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AXEL SPRINGER PLUG AND PLAY ACCELERATOR
Stefan Kimmel, Thomas Skowronek, Lukas Kawka
16 July 2014
Legal // Tax // Accounting
(selected topics)
2 © 2014 KPMG AG Wirtschaftsprüfungsgesellschaft, a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG
International Cooperative ("KPMG International"), a Swiss entity. All rights reserved.
Agenda
Founding 1
Employees 2
Investment Agreements 3
Selected Tax Topics 4
Accounting 5
3 © 2014 KPMG AG Wirtschaftsprüfungsgesellschaft, a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG
International Cooperative ("KPMG International"), a Swiss entity. All rights reserved.
Agenda
Founding 1
Employees 2
Investment Agreements 3
Selected Tax Topics 4
Accounting 5
4 © 2014 KPMG AG Wirtschaftsprüfungsgesellschaft, a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG
International Cooperative ("KPMG International"), a Swiss entity. All rights reserved.
Growth stages of STARTUP COMPANY
Stage overview
1. Founding
The business idea of STARTUP
COMPANY has moved into a legally
existing company
■ Choosing the legal form that is suited
best
■ Considering the set-up from an
employment side (own staff/
subcontracts/ leased workers
■ Choosing the right type of
employment contract
■ Setting up a tax efficient corporate
structure (i.e. regarding a future exit)
■ Tax optimized contribution of existing
assets (e.g. IP) in the startup
company
3. Exit
The business idea of STARTUP
COMPANY has moved into a legally
existing company
2. Development
STARTUP COMPANY has gained
higher market share and needs to
expand its personnel to cope with the
growth
■ Search for investors
■ Negotiate investment agreements
■ Working Time restrictions
■ Handling disputes with employees
■ Implementation of employee
participation programs
■ Employees vs. freelancer
■ Internationalization of the business
model (tax aspects)
■ Tax compliance
Legal aspects 1
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International Cooperative ("KPMG International"), a Swiss entity. All rights reserved.
Typical legal questions of founders
What do I have to do to secure
my investment from a legal
perspective?
How to avoid common
legal mistakes (e.g.
data/consumer
protection)?
What does an investment
agreement mean for my life?
How to form a
company?
What do I have to
consider to adequately
protect my Intellectual
Property?
When should I
involve legal
advisors?
7 © 2014 KPMG AG Wirtschaftsprüfungsgesellschaft, a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG
International Cooperative ("KPMG International"), a Swiss entity. All rights reserved.
Legal Entities
AG
Verein
Kapital-
gesell-
schaften
Personen-
gesell-
schaften
BGB-
Gesell-
schaft
OHG
Körper-
schaften
KG
GmbH &
Co. KG
Zusammen-
schlüsse
von
Personen
Personen-
handels-
gesell-
schaften
Publikums-
gesell-
schaft
Genossen-
schaft
GmbH
8 © 2014 KPMG AG Wirtschaftsprüfungsgesellschaft, a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG
International Cooperative ("KPMG International"), a Swiss entity. All rights reserved.
Corporate
Overview: Typical Legal Forms for Startups
Minimum Share
Capital
Liablitiy of the
Shareholders
Formal
Requirements for
the Foundation
(Management)
Bodies Transfer of Shares
GbR None Unlimited None None Consent of the other
shareholders required
GmbH € 25,000 Limited to the
company‘s assets
Notarization required
(costs approx. €
500.00)
Management,
shareholder‘s
meeting, voluntarily:
Supervisory board
In general no consent
of the other
shareholders
required, notarization
mandatory
UG
(haftungs-
beschränkt)
€ 1.00 Limited to the
company‘s assets
Notarization required
(costs approx. €
500.00)
Management,
shareholder‘s meeting
In general no consent
of the other
shareholders
required, notarization
mandatory
AG € 50,000 Limited to the
company‘s assets
Notarization required
(costs approx. €
700.00)
Management, general
meeting, supervisory
board
In general no consent
of the other
shareholders
required, no formal
requirements
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International Cooperative ("KPMG International"), a Swiss entity. All rights reserved.
Legal Forms
Partnership under the German Civil Code (GbR)
Partnership under the German Civil Code (Bürgerliches Gesetzbuch – BGB) Gesellschaft bürgerlichen
Rechts – „GbR“ (also „BGB-Gesellschaft“)
Minimum of two shareholders
Shareholders need to pursue an economic or ideal purpose
No formal foundation necessary (i.e. no written articles of association)
Therefore: In case two or more persons act together for an economic or ideal reason, in most cases this is already
considered a GbR (e.g. when the business plan is prepared)
Unlimited personal liability of the shareholders
In general all shareholders together are authorized to conduct the GbR‘s business and to represent the GbR
10 © 2014 KPMG AG Wirtschaftsprüfungsgesellschaft, a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG
International Cooperative ("KPMG International"), a Swiss entity. All rights reserved.
Legal Forms – GmbH (UG)/AG
Corporate Governance and Structure
Limited Liability Company (GmbH/UG)
(haftungsbeschränkt)) Stock Company (AG)
Articles of Association ■ In many areas, flexible provisions and
provisions that deviate from legal regulations
can be laid down in the articles of association
■ Principle of formal strictness of the
articles: Provisions that deviate from legal
regulations are only possible in the case of
explicit legal admissibility
■ Thereby transparency with regard to
applicable provisions on principles about
corporate governance, liability of corporate
bodies, protection of minority shareholders
etc.
Organization ■ Two- or threefold structure:
– Managing directors and shareholder meeting
– (in general) voluntarily: supervisory board/
council
■ In general supervision of managing directors by
the shareholder meeting, delegation of
competences to supervisory board/council and
other bodies possible
■ Threefold structure:
Management board, supervisory board and
general meeting
■ Supervision of the management board by
the supervisory board
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International Cooperative ("KPMG International"), a Swiss entity. All rights reserved.
Legal Forms – GmbH (UG)/AG
Corporate Governance and Structure
GmbH/ UG (haftungsbeschränkt) AG
Management The managing directors manage the business
activities and represent the company in dealings
with third parties
The management board manages the
business activities and represents the
company in dealings with third parties
Supervisory Board ■ Implementation of supervisory board only on a
facultative basis
■ Exception: Supervisory board is mandatory
due to co-determination of employees (if more
than 500 employees)
■ Supervisory board is mandatory
■ Supervisory board supervises and controls
the activities of the management board
Organization of the
shareholders
■ Shareholder meeting
■ Convocation by registered mail
■ 1 vote per € 1,- of a share
■ Shareholders have the authority to issue
instructions to the managing directors by
shareholder resolution
■ General meeting
■ Convocation by public announcement or
registered mail
■ Voting right in accordance with the number
of shares respectively the par value of the
shares
■ No authority to issue instructions with
regard to management matters by the
general meeting or the supervisory board
12 © 2014 KPMG AG Wirtschaftsprüfungsgesellschaft, a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG
International Cooperative ("KPMG International"), a Swiss entity. All rights reserved.
GmbH/UG (haftungsbeschränkt) AG
Information rights of the
shareholders
■ Each shareholder is entitled to request
information from the managing directors
regarding the company affairs and to request
access to the company’s books principally at
any time
■ Information has to be provided “without undue
delay” by managing directors
■ At the general meeting, shareholders can
request information from the management
board regarding company affairs insofar as
they are required to appropriately judge the
object of the agenda
■ No right of information regarding
individual items
Share Capital ■ GmbH: Minimum share capital: € 25,000;
contribution in kind is permitted.
■ UG (haftungsbeschränkt):
– Minimum share capital € 1.00
– Obligation to form a statutory reserve
(gesetzliche Rücklage), 25% of the yearly
profits minus the losses need to be paid into
such statutory reserve until the company
increases its share capital to a minimum of €
25,000
– No contribution in kind permitted
■ Minimum share capital: € 50,000
Legal Forms – GmbH (UG)/AG
Corporate Governance and Structure
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International Cooperative ("KPMG International"), a Swiss entity. All rights reserved.
GmbH/UG (haftungsbeschränkt) AG
Duties ■ Full representation of the company in dealings
with third parties
■ If there are several managing directors, they
represent the company jointly,
sole power of representation may be granted
■ Pursuit of the company‘s objects by
determination of how to use the resources of
the company
■ But: Margin of discretion towards shareholders
in case of management measures is smaller
(limited application of the business judgment
rule)
■ Legal obligations like keeping of books,
preparation of annual accounts etc.
■ Full representation of the company by the
management board in dealings with third
parties
■ If there are several members of the
management board, they represent the
company jointly, sole power of
representation may be granted
■ The management board is required to
manage the company under “its own
responsibility”, this includes management
and guidance
(so-called business judgment rule)
■ The management boards’ obligations
comprise its own legal compliance and its
enforcement at lower levels, this includes
organizational obligations and preventive
control
Legal Forms – GmbH (UG)/AG
Management I
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International Cooperative ("KPMG International"), a Swiss entity. All rights reserved.
Legal Forms – GmbH (UG)/AG
Management II
GmbH/UG (haftungsbeschränkt) AG
Membership ■ Managing directors may be appointed by the
shareholder meeting, the articles of association
may provide for the appointment by the
supervisory board
■ Appointment for an indefinite period of time
possible
■ Further rights and obligations can be
established in the management service
agreement
■ Revocation is possible at any time by
shareholder resolution (or as the case may be
resolution of supervisory board or council in
case of an according determination in the
articles of association)
■ Revocation is also possible without an
important reason
■ Management board members are appointed
by the supervisory board
■ Appointment for a maximum period of five
years
■ A repeated appointment or extension of the
period in office is possible for a maximum
period of five years (contractual
commitments of a longer appointment or
repeated appointment are ineffective
according to the prevailing view in law
literature and jurisdiction)
■ Revocation by the supervisory board only
for good cause, e.g. serious violation of
duties, incapacity to carry out management
duties or withdrawal of confidence by the
general meeting
– Management service
agreement –
■ Management service agreements of managing directors and members of the management board
may determine further rights and obligations, in particular as to the period of appointment and the
remuneration, management service agreements have to be terminated separately from the
revocation
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International Cooperative ("KPMG International"), a Swiss entity. All rights reserved.
Legal Forms – GmbH (UG)/AG
Management III
GmbH/UG (haftungsbeschränkt) AG
Management competences ■ Shareholders are entitled to give instructions
by shareholder resolution to the managing
directors also in day-to-day business
■ Extensive catalogue of reserved matters that
require the consent of the shareholder
meeting, supervisory board, council or
additional bodies can be laid down, also in the
area of day-to-day business
■ Principally, shareholders have no influence
regarding the management since the
management board is acting free of
instructions; the management board is not
subject to any instructions from the
supervisory board
■ Catalogue of reserved matters that require
the consent of the supervisory board is
admissible, but only in case of significant
business transactions of a certain type,
reserved matters in the area of day-to-day
business are not permitted
■ Reserved matters that require the consent
of the general meeting are not permitted
■ The supervisory board may adopt rules of
procedure for the management board (in
case of several members)
16 © 2014 KPMG AG Wirtschaftsprüfungsgesellschaft, a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG
International Cooperative ("KPMG International"), a Swiss entity. All rights reserved.
Legal Forms – GmbH (UG)/AG
Management IV
GmbH/UG (haftungsbeschränkt) AG
Liability ■ Formal discharge of the managing directors
results in the waiver of claims towards the
respective managing director regarding such
facts, which the shareholders already know or
should have known due to reports made by the
managing directors or arising from documents
submitted by them
■ No liability towards the company in case of
acting on the basis of an effective instruction
by the shareholder meeting, unless creditor-
protecting provisions are contradictory or the
instruction is illegitimate
■ In case a D&O insurance is contracted, the
managing directors are not legally obliged to
agree on an excess
■ Formal discharge of Management Board
and Supervisory Board does not represent
a waiver of damage claims
■ No liability in case of transactions
undertaken due to a legitimate resolution by
the General Shareholders‘ Meeting, for
which the Management Board can
exceptionally ask the General
Shareholders‘ Meeting
(exception: infringement of creditor-
protecting provisions)
■ Incorrect statements regarding the state of
the company in the General Shareholders‘
Meeting are penalized, § 400 AktG
■ In case a D&O insurance is contracted, the
management board is obliged to agree on
an excess in the amount of 10% of the
claim up to at least 150% of the fixed
annual remuneration
17 © 2014 KPMG AG Wirtschaftsprüfungsgesellschaft, a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG
International Cooperative ("KPMG International"), a Swiss entity. All rights reserved.
Legal Forms – GmbH (UG)/AG
Shareholders I
GmbH/UG (haftungsbeschränkt) AG
Duties ■ Comprehensive rights of control and
instruction of the shareholder meeting
towards the managing directors
■ Competences may be delegated to council/
supervisory board, so that these bodies then
fulfil duties of the shareholder meeting
■ The general meeting is the decision-making
body for the shareholders and has the
competences described by law
■ Rights of co-determination are limited to
participation in the general meeting, rights
of information and voting in the general
meeting
■ No right of instruction towards
management board or supervisory board
■ In charge of resolutions regarding
periodical measures (allocation of profit or
loss etc.), structural measures (capital
increase) and special cases (compensation
claims against the members of corporate
bodies etc.)
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International Cooperative ("KPMG International"), a Swiss entity. All rights reserved.
Legal Forms – GmbH (UG)/AG
Shareholders II
GmbH/UG (haftungsbeschränkt) AG
Resolutions ■ Shareholders‘ resolutions are principally to be
recorded in written form
■ Resolutions by written procedure (circulation
procedure) are principally allowed provided
that no shareholder rises any objections
■ Resolutions amending the articles of
association require notarization
■ Only resolutions amending the articles of
association have to be submitted to the
commercial register
■ Minutes of the protocol of the general
meeting
■ Circular resolutions of the general
meeting are not permitted, but casting of
a vote per postal vote or electronic
participation (Online-General Meeting)
■ Notarization is required in case of a non-
listed company, if a three-quarter majority
or a larger majority is legally required (e.g.
alteration of the articles of association,
fundamental resolutions, capital increase)
■ Apart from that non-notarial minutes, which
have to be signed by the chairperson of the
supervisory board
■ All minutes have to be submitted to the
commercial register
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International Cooperative ("KPMG International"), a Swiss entity. All rights reserved.
Legal Forms – GmbH (UG)/AG
Shareholders III
GmbH/UG (haftungsbeschränkt) AG
Meeting ■ Convocation of the shareholder meeting with a
notice of (at least) one week by registered
■ Significant defaults in the convocation
(invitation, which is not directed to all
shareholders, by unauthorized persons, by
regular mail etc.) are resulting in nullity, slighter
defaults (inadmissible place or time, shorter
notice period) result in the voidability of the
resolutions
■ Convocation of the general meeting with a
notice of at least 30 days by registered mail
or announcement in the company’s
designated publications (at least EBAnz)
■ Defaults in the convocation result in the
nullity of resolutions
Protection of minority
shareholders
■ The shareholder meeting has to be convened
if so required by a minority representing 10%
of the registered share capital
■ Minority shareholders may effect the
convocation themselves in some cases
■ The amendment of the agenda can be
requested by a minority of 10%
■ The general meeting has to be convened
upon request of a minority representing 5%
of the registered share capital
■ Minority shareholders may effect the
convocation by themselves after
authorization by court
■ The amendment of the agenda can be
requested by a minority of 5% or a minority
of € 500.000
20 © 2014 KPMG AG Wirtschaftsprüfungsgesellschaft, a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG
International Cooperative ("KPMG International"), a Swiss entity. All rights reserved.
Legal Forms – GmbH (UG)/AG
Shareholders IV
GmbH/UG (haftungsbeschränkt) AG
Information rights ■ Each shareholder is entitled to request
information on company affairs and access to
the books of the company in principal at any
time
■ Information has to be provided „without undue
delay“ by the managing directors
■ The information rights are limited by a
„considerable need of information“ (not each of
the shareholders can arbitrarily „browse“ the
company‘s files)
■ The principle of proportionality has to be
respected
■ Information and access to books may be
refused in case of concerns that the
information obtained might be used for non-
company purposes
■ In the general meeting, shareholders may
request information on company affairs
from the management board, insofar as this
information is required to appropriately
judge the object of the agenda
■ Information individual items is not
allowed in the general meeting
■ Information may be refused only under
certain conditions established in Sec. 131
para. 3 AktG (in case of concerns on
disadvantageous transactions)
21 © 2014 KPMG AG Wirtschaftsprüfungsgesellschaft, a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG
International Cooperative ("KPMG International"), a Swiss entity. All rights reserved.
Legal Forms – GmbH (UG)/AG
Shareholders V
GmbH/UG (haftungsbeschränkt) AG
Shares ■ Purchase agreement and transfer of shares
need to be notarized
■ Shares are freely transferable, if there is no
restriction on transferability
■ Differentiated constitution of memberships‘
rights possible (participation in profits, voting
rights)
■ Shares may be transferred without
observing any formal requirements
■ Shares are freely transferable, if there is no
restriction on transferability
■ Setting-up of different types and classes of
shares is possible (par value or non-par
value shares, ordinary or preference
shares)
■ Obligation to keep a shareholder‘s register
(in case of registered shares with restricted
transferability)
– Restriction on
transferability –
The restriction on transferability has to be provided for in the articles of association, but may be
limited in accordance with the specific requirements, such as that transfers of certain shareholders
or for specific reasons do not require prior approval
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International Cooperative ("KPMG International"), a Swiss entity. All rights reserved.
Legal Forms – GmbH (UG)/AG
Shareholders VI
GmbH/UG (haftungsbeschränkt) AG
Liability ■ Liability is principally limited to the payment of
the registered share capital (not an issue in
case of transformation)
■ In general no liability in regard to company’s
debts
■ Direct liability of the shareholders possible in
case of undercapitalization, intermixture of
assets, dependent relationships and
economically destructive intervention or other
cases of intentional damage of creditors
contrary to public policy
■ Each shareholder is obliged to file for
insolvency if the company lacks management,
unless the reasons for filing for insolvency or
the lack of management are unknown
■ Liability is principally limited to the payment
of the registered share capital (not an issue
in case of transformation)
■ In general no liability in regard to
company’s debts
■ In practice the direct liability of
shareholders is hardly seen, theoretically
possible in case of undercapitalization (in
case of capital investment of a certain
amount ), intermixture of assets, dependent
relationships and economically destructive
intervention
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International Cooperative ("KPMG International"), a Swiss entity. All rights reserved.
Legal Forms – GmbH (UG)/AG
Supervisory Board/ Council I
GmbH/UG (haftungsbeschränkt) AG
Structure ■ Optional establishment of supervisory board/
council
■ Respective provision is required in the articles
of association
■ Provisions of German Stock Companies Act
are largely dispositive, therefore possibility of
flexible provisions about competences,
meetings etc.
■ The supervisory board has to be composed
of at least 3 members (or a number of
members divisible by 3) according to
mandatory law
■ The supervisory board has to supervise the
company‘s management by the
management board and should have the
required expertise
■ Regulations regarding the supervisory
board (§§ 95 – 116 AktG) are largely
mandatory
Duties ■ Control of the management board, articles of
association can provide for the extent of such
control and further duties
■ Control of the management board, no right
to issue instructions, exercising influence
possible through catalogue of reserved
matters requiring approval (see below)
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Legal Forms – GmbH (UG)/AG
Supervisory Board/ Council II
GmbH/UG (haftungsbeschränkt) AG
Membership ■ Members of the supervisory board may be
elected by shareholder resolution or seconded
by certain (groups of) members
■ The period of appointment or secondment as
well as the revocation may be stipulated in the
articles of association
■ Members of the supervisory board may be
represented by third parties
■ Members of the supervisory board may be
elected by the general meeting or
seconded by certain shareholders
according to a respective provision in the
articles of association
■ Appointment for a period of maximum 5
years with the possibility of reappointment
■ Members who are seconded may be
revocated and replaced at any time
■ Elected members may be revocated with a
three-quarters majority (dispositive)
■ Representation by third parties is only
possible in case of a respective provision in
the articles of association and without an
own speaking and petition right of the third
party („messenger“)
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Legal Forms – GmbH (UG)/AG
Supervisory Board/ Council III
GmbH/UG (haftungsbeschränkt) AG
Liability of Supervisory Board
Members
■ Members of an optional supervisory board are
liable towards the company due to general
provisions, the liability may be reduced by the
articles of association
■ In exceptional cases, third parties may claim
damages directly from the members of the
supervisory board in accordance with general
provisions of civil law
■ Release from liability by shareholders‘
resolution is possible
■ Members of the supervisory board shall
execute their duties with the diligence of a
prudent and diligent member of a
supervisory board, they are responsible for
non-compliance towards the company and
third parties according to §§ 116, 93 AktG
■ Incorrect statements of the supervisory
board in the general meeting regarding the
state of the company are penalized, § 400
AktG
■ Each member of the supervisory board is
obliged to file for insolvency if the company
lacks management, unless the reasons for
filing for insolvency or the lack of
management are unknown
Tax aspects 2
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International Cooperative ("KPMG International"), a Swiss entity. All rights reserved.
Founding a company
Taxation of Income
Startup GmbH
Shareholder
■ Corporate income tax (Körperschaftsteuer) plus
solidarity surcharge (Solidaritätszuschlag): 15.825%
■ Trade tax (Gewerbesteuer), trade tax rate depends on
the respective municipality:
– Berlin: 14.35%
– Schönefeld: 7%
■ (Total) tax rate (Berlin): 30.175%
TAXATION AT THE LEVEL OF STARTUP GMBH
>1%
28 © 2014 KPMG AG Wirtschaftsprüfungsgesellschaft, a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG
International Cooperative ("KPMG International"), a Swiss entity. All rights reserved.
Founding a company
Participation possibilities – Tax effects (dividends)
Startup GmbH
Shareholder
>1%
■ Dividends: 100
■ Dividends after WHT approx.: 73
■ Capital gains: 100
■ Capital gains after tax approx.: 98
DIVIDENDS
Startup GmbH
Shareholder
Holding UG
(haftungsbeschränkt)
>15%
100%
DIVIDENDS
DIVIDENDS
■ Capital gains: 100
■ Capital gains after tax approx.: 98
■ Dividend distribution after tax approx.: 72
29 © 2014 KPMG AG Wirtschaftsprüfungsgesellschaft, a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG
International Cooperative ("KPMG International"), a Swiss entity. All rights reserved.
Founding a company
Participation possibilities – Tax effects (dividends)
Startup GmbH
Shareholder
>1%
■ Dividends: 100
■ Dividends after WHT approx.: 73
■ Capital gains: 100
■ Capital gains after tax approx.: 70
DIVIDENDS
Startup GmbH
Shareholder
Holding UG
(haftungsbeschränkt)
<15%
100%
DIVIDENDS
DIVIDENDS
■ Capital gains: 100
■ Capital gains after tax approx.: 70
■ Dividend distribution after tax approx.: 52
30 © 2014 KPMG AG Wirtschaftsprüfungsgesellschaft, a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG
International Cooperative ("KPMG International"), a Swiss entity. All rights reserved.
Founding a company
Participation possibilities – Tax effects (capital gains)
Startup GmbH
Shareholder
100%
■ Dividends: 100
■ Dividends after WHT approx.: 72
■ Capital gains: 100
■ Capital gains after tax approx.: 98
DIVIDENDS
DISPOSAL X
Startup GmbH
Shareholder
Holding UG
(haftungsbeschränkt)
100%
100%
DISPOSAL X
■ Capital gains: 100
■ Capital gains after tax approx.: 98
■ Dividend distribution after tax approx.: 71
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International Cooperative ("KPMG International"), a Swiss entity. All rights reserved.
Founding a company
Participation possibilities – Tax effects (capital gains)
Startup GmbH
Shareholder
100%
■ Dividends: 100
■ Dividends after WHT approx.: 72
DISPOSAL X
Startup GmbH
Shareholder
■ Capital gains: 100
■ Capital gains after tax approx.: 98
■ Dividend distribution after tax approx.: 71
Holding UG
(haftungsbeschränkt)
5%
100%
DIVIDENDS
DISPOSAL X
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Founding a company
Tax issues
Founder
A-C
= partnership (e.g. GbR)
= business assets
Startup GmbH
Founder
A Founder
B
Founder
C
100% 1. Founders incorporate
Startup GmbH
2. Startup GmbH “uses” IP
1. Taxation of the IP value
(at fair market price)!
2. Tax neutral transfer
possible under certain
formal conditions
Developed:
IP (e.g. Software, etc.)
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International Cooperative ("KPMG International"), a Swiss entity. All rights reserved.
Agenda
Founding 1
Employees 2
Investment Agreements 3
Selected Tax Topics 4
Accounting 5
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International Cooperative ("KPMG International"), a Swiss entity. All rights reserved.
Freelancer vs. Employees
Freelancer or Employee?
Freelancer or Employee?
Clarification
necessary
Classification as Employee?
■ Formal approach is not possible
■ Consideration of all circumstances of each individual case
■ Decisive: Actual execution of the employment relationship
Indicators ■ Bound by instructions and operationally integrated in organization
■ Business risk
■ Primarily and permanently active for one principal
■ Activities that are typically performed by employees
Measures to
obtain legal
certainty
■ Application for a binding ruling regarding the social security status for statutory pension scheme
(Sozialversicherungsrechtliches Statusfeststellungsverfahren der Rentenversicherung)
■ Application for a binding ruling for wage tax purposes
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Freelancer vs. Employee
Possible Legal Consequences for Incorrect Attribution
Possible Consequences for Mistaking an Employee for a Freelancer
Timeframe ■ Claim for restitution over a number of years
Wage Tax ■ Salary is subject to wage tax, possibly withholding category VI
■ Responsibility to properly pay wage taxes
Social Security ■ Social insurance contributions are subsequently due (both employer‘s and employee‘s contribution), recourse to
the employee usually not possible
VAT ■ VAT wrongfully invoiced – disguised employment (Scheinselbstständiger)
■ Input VAT must be refunded (recourse to the employee usually not possible)
Labor Law ■ “Scheinselbstständiger” will become employee with protection against unfair dismissal, right to paid vacation and
continued payment of wages in case of illness
Commission of
an Offense
■ Possible punishability for withholding social security contributions and wage tax evasion
■ Fines are possible – even detention in severe cases
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International Cooperative ("KPMG International"), a Swiss entity. All rights reserved.
Employment Law Issues I
■ German law on General Terms and Conditions has many pitfalls; any unclarity will be interpreted in favor of the employee.
■ Certain rights of the employer, e.g., the option to ensure that possible inventions of the employee remain with the company, need to be
ensured.
■ In certain instances, it might make sense to agree on post-contractual non-compete obligations – this is, however, rather expensive.
The employer needs to pay half of the total compensation of the employee during the period in which the employee is not allowed to
compete.
■ It may be relevant to have fixed term or project-limited contracts
■ It is essential that the contract reflects the actual status of the employee as employee or freelancer and that the employment
relationship is executed in line with the contract.
DRAFT OF EMPLOYMENT CONTRACTS
■ In Germany, working time is restricted to a daily general maximum of 8 hours. However, it may be prolonged to 10 hours if – in a period
of 24 weeks – the average is not more than 8 hours. Since the law assumes a 6-day-working week, it is generally possible to work up
to 10 hours at 4 days a week and 8 hours on day 5. Please note that the threshold of 10 hours may not be exceeded. An
exception is only possible in very rare circumstances.
WORKING TIME
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Employment Law Issues II
■ Disputes can occur in many instances – employees may ask for better employment conditions, fall ill (too often), would like to go on
holiday at a time that is inconvenient for the company, violate their employment obligations etc.
■ In a small company, the employer can terminate the employment „at will“, he only has to observe the applicable notice period and
notice must be given in writing. If the company has a work council, the work council must be heard (caution: the hearing of the works
council is a pitfall)
■ Once the company employs more than 10 employees, the employees enjoy termination protection. This means that the employer must
not dismiss employees who he considers to be, e.g., low performing. Rather, the employer is restricted to three legally recognized
reasons that he must prove in the event of a dispute.
■ The legally recognized reasons are:
– Violation of obligations. Please note that most violations are not per se qualified as a reason to terminate the contract, but the
employee needs to receive a formal warning and only repeated offenses may suffice to terminate the contract. An exception are
serious and grave violations like stealing.
– Personal incapacity to perform the obligations under the contract; e.g., if the employee is ill for more than 42 days each year over a
period of three years and it may be expected that he will not get better.
– Redundancies. Please note that in the event of redundancies, the employer may not freely choose, which employee he dismisses,
but must keep the employees who are the socially weakest. In order to determine, who is socially strong or weak, the marital status,
the number of children, the age, and the seniority of the employee are generally taken into account
DISPUTE WITH EMPLOYEES
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Agenda
Founding 1
Employees 2
Investment Agreements 3
Selected Tax Topics 4
Accounting 5
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International Cooperative ("KPMG International"), a Swiss entity. All rights reserved.
Growth
Typical Clauses in Investment Agreements
Vesting 1
Tag along 2
Drag along 3
Duty to Sell/Right of first Refusal 4
Liquidation Preference 5
Audit Obligations 6
Non-Compete Obligations 7
Employee Participation Programs 8
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International Cooperative ("KPMG International"), a Swiss entity. All rights reserved.
Vesting
Vesting
(“We want You (to stay)“)
■ Vesting means: In case the founders leave, they need to
sell (part of) their participation.
■ The vested part usually diminishes with a certain lapse of
time.
■ There might be different scenarios (good leaver/bad leaver)
IMPLEMENTATION
■ The investors want the „brain“ (i.e. the founders) to stay as
long as possible.
BACKGROUND
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Tag Along Rights
Tag along Right for Investors
(“Sell my shares also“)
■ In case of a sale of a participation, the investors can
demand that (part of) their shares are sold as well at the
same conditions as the selling founder.
■ Management is under a duty to report any offers to the
other shareholders.
IMPLEMENTATION
■ The Investors want to safeguard that they can participate in
exit-scenarios.
■ Therefore, they need to have the opportunity to (partly) sell
their shares when the founders want to sell their shares.
■ Also, in case of a minority participation of the investors,
they want to safeguard that the new majority shareholder is
acceptable to them.
BACKGROUND
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International Cooperative ("KPMG International"), a Swiss entity. All rights reserved.
Drag Along Rights
Drag along Right for Investors
(“We want to sell all shares, including yours“)
■ Implementation of a drag along right for the investors.
■ Means: The investors have a right to drag along all other
shares in the company.
■ For the founders this means that they are under an
obligation to sell all their shares at the same conditions as
the investors.
IMPLEMENTATION
■ Economic aim of the investors is the (profitable) exit.
■ Chances of a higher profit if the investors are in a position
to sell all shares in the company.
■ Often times, the sale/acquisition of all shares is a
prerequisite for the potential purchaser.
BACKGROUND
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Duty to Sell/ Right of First Refusal
Duty to Sell to Other Shareholders/Right of First Refusal
(“Never change a winning (Shareholder-)Team“)
■ The potential seller is under an obligation to first offer his
shares to the other shareholders.
■ The offer needs to be at the same conditions as with the
potential purchaser.
■ The remaining shareholders may then purchase the shares
of the selling shareholder at the ratio of their current
shareholdings in the Company.
■ Any remaining shares (not purchased by the current
shareholders) may then be acquired by the other
shareholders.
■ Any remaining shares after that may be acquired by the
potential purchaser.
IMPLEMENTATION
■ Investors would like to have a word as to who becomes
shareholder of the company.
■ Investors want to avoid that the company is owned by
competitors or persons unwilling/unable to invest.
■ Protection of know-how and investments.
BACKGROUND
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International Cooperative ("KPMG International"), a Swiss entity. All rights reserved.
Liquidation Preference
Liquidation Preference
(“We give the Cash, we get the Cash“)
■ The investors are granted a preference when the
liquidation proceeds are distributed, meaning he gets a
higher share.
■ He will receive at least his earlier investment prior to any
further distributions.
■ Sometimes, further preferences are agreed upon such as
– interest on the investment or
– multiple of the investment.
IMPLEMENTATION
■ The investors provide more cash to the company then the
founders.
■ Sometimes a liquidation is necessary or economically more
sensible.
■ In case of a liquidations the investors need a protection of
their investment.
■ The interest of the investors is the same in case all shares
are sold at a value below the initial evaluation.
BACKGROUND
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International Cooperative ("KPMG International"), a Swiss entity. All rights reserved.
Audit Obligations
Audit Obligations
(“We need to control what you are doing there“)
■ The company is obliged
– to prepare the annual accounts in line with certain
criteria and
– to have them audited.
■ Regardless of the existence of any legal necessity (e.g.
under Section 316 HGB).
IMPLEMENTATION
■ The investors want to safeguard that they have the full
picture of the operational business.
■ Also, they need to safeguard that the annual accounts are
in line with statutory requirements.
BACKGROUND
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International Cooperative ("KPMG International"), a Swiss entity. All rights reserved.
Non-Compete Obligations
Non-Compete Obligations of the Founders
(“We paid for the idea so it needs to stay”)
■ Clauses on non-compete for the time while the founder is
working for the company and afterwards.
■ Often combined with contractual penalty.
IMPLEMENTATION
■ The investors want the founders to stay in the company
and not transfer their ideas to a new entity.
■ The non-compete shall remain effective
– for the time the founders are in the company and
– for a certain period afterwards.
BACKGROUND
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International Cooperative ("KPMG International"), a Swiss entity. All rights reserved.
Agenda
Founding 1
Employees 2
Investment Agreements 3
Selected Tax Topics 4
Accounting 5
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International Cooperative ("KPMG International"), a Swiss entity. All rights reserved.
Main Principles of Business Taxation
Wage Tax
■ Wage is subject to wage tax
■ Cash benefits are basically always considered as wage income
■ Non-cash benefits (free of charge/ provision of goods and services at a discount price) are subject to wage tax and social
insurance in the amount of the respective cash benefit.
Liability of employers and employees for wage taxes!
– Examples of employee benefits:
■ Special topic: granting of company‘s shares to employees free of charge or at a discount price
■ Use of a company car; benefit equals 1% of the car’s gross list price and 0,03% per each kilometer driven between
domicile and place of work
■ Non-cash benefits possibly tax-exempt if < 44 EUR per calendar month (tax exemption limit)
■ Discount allowance of 4% up to 1,080 EUR per calendar year
■ Maximum amount for a usual company event: 110 EUR (twice a year)
■ Private use of company‘s telecommunications (telephone/ internet) is exempt from wage tax
■ Flat taxation of non-cash benefits at tax rate of 30% is possible (10,000 EUR limit per fiscal year and employee)
■ Gifts (e.g. on birthday occasion) are tax-exempt if their gross value does not exceed 40 EUR
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Main Principles of Business Taxation
Forfeiture of Tax Loss Carry forwards
■ Tax losses can be carried forward to the next fiscal year
(and/or carried back to the previous fiscal year)
Tax losses can be offset against future profits
(minimum taxation rules may apply)
TAX LOSS CARRY FORWARDS
■ Indirect (e.g. through a holding company)/direct
acquisition of
– >25% of voting rights within 5 years:
pro rata forfeiture of losses carried forward
– >50% of voting rights within 5 years:
forfeiture of all losses carried forward
■ Escape clause where applicable (group exemption
clause (Konzernklausel), built-in-gains clause)
FORFEITURE OF TAX LOSS CARRY FORWARDS
DUE TO DETRIMENTAL CHANGE OF OWNERSHIP
Startup GmbH
Founder Purchaser
Share transfer
1) >25%
2) >50%
Effect: basically (pro
rata) forfeiture of
tax loss carry
forwards
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International Cooperative ("KPMG International"), a Swiss entity. All rights reserved.
Internationalization Issues from Tax Perspective
Withholding Tax
■ Possible obligation to withhold taxes in Germany
– License = Remuneration for the temporary transfer of
a right of use (e.g. trademark, copyright, etc.)
– Licensee is responsible (and liable) to withhold taxes
of the licensor in Germany
– Withholding tax rate: 15.825% (including solidarity
surcharge)
– Licensor may apply for a withholding tax exemption
LICENSE FEES ABROAD
■ Right to remuneration from a German company (e.g.
granting a license abroad) can be subject to withholding
tax in a foreign country
■ Possible tax issues:
– Crediting of foreign taxes
– Problems occur where no tax treaty exists (e.g.
Brazil)
(LICENSE) FEES RECEIVED FROM ABROAD
Startup GmbH (DE)
License fee (84) 1. Right (temporary
transfer)
2. Invoice (100)
WHT (16)
IP Owner
(US)
Refund claim? (16)
Federal Central
Tax Office
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International Cooperative ("KPMG International"), a Swiss entity. All rights reserved.
Internationalization Issues from Tax Perspective
Withholding Tax
■ License fees for granting copyrights
– As a rule, software is subject to
copyrights under German tax law
– Exception: „Standard Software“
– IA as, SaaS, Papas? Differentiation
between provision of services/ granting
of rights?
– Relevant also for trade tax
ESPECIALLY RELEVANT IN PRACTICE:
License fee
Startup GmbH(DE)
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International Cooperative ("KPMG International"), a Swiss entity. All rights reserved.
Internationalization Issues from Tax Perspective
Value Added Tax
■ VAT identification number – where applicable,
obligation to register for VAT purposes abroad
■ Tax liability inversion – Reverse Charge
Mechanism
The recipient of goods and services is obliged
to self-account for VAT and to report VAT. No
stating of VAT in the invoice
■ Obligations to file VAT returns abroad –
sales threshold have to be observed
■ Different treatment of turnover issues in the
EU and so-called third countries possible
■ New regulations regarding e-commerce
within the EU with effect from 1 January
2015
INTERNATIONAL BUSINESS RELATIONSHIPS
Turnover
Startup GmbH(DE)
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Main Principles of Business Taxation
Value Added Tax
■ VAT identification number – obligation to register
■ Ensuring the input VAT claim – purchase invoice have to meet formal requirements
■ Electronic invoice – domestic and, where applicable, foreign documentation requirements
■ Requirements to file monthly preliminary VAT returns during the first two years and filing of annual VAT
returns
IMPORTANT ISSUES
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Agenda
Founding 1
Employees 2
Investment Agreements 3
Selected Tax Topics 4
Accounting 5
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International Cooperative ("KPMG International"), a Swiss entity. All rights reserved.
Accounting – Agenda
Road map: The structure of accounting 1
Internally generated intangible assets 2
Revenue recognition 3
Road map: The structure of accounting 1
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I. Road map: The structure of accounting
Stages of development
Start of business operations
Second round financing
Exponential growth
Number of business
transactions, turnover and
employees
Further development Process implementation Basics Routine and audit
Developmental stages of
accounting
Internationalization First round financing Incorporation
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I. Road map: The structure of accounting
Stage 1 Basics
Functions:
Essential decisions
Ensure compliance
of obligations
relating to German
Commercial Code,
tax liabilities and
obligatory social
charges
Legal certainty
during daily course
of business
■ Registration with tax authorities (Tax number, tax ID number, …)
■ Decision between in-house accounting and external service providers
– Continuous accounting, personnel accounting, annual financial statement accounting,
processing/ transfer of incoming invoices, VAT-declaration, income tax statement
■ Assignment of a tax consultant (Matching of financial accounting software)
■ Preparation of an opening balance sheet, short business year
■ Consideration of contracts of association for the year-end closing (voluntary auditing,
annual report)
■ First process structures and responsibilities:
– Cash, payment transactions
– Invoice receipt (electronically?, control, stamp)
– Monthly VAT declaration (permanent extension of payment deadline)
■ Development of model contracts for the sales department and preparation of general
business terms (control by attorney-at-law, coordination with sales model)
■ Draft of outgoing invoices (in consultation with a tax consultant)
– National/international, individual/entrepreneur, down payments
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I. Road map: The structure of accounting
Stage 2 Process implementation
Functions:
First business
operations
Proper presentation
of business
transactions in the
financial accounting
system
Preparations for due
diligence and
shareholder
reporting
If required, special
audit for VAT
■ Development of process cycles, formulation of process instructions for:
– Cost allocation/Invoicing (interfaces between feeder system/inventory management,
processing of payment service providers)
– Recruitment and personnel accounting
– Travel expenses and benefits (directives, hospitality expenses of employees and other
parties, accommodation, vehicles, credit cards)
■ Establishment of an internal control system for essential areas:
– Sales (four eyes principle and IT controls/interfaces)
– Purchase (function separation)
– Higher Level Controls
■ Structure of controlling:
– Monitoring and planning of the liquidity monthly/weekly delayed filing of insolvency
– Conversion of the business plan into a monthly reporting based on the latest accounting
■ Implementation of communication structures and hierarchies
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I. Road map: The structure of accounting
Stage 3 Further development
Functions:
Adaption to
exponential growth
Internationalization
Subsidiaries
Additional
complexity
■ Adaption of the process structure and the operating procedures to an increasing amount of
business transactions
■ Adjustment of the communication structures
■ Revision and standardization of contracts
■ Consultation with the tax advisor/ auditor in relation to the Internationalization:
– VAT, income tax/ business premises, royalties, transfer price, …
■ Implementation of accounting guidelines, set-up of an internal reporting system
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International Cooperative ("KPMG International"), a Swiss entity. All rights reserved.
I. Road map: The structure of accounting
Stage 4 Routine and Audit
Start of business operations
Second round financing
Exponential growth
Number of business
transactions, turnover and
employees
Further developmentProcess implementationBasics Routine and audit
Developmental stages of
accounting
InternationalizationFirst round financingIncorporation
Routine and Audit:
Adequate
implementation of
processes and
internal control
system
Audits
Year-end audit
■ Quality improvement of the month-end closings (accrual, …)
■ Transition from external service providers to internal accounting (if required, internal
preparation of annual financial statements)
■ Support of audits during the year
■ Preparation and support of year-end audits
Internally generated intangible assets 2
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II. Internally generated intangible assets
■ Basics – Option to capitalize the costs of internally generated intangible assets according to § 248 par. 2 HGB
– Not to be capitalized are e.g. internally produced brands and customer lists
■ Requirements – Asset relating to German commercial law (independent usability, valuation and future economic benefits)
– Determination of production costs if possible:
■ Direct costs
■ Indirect costs
■ Costs of depreciation of fixed assets
■ If required, an adequate proportion of costs for the general administration
OPTION TO CAPITALIZE ACCORDING TO GERMAN COMMERCIAL CODE (HGB)
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II. Internally generated intangible assets
■ Complex evaluation of production costs
■ Difficulties in determining the start of use
■ Constant development of the asset: after the start of use an additional capitalization is not possible
repairs and maintenance expenses
■ Post-capitalization is possible, if the asset is improved significantly very restrictive standards in the German Commercial Code
(HGB)
■ Effects on the financial statements
– Performance improvement (Capitalization of expenses)
– Increase of balance sheet total (higher fixed assets)
– Decline of equity ratio due to report of deferred tax assets and liabilities
PROBLEMS ENCOUNTERED IN PRACTICE AND THEIR EFFECTS ON FINANCIAL STATEMENTS
Assets Balance sheet Liabilities
Capital/ profit +70
DTAL + 30
Intangible
+100
assets
+100 +100
Revenue recognition 3
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III. Revenue recognition
■ Realization principle
– …; profits are only to be taken into account, when they are realized until the closing date § 252 par. 1, phrase 4 HGB
– Therefore: before posting revenue (and expenses), check if the company has acquired an absolute entitlement of remuneration or
an equivalent when executing contractual performances
■ Crucial: Point of time, when the services are rendered
– After delivery of goods or after the services are rendered
– Criterion: when has the risk been transferred to the buyer? (transfer of risk)
– Identification of performance period is more difficult for work performance and goods in transit
– Further criterion: the turnover must be „secure“, i.e. there are no uncertainties about the amount of turnover and the expenses have
to be assigned accurately
– But: in general, the right of return of the customer and right of warranty do not affect the revenue recognition provisions has to be
recognized for that cases
BASICS
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III. Revenue recognition
■ Depending on the revenue model, there are different accounting issues:
– What kind of services are due?
– Are there any additional services, are they autonomous?
– Is the company the service provider or the intermediary? (gross or net result)
– Who bears the risk of invoices, returns and credit notes?
– Do I have to accrue not realized periods of services? (deferred income)
– Which obligations result after the rendering of services?
– Is a time-based license or a license unlimited in time provided for?
■ Types:
– Revenue recognition at the time of sale (when risk is transferred)
– Revenue recognition for service contracts – e.g. long-term contract production
– Revenue recognition for service periods – e.g. rents, subscriptions
– Special case: revenue recognition for licensing
REVENUE MODELS
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69 © 2014 KPMG AG Wirtschaftsprüfungsgesellschaft, a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG
International Cooperative ("KPMG International"), a Swiss entity. All rights reserved.
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© 2014 KPMG AG Wirtschaftsprüfungsgesellschaft, a subsidiary of
KPMG Europe LLP and a member firm of the KPMG network of
independent member firms affiliated with KPMG International
Cooperative ("KPMG International"), a Swiss entity. All rights
reserved.
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