Saving Tax as a GmbH: The Options Available

Managing directors and shareholders of GmbHs pursue an obvious objective: they want to reduce the tax burden on their company. For this legal form, the relevant taxes are corporation tax (Körperschaftsteuer) and trade tax (Gewerbesteuer). Both are profit-based taxes — the tax authorities use profit as the basis for their calculation. But how do you reduce your tax burden? There are various approaches; this article gives you an overview!

Saving tax as a GmbH? In the broader sense, this also includes the taxes payable by shareholders. The tax office levies tax on profit distributions just as it does on a managing director's salary. We shall also touch briefly on this topic.

The state taxes the profits of corporations such as a GmbH. This gives rise to a straightforward idea: minimise that profit and you pay less corporation tax and trade tax.

Reducing profit cannot be the primary goal of a business — all GmbHs aim for maximum earnings. However, Germany's multifaceted tax law provides a variety of instruments for reducing profit without adverse effects on the business. Examples include the loss carryforward and tax-free reserves.

At the same time, one principle that applies to GmbHs — as it does to other legal forms — is this: investment and a well-considered expenditure policy reduce the tax burden and lay the foundation for future business success.

An overview of the three most important approaches a GmbH can use to save tax:

- Loss carryback and loss carryforward: Tax law provides that businesses may offset losses of up to one million euros in full against profit from the preceding year or a future year. This rule offers opportunities to reduce tax.

- Formation of tax-free reserves: GmbHs form their reserves after deducting corporation tax. However, there are isolated exceptions in the form of tax-free reserves for replacement acquisitions, reinvestments, and other purposes. Entrepreneurs should make use of the available scope.

- Reducing profit: Increased ongoing expenditure and acquisition costs, as well as extensive investment, reduce profit and thereby the tax burden. Where additional expenditure can be justified on business grounds, it is a further means of optimising a GmbH's tax position. For investment in particular, good timing is also important.

In addition, there are further ways to save tax as a GmbH. Many managing directors are also shareholders of a GmbH, for example. The question then arises whether a salary increase for the managing director is more tax-efficient than a profit distribution. On closer inspection, this and other scenarios prove to be complex — let the experts at Guhr Steuerberatung support you!

The tax legislation for corporations provides for a loss deduction. If you record a loss in one tax year, it reduces your profit — and hence your tax burden — in another year. Up to one million euros this applies in full; amounts beyond this are deductible at up to 60% of the remaining income.

With the loss carryback and the loss carryforward, you choose between two options. The question is which variant is more tax-efficient. A clear-cut case: if the legislator raises the tax rate in the following year, there is every reason to opt for a loss carryforward. Guhr Steuerberatung provides valuable tips and explains, for example, what you need to bear in mind in the event of a change of shareholder.

Within certain limits, you can reduce your tax burden through profit appropriation. Please note that most decisions are only made after the deduction of corporation tax. Profit distributions, for instance, have no bearing on the amount of your corporation tax.

However, you can form tax-free reserves. Tax law permits this for, amongst other things, replacement acquisitions and reinvestments. Exploit this potential with the help of a reputable tax advisory firm!

This requires a forward-looking business policy. Plan replacement acquisitions, reinvestments, and similar expenditure in advance. Also consider how you can link these with further business and tax advantages. Bear in mind at the same time that tax-free reserves are subject to a restriction on purpose, which limits your flexibility.

Business expenses reduce profit and thereby the basis for tax calculation — that is a truism. But how can this fact be used to advantage from a tax and business perspective?

As a general principle: if expenditure improves the business foundation, it is worthwhile. The positive side effect is that it reduces your tax burden — at least where the positive effects in the form of higher revenues only materialise later. Long-term investment is the classic example. Reduce your profit and your tax burden — and secure the prospect of higher operating revenues and better profitability in the future!

Your Guhr Steuerberatung will also explain the various state funding opportunities available. The state supports businesses that invest in renewable energy or research, for example. Support may take the form of tax relief, subsidised loans, or grants.

The salary of a managing director also plays an important role in the business expenses of GmbHs. If the managing director is also a shareholder, an obvious question arises: should they benefit from the company's success primarily through a high salary or through profit distributions? This question cannot be answered in general terms — it depends on individual circumstances. Tax experts can calculate this for you!

Important: those responsible in GmbHs should avoid constructive profit distributions (verdeckte Gewinnausschüttungen). These include, for example, excessive salaries for managing directors and excessive rental payments to persons who are shareholders or who are directly connected to shareholders.

Shareholders of GmbHs participate in company profits through profit distributions. They are taxed on these individually. Two options exist:

- Capital gains tax / withholding tax (Abgeltungsteuer): Many shareholders have their profit participation taxed at a flat rate under the Abgeltungsteuer, plus the solidarity surcharge and, where applicable, church tax.

- Partial income method (Teileinkünfteverfahren): In this case, the individual income tax rate applies. The advantage is that the tax office only takes 60% of the profit distribution into account. The remainder is tax-free.

German tax law is recognised worldwide for its complexity. This presents a bureaucratic challenge, but at the same time opens up numerous opportunities for tax optimisation. Take advantage of these possibilities by seeking advice from experienced tax experts! Guhr Steuerberatung is the ideal point of contact for GmbHs of all sizes and across a wide range of industries.

How can you reduce a GmbH's profit?

You reduce profit through increased business expenses. These may take the form of typical operating costs or capital expenditure. All such expenses minimise profit and thereby the tax burden. However, this should not be an end in itself — the business benefit must always be at the centre of any expenditure decision! In addition, you can reduce your profit by forming tax-free reserves. Guhr Steuerberatung actively supports you with this complex challenge!

What are the tax advantages of a GmbH?

Compared with other legal forms, retained profits are subject to a comparatively low rate of corporation tax. Other business owners, such as sole traders, by contrast pay tax on their profits at their personal income tax rate. It is worth noting that an additional layer of taxation applies when profits are distributed. Shareholders choose between the Abgeltungsteuer and the partial income method (Teileinkünfteverfahren). Ideally, founders should seek advice from tax experts before choosing their legal form!

Can a GmbH reduce personal tax liability?

This is possible, for example, by changing the legal form. If you currently operate as a sole trader, you pay tax on the entire profit at your personal income tax rate. If you convert your business into a GmbH, the tax framework changes fundamentally. Ask reputable tax advisers whether this step is worthwhile for you! Are you already a shareholder of a GmbH? Then the question of how to structure your profit distributions in a tax-optimised manner will be of interest.

How can a managing director save tax?

A managing director's salary is subject to payroll tax (Lohnsteuer). From the managing director's perspective, the same opportunities for tax optimisation exist as for all employees. High-earning managing directors can, for example, reduce their tax burden through substantial contributions to private pension provision. For managing directors who also act as shareholders, a further question arises: are salary increases or profit distributions the more sensible option?