Ina Ree­se Tax & Legal Prac­ti­ce – Flens­burg | Harrislee

Tax and legal advice from a single source

Many tax impli­ca­ti­ons are not deter­mi­ned in the tax return, but are deci­ded before­hand in the con­tract. Using examp­les from com­pa­ny law, cor­po­ra­te res­truc­tu­ring, ten­an­cy law and tax audits, we demons­tra­te whe­re law and tax go hand in hand. 
Tax and legal advice from a single source

Tax and legal advice from a single source

Tax and legal advice from a sin­gle source: whe­re law and tax go hand in hand

A typi­cal pro­cess in many com­pa­nies: a soli­ci­tor drafts the artic­les of asso­cia­ti­on, whilst the tax advi­ser hand­les the book­kee­ping and tax returns. Both car­ry out their work meti­cu­lous­ly. Nevert­hel­ess, money can be lost pre­cis­e­ly whe­re their are­as of respon­si­bi­li­ty over­lap. The tax advi­ser often does not see the con­tract until it has been signed. The soli­ci­tor is fre­quent­ly una­wa­re of the company’s figu­res in detail and can­not always assess the tax impli­ca­ti­ons of a par­ti­cu­lar clause.

Tax impli­ca­ti­ons rare­ly only ari­se when fil­ing a tax return. In most cases, they are deter­mi­ned as soon as a con­tract is con­cluded, a com­pa­ny is incor­po­ra­ted or a busi­ness is res­truc­tu­red. Using examp­les, we show whe­re legal struc­tu­ring deter­mi­nes the tax lia­bi­li­ty, what ‘one-stop advice’ means in prac­ti­ce, and whe­re its limits lie. Anyo­ne wis­hing to know what a tax advi­ser and a spe­cia­list soli­ci­tor in tax law are respec­tively per­mit­ted to do will find this infor­ma­ti­on in our artic­le Tax advi­ser or spe­cia­list soli­ci­tor in tax law.

The problem lies at the interface

Tax law is lin­ked to cir­cum­s­tances that have alre­a­dy been legal­ly estab­lished: con­tracts, share­hol­ders’ reso­lu­ti­ons, purcha­se pri­ces and sala­ry agree­ments. Once the­se have been laid down and imple­men­ted, it is vir­tual­ly impos­si­ble to amend them for tax pur­po­ses. As a gene­ral rule, the tax aut­ho­ri­ties do not reco­g­ni­se agree­ments inten­ded to have retro­s­pec­ti­ve effect, apart from excep­ti­ons pro­vi­ded for by law, such as in the case of com­pa­ny con­ver­si­ons. The tax advi­ser can then only explain what has hap­pen­ed; he can no lon­ger influence the outcome.

A simp­le exam­p­le illus­tra­tes just how quick­ly this can hap­pen: two busi­ness owners agree on a pri­ce of 50,000 euros wit­hout making any arran­ge­ments regar­ding VAT. Accor­ding to estab­lished case law, VAT is then dee­med to be included in the pri­ce in cases of doubt. The sel­ler must pay around 8,000 euros in VAT and is left with a net sum of around 42,000 euros ins­tead of the expec­ted 50,000 euros. Legal­ly, the con­tract is valid; eco­no­mic­al­ly, howe­ver, the sel­ler is short of around 8,000 euros.

Incorporation and legal form: deciding on liability and tax together

The choice of legal form is a legal decis­i­on with signi­fi­cant tax impli­ca­ti­ons. In the case of sole trad­ers and part­ner­ships, pro­fits are taxed at the owners’ and part­ners’ per­so­nal inco­me tax rates. Trade tax, which is paya­ble by com­mer­cial enter­pri­ses, is lar­ge­ly off­set against inco­me tax (Sec­tion 35 of the Inco­me Tax Act (EStG)). In the case of a limi­t­ed lia­bi­li­ty com­pa­ny (GmbH), the com­pa­ny initi­al­ly pays cor­po­ra­ti­on tax and trade tax; the share­hol­ders are only taxed on the divi­dends they recei­ve. Which form is more favoura­ble depends, among­st other things, on how much pro­fit is to be retai­ned within the com­pa­ny and how high the share­hol­ders’ other inco­me is. Gene­ral part­ner­ships, pro­fes­sio­nal part­ner­ships and regis­tered civil-law part­ner­ships (GbR) may, upon appli­ca­ti­on, even be taxed as a cor­po­ra­ti­on (Sec­tion 1a of the Cor­po­ra­ti­on Tax Act (KStG)).

The legal form alo­ne is not enough. The artic­les of asso­cia­ti­on set out the rules gover­ning pro­fit dis­tri­bu­ti­on, with­dra­wals, sever­ance pay­ments and suc­ces­si­on. Each of the­se clau­ses has tax impli­ca­ti­ons. This is par­ti­cu­lar­ly evi­dent in the case of a share­hol­der-mana­ging direc­tor of a GmbH:

  • Sala­ry and bonus: If the remu­ne­ra­ti­on is unre­ason­ab­ly high, the tax office tre­ats the excess amount as a hid­den dis­tri­bu­ti­on of pro­fits (Sec­tion 8(3) of the Cor­po­ra­ti­on Tax Act). It does not then redu­ce the GmbH’s inco­me and is taxed as invest­ment inco­me in the hands of the shareholder.
  • For­mal requi­re­ments: In the case of a con­trol­ling share­hol­der, the remu­ne­ra­ti­on must also be cle­ar­ly and valid­ly agreed in advan­ce and actual­ly paid in that man­ner. The tax office will not reco­g­ni­se a pay rise that is only deci­ded upon retro­s­pec­tively at the end of the year for the pre­ce­ding months.
  • Social secu­ri­ty: Accor­ding to the case law of the Fede­ral Social Court, a share­hol­der-mana­ging direc­tor is, as a rule, only exempt from social secu­ri­ty con­tri­bu­ti­ons if he holds at least half of the share capi­tal or if the artic­les of asso­cia­ti­on grant him a com­pre­hen­si­ve blo­cking mino­ri­ty, enab­ling him to pre­vent ins­truc­tions with which he does not agree. Agree­ments out­side the artic­les of asso­cia­ti­on are not suf­fi­ci­ent. Legal cer­tain­ty is pro­vi­ded by a sta­tus deter­mi­na­ti­on pro­ce­du­re with the Ger­man Pen­si­on Insu­rance Sche­me (Sec­tion 7a of Book IV of the Social Code).

The artic­les of asso­cia­ti­on, the mana­ging director’s con­tract and tax mat­ters should the­r­e­fo­re all be dis­cus­sed tog­e­ther. Find out more on our page about Com­mer­cial and Com­pa­ny Law.

Restructuring: Law on corporate conversions and tax law relating to corporate conversions

Anyo­ne who trans­fers a sole trader busi­ness into a limi­t­ed lia­bi­li­ty com­pa­ny (GmbH), mer­ges com­pa­nies or spins off part of a busi­ness is sub­ject to two pie­ces of legis­la­ti­on at the same time. The Trans­for­ma­ti­on Act governs the legal pro­cess of the res­truc­tu­ring. The Trans­for­ma­ti­on Tax Act deter­mi­nes whe­ther hid­den reser­ves are sub­ject to tax in the process.

In many cases, a con­ver­si­on can be car­ri­ed out on a tax-neu­tral basis at book value, but only upon appli­ca­ti­on and sub­ject to con­di­ti­ons that must alre­a­dy be met at the legal plan­ning stage:

  • Full tran­script: When a busi­ness is con­tri­bu­ted, all essen­ti­al assets of the busi­ness must, as a gene­ral rule, be trans­fer­red as well. If, for exam­p­le, the busi­ness pre­mi­ses are left behind, the car­ry­ing amount is at risk.
  • Retroac­ti­ve effect: For tax pur­po­ses, con­ver­si­ons may be back­da­ted by up to eight months (Sec­tion 2 of the Ger­man Con­ver­si­on Tax Act (UmwStG), Sec­tion 20(6) of the UmwStG). In the case of mer­gers and demer­gers, the clo­sing balan­ce sheet sub­mit­ted with the appli­ca­ti­on to the Com­mer­cial Regis­ter must also be no more than eight months old (Sec­tion 17(2) of the UmwG). The appoint­ment with the nota­ry, the appli­ca­ti­on and the balan­ce sheet must the­r­e­fo­re be coor­di­na­ted in terms of timing.
  • Embar­go peri­ods: If the con­tri­bu­tor sells the shares recei­ved in exch­an­ge for the con­tri­bu­ti­on within seven years, the hid­den reser­ves exis­ting at that time are sub­ject to retro­s­pec­ti­ve taxa­ti­on, redu­ced by one-seventh for each year that has elap­sed (Sec­tion 22(1) of the Ger­man Law on the Taxa­ti­on of Busi­ness Reor­ga­ni­sa­ti­ons (UmwStG)). In the case of demer­gers, a sepa­ra­te five-year peri­od appli­es to the sale of shares (sec­tion 15(2) of the Ger­man Trans­fer Tax Act (UmwStG)).
  • Land Trans­fer Tax: If the busi­ness owns land, the reor­ga­ni­sa­ti­on may trig­ger land trans­fer tax. Whe­ther an exemp­ti­on appli­es depends on the cho­sen structure.

In addi­ti­on, the­re are obli­ga­ti­ons under employ­ment law, such as informing employees when their employ­ment con­tracts are trans­fer­red. Find out more on our page on Right of con­ver­si­on.

Contracts with VAT implications

When it comes to VAT, the absence of a con­trac­tu­al clau­se can cost you money very quick­ly. Here are two real-life examples.

Commercial tenancy: the VAT option

The let­ting of com­mer­cial pre­mi­ses is, in prin­ci­ple, exempt from VAT. Howe­ver, if the owner lets the pre­mi­ses to ano­ther busi­ness owner for use in that busi­ness, they may opt to be sub­ject to VAT (Sec­tion 9 of the Ger­man VAT Act (UStG)). This is par­ti­cu­lar­ly wort­hwhile if they wish to deduct input VAT ari­sing from the con­s­truc­tion, purcha­se or main­ten­an­ce of the pro­per­ty. For most buil­dings, this opti­on is only per­mit­ted if the ten­ant uses the pre­mi­ses exclu­si­ve­ly for tran­sac­tions that do not pre­clude the deduc­tion of input VAT (Sec­tion 9(2) of the Ger­man Value Added Tax Act). The tax aut­ho­ri­ties allow a de mini­mis thres­hold of five per cent in this regard. This is not usual­ly the case for a doctor’s sur­gery or an insu­rance broker.

If such a ten­ant moves in at a later date, or if the cur­rent ten­ant chan­ges the natu­re of their busi­ness, the land­lord may lose part of their input tax. For buil­dings, the input tax deduc­tion is tra­cked over a peri­od of ten years (Sec­tion 15a of the Ger­man Value Added Tax Act (UStG)). The ten­an­cy agree­ment should the­r­e­fo­re sti­pu­la­te three things: that the rent is paya­ble plus VAT, the pur­po­ses for which the ten­ant is per­mit­ted to use the pre­mi­ses, and that the ten­ant must noti­fy the land­lord of any chan­ge in their busi­ness acti­vi­ties and com­pen­sa­te the land­lord for any resul­ting loss. Find out more on our page about Ten­an­cy law.

Sale of a business: Sale of the business as a whole

If a com­pa­ny or a sepa­ra­te­ly mana­ged busi­ness is sold in its enti­re­ty to an entre­pre­neur who con­ti­nues to run it, no VAT is paya­ble (Sec­tion 1(1a) of the Ger­man VAT Act (UStG)). If the sel­ler nevert­hel­ess char­ges VAT, they are lia­ble for it under Sec­tion 14c of the Ger­man VAT Act (UStG), and the buy­er can­not deduct it as input tax. Con­ver­se­ly, VAT beco­mes paya­ble if the con­di­ti­ons for a busi­ness trans­fer are not met after all and nobo­dy had anti­ci­pa­ted this. A con­tract of sale should spe­ci­fy, for both sce­na­ri­os, who bears the tax and how any sub­se­quent cor­rec­tions are to be made.

In the gene­ral civil law The same appli­es to any major con­tract: whe­ther a pri­ce is meant to be net or gross must be expli­cit­ly sta­ted in the text.

When a tax audit turns into criminal proceedings

A tax audit is, first and fore­most, a tax pro­ce­du­re. The busi­ness owner must coope­ra­te, pro­vi­de docu­men­ta­ti­on and ans­wer ques­ti­ons. If, during the audit, sus­pi­ci­on ari­ses of a tax offence, the situa­ti­on chan­ges fun­da­men­tal­ly. The audi­tor must noti­fy the depart­ment respon­si­ble for admi­nis­tra­ti­ve fines and cri­mi­nal mat­ters and may only con­ti­nue the inves­ti­ga­ti­on with the busi­ness owner regar­ding the­se facts once they have been infor­med that cri­mi­nal pro­cee­dings have been initia­ted (Sec­tion 10(1) BpO, Sec­tion 397 AO). From this point at the latest, coer­ci­ve mea­su­res are pro­hi­bi­ted if they would requi­re the busi­ness owner to incri­mi­na­te them­sel­ves (Sec­tion 393(1) AO). Howe­ver, the tax office may then esti­ma­te the basis for taxa­ti­on. Any infor­ma­ti­on the busi­ness owner pro­vi­des at this stage may be used against them in cri­mi­nal proceedings.

It is par­ti­cu­lar­ly during this pha­se that it pays off if tax argu­ments and cri­mi­nal defence stra­tegy are coor­di­na­ted rather than deve­lo­ped sepa­ra­te­ly by two dif­fe­rent law firms. An excep­ti­on appli­es if the tax returns in ques­ti­on were pre­pared by the advi­sing law firm its­elf: in that case, the firm may be cal­led as a wit­ness during the pro­cee­dings, and an inde­pen­dent defence is usual­ly the bet­ter solu­ti­on. You can find out more about this, inclu­ding vol­un­t­a­ry dis­clo­sure, on our page at Tax law and cri­mi­nal tax law.

Disputes and Settlements: Civil Law Meets Accountancy

Even in the case of dis­pu­tes and out­stan­ding claims, every legal step has tax impli­ca­ti­ons. If a cla­im turns out to be uncoll­ec­ti­ble, the VAT must be adjus­ted (Sec­tion 17(2) of the Ger­man VAT Act), and com­pa­nies that prepa­re finan­cial state­ments must wri­te down the cla­im in their annu­al accounts. If a legal dis­pu­te ends in a sett­le­ment, it depends on what the pay­ment is for: a pay­ment for ser­vices ren­de­red con­sti­tu­tes con­side­ra­ti­on sub­ject to VAT, whe­re­as genui­ne com­pen­sa­ti­on for dama­ges does not. The text of the sett­le­ment should cle­ar­ly reflect this and spe­ci­fy whe­ther the amount is paya­ble plus VAT. In the absence of such a pro­vi­si­on, the reci­pi­ent must, in case of doubt, pay VAT on the sett­le­ment amount. We descri­be how we enforce claims, from the first remin­der let­ter through to enforce­ment, on our page on Cre­dit manage­ment.

We explo­re just how clo­se­ly employ­ment law and tax are lin­ked – for exam­p­le, in rela­ti­on to sever­ance pay­ments, ter­mi­na­ti­on agree­ments and bogus self-employ­ment – in a sepa­ra­te artic­le: Employ­ment law and tax advice under one roof. For infor­ma­ti­on on the han­do­ver of a fami­ly busi­ness, see our artic­le on Busi­ness suc­ces­si­on in Flens­burg.

What „all under one roof“ means in practice

For us, ‘one-stop advice’ does not sim­ply mean that a soli­ci­tor and a tax advi­ser are based in the same office. Ina Ree­se is a soli­ci­tor, a spe­cia­list in tax law and a tax advi­ser, all rol­led into one. She has been run­ning her prac­ti­ce in Flens­burg and Harris­lee sin­ce 2000. For cli­ents, this has very prac­ti­cal implications:

  • One point of cont­act, one file. The­re is no need to explain mat­ters twice, nor to cross-check docu­ments bet­ween two offices.
  • Design and cal­cu­la­ti­on at the same time. When we draft a con­tract, we work through the tax impli­ca­ti­ons of the various opti­ons in par­al­lel, rather than wai­ting until after it has been signed.
  • Design that is actual­ly put into prac­ti­ce. As we also hand­le book­kee­ping, tax returns and annu­al accounts on request, we are able to check whe­ther a con­tract is being imple­men­ted in prac­ti­ce as inten­ded – for exam­p­le, whe­ther the agreed mana­ging director’s sala­ry is actual­ly being paid as agreed.
  • No break in the event of a dis­pu­te. Should an appeal or legal action be brought befo­re the tax court, the cli­ent remains with the same soli­ci­tor. In cri­mi­nal tax pro­cee­dings, the same appli­es, sub­ject to the excep­ti­on men­tio­ned above.
  • Dou­ble duty of con­fi­den­tia­li­ty. As a soli­ci­tor and tax advi­ser, Ina Ree­se is bound by a duty of con­fi­den­tia­li­ty (Sec­tion 43a(2) of the Fede­ral Lawy­ers’ Act (BRAO), § 57(1) StBerG) and, as a gene­ral rule, has the right to refu­se to give evi­dence in cri­mi­nal pro­cee­dings (§ 53(1), first sen­tence, No. 3 StPO).

Con­sul­ta­ti­ons are available in Ger­man, Eng­lish and Spanish.

Where the boundaries lie

A one-stop con­sul­tancy ser­vice does not mean that a law firm can hand­le ever­y­thing on its own. Some limi­ta­ti­ons are laid down by law, whilst others ari­se from the natu­re of the firm’s specialisation:

  • Nota­ri­al cer­ti­fi­ca­ti­on: The incor­po­ra­ti­on of a limi­t­ed lia­bi­li­ty com­pa­ny (GmbH), the trans­fer of GmbH shares, amend­ments to the artic­les of asso­cia­ti­on, mer­ger and demer­ger agree­ments, and pro­per­ty tran­sac­tions must be nota­ri­sed. We prepa­re the rele­vant docu­ments and coor­di­na­te them with the notary’s office.
  • Are­as of law out­side our core prac­ti­ce: We pro­vi­de con­sul­tancy ser­vices in the are­as lis­ted on our Over­view of Ser­vices … If a ques­ti­on falls out­side this scope, we’ll say so openly.
  • Inter­na­tio­nal con­text: In the case of busi­ness dealings or assets abroad, such as in Den­mark, we assess the Ger­man aspects. A local advi­ser may also be requi­red to deal with the rele­vant for­eign law.

Checklist: When legal and tax matters need to be discussed together

  • You are set­ting up a busi­ness or taking on a new shareholder.
  • A part­ner­ship agree­ment, a mana­ging director’s con­tract or a com­mer­cial ten­an­cy agree­ment is ente­red into or amended.
  • You wish to res­truc­tu­re your busi­ness, trans­fer it into a limi­t­ed lia­bi­li­ty com­pa­ny (GmbH) or spin off a part of the business.
  • You are buy­ing or sel­ling a busi­ness, shares in a com­pa­ny or a com­mer­cial property.
  • A tax audit has been announ­ced or is alre­a­dy under­way, or the audi­tor sud­den­ly starts asking dif­fe­rent questions.
  • A legal dis­pu­te is to be sett­led by way of a settlement.
  • The han­do­ver of the busi­ness to the next gene­ra­ti­on is imminent.

Frequently Asked Questions

Is a one-stop consultancy service more expensive than two separate consultants?

Not auto­ma­ti­cal­ly. The Tax Advi­sers’ Remu­ne­ra­ti­on Regu­la­ti­ons app­ly to tax returns and book­kee­ping, whilst the Lawy­ers’ Remu­ne­ra­ti­on Act appli­es to appeals, pro­cee­dings befo­re the tax courts and cri­mi­nal pro­cee­dings, regard­less of who car­ri­es out the work. Dif­fe­rent remu­ne­ra­ti­on arran­ge­ments are pos­si­ble. Whe­re sepa­ra­te advi­sers are invol­ved, howe­ver, this crea­tes addi­tio­nal work if both need to fami­lia­ri­se them­sel­ves with the same facts and coor­di­na­te with one ano­ther. We will dis­cuss the bil­ling arran­ge­ments befo­re the enga­ge­ment begins.

Do I need to change my current tax adviser?

No. You can also enga­ge us spe­ci­fi­cal­ly for a one-off assign­ment, a tax audit or a dis­pu­te. If you wish to ent­rust us with your ongo­ing tax affairs in their enti­re­ty, you are wel­co­me to do so. We will then coor­di­na­te the han­do­ver of the pre­vious year’s data in an orga­nis­ed manner.

What is the difference between this and a firm with solicitors and tax advisers?

In a joint prac­ti­ce, peo­p­le with dif­fe­rent qua­li­fi­ca­ti­ons work tog­e­ther. This can work well, but it requi­res them to liai­se with one ano­ther on an ongo­ing basis. In our prac­ti­ce, legal and tax assess­ments are car­ri­ed out by the same person.

What documents do I need for an initial interview?

For an initi­al assess­ment, the rele­vant con­tracts or drafts, the latest annu­al accounts or tax assess­ment noti­ce and, whe­re appli­ca­ble, cor­re­spon­dence from the tax office are usual­ly suf­fi­ci­ent. We will cla­ri­fy what else is requi­red during the initi­al consultation.

In summary

  • Many tax impli­ca­ti­ons are deter­mi­ned in the con­tract, not in the tax return. It is almost impos­si­ble to rec­ti­fy them retrospectively.
  • The legal form, the artic­les of asso­cia­ti­on and the direc­tors’ remu­ne­ra­ti­on deter­mi­ne how a com­pa­ny and its share­hol­ders are taxed.
  • Con­ver­si­ons can only be car­ri­ed out on a tax-neu­tral basis if the legal imple­men­ta­ti­on meets the tax requirements.
  • In the case of com­mer­cial lea­ses, busi­ness acqui­si­ti­ons and sett­le­ments, the wor­ding of the con­tract deter­mi­nes the VAT liability.
  • If a tax audit leads to cri­mi­nal pro­cee­dings, the rules chan­ge. Tax and cri­mi­nal assess­ments must then be coordinated.
  • Ina Ree­se is a soli­ci­tor, a spe­cia­list in tax law and a tax advi­ser, all rol­led into one.

Are you plan­ning to draw up a con­tract, car­ry out a reor­ga­ni­sa­ti­on, or have you recei­ved a let­ter from the tax office? During an initi­al con­sul­ta­ti­on las­ting around 15 minu­tes, we will dis­cuss what the mat­ter is about and which legal and tax issues should be cla­ri­fied first. Get in touch now

Sources

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