Deducting GmbH formation costs for tax purposes

Overview: What formation costs are incurred when setting up a GmbH?

Various costs can arise when forming a GmbH. These primarily include notary fees, fees for registration in the commercial register, and, where applicable, legal and tax consulting fees. Costs for certain other formation-related measures may also be incurred.

Whether and to what extent the GmbH can bear these costs itself and deduct them as business expenses for tax purposes depends on the specific structure of the formation and the nature of the costs involved.

Overview of typical formation costs

The formation cost clause in the articles of association

In principle, formation costs must initially be borne by the founding shareholders. If the GmbH is to take on the formation expenses, this must be appropriately regulated in the articles of association. If a total or maximum amount for the formation expenses to be borne by the company is specified therein, these expenses can generally be deducted as business expenses for tax purposes.

Standard protocol: 300-euro limit

When forming a company using the statutory standard protocol, the assumption of costs is explicitly limited. The standard protocol stipulates that the company may cover formation costs up to a total amount of €300, up to a maximum of its share capital. Any costs exceeding this amount are to be borne by the shareholder.

In the case of individual articles of association, however, a specific provision regarding formation expenses can be included. The expenses to be borne by the company should be defined specifically or capped at a certain amount. There is no rigid statutory upper limit of 10% of the share capital. The decisive factor is, in particular, that the assumption of costs is reasonable.

What happens if there is no provision for cost assumption or if the limit is exceeded?

If the GmbH assumes formation costs that should actually be borne by the shareholders and for which there is no effective basis in the articles of association, this may be treated for tax purposes as a constructive dividend.

Therefore, it should be clarified at the time of incorporation which costs are to be assumed by the GmbH and to what extent.

Can founders deduct formation costs privately?

Whether formation costs can be taken into account for the shareholders' personal tax purposes depends on the specific circumstances. A blanket allocation of all formation costs to private income-related expenses or special expenses is therefore not advisable.

If the GmbH is properly incorporated and assumes the formation expenses based on a corresponding provision in the articles of association, the costs should be recorded and accounted for by the company.

If invoices are initially paid privately by a shareholder, it should be verified before reimbursement by the GmbH whether the company has effectively assumed the respective costs and how the payment is to be treated in terms of accounting and taxation.

Input tax deduction for formation costs

A distinction must also be made between the various phases of the GmbH incorporation process when it comes to input tax deduction.

An input tax deduction may be possible under certain conditions even during the planned incorporation stage. For example, the Federal Fiscal Court has ruled that a shareholder of a GmbH yet to be incorporated may be entitled to an input tax deduction if the receipt of services is related to an intended business activity of the future GmbH.

The decisive factors are therefore, among others, the specific service, the entrepreneurial status or formation phase, and the allocation of the service received. Invoicing and input tax deduction should therefore be reviewed for tax purposes on a case-by-case basis.

Accounting for formation costs

The specific accounting entry depends on the type of cost, the formation phase, and the chart of accounts used. Therefore, general account numbers should not be adopted as binding accounting recommendations without verification.

For accounting purposes, invoices, proof of payment, and the provision in the articles of association regarding cost assumption should be fully documented.

6 steps: Correctly recording formation costs

1. Check the cost assumption in the articles of association: Clarify which formation costs are to be borne by the GmbH and what total or maximum amount is intended.
2. Collect invoices: Keep all invoices and proof of payment related to the incorporation on file.
3. Consider the incorporation phase: Distinguish between the pre-incorporation entity, the GmbH in formation (GmbH i. G.), and the registered GmbH.
4. Check input tax: For services subject to VAT, have it checked whether and to what extent an input tax deduction is possible.
5. Record the entry: Categorize individual costs according to their type and tax treatment.
6. Check for reimbursement: If costs were initially paid by a shareholder, the reimbursement by the GmbH should be reviewed in advance from a tax and corporate law perspective.

Calculation example: Tax impact of GmbH incorporation costs

For a simplified example, a distinction can be made between net expenses, VAT, and income tax effects.

Assuming there are €2,500 net in tax-deductible incorporation expenses and, on top of that, €475 in VAT:

• Net expense: €2,500
• VAT: €475
• Gross amount: €2,975

Provided the requirements for input tax deduction are met, the €475 can be claimed as input tax. The actual income tax impact of the net expense, however, depends on the specific tax situation of the GmbH and, in particular, on the trade tax.

A flat-rate tax saving of 30.83% should therefore not be presented as a universally applicable figure.