Globalization does not only effect business companies, but also nonprofit organizations (NPOs). To expand their spectrum of activities, many international NPOs reach out to foreign countries like Germany. When doing so, international organizations must observe the specific German laws not only when conducting their activities, but also upfront when entering the German nonprofit market and when considering the proper legal entity form for their venture.
Several legal factors need to be considered by international organizations interested in pursuing not-for-profit and charitable activities in Germany. Amongst others, some main questions concern:
- the required capital stock
- the extent of personal liability
- the composition of the membership basis of the German entity
- possibilities of exerting influence on the German subsidiary, and
- the administration and management of the German entity.
In addition to that, one major factor for charitable organizations performing their activities in Germany is how they will be treated by the German revenue service. Like in most other industrialized countries, German nonprofit tax law grants exemptions from many different taxes and, on the other hand, levies taxes on business activities with whom charities compete with for-profit companies.
There may even be provisions in double taxation treaties between Germany and foreign jurisdictions (like for example between the USA and Germany; the treaty refers to US 501(c)(3) charities as well as to German charitable organizations) that help avoid taxation.
However, there is no such thing like a free lunch: For an international charity to be exempt from German taxation, it is crucial that it complies with several very specific rules under German nonprofit tax law and, indeed, not all forms of organizations are eligible for such a tax exemption.
Typically, there are three ways for international organizations to be present in Germany:
- a representative office,
- a branch office or
- a subsidiary.
A representative office is not a separate legal entity. It simply means that the organization's staff is active in Germany. However, all legal activities have to be conducted and authorized by the foreign organization itself, which often results in legal problems as to which law is applicable.
A branch office, too, is no separate legal entity which means that the full liability for its activities in Germany is on the foreign organization. However, unlike a representative office, a branch office typically needs to be registered with German authorities.
From a tax perspective, operating a representative or branch office usually results in the foreign organization (sometimes involuntarily) maintaining a permanent establishment in Germany, which means that it may be subject to German corporate income taxation and to German trade tax. Representative offices and branch offices are not eligible for tax exemption under German law, regardless of the nonprofit or tax-exempt status of the international organization abroad. In most cases, this means that neither a representative office nor a branch office is suitable for a market entry in Germany.
The most common approach for international organizations engaging in Germany is incorporating a subsidiary with the foreign organization as its single shareholder, thus effectively exercising control over the German subsidiary. By far the most popular German type of a separate legal entity is the so-called “Gesellschaft mit beschränkter Haftung” (GmbH), which translates to “company with limited liability”. It needs a minimum capital of EUR 25,000 (however, only EUR 12,500 of which have to be paid in immediately upon incorporation) and can be founded within a few days to a few weeks. An alternative is called “Unternehmergesellschaft” (UG) and can be established with a minimum capital of only EUR 1.
The GmbH as well as the UG consist of at least one shareholder, which can be a (foreign) corporation, too. Liability is limited to the corporation’s assets, shareholders can be held liable only in very exceptional cases (known as “piercing the corporate veil”). The shareholder’s assembly appoints the managing director, who has to comply with the shareholder’s instructions. Therefore, the shareholder has absolute power over its subsidiary, which makes the GmbH/UG the ideal legal entity form for international investors as well as foreign nonprofit organizations.
German corporations which pursue privileged goals like charitable, religious or public-benefit purposes, can apply for tax exemption with the competent tax office. Once granted tax-exempt status as a charity, they do not have to pay taxes on earnings that are related to their privileged goals and, depending on the facts and circumstances, they may also be eligible for tax reductions or exemptions concerning the Value Added Tax (VAT). A tax-exempt GmbH is usually referred to as a “gGmbH”, a tax-exempt UG as a “gUG”. The small "g" stands for "gemeinnützig” which means “charitable”.
Profits which come from commercial activities are taxed if the revenue exceeds EUR 35,000 per year. Tax-privileged corporations are forbidden to distribute their profits (non-distribution constraint). All money must be used for the privileged goals, only. It is possible, however, to transfer capital to other tax-privileged organizations, which may also be foreign ones (even the foreign parent company).
Do you want to do good in Germany by setting up a legal entity? Do you have questions regarding German tax exemption? Attorney Uwe Müller as well as Attorney and Certified Foundation Consultant Alexander Vielwerth are looking forward to answering your questions regarding the incorporation process of your subsidiary in Germany. Please contact us by e-mail (email@example.com) or by phone (+49 (0)69 76 75 77 80). We are very happy to assist and to make your venture in Germany a success.