The GmbH & Co KG is transparent and not a legal entity when it comes to income tax. This means that it is not the company that is paying the income taxes, but the shareholder / partner. However, the company has to pay the trade tax of about 14%. This trade tax can be deducted by the shareholder / partner nearly completely. If you take the highest tax rate of a German private person (usually 42%) you end up by about 44%.
If the shareholder / partner receives a salary from his company this cannot be deducted for tax reasons.
At the end of the day, the average tax rate of the GmbH and the GmbH & Co KG are quite similar in general but differ a lot between the shareholders. This makes it even more important to check your specific personal tax situation before setting up the company.
There are two very specific and complicated tax issues regarding only partnerships such as the GmbH & Co KG:
1. GmbH & Co KG – Offset of the losses
In a regular partnership losses of the partnership can be offsetted with other German income (income from another job or real estate income). In the case of a GmbH & Co KG this netting of losses is limited if the liabilty of the shareholder is limited. It is a very complicated rule to calculate the limit of the offsetting. Let me try to explain it in simple words. It is the nominal capital (which usually is not very high) plus the profits of former years minus the losses. Not used losses may be carried forward. So if for example a partner paid in EUR 1.000 at the start and the company makes a loss in the first year of EUR 5.000 the partner can only offset EUR 1.000 with his other income. The other EUR 4.000 will be carried forward though. So if the company makes a profit of EUR 6.000 in the following year the partner would only have taxable income of EUR 2.000.
2. GmbH & Co KG – Contracts with partners
If a GmbH & Co KG has contracts with its shareholders the consequences are neutralized for tax purposes. So if for example one partner receives a salary these expenses will be added to the income of the GmbH & Co KG. As a result the trade tax income will be the same with or without the salary.
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