Common tax mistakes expats make with their GmbH (and how to avoid them)

Make sure you aren't making expensive mistakes with your GmbH taxes with this guide from GmbH Tax Services, which covers eight common mistakes and how to avoid them them. 

Germany has a complicated corporate tax structure, which even native German speakers can find difficult to understand. If you are a German GmbH owner, here are the eight most important things for you to know, so you can be confident that you are filing your taxes correctly.

1. The German GmbH tax basics

A GmbH separates personal finances from business assets. You pay a few different types of tax on your business income, including:

• Corporate tax (Körperschaftsteuer): 15% plus a 5,5% solidarity surcharge.
• Trade tax (Gewerbesteuer): This varies by location but is commonly between 14% and 17%.
• VAT (Umsatzsteuer): 19% (standard rate) or 7% (reduced rate). This has to be filed either monthly or quarterly, depending on your turnover.
• Withholding tax on dividends: 25% plus a solidarity surcharge at distribution.

While the 15 percent corporate tax rate seems attractive compared to personal rates of up to 45 percent, the combined burden of corporate and dividend taxes creates dual taxation on distributed profits. Tech startups should note that R&D activities may qualify for additional tax incentives.

A common mistake expats make

It's not uncommon for expats to get overexcited about starting their new business and rush in without considering all the taxes and their implications, causing complications and further costs down the line.

To avoid making this mistake, schedule a quarterly tax position review with a licensed tax advisor (Steuerberater) to align taxation with your business growth stage.

2. Tax residency

Tax residency determines how your worldwide income is treated. Spending over 183 days annually in Germany typically establishes residency, but what is often overlooked is that other factors can result in you being considered a tax resident, even if you have been in Germany for less time. 

Even when other factors may affect your residency status, it is crucial that you can prove the amount of time you spent in Germany, if requested.

A common mistake expats make

Expats can sometimes wrongly assume that simply staying fewer than 183 days exempts them from German tax residency. The German tax authorities often determine that maintaining an apartment or making key business decisions from Germany establishes residency, which can result in unexpected tax liabilities exceeding 10.000 euros.

To avoid this, document your physical presence using a dedicated residence tracking app and consult a residency specialist before making significant lifestyle changes.

3. Deadlines and documentation

It might sound too simple, but making sure you meet the various deadlines for each task is a very easy way to avoid unnecessary fines. 

Critical German deadlines that you need to put in your calendar include:

• Monthly or quarterly VAT returns: The 10th of the following month (extendable)
• Annual VAT return: July 31 of the following year
• Monthly wage tax returns: The 10th of the following month
• Annual corporate and trade tax returns: July 31 of the following year
• Annual financial statements: Within 12 months of fiscal year-end

German authorities require impeccable documentation. The 2024 expansion of ELSTER digital filing requirements means proper record-keeping is increasingly crucial.

A common mistake expats make

It's not just a case of filing on time, which not everyone manages to do, but also making sure that things are filed correctly. Rushing to complete a filing before a deadline but not having the documentation required to back it up is like missing the deadline in the first place.

It's wise therefore to implement a GoBD-compliant documentation system and set automated alerts for all tax deadlines.

4. Personal-commerce interface: Salary versus dividends

As a GmbH owner-director, you must make an important decision: do you take a salary or dividends?

A salary is taxed progressively up to 45 percent, plus social security, while dividends will incur an approximate 25-percent withholding tax without social security, but paid from after-corporate-tax profits.

A common mistake expats make

Many expat GmbH owners initially set excessive salaries, incurring significant personal income taxes. By restructuring to a market-appropriate salary supplemented with strategic dividend distributions, they can reduce their annual tax burden by thousands of euros.

To avoid this, use a tax planning calculator to model different salary-dividend scenarios before making compensation decisions.

5. Double taxation and international factors

Germany maintains double taxation agreements (DTAs) with numerous countries. While your tax residency usually determines primary taxing rights, source-country rules can apply in specific cases. For example, US citizens face additional IRS filing requirements, such as Form 5471, while UK nationals post-Brexit face new considerations regarding permanent establishment.

A common mistake expats make

A significant risk is inadvertently creating a "permanent establishment" in another country through management activities, which could potentially trigger corporate taxation in multiple jurisdictions.

You can avoid making this mistake by keeping detailed travel logs and documenting where strategic decisions occur to prevent unintended tax exposure.

6. Digital filings and communication

Germany's ELSTER platform handles all tax filings with strict formatting requirements and limited English support. The GoBD framework governs digital recordkeeping, requiring immutable, auditable records retained for 6-10 years.

A common mistake expats make

Many expats use familiar foreign accounting software that fails to meet German requirements for audit trails and data integrity. Tax authorities frequently reject these records, leading to recalculated revenues, disallowed deductions, and substantial penalties.

To avoid this, confirm that your accounting software has a "GoBD-compliant" certification or integrate with DATEV, Germany's standard tax accounting system.

7. Exit planning and succession

Leaving Germany can trigger exit taxation on unrealised GmbH share gains. Options include:

• Remote management: Risks permanent establishment issues
• Company sale: Requires an understanding of how hidden reserves affect taxation
• Formal liquidation: At least a 12-month process
• Family transfers: Subject to inheritance/gift tax regulations

The recent tightening of exit tax rules makes advance planning more critical than ever.

A common mistake expats make

Expats often live flexible and changeable lives, and like to be able to move freely. By not planning an exit from Germany well in advance, they are often hit by restrictions on how quickly they can leave, or they may have to leave more money behind than they intended.

Consult with an exit planning specialist one to two years before your intended departure to create a step-by-step exit roadmap.

8. Working with a Steuerberater

An experienced international tax advisor provides invaluable support for compliance and optimisation. When selecting your advisor, focus on these qualities:

1. Communication and responsiveness: You should expect clear English communication with prompt replies.
2. International tax expertise: Make sure that they have a deep understanding of cross-border issues and treaties.
3. Digital efficiency: Check that they are using modern systems that meet German compliance requirements.

A common mistake expats make

Many expats either try to go it alone, or simply pick the cheapest support they can find. Both of these options leave you open to errors creeping in, with the potential for fines for non-compliance.

To avoid this, make sure your Steuerberater meets the above requirements and has experience working with expats. There are unique considerations for expats living in Germany that not all tax advisors will have experience with. 

Make sure you are doing the right things

Now you have an idea of what commonly goes wrong for expats with a GmbH in Germany, be proactive! Evaluate your current tax structure against each section above and identify at least three action items to implement as soon as possible. 

Remember, proactive tax planning isn't just about compliance - it's a strategic business advantage that can significantly impact your company's profitability and your personal financial wellbeing in Germany.

Find out your trade tax rate with GmbH Tax Services online calculator. If you need English language tax advice on how best to set up your GmbH or keep records and file taxes, contact GmbH Tax Services, a licensed Steuerberater that specialises in helping expats.