For a foreign corporation intending to set up in Germany, accounting is fundamental to the success of the operation. When contemplating coming to Germany, one of the first things which must be done from an accounting point of view is to consult with a German tax adviser to ensure the set up of the company structure does not cause unexpected tax problems.

The kind of accounting and German taxation regulations of the German engagement are affected by the chosen forms: liaison office; permanent establishment (branch office) with or without registration; GmbH (legal entity); partnership; and function (market introduction, buy and sell operation, commissionaire, soliciting agent and service entity).

Good tax and legal advice in that stage is imperative. In addition, inter-company agreements (for transactions between affiliated structures), which meet the arm’s length test and the transfer pricing principles need to be put in place as soon as possible to avoid unpleasant tax risks. US corporations looking to go global and set up a German entity must think of the accounting procedures.

Accounting in Germany involves many regulations which may seem complicated, but if they are established and observed at an early stage they are manageable. The first step is to set up a bank account. Next, you need a company to do accounts. It is better to outsource this so that your German tax adviser can concentrate on tax advice, you do not incur unnecessary costs or have the conflict of changing advisers if you form a GmbH and have the auditing and accounting with the same person.

Next, the German engagement must be announced and registered at the local tax office. A tax number will be issued and with this monthly VAT returns must be filed. It is important to have your accounting company cooperate with your tax adviser at an early stage, so that the set-up is watertight. Also, the tax adviser can assist you in making the best of the German Chart of Accounts, so that monthly reporting is not too cost intensive.

The regulation that a governmental tax auditor should be able to find receipts or invoices for a booking within five minutes combined with the fact that the auditor is not required to speak English would indicate that accounting in the German language is at the very least of advantage to your company. Please note that the result of proper accounting is the basis for all possible taxes (VAT, trade tax and corporate tax, if applicable) and can be audited by tax inspectors.

Keys to success

The key to professional accounting is solid and complete documentation, especially original receipts, inter-company invoices and proper inter-company agreements for all transactions. It must be noted that regulations for travel costs are different in Germany compared to other countries. It is advisable to get information on these regulations from your German tax adviser before or while bringing in the first employee.

Salaries can be handled easily if the correct documentation is submitted to your payroll company on time for the monthly salary bookkeeping. For the initial stages, it is important to know that in Germany payroll payments are made by bank transfer. If the bank transfer is made from abroad this can take up to five days, and therefore, payroll preparation must be handled in a timely manner.

Payments to the authorities (tax and social security tax authorities) should be made with German language descriptions. Bank fees, which are deducted, lead to a non-fulfilment of the deadlines, so it is imperative to ensure that no bank fees are transferred to the authorities.

Please note, that an employer is obliged to withhold the monthly wage and social security tax from the salaries and submit it just in time to the respective authorities.

The key is to have a local accounting and payroll company along with a German tax adviser manage this for you and to contact them at an early stage so that they can give you good advice on how to set up and to meet all legal and tax requirements. If this is done, fines and problems can be avoided.

July 2002

Anne Koark is CEO, Trust in Business.
Ernst Altweger, of Auditjurtax GmbH, is a Rechtsanwalt (Attorney-at-Law) and a Steuerberater (Tax Consultant).
Trust in Business, www.trustib.com, is a full-service company for the start-up phase of international subsidiaries in Germany.