There's a reasonable argument to be made whether you should be subject to capital gains in the first place. I sold my last company in the UK, and honestly the tax burden was so ridiculously low I still feel somewhat bad for it. It's crazy.
There is of course a competition problem with the high taxation in Germany; if your expected returns are much lower than in other countries your risk just increased significantly. We already have a situation where on average it's much, much more lucrative to work at bigcorp instead.
My main gripe with the GmbH though is not the amount of taxation. GmbHs are so needlessly complex it blows my mind (I'm currently running one), but that's on the side of regulations. I'd MUCH prefer if Germany worked on getting rid of silly shit like the notary requirement etc., and if taxation and bookkeeping were simplified, before we talk about lowering taxes.
I'd love to hear more about your UK exit! Most of my knowledge about UK tax rates and processes is theoretical research, so I'd really appreciate hearing a real-world experience. Did you qualify for Business Asset Disposal Relief (the old Entrepreneurs' Relief)? How was the overall process and timeline for you?
I was going to say that I'm not sure the article is quite right. While the UK does have BADR for up to £1m, it applies to individuals, not businesses. So if I sell the shares in my company or liquidate my company, I can use it. But if the business does an asset sale, there's another step: the company selling the assets. And that company has to pay its own taxes first.
If my British company sold its assets for £1m, it needs to pay 25% Corporation Tax on that. Then I could liquidate the company with its £750k remaining cash and pay 10% on that (for now, it's going up to 14% in April). This results in a total 32.5% tax, not 10%. Above £1m, it'll be even more as there's no more BADR (so roughly 40% tax total on the £1m+ chunk).
The disclaimer is absolutely right, you should consult a qualified accountant because the rest of the article is wrong. First of all, it's not just about SaaS, but all GmbH. I don't see any reason why Germany should make exceptions for software companies as the author wishes for in the second-to-last paragraph.
In cases where you personally owned the company, only 60% of the sale price will taxed. After this Teileinkünfteverfahren the 60% are indeed subject to your incomee tax. Even better as sales are consindered außergewöhne Einkünfte their taxation will follow the Fünftelregelungen where the sale profit is spread across five years. https://de.wikipedia.org/wiki/F%C3%BCnftelregelung
Realistically you'll end up paying taxes comparable to the 10~20% you can expect in the US.
You should read the article in full, and/or learn the difference between a share and asset deal. Your link is about the former, the article about the latter.
"You can have the shares for €4m or the assets for €5m". Both sides have agency in a negotiation.
AIUI the .de rules are intended for a somewhat different situation, perhaps more common. The article describes a situation where almost all of the exit is profit. I'm happy for you if you're in that situation, but I'd guess that most people have costs. In that case .de lets you set costs from past years against the exit, and I've heard (hearsay alert!) that .de gives you more flexibility than most countries.
All that said: if you have high income and no costs, German taxes are hard on you, it's true.
Thanks for sharing that link, but it actually confirms my point. That article is about selling GmbH shares ("Share Deal"), but as explained in my post, buyers of smaller SaaS companies ($1-10M) almost never want to do share deals - they want asset deals.
Seller GmbH sells their assets, profits are taxed accordingly. Only when taking that profit our the individual is taxed but as I mentioned above the Teileinkünfteverfahren, only 60% being taxed.
The headline is a bit sensationalized: the article focuses exclusively on small SaaS exits, which are usually done by selling assets, NOT the whole company. In Germany, these sales are treated like any other business income.
If you're aiming for a normal exit - where you actually sell the company - things are much more favorable.
You need to set up a holding company, which is usually a UG. This is easy and cheap: there is a simplified process for it ("Musterprotokoll"), and it requires no upfront capital like a GmbH. As of recently, it can be done online without having to visit a notary in person. The overhead is negligible.
Once the holding sells its subsidiary ("share deal"), in most cases, the effective tax rate at the holding level is only ~5% due to § 8b KStG. This is not bad at all, since you'll want to reinvest most of the money anyways.
There are gotchas in every jurisdiction, and you need to get professional advice by a local accountant. Germany is a fine place to run a business. If you already live here and don't want to move your family for tax reasons, you don't have to.
I made a rather stupid mistake recently, as an American. I put $30k or so of my Roth IRA into BMW stock, since it was paying something close to 8% annual dividends. Once a year. I suppose I should have looked at this more closely. When the dividend was paid, the German government took about 30% of it right off the top in taxes... for a foreign investor. Still not a bad return, but I won't be buying any German stocks going forward.
That's my Yelp review of investing in German businesses, if it helps anyone. I've had more or less the same experience dining in Seattle and accidentally tipping 20% on top of an included 20% tip that was already included but not specified in the bill.
I spent some time trying to learn about investing as an average person, and from what I understood, the entire knowledge could be summarized into "pick your favorite global index fund and hold"
The EU stock exchanges withhold the most aggressive dividend tax disregarding bilateral agreement with country of your tax residence. If you think that German 26% is bad, the Swiss withhold 35%.
Sorry to "but actually" you, but that is just because you did not claim the treaty benefits. Pedantic, it is also 26%, not 30%.
You should be able to get 15% tax on dividends, which also count towards your US taxes which you stil have to pay.
It is also exactly the same for foreign investors from Germany investing in US companies. We have to file a W-8BEN, otherwise the US takes 30% on dividends and even on capital gains!
FORGET ABOUT IT. You'd have to send traditional letters back and forth between your local tax office and the tax office of the dividend origin country. Usually the foreign tax office demands their form be rubber stamped by your local tax office. Obviously your local tax office will not rubber stamp a form by foreign tax office in a foreign language, but they don't care.
Tricky, maybe, because it was bought in a Roth IRA - which is not taxed. And therefore, I think, not eligible for tax refunds. I probably should have bought it in a normal trading account.
I'm German and had a startup in Germany (standard UG holding + GmbH).
My one advice to anyone thinking of starting a company is: don't do it in Germany. Tax burden, insane bureaucracy and a conservative, tech adverse local market put you at a disadvantage against UK/US peers.
>German founders are incentivized to move abroad before exits
Don't do that. The tax office will treat that as a sale and will tax the current valuation at 20%.
As someone who has run a small business in an EU country for 10 years and is in a process of relocating to a low tax jurisdiction I wonder what EU's endgame on this one is.
It's not like EU countries offer a potential founders anything of substance. You can just as well run your company from abroad. Most of your customers are going to be outside of EU (most likely), you will be buying services from outside of EU, hire/work with people from various countries. There is just no reason to be in Germany, France, Spain, Italy when you don't get anything but bureaucracy burden and high taxes.
I paid my (admittedly quite low by EU standards) taxes honestly but right now savings on capital gain tax alone are enough for me to buy a beach house in a country with a better weather and still save some. My country wants to charge >1% of my wealth every year just to be there not even going into business taxes.
The incentives are right there to leave. If I ever start another business it will be in my new tax friendly country. A lot of people are like me and will realize what terrible deal they are getting. Out of those who stay a smaller number is going to be successful because of all the tax/bureaucracy burden. Is the endgame to just give up on IT? Introduce tariffs on everything? Forbid foreign corporations to sell in EU?
I just don't see how EU isn't going to be left in the dust in technology sector with their current policies.
This is a lot of words trying to explain that in Germany the system is designed that poor remain poor. First 40% of gross salary on contributions, then 30% of net salary on rent. Dynasties with their VW-Porsche-VW-Porsche quadruple currywurst burger-sandwich need the society to be poor.
More like the system wasn't set up with the expectation that people will become rich by creating a SaaS and selling it, because it predates those concepts by at least a few decades.
Porsche, Siemens, Krupp, Thyssen, Bosch were all startups back in the day, just in hardware
>Porsche, Siemens, Krupp, Thyssen, Bosch were all startups back in the day, just in hardware
Yeah and they all got big and wealthy by exploiting laws, loopholes, state subsidies and even slave labor back in their days. Let's not pretend the German industrialists from 100 years ago who started those businesses were some patron saints and beacons of legality and morality.
I was working for a big German scrap metal business a while back and during the Christmas party the CEO got so drunk he started bitching how much better it was in the past when he could engage in corruption and tax fraud to grow the business without being caught compared to today when this isn't possible anymore.
None of those companies you listed could have gotten remotely as wealthy in the legal and regulatory environment of today.
Regulation, Taxes, inflexibility and small-thinking mindset let me leave Germany 10 years ago. I didn’t regret it a single day and everytime I’m going back home after visiting my parents in Germany I feel so much more free.
Readit News
There is of course a competition problem with the high taxation in Germany; if your expected returns are much lower than in other countries your risk just increased significantly. We already have a situation where on average it's much, much more lucrative to work at bigcorp instead.
My main gripe with the GmbH though is not the amount of taxation. GmbHs are so needlessly complex it blows my mind (I'm currently running one), but that's on the side of regulations. I'd MUCH prefer if Germany worked on getting rid of silly shit like the notary requirement etc., and if taxation and bookkeeping were simplified, before we talk about lowering taxes.
If my British company sold its assets for £1m, it needs to pay 25% Corporation Tax on that. Then I could liquidate the company with its £750k remaining cash and pay 10% on that (for now, it's going up to 14% in April). This results in a total 32.5% tax, not 10%. Above £1m, it'll be even more as there's no more BADR (so roughly 40% tax total on the £1m+ chunk).
In regards to taxation of a sale I can only point to this first google result: https://www.rosepartner.de/besteuerung-verkauf-gmbh-kauf.htm...
In cases where you personally owned the company, only 60% of the sale price will taxed. After this Teileinkünfteverfahren the 60% are indeed subject to your incomee tax. Even better as sales are consindered außergewöhne Einkünfte their taxation will follow the Fünftelregelungen where the sale profit is spread across five years. https://de.wikipedia.org/wiki/F%C3%BCnftelregelung Realistically you'll end up paying taxes comparable to the 10~20% you can expect in the US.
Edit: Sorry, missed that part about the seller GmbH still existing afterwards. But the next paragraph I linked goes into that as well: https://www.rosepartner.de/besteuerung-verkauf-gmbh-kauf.htm... Again, Teileinkünfteverfahren only 60% being taxed.
AIUI the .de rules are intended for a somewhat different situation, perhaps more common. The article describes a situation where almost all of the exit is profit. I'm happy for you if you're in that situation, but I'd guess that most people have costs. In that case .de lets you set costs from past years against the exit, and I've heard (hearsay alert!) that .de gives you more flexibility than most countries.
All that said: if you have high income and no costs, German taxes are hard on you, it's true.
Seller GmbH sells their assets, profits are taxed accordingly. Only when taking that profit our the individual is taxed but as I mentioned above the Teileinkünfteverfahren, only 60% being taxed.
If you're aiming for a normal exit - where you actually sell the company - things are much more favorable.
You need to set up a holding company, which is usually a UG. This is easy and cheap: there is a simplified process for it ("Musterprotokoll"), and it requires no upfront capital like a GmbH. As of recently, it can be done online without having to visit a notary in person. The overhead is negligible.
Once the holding sells its subsidiary ("share deal"), in most cases, the effective tax rate at the holding level is only ~5% due to § 8b KStG. This is not bad at all, since you'll want to reinvest most of the money anyways.
There are gotchas in every jurisdiction, and you need to get professional advice by a local accountant. Germany is a fine place to run a business. If you already live here and don't want to move your family for tax reasons, you don't have to.
That's my Yelp review of investing in German businesses, if it helps anyone. I've had more or less the same experience dining in Seattle and accidentally tipping 20% on top of an included 20% tip that was already included but not specified in the bill.
That why global index funds are probably the best way to invest for non-professionals
You should be able to get 15% tax on dividends, which also count towards your US taxes which you stil have to pay.
It is also exactly the same for foreign investors from Germany investing in US companies. We have to file a W-8BEN, otherwise the US takes 30% on dividends and even on capital gains!
You just need to file for a refund.
FORGET ABOUT IT. You'd have to send traditional letters back and forth between your local tax office and the tax office of the dividend origin country. Usually the foreign tax office demands their form be rubber stamped by your local tax office. Obviously your local tax office will not rubber stamp a form by foreign tax office in a foreign language, but they don't care.
My one advice to anyone thinking of starting a company is: don't do it in Germany. Tax burden, insane bureaucracy and a conservative, tech adverse local market put you at a disadvantage against UK/US peers.
>German founders are incentivized to move abroad before exits
Don't do that. The tax office will treat that as a sale and will tax the current valuation at 20%.
It's not like EU countries offer a potential founders anything of substance. You can just as well run your company from abroad. Most of your customers are going to be outside of EU (most likely), you will be buying services from outside of EU, hire/work with people from various countries. There is just no reason to be in Germany, France, Spain, Italy when you don't get anything but bureaucracy burden and high taxes.
I paid my (admittedly quite low by EU standards) taxes honestly but right now savings on capital gain tax alone are enough for me to buy a beach house in a country with a better weather and still save some. My country wants to charge >1% of my wealth every year just to be there not even going into business taxes. The incentives are right there to leave. If I ever start another business it will be in my new tax friendly country. A lot of people are like me and will realize what terrible deal they are getting. Out of those who stay a smaller number is going to be successful because of all the tax/bureaucracy burden. Is the endgame to just give up on IT? Introduce tariffs on everything? Forbid foreign corporations to sell in EU?
I just don't see how EU isn't going to be left in the dust in technology sector with their current policies.
Porsche, Siemens, Krupp, Thyssen, Bosch were all startups back in the day, just in hardware
Yeah and they all got big and wealthy by exploiting laws, loopholes, state subsidies and even slave labor back in their days. Let's not pretend the German industrialists from 100 years ago who started those businesses were some patron saints and beacons of legality and morality.
I was working for a big German scrap metal business a while back and during the Christmas party the CEO got so drunk he started bitching how much better it was in the past when he could engage in corruption and tax fraud to grow the business without being caught compared to today when this isn't possible anymore.
None of those companies you listed could have gotten remotely as wealthy in the legal and regulatory environment of today.