Managing a GmbH? 6 legal and tax considerations

1. Appointment of director

If you establish a GmbH in Germany and appoint a board of directors, German law applies. This means that, unlike in the Netherlands, each director must be a natural person. This person does not need to be a German citizen or registered in Germany.

The management board (Geschäftsführung) of a GmbH is appointed (and dismissed) by the shareholder(s) and can consist of one or more members. It is also possible to appoint one or more shareholders to the management board (Gesellschaftergeschäftsführer).

Also read: Setting up a GmbH in 5 steps

2. Dutch driver

Just like in the Netherlands, the board of a GmbH is responsible for the day-to-day management of the company. As mentioned, as a director, you may reside in the Netherlands and work from there. However, you must ensure and be able to demonstrate that you have sufficient oversight of the GmbH’s activities and business operations.

3. Power of representation

In Germany, the authority to represent a company is regulated in many respects similarly to that in the Netherlands. In Germany, a director’s authority to represent a company externally cannot be limited. However, if multiple directors are appointed, you can stipulate at the time of appointment that they are only authorized to represent jointly.

It is common practice to draft supplementary management instructions (Geschäftsordnung) stipulating that the board requires the approval of the shareholders’ meeting (Gesellschafterversammlung) for certain decisions or legal acts and/or that the authority to represent the company is limited to a certain amount of money. If the director complies or fails to comply with these requirements, there are no external consequences, but the director may be liable for damages to the GmbH.

4. Annual reporting

The management of a GmbH must prepare annual financial statements within three months of the end of the financial year. These statements consist of a balance sheet, a profit and loss account, an appendix, and an annual report. Small companies have several exemptions. For example, they have an additional three months to prepare their annual financial statements. They are also not required to prepare an annual report and do not need to have the annual financial statements audited by an auditor.

5. Liability

Internal liability
The general meeting of shareholders may issue instructions to the director. If these instructions conflict with the law or the normal business operations of the company, the director may refuse them.

If the director fails to comply with (reasonable) instructions, or if they act culpably, intentionally, or recklessly, they may be held internally liable (to the GmbH).

External liability
As with Dutch private limited companies (BVs), in Germany, in principle, only the GmbH is liable to third parties. And, as in the Netherlands, a director’s personal liability can only arise in exceptional circumstances, if they can be seriously blamed personally.

Slightly different rules apply to companies in financial difficulty than in the Netherlands. In Germany, a director must file for bankruptcy of the GmbH within three weeks if:

• There is negative equity; or
• The GmbH can no longer meet its payment obligations and this cannot be expected within a reasonable period of time.

If the director fails to do so (in time), they are liable for fulfilling obligations they entered into at a time when they should have filed for bankruptcy. Criminal prosecution is also possible in that case.

6. Duty of care

In Germany, a so-called duty of loyalty (Treuepflicht) applies. This obligation stipulates that the management may not act to the detriment of the GmbH and that directors may not act in their own self-interest. They must always put the interests of the company first.

The tax treatment of a GmbH’s managing director depends heavily on their position, how their remuneration is structured, and any cross-border activities. Especially for a managing shareholder (Gesellschaftergeschäftsführer), a clear separation between business and personal interests is essential to avoid tax risks.

1. Remuneration of a director

In principle, a director’s remuneration is considered a deductible business expense for the GmbH and thus reduces the company’s taxable profit.

For the director, remuneration is subject to payroll tax and income tax, generally in the country where the GmbH has its registered office. In cross-border corporate structures, it is often wise to have part of the remuneration paid directly by the German GmbH to limit tax risks. If the entire remuneration is paid exclusively through management or service companies abroad, the German Tax Administration (Finanzverwaltung) may decide to subsequently subject a lump-sum portion of the remuneration to payroll tax in Germany if it believes that part of the work is actually performed for the German GmbH.

In addition, it can be tax-efficient to split remuneration (known as wage splitting) – especially when working in multiple countries, such as Germany and the Netherlands. This involves allocating income to the countries where the work is actually performed. This can lead to a lower total tax burden and reduce the risk of double taxation. However, the allocation must be properly substantiated and in accordance with the German-Dutch tax treaty (DBA).

For managing shareholders, the German tax authorities also check whether the remuneration is determined at arm’s length. Only in these cases can there be a disguised profit distribution (verdeckte Gewinnausschüttung, vGA) – for example, if the remuneration is excessively high or not based on a clear contractual basis. In this case, the GmbH is not permitted to deduct the expenses, and the managing shareholder must additionally declare the amount as capital income.

2. Company car and cross-border use

If a driver also uses a company car privately, this constitutes a taxable benefit. Valuation is based on the 1% ruling or a mileage log (Fahrtenbuch). For cross-border activities—for example, if the driver lives or works in multiple countries—it must be determined which country has the right to levy tax. This can have consequences for both the GmbH’s corporate income tax and the driver’s income tax.

3. Settlement of management and holding services

Within international corporate structures, the passing-on of management and holding services is a sensitive issue. Services between affiliated companies must be priced at arm’s length ( transfer pricing ) and properly documented. Failure to do so may result in additional assessments and adjustments, especially if the fees are not transparent or not set in line with market conditions.

4. Documentation and evidence obligations

For tax recognition of payments to directors, clear agreements, traceable payment flows, and—in the case of cross-border activities—timesheets or work reports are necessary. These documents are important not only for transparency but also to prevent accusations of disguised profit distribution or a non-arm’s-length transaction.

5. Social security aspects when working abroad

If the driver works abroad, social security issues also arise. Depending on the country of residence and the country of employment, different systems may apply. Within the EU, the country-of-employment principle generally applies, unless the posting involves a valid A1 certificate. Social security and taxation are closely linked; ambiguities can quickly lead to additional assessments or double contributions.

6. Tax optimization with an eye for borders

There are certainly opportunities for tax optimization – for example, through transparent contractual structures, international remuneration models, or holding structures. However, caution is advised: if such measures cross the line into aggressive tax planning, tax or even criminal consequences may arise. Especially in the case of shareholder-directors, the tax authorities critically assess whether there is a disguised profit distribution or personal gain at the expense of the GmbH.

Do you have questions about the legal and tax considerations that apply to directors? Or about director liability in Germany? The specialists at Heisterborg International are happy to advise you, in your own language.

We can also assist you with establishing a GmbH, including the practical implementation. For example, if you don’t have a German address—a requirement for establishing a GmbH, among other things—you can establish the company with us through a registered office agreement. We can also handle your bookkeeping, work with you to hire your first employees, draft employment contracts, and handle your payroll administration.