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Expanding your business to Europe:
Business location Bavaria
Four Embarcadero Center (conference hall),
San Francisco, California 94111
Thursday, Jun 16, 2011, 11:30 AM - 02:00 PM
Jörg Kemkes, managing director,
BridgehouseTax, Atlanta
2 Schedule
• How to organize the market entry in Germany
• Difference between a Permanent Business
Establishment and a Foreign Subsidiary
• Basic Rules of taxation
• Taxation of Expatriates
• Stock options
• Withholding tax for dividends, distributions
and royalties
3 Market Entry
• Investment in a Permanent Business
Establishment
• Investment in a Subsidiary
– Direct (German Company )
– Indirect (through a U.S. Corporation, which
is holding the shares of the German
Company)
4 Legal forms
Legal forms
Classification of the legal forms according to German Standards
Germany U.S.A.
Einzelunternehmen Sole Proprietorship
Personengesellschaft
OHG, KG
Partnership
General P., Limited P., LLC
Kapitalgesellschaft
GmbH, AG
Corporation
Inc., Corp., LLC
5 Permanent Establishment
§ 12 German Tax Code
“Permanent business establishment”
– Place of Management,
– Branch or office
– Factory or a work shop,
– Place of storage, display , sell and buy goods
– Building site or construction
if it lasts more than 6 month
(different characteristics)
6 Permanent Establishment
Permanent establishment
Art. 5 DTA versus § 12 German Tax code
– DTA:
more detailed
positive and negative catalog of cases
� Review every single case separately
7 Foreign subsidiary
= corporation, which is
separate and distinct from its owners
and a legally recognized person
• In Germany:
mainly GmbH
= Gesellschaft mit beschränkter Haftung
= company with limited liability
(always a corporation, no “check the box”)
8 Differences
• A permanent establishment located in
Germany: the profit of the company earned
by the permanent establishment will be taxed
in Germany (limited taxation)
Main problem: how to split the profit
• A German Corporation with either their
management or their registered office in
Germany is to be taxed in Germany with their
world income (unlimited taxation)
9 Income tax
Taxes in income/ earnings
Classification of the legal forms according to German Standards
Germany U.S.A.
Einkommensteuer
(up to 42/45 % plus
solidarity surcharge)
Körperschaftsteuer
(15% plus
solidarity surcharge)
Federal tax (up to 35%)
Income tax
Corporate tax
State tax (4 - 9%)
Income tax
Corporate tax
Gewerbesteuer City tax/ Local tax/ Business Tax
10 Value added tax
VAT in Germany
• is borne by the end costumer
(private individual)
• not borne by the company
11 Value added tax
Basics about VAT in Germany
• imposed on assets and services in Germany as
well as on imports into Germany
• standard value added tax rate: 19%.
• reduced rate of 7% (food, books…)
• input VAT will be credited
• tax reports: monthly or quarterly
(tax authoities are very strict)
12 Taxation of Expatriates
three Scenarios:
Employee takes residence in Germany
1. and fully abandons the U.S. residence
2. and does not fully abandon the U.S. residence
and
a) preserves the centre of life in the U.S.
or
b) shifts of the centre of life to Germany
13 Taxation of Expatriates
„183-day-Rule“ (Country of residence versus State of work)
How are calculated the 183 days?
• Physical presence
• A couple of minutes per day are already
enough
• During one calendar year
• Caution: spending holidays in the state of
work
14 Participation in stocks
Differentiate three main cases:
• Employees stock purchase plan
(ESPP)
• Restricted stock unit (RSU)
• Stock options
15 ESPP
Employees stock purchase plan (ESPP)
= (for an employee) the purchase of the
common stock of a company below the
market price (usually 15%)
• Difference between the market price and the
purchase price � benefit is subject to
German wage tax withholding (payroll) at the
moment of the purchase
16 RSU
Restricted stock unit (RSU)
= (for an employee) the receipt of the common
stock of a company below the market price,
issued as a form of non-cash compensation
• Value of the restricted stock units � benefit
is subject to German wage tax withholding
(payroll) at the moment, when the employee
receives the authority to dispose of the shares
(special tax rate possible)
17 Stock options
Stock option
= (for an employee) a call option on the
common stock of a company
• Difference between market price and
purchase price � benefit is subject to
German wage tax withholding (payroll) at the
moment of exercise of the option to buy
(special tax rate possible)
18 Participation in stocks
Problems
What will happen, if
• the employee leaves the company?
• the employee leaves the country to work in
another country?
19 Participation in stocks
• Employee leaves the company
– Company has to claim the payroll tax from the
former employee or (if not successful)
– Company sends a special notice to the company‘s
tax office and the tax authority will claim the
payroll tax directly from the employee
– In cases of high taxable benefit it is advisable to
withhold 51,08 % of the stock gain to cover the
maximum payroll tax. The correct personal tax then
would be calculated with the next payroll.
20 Participation in stocks
• Employee leaves the country
(and is still working for the same company)
– In every case:
If the employee has earned this benefit also outside
of Germany the advantage has to be split up
– concerning an U.S. company that means:
the period between grant day and vesting day
(former: exercise date) has to be split up
– The grant would be taxable in different countries
21 Withholding Tax
Withholding tax
= an amount withheld by the party making
the payment to the entitled party and
paid to the revenue service
• Main cases:
– Dividend payments
– Royalties (= License fee payments)
– (Salaries and Wages)
22 German WHT
If the payer is a German resident
• German rules: §§ 43 ff EStG
• 15% of license payment
or 25% of dividend payment
• plus 5,5% solidarity surcharge
• The payer will withhold the tax and pay to the
revenue service
� Reduction through DTA is possible
23 WHT in the DTA: dividends
Art. 10 par.2, 3 DTA:
Taxation in the source state:
• 5 % of the gross amount of the dividends if
the owner is a company that owns directly at
least 10 percent of the voting stock of the
paying company
• 0 % (Zero tax) is possible
difficult tests have to be made,
thorough examination is necessary
24 Definition: royalty
Art. 12 par.2 DTA: Royalty
= payments of any kind received as a consideration for
the use of, or the right to use
• any copyright of a literary, artistic, or scientific
work
• any patent, trademark, design or model, plan,
secret formula or process…
= also includes gains derived from the alienation of
any such right or property
25 WHT in the DTA: royalty
• the intellectual property is in the US and the
German subsidiary pays for the use of the
license
• 0 % (Zero tax) is possible
but the application for the exemption must be
applied and granted before payment
26 Kontakt
BridgehouseTax Atlanta
Jörg Kemkes
The Proscenium, Suite 1775
1170 Peachtree Street, NE
Atlanta, GA 30309-7675
U.S.A.
T +1 404 898 9122
F +1 404 506 9930
www.bridgehouestax.us
