and costs involved in setting up and managing a branch office are much lower than for a subsidiary.
  2. Others believe that they can do business or make extensive preparations in Germany without becoming liable for tax here.

The form and manner in which a company is founded in Germany should be carefully considered, as many factors depend on it, which in the worst case can lead to expensive mistakes that cannot be reversed.

The following factors in particular must be taken into account:

  • Costs for the foundation
  • Current taxation
  • Liability for obligations by the company and the shareholders
  • Costs for ongoing administration
  • Business aspects, e.g. the handling and duration of activities in Germany.

For foreign companies that want to become active in Germany, there are three main options: The rep office, the branch office and the subsidiary.

Branch office or limited company Which is better?

Branch office or limited company? Which is better?

Permanent establishment / branch office

A branch is a legally dependent unit of a company. It bears the name of the parent company with the addition “branch office”. Entry in the commercial register is mandatory.

A permanent establishment is a term coined for tax purposes and arises independently of entry in the commercial register if certain conditions are met.

Prerequisite for a permanent establishment:

  • A permanent establishment from which business is conducted.
  • Only exists for a certain period of time.
  • Entrepreneur can freely dispose of them (key power).

Even a warehouse or a construction site that lasts more than six months can be a permanent establishment. If a branch is entered in the commercial register, it is always a permanent establishment.

The rep office or representative office commonly used abroad does not legally exist in this form in Germany. The least common form of business activity in Germany by foreign entrepreneurs, apart from commercial agents, is when employees of the foreign company work in Germany without meeting the above-mentioned criteria for a permanent establishment. Here, too, it should be noted that the employees may have to be registered in Germany for social security and tax purposes. Even preparatory sales activities can lead to the creation of a permanent establishment.

German VAT law may also be applicable in some cases when it comes to invoicing. This is often overlooked, especially in online trade / e-commerce. Find out more about VAT here.

Ltd.

A GmbH is a separate legal entity. It is legally independent of the shareholders or the parent company. It is represented externally by its managing director(s). Its name can include the name of the parent company or have a different name. The involvement of a notary and entry in the commercial register are mandatory.

The GmbH comes into existence with the notarial establishment

This requires a partnership agreement. You can have this individually drafted by a lawyer according to your wishes within a certain legal framework. This can be very helpful in the event of disputes between the shareholders in the future. Until entry in the commercial register, the founding partners have unlimited personal liability. Thereafter, the shareholders are only liable up to the amount of their contribution. Once this has been paid in full, the shareholders are no longer liable and the GmbH itself is only liable up to the amount of its assets. This is a major advantage of the GmbH. If this liability is to be limited, regular profit distributions should be made.

The share capital for a GmbH is at least € 25,000

At least half of this must be paid in before entry in the commercial register. The share capital must initially be at the free disposal of the managing directors. After registration and receipt of a tax number, however, it may also be used within certain limits, e.g. for the purchase of fixed assets for ongoing business activities.

If the GmbH is to be terminated, it can be liquidated. The blocking year must be observed. If the company is insolvent or over-indebted under insolvency law, the managing directors must file an application for the opening of insolvency proceedings with the competent local court without undue delay, but within 3 weeks at the latest. Failure to do so may constitute a criminal offense by the managing directors and may result in personal liability for the managing directors. The managing directors should therefore always keep an eye on the financial development of the GmbH in their own interest.

The GmbH must register for tax purposes and submit regular tax returns. These include advance VAT returns, which must be submitted monthly, quarterly or annually, and annual tax returns for corporation tax, trade tax and VAT. If the GmbH employs staff, it must fulfill employer obligations. These include the calculation and payment of wage tax and contributions to social security institutions.

The GmbH must prepare annual financial statements

The content and components of the annual financial statements are based on size criteria defined in the HGB. The same applies to the disclosure or filing of financial data. If the shareholders wish to deposit or withdraw funds, this is generally only possible via contributions to equity or via distributions or loans. In the case of distributions, a shareholder resolution must be passed beforehand. In addition, a capital gains tax return must be prepared and submitted to the tax office. Up to 25% capital gains tax and 5.5% solidarity surcharge may have to be withheld so that the receiving shareholder does not receive the full amount of the distribution.

We are happy to take on these and other tax and accounting tasks for you and will be happy to answer any questions you may have.

Advantages and disadvantages

In favor of the GmbH is the limitation of liability to its assets and its good reputation in business transactions in Germany. Arguments against the GmbH are the minimum share capital and the fact that a notarized articles of association are required. This means that the formation costs are generally higher for a GmbH than for a branch office. It should also be noted that higher costs are incurred for liquidation and the GmbH can only be liquidated after a blocking year in which all liabilities to third parties have been repaid.

The slightly lower formal requirements for profit determination speak in favor of the branch office. Up to certain turnover limits, it only has to prepare a statement of surplus income and not annual financial statements with notes like the GmbH. This also gives it more leeway with regard to the allocation of profits in certain years, in which payments are withheld or brought forward.

An argument against the branch office is that, if it is a branch registered in the commercial register, all legal changes to the parent company must also be entered in the German commercial register. In addition, the administrative burden is similar to that of a GmbH. The biggest disadvantage is that the parent company is directly and indefinitely liable for all liabilities of the branch. A small mistake can be expensive.

From a tax perspective, it makes no difference, as the GmbH and the branch office are subject to corporation and trade tax and therefore to the same tax rates.

Our recommendation: Due to the limitation of liability and the better reputation, we recommend that our clients form a GmbH.

General information on the choice of legal form

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