German Tax Aspects of Choosing a Business Location When Setting Up a Company 

The choice of location for a newly formed company has immediate tax consequences. In particular, trade tax (Gewerbesteuer) and, in several respects, value added tax (Umsatzsteuer) depend on the place where the business is actually carried on. In addition, corporate law matters and regulatory requirements must be settled at the formation stage. The following sections set out the key aspects and provide practical guidance.

1. Trade Tax: The Municipal Multiplier as a Location Factor

Trade tax is a municipal tax. Which municipality is entitled to levy it follows from section 4 (1) sentence 1 of the Trade Tax Act (GewStG): the right to levy the tax belongs to the municipality in which the business maintains a permanent establishment (Betriebsstätte). What matters is not the registered seat under the articles of association, but the place where business is actually conducted. The concept of a permanent establishment within the meaning of section 12 of the Fiscal Code (AO) covers, in particular, the place of management, branches, offices, manufacturing premises and workshops, warehouses, and purchasing and sales outlets.

The decisive location-dependent factor is the municipal multiplier (Hebesatz). Under section 16 (1) GewStG, trade tax is calculated by applying the multiplier set by the municipality to the base amount of tax (Steuermessbetrag). The statutory minimum multiplier is 200 percent. In practice, however, multipliers are considerably higher: in 2021 the average multiplier across all German municipalities was 403 percent, and 435 percent in the 701 municipalities with 20,000 inhabitants or more. This produces substantial differences in the tax burden: at a multiplier of 200 percent, the effective trade tax burden amounts to 7 percent of trade income (200 % × 3.5 %); at 400 percent it is around 14 percent; and at 600 percent it can reach 21 percent. From a multiplier of 429 percent onwards, trade tax becomes the dominant tax and exceeds corporate income tax (15 percent).

Smaller municipalities on the outskirts of major cities — the so-called commuter belt — frequently set lower multipliers in order to attract businesses. For founders, this can be a significant incentive when selecting a location on tax grounds. The minimum multiplier of 200 percent was, however, introduced precisely in order to prevent domestic tax havens and relocations driven solely by tax considerations.

Where a business maintains permanent establishments in several municipalities, the base amount of tax is apportioned among them pursuant to section 4 (1) sentence 2 GewStG, and each municipality taxes the share attributable to it at its own multiplier.

2. Value Added Tax: Place of Management in Germany as the Decisive Criterion

For VAT purposes, the question whether there is a domestic establishment is of central importance. Under section 2 (1) of the VAT Act (UStG), an entrepreneur is any person who independently carries on a commercial or professional activity. Pursuant to section 1 (1) UStG, supplies of goods and other services rendered by an entrepreneur for consideration within Germany are subject to VAT. “Within Germany” covers the territory of the Federal Republic of Germany. It is irrelevant for taxation whether the entrepreneur is a German national or is resident in Germany; what matters is whether the transaction is located in Germany under the place-of-supply rules.

In determining whether an entrepreneur is established (ansässig) in Germany, section 14 (2) sentence 3 UStG takes as decisive whether the entrepreneur has in the relevant territory a seat, a place of management, or a permanent establishment involved in rendering the supply, or — in the absence of a seat — a domicile or habitual place of abode. The place of management, i.e. the place where the essential decisions on the overall running of the business are taken, is the primary criterion. Premises that merely provide office services and ensure receipt of mail do not constitute a fixed place of business. The place of management therefore determines whether the business is subject to German VAT and whether it must register for VAT in Germany and account for the tax.

3. Practical Guidance on Choosing a Location

The following points should be considered when selecting a location:

• Before setting up the business, obtain the multipliers applied by the municipalities under consideration. Multipliers are set annually by the municipalities and are subject to change.
• A resolution increasing the multiplier must be adopted by 30 June of the calendar year in order to take effect from the beginning of that year (section 16 GewStG). Current figures should therefore be obtained directly from the municipality or from the statistics published by the chambers of industry and commerce (IHK).
• Make sure that the chosen location genuinely gives rise to a permanent establishment within the meaning of section 12 AO. Merely registering the business with a municipality without actually conducting any activity on site — a letterbox company — establishes neither the tax liability nor the benefit of the favourable multiplier. The place of management may, however, constitute a permanent establishment where the essential management decisions are in fact taken on site. This is particularly relevant where the managing shareholder resides in a municipality with a low multiplier.
• Note that a municipality has no power to grant tax concessions as a matter of goodwill in order to attract businesses to the region. Informal assurances of tax advantages should not be relied upon; they have no legal effect.
• For VAT purposes, ensure that the place of management — the administrative centre — is unambiguously located in Germany if the business is to fall within the German VAT regime. This is particularly important where shares are held by foreign owners or foreign parties are involved. Management must be exercised through business decisions actually taken on site; a postal address alone is not sufficient.
• Involve a tax adviser in the choice of location, who can assess the tax consequences and verify the municipality’s figures. The local chamber of industry and commerce (IHK) or chamber of crafts often provides advisory services and information on multipliers as well. Where several places of business in different municipalities are contemplated, the allocation of activities should be planned in advance: the base amount of tax is apportioned in proportion to the wages and salaries paid (section 29 (1) no. 1 GewStG) and can be optimised by distributing staff across locations.

4. Legal Support on Formation

In addition to tax advice, legal support should be obtained when setting up a business. Counsel will assist not only in selecting the appropriate legal form — for example a GmbH, a UG (haftungsbeschränkt), a GbR or a sole proprietorship — but also in structuring the company under corporate law.

This includes, in particular, drafting or reviewing formation agreements, articles of association and shareholders’ agreements, which govern on an individual basis such matters as profit distribution, management authority, succession and exit provisions, and non-compete clauses. Clear contractual provisions are essential above all where there are several shareholders, in order to avoid future disputes.

In connection with the choice of location, counsel can also examine whether the chosen location meets the requirements for a permanent establishment within the meaning of section 12 AO, and ensure that the registered seat under corporate law corresponds to the actual place of management. This is likewise relevant for VAT purposes, since a place of management within Germany is the decisive criterion for German VAT liability. Counsel can further assist in reviewing and complying with trade, commercial and tax obligations, such as registration in the commercial register pursuant to section 8 of the Limited Liability Companies Act (GmbHG), business registration pursuant to section 14 of the Trade Regulation Act (GewO), and applying to the competent tax office for a tax number and a VAT identification number (USt-IdNr.).

Where the company’s seat is located abroad, or where cross-border elements are present — foreign shareholders, permanent establishments in other EU member states, supplies abroad — legal advice is indispensable in order to resolve the complex interplay between German tax law, EU law and, where applicable, double taxation treaties. In such cases, cooperation between counsel and tax adviser is also advisable in order to ensure comprehensive advice.

In summary, a coordinated approach is recommended when forming a company: the tax adviser quantifies the tax burden at the specific location and optimises the multiplier and the consequences of income attribution, while counsel ensures compliance with corporate law and regulatory requirements. This ensures both that the tax advantages of the chosen location are used in accordance with the law and that the corporate law foundations for successfully running the company are in place from the outset.