Have you checked out the previous articles about German taxation regulations under our “Starting a business in Germany” series yet? If not, feel free to read more about German VAT and input tax, German trade tax and corporate tax.
This time, to continue the series, we will introduce you to German accounting and audit rules, which you should definitely need to know if you plan to start your business in Germany.
The German Commercial Code (Handelsgesetzbuch, HGB) requires all companies must prepare books and appropriate book that comply with German regulations. The book must include a comprehensive record of all transactions supported by relating documentations and vouchers and comply with the generally accepted record keeping standards. The book’s currency should be euros and the language of the books should be German. The tax authorities have the right to ask for a translation if the documents are not in German.
Besides the Commercial Code, companies should also take tax acts into consideration especially the provisions affecting the accounting records. It is required that all the books should be retained and prepared in Germany at all times and have orderly computerized accounting systems. Otherwise, companies will possibly have troubles with regard to taxation, if they neglect these requirements. Nevertheless, there is still an exception of recording and keeping electronic books in another country in case the tax office permission is granted.
Financial statements have to be prepared under the German Commercial Code, which contains regulations to be complied with by all businesses and supplementary regulations for incorporated companies, banks, and insurance companies.
Sole proprietors are exempted by the German Commercial Code from the requirements of keeping books and preparing financial statements if net income does not exceed 60,000 EUR and annual revenues are under 600,000 EUR on the balance sheet dates of two consecutive fiscal years.
For incorporated companies (AG, KGaA, GmbH, SE), the HGB contains reporting categories based on the entity’s size. A company is included in a particular size if it meets two out of the three criteria on two successive balance sheet dates.
|Employees||Annual turn-over||Balance sheet total|
|Micro-entity||≤ 10||≤ EUR 700,000||≤ EUR 350,000|
|Small||≤ 49||≤ EUR 12,000,000||≤ EUR 6,000,000|
|Medium||50 – 249||≤ EUR 40,000,000||≤ EUR 20,000,000|
|Large||More than 250||> EUR 50,000,000||> EUR 20,000,000|
For accounting periods ending after 30 December 2012, the “micro-entities” may use simplified rules such as simplified balance sheet and income statement classifications. Moreover, they are not required to publish their annual financial statements.
Small companies are not required to prepare a management report and must submit only the balance sheet with the notes to the financial statement. Medium-sized companies need only to prepare a simplified income statement and simplified notes to the financial statement.
Large companies which also include publicly traded companies must prepare a balance sheet, an income statement, notes to the financial statements (which contains the information required by law and the information laid down in the articles of association, their purpose must explain single items in the balance sheet and in the profit and loss statement) and a management report (describing the development of the commercial activities of the company, its position and the risks posed by future developments).
Upon the conclusion of any financial year, sole proprietorships and business partnerships as well as joint-stock companies are required to prepare an annual statement of accounts consisting of a balance sheet and a profit and loss statement (Gewinn- und Verlustrechnung). In addition, joint-stock companies have to prepare notes and a management report.
In general, the following documents have to be retained:
- records from the companies’ register
- articles of association/statutes
- all shareholders’ resolutions
- list of partners and managers
- the prescribed accounting records
The accounting records are:
- books and records
- opening balance sheet
- financial statements
- management report
- the operating procedures necessary to understand the accounting records and other administrative documents
- commercial and business correspondence received
- copies of commercial or business correspondence sent
As a rule, these records must be retained for ten years. Documents required for taxation purposes may have to be stored longer under certain circumstances.
Under German Commercial Code, and inventory must be made at the end of every financial year. Certain simplification procedures are permissible provided they comply with the GAAP.
Accounting principles are defined as guidelines and rules that businesses have to comply with when reporting their financial data. One of the most common accounting principles is the Generally Accepted Accounting Principles known as GAAP. Bookkeeping needs to follow GAAP as stated in the German Commercial Code. It has to be prepared in such a manner that a competent outsider will be able to get an overview of the business activities and ascertain the financial position of the business within a reasonable period of time.
All financial statements must be complete and accurate and be compiled within three months of the company’s year-end. This period can be extended to six months for small companies.
Additionally, financial statements must be in compliance with general accounting principles such as consistency and prudence, going-concern (means the company will continue its business operations into the foreseeable future) and accrual accounting.
Individual enterprises and business partnerships do not need to have their financial statements audited by an auditor. However, when two of the following size criteria are exceeded at three successive closing dates, the requirements on auditing the annual financial statements and on disclosure have to be applied:
- balance sheet total > 65 Mio. EUR
- annual turn-over > 130 Mio. EUR
- annual average of employees > 5,000
Small companies are not subject to an audit requirement, and only need to submit a condensed balance sheet and notes (Anhang) electronically, but without a profit and loss account. medium-sized and large companies must have their financial statements audited. However, the medium-sized companies are exempt from various disclosures and must meet easier publication requirements. Large companies are subject to the full publication requirement, which means depositing a full annual report with the trade register and as an electronic publication with the Federal Gazette (Bundesanzeiger). Generally, these companies are obligated to publish the documents within 12 months of the balance sheet date. For companies that are listed, or issue bonds to the public, they have to publish the required documents within 4 months of the year-end.
You don’t need to go through the tax jungle alone!
There is no doubt that dealing with accounting and tax issues is a pain for any businesses. Therefore, in addition to constantly updating and following new tax rules and policies, companies should have trusted tax experts or tax consultants by their side.
Thanks to our international, well-qualified and customer-centered tax team, which specializes in corporate and individual tax services and personal income tax services, you don’t have to struggle with these problems alone anymore. At Ecovis Beijing, we offer various German tax-related services such as financial bookkeeping service, tax returns, VAT compliance, audit, tax consulting, tax due diligence, tax advisory for freelancers, families etc.
Richard Hoffmann is a partner at Ecovis Beijing China. Richard obtained an honors degree in law and worked in Germany, the United States, and China for various prestigious law firms prior to joining Ecovis. In addition to being a member of the board of Ecovis International, he is Supervisor for the China business of several respected German companies and shares his extensive knowledge to students by teaching commercial law in China at SRH Hochschule Heidelberg. He has published more than fifty articles in international magazines, frequently speaks at high profile events in China and abroad and is often invited as a legal expert by international TV stations. Contact: firstname.lastname@example.org
Ecovis Beijing is the trusted tax and legal advisor to several embassies and official institutions in China. It specializes in mid-sized international companies and is focused on tax & legal advisory, accounting and auditing. If you’re interested in finding out more about tax and legal, don’t hesitate to sign up for our Newsletter, give us a call +86 10-65616609 or contact us directly via email@example.com.