Peter Scheller
Berater für Wirtschaftsprüfer, Rechtsanwälte, Steuer- und Unternehmensberater

„Wenn es knifflig wird.“

German legal framework for businesses

von Peter Scheller

Germany has a few legal specifics which needs be taken into consideration by foreign investors and businesses who want to invest or start business activities in Germany. This article lines out only very basic principles which can be surprising for foreign investors and businesses.

Trade and business versus freelance professional activity

German law strictly distinguishes between "trade and business" on one hand and "freelance professional activities" on the other hand. “Trade and business” is every activity which can be described as follows:

  • The activity must be self-sufficient. This means that the person works independently and is not obliged to follow any instructions of an employer.
  • The activity must be permanent in nature.
  • The activity is performed to make a profit.
  • The activity must constitute a participation in general economic transactions.

An employment relationship fulfils all criteria except the first one. An employee is not independent in the sense of the definition.

However, there is another distinction which may come as a surprise to foreigners since this distinction does not exist abroad or is of far less legal importance: Trade and business versus freelance professional activity. Freelance professionals fulfil all above mentioned criteria but are treated differently for legal and tax purposes.

As freelance professional activities qualifies every independent activity of scientific, artistic, literary, teaching or educating nature. These are for example medical doctors, dentists, lawyers, chartered accountants, tax advisers, chemists, engineers, journalists, interpreters and so on. A freelance professional requires a proper professional education (in general a university degree) and the services have to be provided by the professional himself or herself. However, the freelance professional may employ staff as long as he or she supervises the employees. In a lot of cases the activity as a freelance professional requires a public admission.

Corporations as business entity

Companies (trading corporations) are treated for legal and tax purposes always as business entities regardless of their activities’ nature. Normally above mentioned freelance professional activities as well as capital or real estate investments of individuals do not qualify as business or trade activity. If these activities are carried out by a corporation these activities are always classified as business activities.

The legal forms of companies in Germany are:

  • Aktiengesellschaft (AG): This is a legal form comparable to an Incorporation in the Anglo-Saxon world and mostly used by companies listed at a stock exchange.
  • Gesellschaft mit beschränkter Haftung (GmbH): This is a Limited Liability Company but is legally more restricted as for example US-LLCs.
  • Unternehmergesellschaft (haftungsbeschränkt): This is a Limited Liability Company with low legal requirements. In general this form is not suitable for foreign business investors.

These corporations are always classified as a person for legal purposes and realizes income from trade and business for tax purposes.

The legal qualification is also applicable to foreign corporations if this corporation is comparable to a German corporation. This requires a comparable legal structure. The qualification of foreign entities always follows German principles as long as German civil, trade or tax law is concerned. For more information see

Partnerships as business entities

For any kind of activity (specially no business or trading activities) Germany’s legal system provides a form of general partnership which is called Gesellschaft bürgerlichen Rechts (GbR). Like in every other partnership two partners are required.

However for business and trade activities the Germany legal systems provides a variety of other legal forms. These forms are

  • offene Handelsgesellschaft (oHG): A trading partnership where all partners have an unlimited liability for all business depts of the company.
  • Kommanditgesellschaft (KG): A trading partnership where at the liability of at least one partner is limited and for at least one other partner is unlimited.

There is an often used hybrid construction: The GmbH & Co. KG. This is a KG which has a GmbH as partner with unlimited liability and another person as partner with limited liability. The partner with limited liability can also be the shareholder of the GmbH. This construction allows the formation of a partnership being controlled and owned by one individual with altogether limited liability.

Trading partnerships are uncommon in a lot of countries. However, in Germany they are widely used especially of small and medium-sized businesses.

Taxation of corporations and partnerships

German corporations are persons with own legal personality. Partnerships lack this legal status as a person. However, in certain areas partnerships are treated as legal entities. For example they can sue other persons or can be sued. German tax law in principle follows this legal structure.

Corporations are subject to the German corporation income tax. Their profits will be taxed at a flat rate of 15%. In addition to that the corporation has to pay a solidarity surplus charge and a trade and business tax (see below). The overall tax rate will be between 30 and 32%. Distributions will be taxed as follows:

  • Individuals as shareholders: Profit distributions will be taxed on the level the shareholder as income from capital investment at a flat rate of 25%. In addition to that a solidarity surplus charge has to be paid.
  • Corporations as shareholders: 95% of the profit distribution will be tax free. 5% will be taxed as mentioned above.

Partnerships are treated as transparent (“pass through”) entities. Their profits will be taxed on the level of the partners as income from trade and business. The income will be taxed at Germany’s progressive income tax rate (maximum rate: 45%). In addition to that a solidarity surplus charge has to be paid. The trade and business tax can be deducted against the income tax liability under certain preconditions.

The solidarity surplus charge was introduced in order to help East Germany after Germany’s reunification some 25 years ago. The charge is calculated at 5.5% of the corporation or individual income tax. This means that a corporation’s profits will be taxed at an overall rate of 15.825%. The overall tax rate on income from capital investment is 26.375 and the maximum income tax rate is 47.475%.

In addition to corporation and individual income tax all businesses have to pay a trade and business tax. This is a council tax and computed on profits adjusted by certain additions and deductions. Every town or community can (within certain limits) set its own tax rate. In general the tax rates in the big cities are the highest and in rural communities the lowest. The overall tax rate may vary between 14 and 18 %. For investors it can be beneficial to situate themselves in smaller communities nearby bigger cities. The trade and business tax has to be paid by all corporations and by trading partnerships or sole entrepreneurs. No trade and business tax has to be paid by freelance professionals or by individuals on rental income, income from capital investments or on other taxable income.

Other legal differences

There are other legal differences between corporations and partnerships such as:

  • Corporate law is more formal than the one for partnerships.
  • Accounting and auditing rules for corporations are in general stricter for corporations.
  • All corporations are obliged to publish their annual accounts while most partnerships are not.
  • The formation of most corporations (GmbH, AG) requires certain minimum amounts for equity capital while partnerships can be formed without any equity capital.
  • An Initial Public Offering at a German stock exchange requires the legal form of an AG.


Aktiengesellschaft (AG)

Stock Company (Incorporation)

Gesellschaft mit beschränkter Haftung (GmbH)

Limited Liability Company





Gesellschaft bürgerlichen Rechts (GbR)

General partnership

offene Handelsgesellschaft (oHG)

General trading partnership

Kommanditgesellschaft (KG)

Trading partnership with (partly) limited liability


Corporation tax


(Individual) income tax


Trade and business tax


Solidarity surplus Charge

Author: Peter Scheller, Steuerberater, Master of International Taxation, Fachberater für Zölle und Verbrauchsteuern




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