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The Hidden Tax Trap for SaaS Founders in Germany

57 points by vincent_s 2y ago

opeon 2y ago
Move to Belgium and get a whopping 0% capital gains tax
BoredPositron 2y ago
…if you plan to sell your company.
- vincent_s 2y ago
  That's exactly the problem - you often don't plan to sell from the start. Life changes. Kids are born. Health issues emerge. New opportunities arise. If you start successful in Germany without the right structure, you're locked in. At least if you plan to sell from day one, you have options (expensive ones). But most bootstrappers just build stuff users want. Then one day they get an interesting acquisition offer... ...and discover they've accidentally built a tax trap that'll cost them millions. No way out at that point.
  - fabian2k 2y ago
    You're paying the same amount as if you had been employed and earned as much as you're selling your company assets for. If that costs you millions, you're still having millions left.
lifestyleguru 2y ago
This is a lot of words trying to explain that in Germany the system is designed that poor remain poor. First 40% of gross salary on contributions, then 30% of net salary on rent. Dynasties with their VW-Porsche-VW-Porsche quadruple currywurst burger-sandwich need the society to be poor.
- TomK32 2y ago
  At least we still have inheritance tax, though it's somewhat broken for those you mentioned who are far too good at avoiding that tax.
  - lifestyleguru 2y ago
    Yeah the Lichtenstein based charities and trusts are very afraid of your inheritance tax.
    - noduerme 2y ago
      I love countries that only exist as tax loopholes. Every time one disappears, another one pops up. Supply and demand.
- sofixa 2y ago
  More like the system wasn't set up with the expectation that people will become rich by creating a SaaS and selling it, because it predates those concepts by at least a few decades. Porsche, Siemens, Krupp, Thyssen, Bosch were all startups back in the day, just in hardware
  - Rinzler89 2y ago
    >Porsche, Siemens, Krupp, Thyssen, Bosch were all startups back in the day, just in hardware Yeah and they all got big and wealthy by exploiting laws, loopholes, state subsidies and even slave labor back in their days. Let's not pretend the German industrialists from 100 years ago who started those businesses were some patron saints and beacons of legality and morality. I was working for a big German scrap metal business a while back and during the Christmas party the CEO got so drunk he started bitching how much better it was in the past when he could engage in corruption and tax fraud to grow the business without being caught compared to today when this isn't possible anymore. None of those companies you listed could have gotten remotely as wealthy in the legal and regulatory environment of today.
earthnail 2y ago
There's a reasonable argument to be made whether you should be subject to capital gains in the first place. I sold my last company in the UK, and honestly the tax burden was so ridiculously low I still feel somewhat bad for it. It's crazy. There is of course a competition problem with the high taxation in Germany; if your expected returns are much lower than in other countries your risk just increased significantly. We already have a situation where on average it's much, much more lucrative to work at bigcorp instead. My main gripe with the GmbH though is not the amount of taxation. GmbHs are so needlessly complex it blows my mind (I'm currently running one), but that's on the side of regulations. I'd MUCH prefer if Germany worked on getting rid of silly shit like the notary requirement etc., and if taxation and bookkeeping were simplified, before we talk about lowering taxes.
- vincent_s 2y ago
  I'd love to hear more about your UK exit! Most of my knowledge about UK tax rates and processes is theoretical research, so I'd really appreciate hearing a real-world experience. Did you qualify for Business Asset Disposal Relief (the old Entrepreneurs' Relief)? How was the overall process and timeline for you?
  - petercooper 2y ago
    I was going to say that I'm not sure the article is quite right. While the UK does have BADR for up to £1m, it applies to individuals, not businesses. So if I sell the shares in my company or liquidate my company, I can use it. But if the business does an asset sale, there's another step: the company selling the assets. And that company has to pay its own taxes first. If my British company sold its assets for £1m, it needs to pay 25% Corporation Tax on that. Then I could liquidate the company with its £750k remaining cash and pay 10% on that (for now, it's going up to 14% in April). This results in a total 32.5% tax, not 10%. Above £1m, it'll be even more as there's no more BADR (so roughly 40% tax total on the £1m+ chunk).
Tomte 2y ago
[flagged]
- oytis 2y ago
  > Sorry you don‘t get a free ride for being rich. You actually do, a lot. It's when you are not rich yet, but want to get rich is where German tax law will hate you.
- vincent_s 2y ago
  This isn't about "special treatment for the rich." When international companies buy German software businesses, that's foreign investment flowing into Germany - money that often gets reinvested locally in new startups and jobs. But our system actively discourages these transactions by treating business sales like regular income.
  - ajsnigrutin 2y ago
    > by treating business sales like regular income. But aren't they regular income? Why should one form of income be taxed at a different rate than some other? Tax rate too high? Sure, agree. Should all income be taxed at same levels? Yes to that too.
    - noduerme 2y ago
      Because, follow this logic: 1. You sit down at a blank screen and begin writing code. 2. You put your own money into launching your web app, then advertising it, then managing it every day and modifying things before you see a single penny in revenue. 3. You earn revenue, now you are already paying taxes on that revenue. 4. You sell the company which had zero value to begin with, you already paid tax on all the revenue you made. Any tax the government now puts on you is a tax for the initial work which you did. This disincentivizes anyone else from creating something new from scratch. This is why it shouldn't be treated as regular income. It was done in your free time. Everyone makes regular income, and pays taxes on that, but only a fraction of people work extra hours on passion. Taxing one's passion is essentially to kill anyone's desire to do it. If no one in your society creates anything from passion, and everyone works for a corporation, your society will not be competitive or dynamic. Therefore there's a societal, even Socialist interest in encouraging this type of behavior - or at least not punishing it. Same reason the last couple Kim Jongs have allowed the peasants in North Korea to grow small plots of private vegetables. Even they know that the creative instinct can only be suppressed so far before doing so creates a negative and destructive drag on even the most tightly controlled corporatist system.
noduerme 2y ago
I made a rather stupid mistake recently, as an American. I put $30k or so of my Roth IRA into BMW stock, since it was paying something close to 8% annual dividends. Once a year. I suppose I should have looked at this more closely. When the dividend was paid, the German government took about 30% of it right off the top in taxes... for a foreign investor. Still not a bad return, but I won't be buying any German stocks going forward. That's my Yelp review of investing in German businesses, if it helps anyone. I've had more or less the same experience dining in Seattle and accidentally tipping 20% on top of an included 20% tip that was already included but not specified in the bill.
- lifestyleguru 2y ago
  The EU stock exchanges withhold the most aggressive dividend tax disregarding bilateral agreement with country of your tax residence. If you think that German 26% is bad, the Swiss withhold 35%.
  - noduerme 2y ago
    I had assumed that if I were a German citizen, I'd probably pay the same amount in taxes on that dividend. Would I actually pay less?
- brtkdotse 2y ago
  FWIW it’s the same thing if you buy an American stock from a EU country, the dividends are taxed in the US. That why global index funds are probably the best way to invest for non-professionals
  - anal_reactor 2y ago
    I spent some time trying to learn about investing as an average person, and from what I understood, the entire knowledge could be summarized into "pick your favorite global index fund and hold"
- lima 2y ago
  You can get it reimbursed in some cases.
unmole 2y ago
> Structure larger exits through international holding companies (complex and expensive) Setting up an LLC in a low-regulation US state is simple and inexpensive.
- vincent_s 2y ago
  True, creating a Delaware LLC is simple, but that doesn't solve the tax problem. Management decisions from Germany mean German tax liability, regardless of where the company is registered. The only way to benefit from US tax rates would be physically moving there - just having a US company adds complexity without fixing anything.
  - unmole 2y ago
    > but that doesn't solve the tax problem It solves the tax problem that TFA is talking about i.e. it makes selling the SaaS a share deal instead of an asset deal. If you mean taxes in Germany are generally too high, that is an entirely separate discussion. Fun fact: Before Trump's tax cuts, the US corporate income tax rate was higher than in Germany.
- herbst 2y ago
  Being an US business makes things complicated in Europe. Especially banking is very eager to understand every single US associated transaction to your account.
  - unmole 2y ago
    I guess my comment was not clear without the context from TFA. I was specifically talking about the dual company structure i.e. the GmbH owns the LLC.
- sofixa 2y ago
  For a German business, setting up a holding company in Estonia would be much better. Still in the EU, no onerous American reporting requirements, everything is fully online and cheap, and taxes aren't super high (20% capital gains, up to 7% on dividends if I'm reading things correctly).
brtkdotse 2y ago
If you ever plan on selling your company you’d do well to have it wholly owned by a holding company (which in turn is owned by you).
TomK32 2y ago
The disclaimer is absolutely right, you should consult a qualified accountant because the rest of the article is wrong. First of all, it's not just about SaaS, but all GmbH. I don't see any reason why Germany should make exceptions for software companies as the author wishes for in the second-to-last paragraph. In regards to taxation of a sale I can only point to this first google result: https://www.rosepartner.de/besteuerung-verkauf-gmbh-kauf.html#c9888 https://www.rosepartner.de/besteuerung-verkauf-gmbh-kauf.htm... In cases where you personally owned the company, only 60% of the sale price will taxed. After this Teileinkünfteverfahren the 60% are indeed subject to your incomee tax. Even better as sales are consindered außergewöhne Einkünfte their taxation will follow the Fünftelregelungen where the sale profit is spread across five years. https://de.wikipedia.org/wiki/F%C3%BCnftelregelung https://de.wikipedia.org/wiki/F%C3%BCnftelregelung Realistically you'll end up paying taxes comparable to the 10~20% you can expect in the US. Edit: Sorry, missed that part about the seller GmbH still existing afterwards. But the next paragraph I linked goes into that as well: https://www.rosepartner.de/besteuerung-verkauf-gmbh-kauf.html#c9889 https://www.rosepartner.de/besteuerung-verkauf-gmbh-kauf.htm... Again, Teileinkünfteverfahren only 60% being taxed.
- dkyc 2y ago
  You should read the article in full, and/or learn the difference between a share and asset deal. Your link is about the former, the article about the latter.
  - Arnt 2y ago
    "You can have the shares for €4m or the assets for €5m". Both sides have agency in a negotiation. AIUI the .de rules are intended for a somewhat different situation, perhaps more common. The article describes a situation where almost all of the exit is profit. I'm happy for you if you're in that situation, but I'd guess that most people have costs. In that case .de lets you set costs from past years against the exit, and I've heard (hearsay alert!) that .de gives you more flexibility than most countries. All that said: if you have high income and no costs, German taxes are hard on you, it's true.
    - 2y ago
wdb 2y ago
In the UK it also is ~20% capital gains tax when you are just equity holder /employee instead of the actual business owner. While the owners with the same class stock can get 10% instead.
dependsontheq 2y ago
Please take note that his specific situation is not selling a company - which would qualify him for a reduced tax burden, but selling assets as a private person. I am unsure if this would be taxed differently in any other country.
- deleted 2y ago
  [deleted]
shubhamjain 2y ago
Is there actually any sane country to do SaaS business except the US? It's insane how easy it's to start an LLC in US, set up a bank account, do your taxes, without ever leaving your home. Hell, you can start it as a foreigner, opt for pass-through taxation, and pay taxes at your tax residence. I mean, I get higher taxes, I just don't understand why you want to make it so hard to start and operate a company.
- bluecalm 2y ago
  Poland is not terrible. You can do most bureaucracy online. Things that require you to visit a government office can be usually done in a day and there is not much waiting. Taxes are lower than Western Europe still (although pressure mounts to increase them). Courts are slow and incompetent but there is not that much litigation in EU anyway so it's often not a problem. When it comes to taxes you pay 19% corporate tax (9% for small companies that bring less than 2M EUR revenue a year) and then 19% capital gain tax. If that's a lot or not I will let you judge. There are other low tax options in EU if you are willing to travel.
- mytailorisrich 2y ago
  > It's insane how easy it's to start an LLC in US, set up a bank account, do your taxes, without ever leaving your home All of this is very simple, cheap, and quick in the UK, too. Fully agree that it is difficult to understand why so many countries make it so complex and costly to set up and run a company...
Scotrix 2y ago
Regulation, Taxes, inflexibility and small-thinking mindset let me leave Germany 10 years ago. I didn’t regret it a single day and everytime I’m going back home after visiting my parents in Germany I feel so much more free.
- vwkd 2y ago
  Where did you go?
jwr 2y ago
Incidentally, in a neighboring EU country (Poland) the tax system has a bizarre nod towards solo entrepreneurs running a SaaS: you can choose simplified revenue-based taxation and fall into the 8.5% bracket. 8.5% tax on revenue is really good. And this is very specific: it applies specifically to SaaS businesses, most revenue-based rates are higher. If you decide to sell your business, assets are taxed at 3%.
- lifestyleguru 2y ago
  And how many brilliant startups Poland bred? Poland is post-Communist state where you're at the mercy of a clerk, disfunctional courts, and bloated buggy IT systems.
  - Rinzler89 2y ago
    CD Projekt Red?
    - lifestyleguru 2y ago
      They are older than Google, launched in the first half of the 90s. They bootstrapped in fiscal and political realities incomparable with those described three comments above.
- bluecalm 2y ago
  Poland still has tax friendly system towards self employed people. Usual deal you get is 19% tax (recently raised to 23.5%) so you avoid double taxation as a company (where you first pay corporate tax and then income tax or capital gain tax as an individual). This makes sense as you don't enjoy privileges of limited liability. Somehow most other countries have it backwards though. The 8.5% thing you talk about is not really that great (it's revenue based so it's out once you have significant costs/partners you pay). It's done to simplify accounting. It only makes sense for small one person companies and it makes sense to incentivize people to start businesses - a wild concept in Germany (or most of other EU countries).
  - 2y ago
impossiblefork 2y ago
The Germans aren't wrong to see it as income from work though, because software is an example of crystallised work. This is why it has had unfavourable treatment in Europe. If you allow people to build software and sell it for capital gains rates, then if you're consistent you allow people to build anything and sell them for capital gains rates, which means that the 'real' tax on labour if you structure your work as leading to something which can be sold, is the capital gains rate. This is the problem for software in Europe: when you tax work, the one who build something through work retains a smaller fraction of it, so he has less money to invest in expanding the work.
- oytis 2y ago
  > software is an example of crystallised work. Yes, but if the software was written by salaried employees then this work has already been taxed. Say if you buy stocks, then sell them at higher price, one could argue that it's someone's work that made them cost more.
  - impossiblefork 2y ago
    Yes, which is why this only matters when the person in questions works in the company. In the Swedish system there's a rule whereby you accumulate something based on wages paid, and where you can thus avoid part of the sale counting towards income, provided that you've paid people so much in salaries that your work can be seen as a small part. What I'm sort of arguing for though, is to tax work less, so as to encourage it.
- mytailorisrich 2y ago
  The software aspect is quite irrelevant, and I believe that what is described is simply how GmbH companies work. If you own a company and sells it, what you are doing is selling your shares in the company. In many jurisdictions this is capital gain (or loss) for accounting and tax purposes since you are selling an asset. Ultimately I suppose the issue is the tax rate, not the "implementation details".
  - 2y ago
flanfly 2y ago
I'm German and had a startup in Germany (standard UG holding + GmbH). My one advice to anyone thinking of starting a company is: don't do it in Germany. Tax burden, insane bureaucracy and a conservative, tech adverse local market put you at a disadvantage against UK/US peers. >German founders are incentivized to move abroad before exits Don't do that. The tax office will treat that as a sale and will tax the current valuation at 20%.
supermatt 2y ago
Disclaimer: Not a tax professional, but have had a few businesses. Why are you calculating the US/UK/AUS as sale of a business, and the german one as sales of an asset owned by the business? One is profit of the business, and therefore subject to additional taxation before before distribution of funds, the other isn't. Thats why your figures are so different. Even in your examples where they would buy the whole company, if they then wanted to roll the assets into their own company in any way, the tax liability would still exist. So all that happens is the burden moves from you to them (no doubt they would do it as efficiently as possible, but there is still a liability). If you are selling the sole asset of your business at what you deem the same value as the whole business, then you clearly aren't accounting for the business liabilities. Account for that, and then you will be equal again.
jillesvangurp 2y ago
I have shares in a bootstrapped Gmbh via a holding company. Germany is a complex place to do business for non native speakers and it is generally financially risky to do business here. But if you structure it right, the flip side is that Germany has a lot of family owned smaller and larger businesses. The economy kind of runs on companies like that. So, it is definitely possible to be an entrepreneur in this country. I don't actually mind paying taxes (to a point); I think there's a fairness in wealthy people doing their part for supporting the society they are a part of that supports them. What I do mind is the incentive structure in Germany is geared towards discouraging people from being entrepreneurial, taking calculated risks, and generally trying to do new things. You take on a lot of personal risk when you found a company here. You are dealing from day one with greedy accountants, endless bureaucracy, a tax office that wants to squeeze you before you even have any revenue, etc. I'm bleeding cash via my holding company that's effectively running on my savings. This thing serves no purpose other than to insure me against potentially succeeding and not bankrupting myself in the process. Success here would be me generating a lot of tax income, employment, etc. I.e. things that most economies would regard as rather desirable things. The whole point of limited liability companies in other countries is to de-risk the process of creating new businesses for individuals so that people might do innovative things that benefit the economy. Germany does the opposite. It actively discourages people from doing that. And a Gmbh actually exposes you to a lot of liability. Bootstrapping means you take a lot of opportunity cost. For example by taking no or a very low salary. So the tax office creaming off profits before you even had a chance to pay yourself is not helpful. That's literally a situation we face now. We've been inching closer to break even this year. We went from the edge of bankruptcy to having a bank account that is able to sustain us well into next year in the space of a few months. This has been a long journey of about four years. We've had part of the German bureaucracy trying to support us and other parts of it doing their best to frustrate that. It's internally conflicted on this. The situation does not compare well to some other countries in Europe where this stuff is a lot easier, less risky, has way less friction, and takes way less time. Though in fairness, lots of EU countries have their own unique challenges for trying to do business. Some Germans get really defensive on this topic. But the fact is that Germany is bordering on a recession right now and it needs the next generation to step in the vacuum of the retiring baby boom generation and its imploding car industry. And that's before we start talking about its crumbling infrastructure, high energy prices, etc. Germany has economic issues. And the fix for many of those issues is for it to invest. And not in its dying industries but in new ones that can replace them and the infrastructure to support the economy. Which includes its legal framework. The trick is investing efficiently and effectively. And it's not currently able to do that. The #1 thing holding that back is the German rules, bureaucracy, counter productive rules and policy, etc. Easy to fix on paper. But that requires a change in attitude here. Apparently we have some elections coming up. Maybe some change is possible.
lima 2y ago
The headline is a bit sensationalized: the article focuses exclusively on small SaaS exits, which are usually done by selling assets, NOT the whole company. In Germany, these sales are treated like any other business income. If you're aiming for a normal exit - where you actually sell the company - things are much more favorable. You need to set up a holding company, which is usually a UG. This is easy and cheap: there is a simplified process for it ("Musterprotokoll"), and it requires no upfront capital like a GmbH. As of recently, it can be done online without having to visit a notary in person. The overhead is negligible. Once the holding sells its subsidiary ("share deal"), in most cases, the effective tax rate at the holding level is only ~5% due to § 8b KStG. This is not bad at all, since you'll want to reinvest most of the money anyways. There are gotchas in every jurisdiction, and you need to get professional advice by a local accountant. Germany is a fine place to run a business. If you already live here and don't want to move your family for tax reasons, you don't have to.
bluecalm 2y ago
As someone who has run a small business in an EU country for 10 years and is in a process of relocating to a low tax jurisdiction I wonder what EU's endgame on this one is. It's not like EU countries offer a potential founders anything of substance. You can just as well run your company from abroad. Most of your customers are going to be outside of EU (most likely), you will be buying services from outside of EU, hire/work with people from various countries. There is just no reason to be in Germany, France, Spain, Italy when you don't get anything but bureaucracy burden and high taxes. I paid my (admittedly quite low by EU standards) taxes honestly but right now savings on capital gain tax alone are enough for me to buy a beach house in a country with a better weather and still save some. My country wants to charge >1% of my wealth every year just to be there not even going into business taxes. The incentives are right there to leave. If I ever start another business it will be in my new tax friendly country. A lot of people are like me and will realize what terrible deal they are getting. Out of those who stay a smaller number is going to be successful because of all the tax/bureaucracy burden. Is the endgame to just give up on IT? Introduce tariffs on everything? Forbid foreign corporations to sell in EU? I just don't see how EU isn't going to be left in the dust in technology sector with their current policies.
- vwkd 2y ago
  Which country did you move from and which did you move to?
siilats 2y ago
in USA its qualified small business so tax is 0

57 points by vincent_s 2y ago

opeon 2y ago

Move to Belgium and get a whopping 0% capital gains tax

BoredPositron 2y ago

…if you plan to sell your company.

vincent_s 2y ago
That's exactly the problem - you often don't plan to sell from the start. Life changes. Kids are born. Health issues emerge. New opportunities arise. If you start successful in Germany without the right structure, you're locked in. At least if you plan to sell from day one, you have options (expensive ones). But most bootstrappers just build stuff users want. Then one day they get an interesting acquisition offer... ...and discover they've accidentally built a tax trap that'll cost them millions. No way out at that point.
- fabian2k 2y ago
  You're paying the same amount as if you had been employed and earned as much as you're selling your company assets for. If that costs you millions, you're still having millions left.

lifestyleguru 2y ago

This is a lot of words trying to explain that in Germany the system is designed that poor remain poor. First 40% of gross salary on contributions, then 30% of net salary on rent. Dynasties with their VW-Porsche-VW-Porsche quadruple currywurst burger-sandwich need the society to be poor.

TomK32 2y ago
At least we still have inheritance tax, though it's somewhat broken for those you mentioned who are far too good at avoiding that tax.
- lifestyleguru 2y ago
  Yeah the Lichtenstein based charities and trusts are very afraid of your inheritance tax.
  - noduerme 2y ago
    I love countries that only exist as tax loopholes. Every time one disappears, another one pops up. Supply and demand.
sofixa 2y ago
More like the system wasn't set up with the expectation that people will become rich by creating a SaaS and selling it, because it predates those concepts by at least a few decades. Porsche, Siemens, Krupp, Thyssen, Bosch were all startups back in the day, just in hardware
- Rinzler89 2y ago
  >Porsche, Siemens, Krupp, Thyssen, Bosch were all startups back in the day, just in hardware Yeah and they all got big and wealthy by exploiting laws, loopholes, state subsidies and even slave labor back in their days. Let's not pretend the German industrialists from 100 years ago who started those businesses were some patron saints and beacons of legality and morality. I was working for a big German scrap metal business a while back and during the Christmas party the CEO got so drunk he started bitching how much better it was in the past when he could engage in corruption and tax fraud to grow the business without being caught compared to today when this isn't possible anymore. None of those companies you listed could have gotten remotely as wealthy in the legal and regulatory environment of today.

earthnail 2y ago

There's a reasonable argument to be made whether you should be subject to capital gains in the first place. I sold my last company in the UK, and honestly the tax burden was so ridiculously low I still feel somewhat bad for it. It's crazy. There is of course a competition problem with the high taxation in Germany; if your expected returns are much lower than in other countries your risk just increased significantly. We already have a situation where on average it's much, much more lucrative to work at bigcorp instead. My main gripe with the GmbH though is not the amount of taxation. GmbHs are so needlessly complex it blows my mind (I'm currently running one), but that's on the side of regulations. I'd MUCH prefer if Germany worked on getting rid of silly shit like the notary requirement etc., and if taxation and bookkeeping were simplified, before we talk about lowering taxes.

vincent_s 2y ago
I'd love to hear more about your UK exit! Most of my knowledge about UK tax rates and processes is theoretical research, so I'd really appreciate hearing a real-world experience. Did you qualify for Business Asset Disposal Relief (the old Entrepreneurs' Relief)? How was the overall process and timeline for you?
- petercooper 2y ago
  I was going to say that I'm not sure the article is quite right. While the UK does have BADR for up to £1m, it applies to individuals, not businesses. So if I sell the shares in my company or liquidate my company, I can use it. But if the business does an asset sale, there's another step: the company selling the assets. And that company has to pay its own taxes first. If my British company sold its assets for £1m, it needs to pay 25% Corporation Tax on that. Then I could liquidate the company with its £750k remaining cash and pay 10% on that (for now, it's going up to 14% in April). This results in a total 32.5% tax, not 10%. Above £1m, it'll be even more as there's no more BADR (so roughly 40% tax total on the £1m+ chunk).

Tomte 2y ago

[flagged]

oytis 2y ago
> Sorry you don‘t get a free ride for being rich. You actually do, a lot. It's when you are not rich yet, but want to get rich is where German tax law will hate you.
vincent_s 2y ago
This isn't about "special treatment for the rich." When international companies buy German software businesses, that's foreign investment flowing into Germany - money that often gets reinvested locally in new startups and jobs. But our system actively discourages these transactions by treating business sales like regular income.
- ajsnigrutin 2y ago
  > by treating business sales like regular income. But aren't they regular income? Why should one form of income be taxed at a different rate than some other? Tax rate too high? Sure, agree. Should all income be taxed at same levels? Yes to that too.
  - noduerme 2y ago
    Because, follow this logic: 1. You sit down at a blank screen and begin writing code. 2. You put your own money into launching your web app, then advertising it, then managing it every day and modifying things before you see a single penny in revenue. 3. You earn revenue, now you are already paying taxes on that revenue. 4. You sell the company which had zero value to begin with, you already paid tax on all the revenue you made. Any tax the government now puts on you is a tax for the initial work which you did. This disincentivizes anyone else from creating something new from scratch. This is why it shouldn't be treated as regular income. It was done in your free time. Everyone makes regular income, and pays taxes on that, but only a fraction of people work extra hours on passion. Taxing one's passion is essentially to kill anyone's desire to do it. If no one in your society creates anything from passion, and everyone works for a corporation, your society will not be competitive or dynamic. Therefore there's a societal, even Socialist interest in encouraging this type of behavior - or at least not punishing it. Same reason the last couple Kim Jongs have allowed the peasants in North Korea to grow small plots of private vegetables. Even they know that the creative instinct can only be suppressed so far before doing so creates a negative and destructive drag on even the most tightly controlled corporatist system.

noduerme 2y ago

I made a rather stupid mistake recently, as an American. I put $30k or so of my Roth IRA into BMW stock, since it was paying something close to 8% annual dividends. Once a year. I suppose I should have looked at this more closely. When the dividend was paid, the German government took about 30% of it right off the top in taxes... for a foreign investor. Still not a bad return, but I won't be buying any German stocks going forward. That's my Yelp review of investing in German businesses, if it helps anyone. I've had more or less the same experience dining in Seattle and accidentally tipping 20% on top of an included 20% tip that was already included but not specified in the bill.

lifestyleguru 2y ago
The EU stock exchanges withhold the most aggressive dividend tax disregarding bilateral agreement with country of your tax residence. If you think that German 26% is bad, the Swiss withhold 35%.
- noduerme 2y ago
  I had assumed that if I were a German citizen, I'd probably pay the same amount in taxes on that dividend. Would I actually pay less?
brtkdotse 2y ago
FWIW it’s the same thing if you buy an American stock from a EU country, the dividends are taxed in the US. That why global index funds are probably the best way to invest for non-professionals
- anal_reactor 2y ago
  I spent some time trying to learn about investing as an average person, and from what I understood, the entire knowledge could be summarized into "pick your favorite global index fund and hold"
lima 2y ago
You can get it reimbursed in some cases.

unmole 2y ago

> Structure larger exits through international holding companies (complex and expensive) Setting up an LLC in a low-regulation US state is simple and inexpensive.

vincent_s 2y ago
True, creating a Delaware LLC is simple, but that doesn't solve the tax problem. Management decisions from Germany mean German tax liability, regardless of where the company is registered. The only way to benefit from US tax rates would be physically moving there - just having a US company adds complexity without fixing anything.
- unmole 2y ago
  > but that doesn't solve the tax problem It solves the tax problem that TFA is talking about i.e. it makes selling the SaaS a share deal instead of an asset deal. If you mean taxes in Germany are generally too high, that is an entirely separate discussion. Fun fact: Before Trump's tax cuts, the US corporate income tax rate was higher than in Germany.
herbst 2y ago
Being an US business makes things complicated in Europe. Especially banking is very eager to understand every single US associated transaction to your account.
- unmole 2y ago
  I guess my comment was not clear without the context from TFA. I was specifically talking about the dual company structure i.e. the GmbH owns the LLC.
sofixa 2y ago
For a German business, setting up a holding company in Estonia would be much better. Still in the EU, no onerous American reporting requirements, everything is fully online and cheap, and taxes aren't super high (20% capital gains, up to 7% on dividends if I'm reading things correctly).

brtkdotse 2y ago

If you ever plan on selling your company you’d do well to have it wholly owned by a holding company (which in turn is owned by you).

TomK32 2y ago

The disclaimer is absolutely right, you should consult a qualified accountant because the rest of the article is wrong. First of all, it's not just about SaaS, but all GmbH. I don't see any reason why Germany should make exceptions for software companies as the author wishes for in the second-to-last paragraph. In regards to taxation of a sale I can only point to this first google result: https://www.rosepartner.de/besteuerung-verkauf-gmbh-kauf.html#c9888 https://www.rosepartner.de/besteuerung-verkauf-gmbh-kauf.htm... In cases where you personally owned the company, only 60% of the sale price will taxed. After this Teileinkünfteverfahren the 60% are indeed subject to your incomee tax. Even better as sales are consindered außergewöhne Einkünfte their taxation will follow the Fünftelregelungen where the sale profit is spread across five years. https://de.wikipedia.org/wiki/F%C3%BCnftelregelung https://de.wikipedia.org/wiki/F%C3%BCnftelregelung Realistically you'll end up paying taxes comparable to the 10~20% you can expect in the US. Edit: Sorry, missed that part about the seller GmbH still existing afterwards. But the next paragraph I linked goes into that as well: https://www.rosepartner.de/besteuerung-verkauf-gmbh-kauf.html#c9889 https://www.rosepartner.de/besteuerung-verkauf-gmbh-kauf.htm... Again, Teileinkünfteverfahren only 60% being taxed.

dkyc 2y ago
You should read the article in full, and/or learn the difference between a share and asset deal. Your link is about the former, the article about the latter.
- Arnt 2y ago
  "You can have the shares for €4m or the assets for €5m". Both sides have agency in a negotiation. AIUI the .de rules are intended for a somewhat different situation, perhaps more common. The article describes a situation where almost all of the exit is profit. I'm happy for you if you're in that situation, but I'd guess that most people have costs. In that case .de lets you set costs from past years against the exit, and I've heard (hearsay alert!) that .de gives you more flexibility than most countries. All that said: if you have high income and no costs, German taxes are hard on you, it's true.
  - 2y ago

wdb 2y ago

In the UK it also is ~20% capital gains tax when you are just equity holder /employee instead of the actual business owner. While the owners with the same class stock can get 10% instead.

dependsontheq 2y ago

Please take note that his specific situation is not selling a company - which would qualify him for a reduced tax burden, but selling assets as a private person. I am unsure if this would be taxed differently in any other country.

deleted 2y ago
[deleted]

shubhamjain 2y ago

Is there actually any sane country to do SaaS business except the US? It's insane how easy it's to start an LLC in US, set up a bank account, do your taxes, without ever leaving your home. Hell, you can start it as a foreigner, opt for pass-through taxation, and pay taxes at your tax residence. I mean, I get higher taxes, I just don't understand why you want to make it so hard to start and operate a company.

bluecalm 2y ago
Poland is not terrible. You can do most bureaucracy online. Things that require you to visit a government office can be usually done in a day and there is not much waiting. Taxes are lower than Western Europe still (although pressure mounts to increase them). Courts are slow and incompetent but there is not that much litigation in EU anyway so it's often not a problem. When it comes to taxes you pay 19% corporate tax (9% for small companies that bring less than 2M EUR revenue a year) and then 19% capital gain tax. If that's a lot or not I will let you judge. There are other low tax options in EU if you are willing to travel.
mytailorisrich 2y ago
> It's insane how easy it's to start an LLC in US, set up a bank account, do your taxes, without ever leaving your home All of this is very simple, cheap, and quick in the UK, too. Fully agree that it is difficult to understand why so many countries make it so complex and costly to set up and run a company...

Scotrix 2y ago

Regulation, Taxes, inflexibility and small-thinking mindset let me leave Germany 10 years ago. I didn’t regret it a single day and everytime I’m going back home after visiting my parents in Germany I feel so much more free.

vwkd 2y ago
Where did you go?

jwr 2y ago

Incidentally, in a neighboring EU country (Poland) the tax system has a bizarre nod towards solo entrepreneurs running a SaaS: you can choose simplified revenue-based taxation and fall into the 8.5% bracket. 8.5% tax on revenue is really good. And this is very specific: it applies specifically to SaaS businesses, most revenue-based rates are higher. If you decide to sell your business, assets are taxed at 3%.

lifestyleguru 2y ago
And how many brilliant startups Poland bred? Poland is post-Communist state where you're at the mercy of a clerk, disfunctional courts, and bloated buggy IT systems.
- Rinzler89 2y ago
  CD Projekt Red?
  - lifestyleguru 2y ago
    They are older than Google, launched in the first half of the 90s. They bootstrapped in fiscal and political realities incomparable with those described three comments above.
bluecalm 2y ago
Poland still has tax friendly system towards self employed people. Usual deal you get is 19% tax (recently raised to 23.5%) so you avoid double taxation as a company (where you first pay corporate tax and then income tax or capital gain tax as an individual). This makes sense as you don't enjoy privileges of limited liability. Somehow most other countries have it backwards though. The 8.5% thing you talk about is not really that great (it's revenue based so it's out once you have significant costs/partners you pay). It's done to simplify accounting. It only makes sense for small one person companies and it makes sense to incentivize people to start businesses - a wild concept in Germany (or most of other EU countries).
- 2y ago

impossiblefork 2y ago

The Germans aren't wrong to see it as income from work though, because software is an example of crystallised work. This is why it has had unfavourable treatment in Europe. If you allow people to build software and sell it for capital gains rates, then if you're consistent you allow people to build anything and sell them for capital gains rates, which means that the 'real' tax on labour if you structure your work as leading to something which can be sold, is the capital gains rate. This is the problem for software in Europe: when you tax work, the one who build something through work retains a smaller fraction of it, so he has less money to invest in expanding the work.

oytis 2y ago
> software is an example of crystallised work. Yes, but if the software was written by salaried employees then this work has already been taxed. Say if you buy stocks, then sell them at higher price, one could argue that it's someone's work that made them cost more.
- impossiblefork 2y ago
  Yes, which is why this only matters when the person in questions works in the company. In the Swedish system there's a rule whereby you accumulate something based on wages paid, and where you can thus avoid part of the sale counting towards income, provided that you've paid people so much in salaries that your work can be seen as a small part. What I'm sort of arguing for though, is to tax work less, so as to encourage it.
mytailorisrich 2y ago
The software aspect is quite irrelevant, and I believe that what is described is simply how GmbH companies work. If you own a company and sells it, what you are doing is selling your shares in the company. In many jurisdictions this is capital gain (or loss) for accounting and tax purposes since you are selling an asset. Ultimately I suppose the issue is the tax rate, not the "implementation details".
- 2y ago

flanfly 2y ago

I'm German and had a startup in Germany (standard UG holding + GmbH). My one advice to anyone thinking of starting a company is: don't do it in Germany. Tax burden, insane bureaucracy and a conservative, tech adverse local market put you at a disadvantage against UK/US peers. >German founders are incentivized to move abroad before exits Don't do that. The tax office will treat that as a sale and will tax the current valuation at 20%.

supermatt 2y ago

Disclaimer: Not a tax professional, but have had a few businesses. Why are you calculating the US/UK/AUS as sale of a business, and the german one as sales of an asset owned by the business? One is profit of the business, and therefore subject to additional taxation before before distribution of funds, the other isn't. Thats why your figures are so different. Even in your examples where they would buy the whole company, if they then wanted to roll the assets into their own company in any way, the tax liability would still exist. So all that happens is the burden moves from you to them (no doubt they would do it as efficiently as possible, but there is still a liability). If you are selling the sole asset of your business at what you deem the same value as the whole business, then you clearly aren't accounting for the business liabilities. Account for that, and then you will be equal again.

jillesvangurp 2y ago

I have shares in a bootstrapped Gmbh via a holding company. Germany is a complex place to do business for non native speakers and it is generally financially risky to do business here. But if you structure it right, the flip side is that Germany has a lot of family owned smaller and larger businesses. The economy kind of runs on companies like that. So, it is definitely possible to be an entrepreneur in this country. I don't actually mind paying taxes (to a point); I think there's a fairness in wealthy people doing their part for supporting the society they are a part of that supports them. What I do mind is the incentive structure in Germany is geared towards discouraging people from being entrepreneurial, taking calculated risks, and generally trying to do new things. You take on a lot of personal risk when you found a company here. You are dealing from day one with greedy accountants, endless bureaucracy, a tax office that wants to squeeze you before you even have any revenue, etc. I'm bleeding cash via my holding company that's effectively running on my savings. This thing serves no purpose other than to insure me against potentially succeeding and not bankrupting myself in the process. Success here would be me generating a lot of tax income, employment, etc. I.e. things that most economies would regard as rather desirable things. The whole point of limited liability companies in other countries is to de-risk the process of creating new businesses for individuals so that people might do innovative things that benefit the economy. Germany does the opposite. It actively discourages people from doing that. And a Gmbh actually exposes you to a lot of liability. Bootstrapping means you take a lot of opportunity cost. For example by taking no or a very low salary. So the tax office creaming off profits before you even had a chance to pay yourself is not helpful. That's literally a situation we face now. We've been inching closer to break even this year. We went from the edge of bankruptcy to having a bank account that is able to sustain us well into next year in the space of a few months. This has been a long journey of about four years. We've had part of the German bureaucracy trying to support us and other parts of it doing their best to frustrate that. It's internally conflicted on this. The situation does not compare well to some other countries in Europe where this stuff is a lot easier, less risky, has way less friction, and takes way less time. Though in fairness, lots of EU countries have their own unique challenges for trying to do business. Some Germans get really defensive on this topic. But the fact is that Germany is bordering on a recession right now and it needs the next generation to step in the vacuum of the retiring baby boom generation and its imploding car industry. And that's before we start talking about its crumbling infrastructure, high energy prices, etc. Germany has economic issues. And the fix for many of those issues is for it to invest. And not in its dying industries but in new ones that can replace them and the infrastructure to support the economy. Which includes its legal framework. The trick is investing efficiently and effectively. And it's not currently able to do that. The #1 thing holding that back is the German rules, bureaucracy, counter productive rules and policy, etc. Easy to fix on paper. But that requires a change in attitude here. Apparently we have some elections coming up. Maybe some change is possible.

lima 2y ago

The headline is a bit sensationalized: the article focuses exclusively on small SaaS exits, which are usually done by selling assets, NOT the whole company. In Germany, these sales are treated like any other business income. If you're aiming for a normal exit - where you actually sell the company - things are much more favorable. You need to set up a holding company, which is usually a UG. This is easy and cheap: there is a simplified process for it ("Musterprotokoll"), and it requires no upfront capital like a GmbH. As of recently, it can be done online without having to visit a notary in person. The overhead is negligible. Once the holding sells its subsidiary ("share deal"), in most cases, the effective tax rate at the holding level is only ~5% due to § 8b KStG. This is not bad at all, since you'll want to reinvest most of the money anyways. There are gotchas in every jurisdiction, and you need to get professional advice by a local accountant. Germany is a fine place to run a business. If you already live here and don't want to move your family for tax reasons, you don't have to.

bluecalm 2y ago

As someone who has run a small business in an EU country for 10 years and is in a process of relocating to a low tax jurisdiction I wonder what EU's endgame on this one is. It's not like EU countries offer a potential founders anything of substance. You can just as well run your company from abroad. Most of your customers are going to be outside of EU (most likely), you will be buying services from outside of EU, hire/work with people from various countries. There is just no reason to be in Germany, France, Spain, Italy when you don't get anything but bureaucracy burden and high taxes. I paid my (admittedly quite low by EU standards) taxes honestly but right now savings on capital gain tax alone are enough for me to buy a beach house in a country with a better weather and still save some. My country wants to charge >1% of my wealth every year just to be there not even going into business taxes. The incentives are right there to leave. If I ever start another business it will be in my new tax friendly country. A lot of people are like me and will realize what terrible deal they are getting. Out of those who stay a smaller number is going to be successful because of all the tax/bureaucracy burden. Is the endgame to just give up on IT? Introduce tariffs on everything? Forbid foreign corporations to sell in EU? I just don't see how EU isn't going to be left in the dust in technology sector with their current policies.

vwkd 2y ago
Which country did you move from and which did you move to?

siilats 2y ago

in USA its qualified small business so tax is 0