Small and medium-sized enterprises (SMEs) in Germany benefit from more favourable tax rates if they opt for the legal form of a partnership. This is the case regardless of whether a limited company distributes or retains its profits completely or partially.

As calculations carried out by the Mannheim Centre for European Economic Research (ZEW) show, a partnership in the manufacturing industry pays 3.27 per cent less in tax than an equivalent company registered in the legal form of a limited company. The lower tax burden to which partnerships are subject is a result of trade tax imputation, a system which was newly implemented in Germany 2001. Only firms in the form of partnerships and sole proprietors are permitted to reduce their tax burden on the basis of the tax imputation system. This in fact overcompensates for the tax disadvantage faced by partnerships in terms of income tax, church tax and the solidarity surcharge.

The ZEW study therefore contradicts the widespread perception of partnerships, the legal form most commonly chosen by SMEs, as being disadvantaged in terms of taxation. This flawed belief is the result of over-simplified comparison of the corporate and trade tax burden applicable to limited companies (40 per cent), and the progressive income tax rates up to 48.5 per cent plus trade tax, to which partnerships are subject. When choosing a legal form, all relevant factors (tax types and forms, tax bases, rates and systems) must be taken into account in order to assess the actual variation in tax burden. In addition, multi-period calculations must be carried out. The ZEW study takes such an approach. The computer simulation software "European Tax Analyser" was used to calculate the tax burden faced by enterprises of both legal forms over a ten-year period on the basis of data indicating the success and balance of a medium-sized business in the manufacturing industry. To enable comparison of partnerships and limited companies which withhold profits, it was assumed that the limited model company distributed retained earnings in the final year of the ten year period.

The calculations also show that the differences in terms of the tax burden faced by partnerships and limited companies are strongly influenced by the individual company's profit levels and financing structure, as well as by the type of contracts held between the company and its shareholders. The lower the income tax rate to which shareholders are subject, the greater the relative advantage enjoyed by partnerships in comparison to limited companies. In contrast, however, policy for the appropriation of earnings is not as significant as is widely claimed in the literature.


Rico Hermann, E-mail:

Dr. Thorsten Stetter, E-mail:





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