Taxation of a GmbH & Co. KG: An Overview

The GmbH & Co. KG is a popular legal form for medium-sized businesses in Germany as it combines the benefits of a limited liability company (GmbH) and a limited partnership (KG). In addition to limiting liability to the company’s assets, this legal form offers tax advantages. In this article, we explore the key aspects of the taxation of a GmbH & Co. KG.

1. Legal Form and Structure of a GmbH & Co. KG

A GmbH & Co. KG consists of two main components:

• The general partner (Komplementär) is the GmbH, which assumes unlimited liability and manages the business.
• The limited partners (Kommanditisten) are only liable up to their investment and typically do not participate in the management.

This structure allows the limitation of liability for the personally liable partners while also leveraging the tax benefits of a partnership.

2. Tax Treatment of a GmbH & Co. KG

a. Income Taxation

The GmbH & Co. KG is taxed as a partnership. This means that the profits of the company are not taxed at the company level but are attributed to the partners and taxed at their individual level. This is known as the transparency principle.

Income Tax for Partners

• Limited Partners: The profits allocated to the limited partners are subject to income tax, which is levied according to the individual tax rate of each partner.
• General Partner (GmbH): The profits allocated to the general partner (GmbH) are subject to corporate tax (currently 15%) and the solidarity surcharge (5.5% of the corporate tax).

b. Trade Tax

The GmbH & Co. KG is subject to trade tax. Trade tax is levied on the company's trade income. It is important to note that the general partner (GmbH) is usually not burdened with trade tax, as trade tax is calculated at the KG level.

The trade tax rate varies depending on the municipality where the GmbH & Co. KG is located. However, there is an allowance of €24,500 that is applied to the trade income.

c. Value-Added Tax (VAT)

The GmbH & Co. KG is subject to VAT and must charge and remit VAT on its supplies and services. At the same time, the company can deduct input VAT charged on its purchases and services.

3. Special Tax Aspects

a. Loss Offset

Losses incurred by the GmbH & Co. KG are attributed to the partners according to their share and can be offset against other positive income. This can reduce the partners' tax burden.

b. Retained Earnings Benefit

Profits that are retained (not distributed) within the company can be subject to a reduced tax rate under Section 34a of the Income Tax Act (EStG). This encourages the buildup of equity within the company.

c. Special Business Income and Expenses

Partners can have additional income or expenses in connection with their participation in the GmbH & Co. KG, known as special business income and expenses. These are separately considered in the tax return.

Conclusion

The GmbH & Co. KG offers both liability and tax advantages due to its hybrid structure. Its tax treatment as a partnership allows profits to be directly attributed to the partners and taxed at their level, while trade tax is assessed at the company level. Careful tax planning and advice are essential to fully utilize the specific advantages of this legal form and minimize tax risks.