Cheap trap “English Limited”?

The Limited as a GmbH alternative?


At first glance, this is correct, because it can be structured as an operating company or a rescue company. Two English pounds sterling will suffice as equity capital “if it is an English limited company” because there are also attractive alternatives in other countries when you think about company taxation. Above all, the English do not as a rule recognise any “liability to pass through” in the event of imminent insolvency (“for this, the intention, i.e. the personal will to disadvantage the creditors, would have to be proven”) – in the case of the German GmbH, it is more like the Middle Ages in court: it is not the intention that has to be proven, but “circumstantial evidence” is sufficient to prove an intention – many a convicted entrepreneur then prefers to remain silent instead of attacking this legal practice.
In practice, there is a risk that the German civil courts and, above all, the tax office will not recognise the English limited company as a corporation. The consequences are brutal when they occur ? the educational effect comes too late. After the foundation the “cheap founder” would like to register his company in the commercial register: But some legal officer at court knows the game and claims that the Limited is a “letter box company”. If the proof to the contrary is not successful, a branch office will never be registered in Germany.

In short:

Who operates with such a Limited, is treated by civil courts and also by the tax office like a sole proprietor ? Full liability, no limitation of liability. The money for the foundation might as well have been thrown out the window.


Administrative burden issue:

A Limited Company needs a “Director” and a “Secretary”, an office address in England (“Registered Office”):

Only the “Memorandum” (articles of association) and the “Articles of Association” (partnership agreement of the company) are not sufficient. An annual return must be filed with the tax office (also in England) as well as an “Annual Return” and, depending on the turnover, a more or less detailed balance sheet must be sent to the commercial register. The administrative costs are no less than for a GmbH: if the Limited is not a letterbox company, the usual costs for tax advice for GmbHs are also incurred. It should also be noted from a tax point of view that a letterbox company in England with management in Germany is fully liable to tax in Germany just like a GmbH. Not infrequently, the uninvited visit of the tax investigation is pre-programmed here, which first takes away all the papers of an entrepreneur’s fancy foreign company as evidence: many owners of American “Incorporated” (Inc.), for example from Texas, experience a similar fate. When the tax inspector shows up, things get uncomfortable ? also because of the often hefty back tax claims, which in most cases can go back ten years or more.

It’s particularly expensive fun, because on top of the taxes, there’s a penalty interest rate of one percent per month and a fine. Whoever fails to effectively set up a branch office for his limited in Germany risks his entire private assets, and can save himself the entire effort from the very beginning. The tax advantages under British tax law only come into play if a corresponding part of the business is actually not conducted “from Germany”. Contact with business in Germany is harmless, up to and including the possibility of profit shifting to England: the prerequisite is the correct documentation of so-called “transfer prices” for tax purposes.

This opens up opportunities for tax optimisation which, until a few years ago, were only available to larger corporations. Some trade offices require, for example, a certificate from which it can be seen that the limited company is registered for corporation tax or income tax and value added tax. It can also happen that the authorities even want to know whether the limited company has a managing director or authorised representative who is permanently resident in England.


Bottom line:

Before founding a company, it is advisable to seek qualified advice and representation. Repairing a failed foundation can quickly cost several thousand euros ? an unnecessary expense. Experience shows that the running administrative costs of a Ltd. are not lower than those of a German GmbH. Whether the expense is worthwhile requires an examination in each individual case, for example of the question of which risks could just as well be covered by insurance.


by Dr. Johannes Fiala, Attorney at Law


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About the author

Dr. Johannes Fiala Dr. Johannes Fiala

Dr. Johannes Fiala has been working for more than 25 years as a lawyer and attorney with his own law firm in Munich. He is intensively involved in real estate, financial law, tax and insurance law. The numerous stages of his professional career enable him to provide his clients with comprehensive advice and to act as a lawyer in the event of disputes.
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