Why a GmbH in Germany? Sorry, that was not a good idea and will costs you money and nerves to fix that. Now you are locked into Germany even if your business can be operated from everywhere around the globe. If you move the GmbH out of Germany you have to pay GmbH fair value ; fair value according to German Tax Authority! Do a Holding GmbH + Operative GmbH to accumulate wealth tax efficiently. You could have your company on your name (Personengesellschaft) and operate from across the globe, especially with cheaper taxes and living expenses OR even found a GmbH-like company in a cheap tax haven and do vacation in Germany.
What most people do not understand about muhaaa's comment is the dry-income problem.
How to bankrupt yourself in 3 easy steps:
1. Incorporate a UG (small limited liablity entity, sometimes called baby GmbH) with 100€ capital base and you owning 100% of stock.
2. Raise Venture Capital, let's say 1M€ for 10%, making your company worth 10M€.
3. Move out of Germany.
4. Receive a letter from the Tax Authority that you are liable for Exit Tax (Wegzugsbesteuerung) and irregardless of your lack of revenues because of your recent capital raise your company is estimated at 10M€, making your personal holdings in the company 9M€ worth, of which the Tax Authority wants 60% of your personal income tax on, which varies but to be optimistic let's say you get taxed 30%, which is among the lower bound.
Now you owe the German Tax Authority 2,7M€ without having made a single € and your company only having 1M€ in liquid cash.
It's literally the reason why I will never incorporate a company in Germany again.
Yes, the recently introduction of a stricter exit tax bit me too, before that I would have entertained the idea of moving across the border to Belgium or Netherlands (both literally less than 5km away). My tax accountant was of the opinion that the recently passed German exit tax will eventually be overturned by EU courts since it contradicts freedom of movement within the EU, but that will likely take years...
For what it's worth, the exit tax applies to all corporate ownership above 1%, foreign or domestic.
Tax accountants are very unlikely to be better at predicting EU court decision than the layman. In other words… there are very many laws that hinder EU freedom of movement in an economic sense without being struck down. Member states get a lot of leeway in designing local tax laws.
How would that be different if you did all steps 1-2 with a foreign corporate entity while being personally tax resident in Germany? Step 4 would be the same except if you were hiding the existence of the foreign corporate entity from the German tax authorities - but my understanding is that reporting steps 1 and 2 to the German tax authorities is legally mandatory for any German tax resident.
Correct, there is no way to escape this if you have made this mistake of being either born as a german tax resident (your tax number is the first document you receive from the government) or having made the weird choice of choosing to become a german tax resident.
Personally this specific situation is in the top 3 reasons for me to leave Germany as soon as possible.
Most people don’t choose where to live based on taxes, including me. Healthcare, lifestyle, family, political climate, job opportunities, overall affordability, safety, the rule of law, and other similar factors matter far more to me. But you do you.
But moving countries often won’t solve your problem, unless you pick one country before starting your business and reside there indefinitely thereafter.
Why? Because the big picture of the tax regime you describe isn’t unique to Germany, though of course the precise details are unique in each country. It’s broadly common for countries with residency-based taxation for individuals, so basically everywhere but the US and Eritrea, to have some form of exit tax for individuals who relocate abroad that includes the value of corporate shares held at the time of the move.
Even the US has such an exit tax for many cases (not all) of renouncing citizenship or abandoning long-term permanent residence.
The problem is, once again, not with being taxed in general, but with being forced to choose between staying in a country or being bankrupted by taxes.
Yes, other countries do have Exit Taxes, but Germany is pretty unique in the way it calculates how much and when you should be taxed for your private holdings, basically trapping you, mostly without your knowledge, in the country.
How would other countries calculate exit tax on private holdings like you describe? If you accept the general principle of exit taxation in a residence-based taxation system, then the only alternative methods I can think of either leave the tax authority vulnerable to not getting their fair share at a subsequent liquidity event or require putting up some kind of acceptable security or continuing limited German tax jurisdiction over those assets to prevent that outcome.
It's only my opinion, but a fair tax scheme only collects taxes at the time where you have actually made gains to pay the taxes from, not any theoretical on-paper gains.
To ensure the "fair" tax is levied i'd propose a limited continued tax jurisdiction over the shares until the time they get liquidated, with the optional alternative of prematurely ending that jurisdiction by settling it at the time of the shareholders convenience, with the ensuing valuation being kicked off then. The limited continued tax should assume a linear value growth over time and armed with that calculate back what the tax would have been at the point the share holder left the tax system.
Since the valuation is largely out of the hands of the founder, the abuse potential is limited to knowing of upcoming changes in the valuation, but since they would be future changes in the valuation, i don't see a legitimate reason why the state you leave should tax you for it.
> It's only my opinion, but a fair tax scheme only collects taxes at the time where you have actually made gains to pay the taxes from, not any theoretical on-paper gains.
I doubt your proposal is implemented in any, or many, countries worldwide. Why? Your proposal seems far more prone to abuse than the status quo.
After all, even most of Elon Musk's Tesla gains have not been realized in the sense of the TSLA stock being sold for a profit. He's sold some shares of course, but most of the wealth he accesses is by borrowing against his on-paper gains, not realizing them in the tax or accounting sense.
So, wealthy people like him who can clearly afford to pay the taxes on their gains would just be exempted by that policy merely due to their choice to borrow against rather than sell their shares.
If an arms-length investor has said that your shares are worth $XMM when they were worthless before, it's not unreasonable for the tax man to expect you to find some way of paying tax on those gains in a timely manner, even if you have to borrow to do so. Every other person with an on-paper gain outside the world of private corporate shares sometimes has to do similar things to satisfy their exit tax. This sometimes even happens in the world of private corporate equity where there is enough of a secondary market for third parties to buy options off of people who don't have the liquidity to pay the taxes required to exercise.
> To ensure the "fair" tax is levied i'd propose a limited continued tax jurisdiction over the shares until the time they get liquidated, with the optional alternative of prematurely ending that jurisdiction by settling it at the time of the shareholders convenience, with the ensuing valuation being kicked off then.
This is absolutely a reasonable way of doing it... almost. Allowing the shareholders to choose the time of tax exit separately from any real-world substantive transaction is so very prone to abuse. They'd just wait until the next recession to minimize taxes, even if they don't move or do any major corporate ownership or investment transactions during that recession.
And the limited continuing tax jurisdiction needs some way to ensure that enforcement will be possible, such as posting acceptable security, at least when the person doesn't move to another a cooperative tax treaty partner country that is willing and able to help with any required enforcement. Otherwise, again, they can just move their residence and assets to a tax haven country and thumb their noses at Germany.
Maybe you're wondering, how is posting acceptable security different than paying taxes, or just plain how would it work? First answer is to go look at other countries like Canada which already offer this option as a way of deferring exit tax on illiquid assets and see what they do.
But purely speculating here: It doesn't necessarily have to prevent you from getting a return on investment on the security you're posting. For example, maybe the security could be in the form of a temporary restriction on your right to withdraw a certain amount of funds from a German bank account, but retaining the right to earn interest on that money and possibly also to withdraw that interest.
> The limited continued tax should assume a linear value growth over time and armed with that calculate back what the tax would have been at the point the share holder left the tax system.
Why would it be linear when that's in no way a reasonable approximation of what happens to most businesses which end up in the tax-trap scenario you're describing? But more importantly, why would one need to care about subsequent events when valuing the company at the moment of departure? Just value the company at the moment of departure, whether or not tax is deferred.
Let me give another scenario or two. What if you die soon after the valuation round instead of leaving Germany? Or, same thing, but what if you divorce instead of die? Either way, you need to value the company well enough to value your shares for whatever inheritance or asset-splitting process follows the death or divorce. To me, applying the same valuation to a residence-based exit tax seems like the fairest and most just solution.
> Since the valuation is largely out of the hands of the founder, the abuse potential is limited to knowing of upcoming changes in the valuation, but since they would be future changes in the valuation, i don't see a legitimate reason why the state you leave should tax you for it.
I don't understand the point here, but I agree that the state you leave should not normally be taxing you on changes in valuation which happen after you leave. Exceptions might exist in some edge cases where you can reasonably attribute the change in valuation to the period before you leave. (Imagine a case where a term sheet is signed before ending German tax residence, prompting you to try to dodge the tax hit by emigrating before closing.)
Or don’t move out because you operate a business out of Germany and none of this is relevant. How many businesses do you think ever reach a phase where this is a problem, let alone actually reach it *and* want to move elsewhere.
I've just described a very simple case, it could be much more nuanced and just as problematic.
Let's say you were one of the founding members of a startup in your 20s, you join and get 20%. After 3 years of not seeing much success you leave, hungry for cash in your pocket. The remaining two founders continue and grow the business substantially over the subsequent 5 years. Your 20% stake never meant much because the company didn't look into VC and was just bootstrapped. Now the company is making 5M ARR with an average of 500k profit over the last three years. Great Success but not unusual or enormous, but totally unrelated to you, you aren't even aware of these numbers.
Now you decide to move to the US, or even another State in Europe, for the love of your life. Suddenly your holdings get evaluated, the 500k profit now get multiplied by 13,75 (Ertragswertverfahren) for a company evaluation at 6.875M€, putting your holdings at 1.375M, leading you to owe 412.500€ to the Tax Authority.
Now you could try to sell your shares to the other two founders before trying to move, which doesn't exactly simplify your life at this point. The founders most likely will not have the cash on hand, and might even not be interested since they do not plan on either raising VC, selling the company in it's entirety or IPO.
The only entity interested in your shares is the german tax authority.
IANAL nor am I a Tax Advisor, but from my understanding transferring the shares for a value for obviously less than the fair market value would come under scrutiny because the tax authority could interpret this as a way of evading income taxes for the founders.
We've had a similar situation happening and it took quite some legal fees to ensure we had all answers ready and in writing before the tax authority would start to ask their questions. It's a complex situation.
Another sad thing is, you can easily get buried in the costs of Legal/Tax advisor costs even for some simple stuff.
That is why sometimes its better not to 'entreprendre' anything while living in Germany. The system is setup in a way to make you work full-time for corps.
I also createda GmbH in germany and i tell you a thing: I don't care to optimize every single shit for the optimum. If i would, i would go to USA and accept that the social scissor is so crazy wide that not every USA citizen can't just go to a dentist.
I live in germany, thats how it is and i'm fine with it.
I don't know how to judge this comment? Is this essentially recommending dodging the taxes via a more complicated holding situation and the "do vacation in Germany", so essentially operate from germany?
If so, I think this is highly unethical. Corporations have to pair their share to keep the society functioning...not just "normal" peoples with their salaries while all the profits get sucked into a foreign black hole.
Nothing against paying some taxes. But keep in mind that Germany is among the top ranking highest tax paying countries. And there are better "society functioning" countries than Germany, at much lower tax rate. Not every tax rate is fair. Some tax rates are unethically high b/c due to a overloaded govt. apparatus.
Not just "some taxes", but all of them. Keep in mind the author probably studied in germany and never had to pay any substantial fees to the university, his parents got money during his childhood and he will get money even if he does not immediately find a job after he closes his business.
Taxes do go both ways. And just because you think the government is too big, you don't get to decide how much you pay for it, thats what a social welfare state is. If you want to change things, you have to vote, lobby and/or take part in political processes.
Or you if you want things to change you leave the country. Chance of success: 100%
Chance of success with "vote, lobby and/or take part in political processes": 0,001%
I was paying over 50% of my income in taxes in Germany, now I live in a country where most things actually work better and pay around 10%.
Germany has become an absolut shit show for everyone who is capable and not in the business of scamming via Gov. The chancellor Scholz is literally the guy who helped to steal from gov. via Cum Ex in the biggest scandal of the country. And now the prosecutor to investigate and prosecut cum ex gets defunded. You can't make that shit up.
Can I guess? The 10% tax country has either 10th of Germany’s population, or rich with natural resources, or has no minimum wage and immigration of cheap labor.
I bet it's a tax haven leeching of the countries around it.
To be honest, I also don't accept the argument if only you are well off in a poor country where everyone suffers but you make big bucks with a low tax rate. Are they enjoying a comparable healthcare? Adequate pension? If so, you should have been taxed more. I am a social democrat by heart and think that in the end economy serves society and successful entrepreneurs have inherent social responsibility because of the economic power they have.
healthcare is better, pension i take care of myself.
Zero leeching, smaller country yes, but why does that matter?
But you are so indoctrinated of "Germany is the best" that you will only wake up when your Pension ponzi scheme in germany explodes. Already now 100% of the federal income taxes are needed to support this ponzi scheme. Just think about it Germany could remove all federal income tax if they just did not have the ponzi pension scheme.
oh come on. I don't think "Germany is the best". In fact, I am leaving germany soon for a new opportunity in the UK. I wouldn't otherwise, right? But it's because it's a great opportunity in a beautiful city I always wanted to live in.
I hope it's not Switzerland, internationally recognised tax haven. If your country profits from the tax-avoidance of the rich then I won't consider it.
I agree that the pension scheme is really the achilles heel of the german state, as the pensions schemes are not really determined bye their true worth. But that's literally only one function of many. And the it also has good sides, as you there's less risk of serious poverty in old age.
> Germany could remove all federal income tax
While it's certainly a big part, it's still the minority of the federal budget and so you could only reduce the federal income tax. Things like research, social safety net for work-seekers, healthcare or major transportation routes are in the hand of the federal state.
EDIT: In the end I am not really arguing that germany is best. But I am arguing that in germany the taxes fulfil important functions and in the end they manage to deliver on most points. You might not want to accept it, but then moving abroad or changing the system from within is the only way to do it, but not staying in germany and avoiding taxes. Pay your fair share if you do your business in germany. I am convinced that successful entrepreneurs have social responsibility, because economy serves society and not the other way around.
Hi Lionga, grandparent poster here and fellow German. Did exactly the same thing as you did. For the same reasons. With the same success. I congratulate us for leaving a, pardon me everyone else, highly corrupt state.
germany is usually ranked as one of the least corrupt states. I know there's corruption happening but it's just not comparable to highly corrupt states, I've been in a few e.g. venezuela. I also have at least some experience with the workings government via courts/day to day life of judges or the inner workings of the administration of munich and I haven't seen corruption at all.
Germany has become an absolut shit show for everyone who is capable and not in the business of scamming via Gov. The chancellor Scholz is literally the guy who helped to steal from gov. via Cum Ex in the biggest scandal of the country. And now the prosecutor to investigate and prosecut cum ex gets defunded. You can't make that shit up.
Still for me building up a company is not only for maximizing personal profit by any means, it’s also a social construct that should be valuable for the society. Paying taxes on economic activity, provide jobs and therefore a living for people, and ideally by producing something actually valuable for society itself (not just exploiting natural resources or siphoning off money from other players).
Also every country has tradeoffs one way or another. And by far not everyone has the same ideal of solidarity or wants to give back to the society that invested quite a lot in the person before he/she got into the situation of making a lot of money. Still some people (like me) notice it and it’s much more respectable than any billionaire.
They're only dumb when it comes to investigating VW, Wirecard or some shady high level politician with strong ties to big business like Schröder or Ursula.
Yes it looks like a trick to circumvent taxes. But it wont work. The german tax authorities are not stupid: If you are living and operating from Germany for a large part of the year you have to pay german taxes even if your residency is somewhere else. Public figures had to pay a lot of taxes because they calculated the number of days incorrectly.
That is not true. It easy to create a holding on top of your GmbH in which case you only pay for 5% of the revenue taxes.
The only shoot in the foot is the higher cost of declaring taxes being it in time or in fee for a specialist.
And as long you are working from Germany you have to pay taxes for any kind of money you are going to take out from the company, being ist as dividend or salary.
The only exception is when you are not residing in one country in the EU for longer than 6 Months than you can play around with a LLC construct or other Holding structures from countries that have a double-tax avoidance agreement.
I think the days when you could just set up a company in some random country and run it from Germany are pretty over, the Finanzamt will just treat it as a domestic entity unless you can prove you've gone full nomad.
You have to cleanly separate personal and company taxes. If the managing director makes significant decisions (as in forming the will, not as in executing) while on German soil, the company is taxed like any other German capital company.
Btw. despite the myth, just being 182 days outside of Germany doesn't get you out of German personal taxes. It just stops taxation of foreign-derived income.
If you're talking about income taxation of individuals and would otherwise be dual resident in Germany and another country with which Germany has a typical set of tax treaty residency tiebreakers, then the top criterion in the list is where you have a permanent home available to you. If you have a permanent home available to you in the other country but not in Germany, you are by treaty a tax non-resident of Germany regardless of days in Germany or center of life.
That does raise the question of what does it mean to have a permanent home available to you. And that's a much harder conversation as applied to the edge cases. But one can certainly construct viable enough scenarios where it would not be a close call even if one spends more than half the year in Germany, and then arrange one's reality to genuinely match the constructed scenario. Explaining to the Finanzamt (tax office) might need a Steuerberater (tax advisor) to argue with them, of course.
I can understand doing so in a country that is squandering money - like the UK, where you pay through the nose and get very little in return, but Germany? I heard public services and basically what you get for your tax is pretty decent.
why is this even the first thing that comes to mind when thinking about the legal form? This is highly unethical in general and really just super selfish.
F*k you if you avoid taxes, especially in a country like Germany where society paid for your university studies etc.
German here. You mean the German education system that has been going down the last 2-3 decades? Are you even aware that the German tax system is redirecting tax income from smaller companies to richer ones (e.g. if they soon introduce "reduced electricity prices" for some heavy industry companies)? Are you aware that the system taxes employees relatively high and companies and capital income pretty low with thousands of tax exempts? Are you aware that government service cost are skyrocketing because they didn't reform anything in the recent 2 decades? Are you aware they poured ~4bn EUR into "digitization" of government services and nothing's working?
The whole system has been broken by corporate lobbies and unethical politicians who just wanted to be voted for. Now tell me about the great social system in Germany that is worth all the tax money.
I am sorry but you can not work in the company or build a company in the country and avoid taxes. Your taxes go directly into these things. All the rest of the society has to pay taxes, they can't avoid taxes on their car via an elaborate foreign holding structure. The only way to change it to your liking is via politics, or build it in a different country respecting their rules. Get involved in local politics, especially the state of the school system and many other things are decided on a very low level that can be directly influenced by your district.
Everyone contributes and we get back free education (our universities are still good btw. and for certain topics really good) and from what I hear about schools from parents they still work, even with expanded care times. Bürgergeld exists if you really hit a rough spot. Super cheap public transit (50€ per month!) and autobahn is still existing.
You say that what Germans lack in competence they make up with arrogance, but it's really to complain about everything and be super pessimistic all the time. You can not just choose to avoid taxes, that's just highly unethical and unfair to everyone who's paying their share and super selfish. I stand by my word:
I highly respect your idealism. I really do. I used to think like that around 15 years ago. I'm still some kind of social democrat by heart (not the party but rather the concept).
But what I learned in recent couple of years is that German leadership (rich people, old industries, bureaucrats, managers, politicians et al) set up a system that is actively squeezing out the middle-class. Doesn't really matter which subystem you're looking at (healthcare, public transport, education, taxation, civil services, childcare, housing, pensions, energy, and more) you'll see that all things have been set up to make rich people richer and let the other 99% struggle with pretty much everything.
I'm not avoiding any taxes and strongly believe in social systems with solidarity and help for the weaker people, but I learned that (a) change is not welcome (rather actively prohibited) in Germany and (b) fighting windmills just lets you burn out.
Ha, that's a very typical answer my compatriots would give. What Germans lack in competence they make up with arrogance. That just seems to be our thing.
I have been self-employed under a Polish business (działalność gospodarcza) for the last few years. With income tax plus mandatory pension and health contributions, over a third of my income goes to taxes or other mandatory fees (like the requirement to have a licensed accountant keep your books). It really isn’t much different than most other EU countries. And of course one pays a comparable VAT on shopping.
Often in Poland people say “Why are you running your business here? Base it in Czech Republic!” The grass always is greener on the other side.
In Czech Republic as self-employed ("živnostník") your effective tax+insurance rate for income up to 2M CZK (~ 80k EUR) is never more than 15%. I have SW contractor friends paying around 8-12% - including health and social insurance. No need to have any accountant at all for income under 2M CZK, you just keep your invoices and sum your income at the end of a year, the tax return form is online and the sum of income is your only input.
you are not forced to live and do business here. Feel free to move to another country if you don't like the taxes. But you can't just avoid the taxes because you feel like it. I don't care how much you would loose by not avoiding taxes.
Society only functions if everyone contributes. And the rest of society pays their taxes, you know. They can't avoid paying taxes on their car through a foreign holding structure. It's a slap on their face because you feel like you should have more.
>Society only functions if everyone contributes. And the rest of society pays their taxes, you know.
Yes, everyone except German businesses dealing in cash only who don't issue receipts, and the likes of Google, Amazon, Microsoft, Airbus, NXP, IKEA, ST etc. and all these conglomerate with complex tax avoidance schemes spread across Netherlands, Ireland, Luxembourg, Lichtenstein, Switzerland and some Caribbean islands who neither fully belonging to the British or Dutch crowns nor are fully independent nations, but some fuzzy situation in between.
You see, once we let so many players legally avoid paying taxes in broad daylight, it's difficult to uphold the social contract that "we should all pay taxes" as then it turns into a crabs in a bucket situation where the veil is lifted and the Average Joe sees through the cash-grab scam that the tax system is on the working class, and will do everything in his power to avoid paying taxes as well.
If you want people to respect the social contract of the welfare state, we need to hold everyone accountable to it with no exceptions, not just the poor suckers who have no means of dodging it or fighting back, while the super wealthy are laughing all the way to the bank.
> People can move in from other countries, you know.
You can also move away from germany. But you can't move to germany and avoid taxes while creating a company here (OP was literally: Bootstrapping a SaaS Business in Germany)
This is a great resource, thank you very much! I have friends who opened small tech companies in Germany, and the prevalent feeling is fear. Fear of doing something wrong, not declaring the correct taxes, misunderstanding profitability, etc. This type of article makes the process much more understandable. I like the strategy of detailing which problems to ignore or push for later, this is very useful advice.
German here. Congrats to your success. Now run away from Germany as fast as possible. It's not for evading taxes but for evading the crumbling German bureaucracy.
I recommend having a look at Estonia's e-residency.
This is such a european startup story - where most energy is spent setting up a company and navigating bureaucracy rather than building a product. If anyone wonders why europe has such a lower number of startups this is why. And it’s not the government at fault. It’s the culture. Like seriously just pay someone 200€ to do this on your behalf and focus on stuff that matters not the “legal gray area” of earning pocket change.
This varies wildly from country to country and Germany is known for their anal retentive bureaucracy and obsession with paper.
In many other countries who didn't have the mental anesthetics of "we are Germans, we are the best" and had to make a living and get competitive the process is much simpler ( not all, far from it ).
Also, "in the US is very easy and cheap" is a fallacy. First companies don't exist "in the US", they exist in states and the amount of shenanigans also varies. Don't forget the US has a very adversarial culture and if you don't be careful and pay a significant amount of money ( when you have some traction ) to a decent lawyer/accountant it's all fine and good until you get yourself in hot water with the IRS mixed with some kind of Better call Saul episode.
I have the general feeling the downside of things is much more lower in the US than in Europe, but I might be wrong.
I’ve opened dozens of companies (ok about a dozen) in the US. I can’t speak for every state, but in Florida and Wyoming it’s really simple. Can be done online and you absolutely do not need a lawyer, not at the beginning and not years later.
The experience does vary widely with the State, but the process in the US is generally pretty easy and forgiving when you are a small company in my experience. In some States they were friendly, helpful, and accommodating when I made mistakes or didn't file some form I didn't know I needed, they understand that happens. California is the only State where I found the process to be consistently hostile.
You can get a business registered in Delaware in under 30 minutes by filling out a handful of forms online. If you don't want to do even that pay some service like Stripe Atlas $200-500 and the entire process will be down to minutes. There are still plenty of hurdles in running a tech startup in the US but bureaucracy is not one of them.
Not sure if it's so much easier in the US. If you sell things you e.g. have different sales tax requirements in every state, and if you have a Delaware C Corp you still need to do you taxes which usually requires an accountant. Overall the system isn't very different in Germany, I'd even say VAT tax rules for Europe are probably a bit easier than sales tax rules in the US. Founding a limited liability company takes 2-3 weeks here BTW, costs are around 2000 T€ I think. Maybe more expensive than opening a C Corp but not by much.
pay who 200€? in Germany? just the notary fee is in the hundreds and you probably need a lawyer and an accountant for a UG/GmbH. I’m trying this now with a new venture. Already have an accountant. But they’re slow and nonresponsive. I tried shopping around and literally got turned down left and right with these types of messages: “Unfortunately we do not have the capacity to take on any new clients at the moment.”
Lawyers can’t seem to advise on tax issues or how to best structure your business(es). Tax advisors cannot seem to actually create a company. It’s a total mess. At least for anything nontrivial and for me as a non-German.
I thought maybe Estonia or someplace else in Europe, but the tax rules are such that if your center of operation is in Germany, you still need to do taxes here.
If anyone has tips or good contacts (accountants lawyers etc), I’d love to hear.
To be clear, I don’t have a problem paying taxes in Germany. The problem for me is primarily how hard it is to set up a company and deal with bureaucracy here. And even though there are great alternatives like Estonia, they sadly don’t really solve the problem.
In contrast, and I don’t know the US but how many people live in Delaware? :)
Then you have to choose between entrepreneurship and family. Germany is the country to have a family and work for a company your whole life, not for business ventures.
- Then some more diverse set of so-called "hidden champions" (German name for world-leaders of some very special physical engineering products) which will sooner or later be fed to some US or Chinese companies.
- Some heavy industry which is currently leaving the country because of shenanigans in energy politics over the last two decades.
- Some of the dinosaurs the sibling comment already stated
- and finally lots of service businesses driven by MBAs and Legals who profit from the jungle German tax and law system is. They have zero interest in change and have been squeezing out the middle class in last 2-3 decades.
Germany is in recession right now as the only of the G7 countries. This is because the cheap Russian energy cannot cover the structural problems anymore but business, taxation and bureaucratic mentality is putting the whole country down. Can't recommend anymore.
>And given the Germany is the economic powerhouse of the EU, their bureaucracy doesn't seem to be hurting them much.
Germany is the "powerhouse of Europe", not because of start-ups and business friendly environment, but because of giant 100-year old dinosaurs like Siemens, Bosch, Daimler, VW, etc, who were innovative in the post-WW2 times and can afford all the lawyers and tax consultants the state could ever require them.
But with US and China hot on their heels on areas that the German dinosaurs were champions like motor vehicles, and dominating all things internet related, they might not be a powerhouse 100 years from now if they don't improve and modernize their mentality and keep leaving bureaucracy and innovation to the retired boomers who grew up with "world powerhouse Germany".
Serious question: who would I hire for these kind of stuff?
In a couple of situations, I decided to give software away for free to avoid the hassle. If there's a simple solution to get advice, I'd really appreciate that.
The author writes "The best approach is to start as an “Einzelunternehmer” (sole proprietor). You can register this at your local town hall for a nominal fee, and you’ll typically receive confirmation within a few days."
When I did it the cost was 35 Euro, I think it depends on city. One can argue why this step can't be done online but until 2023 it wasn't possible to register a car online in Germany either.
Then a letter to the local tax office (in Germany they're by city or region, not central. Then as the author says ignore VAT until you're over the threshold.
The difference is that a GmbH projects your personal assets. The risk for a software engineere is small, much smaller than for a lot of other business but still it protects you.
It also makes you a better business partner (in theory) as you have crossed a certain amount of effort to create a GmbH
Yeah I think all you need to know about the "gray area" is the threshold of "tax evasion" or "tax fraud" in your country, and don't get even close to it, for me I'd still be worried to make a mistake and it would be on the back of my mind, so as you are saying, if you want to make things right and easy, incorporate a mini-GmbH, use professional help, and focus on your product.
Germany has a huge burocracy problem, but not all countries in Europe do. In Norway company registration is done online in around 15 minutes, for a 370 EUR fee. I am pretty sure Denmark, Sweden and Finland are the same.
I have registered companied both in Germany and Norway, the processes are very different in terms of hurdles.
Question regarding the "Einzelunternehmer" vs "GmbH" topic: in terms of liability, going for the former seems a bit "optimistic" as you are personally liable, no? Depending on your business it might vary how high the dangers in this regards are, but for a SaaS business, DSGVO fines immediately come to mind.
I worry that Lukas is about to find out about the business end of the Umwandlungssteuergesetz: converting a Einzelunternehmen to a GmbH is a surprising amount of faff, and once you've done it you (normally) end up with a company you can't easily sell for 7 years without paying some pretty hard-core taxes. I got to do this whole dance early this year, and it took a big bite of momentum out of the little bootstrap I was trying to pull.
As weird as it sounds: German founders, consider just biting the bullet and doing a GmbH straight away. Conversion is no fun. And even worse, UGs are hated by everyone with a law degree for absolutely no reason, but they will try to make your life as difficult as they can just to show who is boss.
If you are planning on VC-like returns by selling your company, you should start with a holding GmbH and an operative GmbH below (or crazier structures like a Holding GmbH & Co. KG). But: This way you have the maximum administrative costs and complexity in the beginning...
I think starting as an Einzelunternehmer makes sense in certain situations. I'm not a tax lawyer, but I'm a lawyer in a firm that advises startups and I have seen a lot of "Starts as Einzelunternehmer -> Does asset sale to own GmbH" type deals... "Normal" lawyers / tax advisors will never recommend this, because it is not a "simple check the box" exercise, and "sophisticated" lawyers are incredibly expensive.
Author here. I appreciate your points. I started the business as a learning experience without any thought of the end game. Now that I am wiser and with some money a GmbH is the way to go for the next business.
While bootstrapping, you do not know whether you would ever want to go full GmbH. So biting the bullet is a little bit like betting on the future. You have considerably higher cost and hassle from day one on and would need a tax consultant for doing your yearly balances. Of course all the cool kids have GmbHs but do you really need it? Its main advantage is that you can sell it at once or in pieces if you need financing, but even that is manageable with an Einzelunternehmen.
With regard to risk, the CEO of a GmbH is still personally liable for a lot of risks and liabilities including the social insurance payments of employees.
Also, all risks you can get insurance for you should get insurance for regardless of the form of the enterprise.
Agree that the UG is the worst choice since you are basically announcing you have zero savings behind and can generally not be trusted.
If you want to get more serious with your Einzelunternehmen, you could also consider becoming an „e.K.“ (eingetragener Kaufmann). Same tax rules but full HGB (Handelsgesetzbuch, special law that governs interactions between companies) applies.
Realistically, it's entirely possible to bootstrap without going full GmbH right away as long as you can do it quickly. There's a grace period where you can retroactively designate stuff to fall under the GmbH you created later and if you are smart about it, you can move your software project into the GmbH if it's plausible that it was created during that period.
In other words: you don't need a GmbH to build a prototype but it's probably a good idea to have the GmbH in place before you're production ready. Also people are way too squeamish about UGs (micro-GmbHs): they're actually fairly normal in the startup space and end users don't care about that distinction and larger companies are more interested in knowing you have sufficient capital/insurance to cover any liability claims rather than what it says on your letterhead - a full GmbH isn't worth anything to them either because they know you can literally buy and repurpose a shell GmbH for cheap.
I agree that a GmbH is not necessary if you don't consider VC investment an early/eventual goal for your product. If you can bootstrap and build a sustainable product, the biggest advantage is that having a GmbH (or UG) makes it easier to appear as a serious business but as you say, often e.K. is another viable route for that. And as you say, the managing director of a GmbH is still personally liable for anything that could be considered a neglect of their legal duties. Plus the way most people found GmbHs, the owner(s) are usually €12.5k in debt to the company as you only need to transfer €12.5k of the €25k initial capital directly to the company's bank account.
That said, things get messy if you're in GbR territory, i.e. if you have a co-founder who is a co-owner. You can approximate something of a worker cooperative by having everyone individually be an Einzelunternehmen but then you'll have to structure your business in such a way to still split profits fairly while also avoiding running afoul of Scheinselbstständigkeit (fake self-employment) - there's a good example in the Premium Kollektiv[0] (and plenty of literature and research articles have been written about their approach) but this is more of a case of "bending the law" and not something the law was written to explicitly support. A GmbH has the advantage of being structured in such a way you can precisely define split ownership but the disadvantage is that by default this will mean your co-founder can just decide to quit and still retain their ownership because the ownership and the job are legally distinct concepts.
Lastly an often overlooked caveat of GmbHs (although this in part also goes for all self-employment) is that German laws are written with the idea that "business owners" have access to generational wealth and are thus exempt from many aspects of the welfare state and this is even reflected in times of crisis: there were for example COVID relief programmes for solo-entrepreneurs (including solo GmbH owners with no employees) as well as COVID relief measures to allow downscaling employee hours (and thus costs) but if you were a small GmbH with more than one owner, most programmes were not available to you. Things also get nasty if you're a woman who wants to have children while owning (or co-owning) a GmbH: legally the best option for heterosexual couples looking to start a business is still for the woman to be an employee (no, not a managing director either) and own zero shares in the company and even then the German IRS may decide that the woman has a controlling influence and retroactively reclassify her as a co-owner. In short: if you're an entrepreneur in Germany, either don't be a woman or plan to abandon your company in favor of dependent employment if you try to get pregnant.
Do you have any further information / links / legal references regarding the IP transfer grace period? As ideally this is what I'd like to do with my current ideas.
Basically work on a bunch of opensource components that would complement a commercial product that I offer / develop under a future GmbH (which I spin up basically as soon as I have an interested party in the hypothetical product).
Trying to reduce the amount of legal and finanzamt shenanigans where possible.
I'm not an accountant or lawyer and I'm not your accountant or lawyer. You should speak to an accountant or lawyer familiar with IP law or software companies.
All I can say is that it's de facto possible to create a GmbH after you already have started building something that will be owned by the GmbH without requiring a formal transfer of the assets. To do so in a way that is legally safe and sound you should speak to a legal expert.
As I understand it, it's less that there's a legally defined period, it's more about the limits of what you can rationalize or to what degree history can be redefined. If all the code you've written is sitting on machines under your control, who's to say that the code you wrote before the company was founded is the same as the code the company ends up owning? Especially when it was just a draft prototype you definitely threw away anyway. If sale of the company or investment ever comes up, they'll do the due diligence to make sure the documented history is up to par anyway.
If any of this was too subtle: legally, history consists of what everyone agrees history is. Founders can be expected to bring in their prior knowledge when founding a company, so any software produced by them for the company while employed by that company is owned by that company, even if it happens to be indistinguishable from software they wrote prior to founding the company, as long as there are no third-party claims to that previous software (which would create liability for the founder anyway). If you're the only person who knows what color your bytes are, well... .
Thanks for sharing, now the last paragraph really got my attention: What exactly is the problem with (co-)owning as a woman with children, no eligibility for parental leave?
The least direct one that may still be fairly consequential is that if you own a controlling share in a company and are in the public health insurance, fluctuations in income can become an existential threat because while salaried employees have their rates adjusted on a monthly basis and Einzelkaufleute can use their income tax advances (which can be adjusted on a fairly short notice based on projected annual revenue) to adjust their rates, you don't pay an income tax advance (because your company instead pays corporate tax advances) but you also aren't considered salaried so public health insurers are legally required to use your most recent income tax return as the basis for your rate even if your salary changes. This can mean up to 2 years of delay between what your insurance rate is based on and what you actually make. Keep in mind that upon submitting a new income tax return, any difference is owed immediately. So if you decide to reduce your salary because you reduce you have to your number of hours or take time off for your kids, you continue having to pay the same monthly rate to your health insurance (although of course the difference will be refunded eventually) and if after doing this for a while you decide to go back to full-time employment you basically have to find out what your rate should be and set the difference aside so you can pay it back when the rate eventually catches up.
Another example with self-employment is that if you give birth, you are banned from working for a set period around the due date and this ban even applies if you're self-employed but because you are self-employed this also translates to zero income (or at least zero billable hours). Contrary to what some accountants might tell you, you can absolutely apply for Elternzeit though and the money you receive will be based on your salary, so there's that - but keep in mind what I said about public health insurance still applies even here.
Another fun fact about public health insurance is that as a mother giving birth, you receive compensation for the days around delivery via the health insurance. But this is tied to the "Krankentagegeld" and this is a "feature" you explicitly have to opt in to. So if at any point you switched health insurance companies you need to make sure you ticked the box - it's absurd that this is optional given that omitting it only saves you a few Euros per month but especially early on many solo entrpreneurs try to cut costs wherever they can. Keep in mind that there is not only a maximum insurance rate but also a minimum and many early entrpreneurs pay this disproportionate minimum while making barely any money - this is something private insurance companies prey on. Private health insurance is always a numbers game and not something that should be taken lightly even if public health insurance may seem extremely awkward an expensive. It's also much more difficult to go back to public once you've been in private (the usual hack is to register as unemployed for a couple of months to lose eligibility for private health insurance and automatically roll back into public insurance).
I don't recall the exact problem we ran into but the short version is that a lot of services Germans think of as "public" because they're publicly funded or paid by the government are actually tied to salaried employment or unemployment and "do you own at least 50% of a GmbH" appears on a surprising number of forms (as well as "does your GmbH employ more than one person including its owners").
Oh, and another thing worth mentioning: if your work is at all creative (somehow "building software products" doesn't tick that box, yet) or editorial, you may be subject to the Künstlersozialkasse. This is a social insurance that anyone hiring creative or editorial labor for commercial use has to pay into directly (i.e. it's not part of the invoice but the amount is based on the invoice). If you hire this labor via a GmbH, you don't have to pay this but the GmbH does. This means if you have a GmbH that provides creative or editorial labor (e.g. you do any design work), the amount owed to the Künstlersozialkasse will be based on the salary of the person that holds ultimate editorial control. If in doubt, this will be one of the owning managing directors, i.e. you. This can be a bit of a shock but if you are in the public health insurance this also means you can join the Künstlersozialkasse as a member, pay into public health insurance (via the KSK) the exact same way a salaried employee would (i.e. none of that "wait 2 years to adjust your rate after salary changes" nonsense) and not only does the money your company has to pay to the KSK go towards your own social security but through the magic of arcane accounting laws, they effectively contribute twice the amount you would if you paid directly (which for self-employed people is voluntary and largely pointless) - in other words you end up in a situation where you are legally self-employed but still benefit from public health insurance and the public retirement fund as if you were a regular salaried employee. I can't overstate how useful this is, especially if you are able to do this early on:
If you want to be self-employed in any creative field subject to the Künstlersozialkasse: JOIN THEM ASAP. You massively cut down on the headaches of self-employment and someone will have to pay into them for your work anyway so you might as well benefit from that.
As a bootstrapper of a German-based SaaS company myself, I've gotta say that I quite enjoyed the article. I would like to weigh in on specific parts of the article with some quick, if not exhaustive, comments:
> Bootstrapping is tough, especially in the beginning.
This couldn't be more true. Once the operation begins, that's when things start to get real. Cash starts to burn once the product moves from your laptop to its first production environment, and that usually happens well before the commercial go-live. Unless you have significant savings parachute should things go really badly, you are faced with the very real possibility of having to fully bail out once personal finances get to a critical point (e.g. not being able to cover rent, bills, food). Much bravery and faith is required to get through this very stressful phase. Expect to spend the early days and months praying for break-even.
> One of the benefits of running a SaaS business is the low operational costs. For Stagetimer, I spent barely €20 per month on tech infrastructure.
This really depends on what it is you're doing. If your service is computationally intensive and works on larger chunks of data as part of its offering, then it gets way more expensive. Bandwidth costs, compute costs (# of VMs/Cores/Threads, RAM, storage) all become pretty expensive. Costs will get more difficult to estimate as time progresses - for a few reasons:
1. Growth is hard to estimate, always, but especially when nCustomers == 0.
2. With increased load comes increased utilization of the infrastructure, which necessitates the need to know how much extra capacity should be available and what usage peaks look like. During the phase of winning your first customers and then some, you don't want to be in a position of getting frequent complaints about degraded performance, or worse, outages. Those things can kill you right at the start. Additionally, you probably shouldn't spend too much time solving scaling issues from the get-go before you have any reasonable traction. Finding a reasonable balance is tricky.
3. With scaling and spare capacity taken care of, you'll then start to see what your gross revenue really looks like and will likely start exploring ways to reduce your operational costs and squeeze out more margin by reducing the TCO, and ideally calculating the COGS for your product to get insights into how to reduce your fixed costs.
> Pricing is a huge challenge in the SaaS space
Oh God, yes. Good luck with this, especially if there's no precedent for the business type. If you're competing in a pre-existing product category then you can just spreadsheet the other offerings out there. If not, then you're basically guessing. In my opinion, you should always start with prices higher than what you think people will pay for. It's easy to go from higher to lower, but not vice-versa, especially at the very early stages. If there is an interest in the product and the pricing is on the high side, you'll likely get a lot of feedback. Be prepared to adjust your pricing and find a harmonious price point, but never rush this process. Don't forget, you can also negotiate prices directly with people who reach out to you.
> Legal, taxes bureaucracy, company founding
All of it is a pain. I'm quite sure that it's much easier in 2023 to explain what a SaaS is, to notars and tax accountants, than it was in 2013. Most tax accountancy firms will want to know stuff about your business before they agree to enrol you. In 2013 it was way more difficult to explain "customers send signals to our computers over the Internet and we send back signals containing the information their signals were asking for, and yes people will pay for this and mostly by credit card". Fun stuff.
(There's a lot more I want to type but I have to step away for now)
