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)
