Association Limited by Shares

Executive Summary

German Name: KGaA (Kommanditgesellschaft auf Aktien)

General Information: has to date been of comparatively low importance vis-à-vis other corporate structures in practice

Incorporation: Establishment of articles of association, entry into the commercial register

Minimum Capital: 50,000 €

Board Structure: managed by one or several partners with unlimited liability; transactions of an extraordinary volume require prior approval by all unlimited partners

General Information

The association limited by shares is a hybrid corporate structure combining elements of the “Kommanditgesellschaft” (KG) and the “Aktiengesellschaft” (AG).

It is a corporation under private law and an incorporated joint stock company with a legal capacity of its own, in which at least one shareholder is liable to creditors without limitations (unlimited partner, “Komplementär”). The unlimited partner may in turn be a corporation, i.e. a “Gesellschaft mit beschränkter Haftung” (GmbH).

The other shareholders (“Kommanditaktionäre”) hold interest in the company’s capital without being liable at all for its obligations.

The association limited by shares is regulated in secs. 278–290 of the German Stock Corporation Code (“Aktiengesetz” (AktG)). However, the unlimited partners’ legal relationship, their internal relation to the other shareholders and the rights of management and representation in relation to third parties are governed by the rules relating to the “Kommanditgesellschaft” as laid down in the Commercial Code (“Handelsgesetzbuch” (HGB)).

In practice, the association limited by shares has to date been of comparatively low importance vis-à-vis other corporate structures, even though it offers a rather high level of creative flexibility due to its hybrid character and despite its providing the possibility of raising capital on the capital market.

Incorporation

The association limited by shares is set up by establishment of the articles of incorporation and entry into the commercial register.

The articles of incorporation must be established by at least five persons, under mandatory participation of all personally liable shareholders and those individuals who sign on shares against contributions. The articles of incorporation must be recorded by a Notary Public. Following the incorporation, the association limited by shares can be operated as a single-member company in such a way that the only unlimited partner, in one person, also becomes the sole “Kommanditaktionär”.

The articles of incorporation must contain the corporate name, the domicile and purpose of the company, the amount of stock capital, its segmentation into shares with and without a par value, information about whether shares are issued to proprietor or name, the number of directors, provisions about the form of publication of the company, and the full names and places of residence of each personally liable shareholder.

The application for entry into the commercial register (“Handelsregister”) must state the personally liable shareholders instead of the members of the board of directors. In the commercial register, only the unlimited partners are recorded, not the “Kommanditaktionäre”.

Beyond the above, all rules about the stock corporation’s (“AG”) incorporation apply.

Capitalisation and Financing

The capital stock of an association limited by shares must be at least EUR 50,000. It is not necessary for the entire amount to have been paid up before the application for registration is filed. However, it is required that a quarter of the minimum issued amount and, if shares are issued for a higher amount, also the respective excess amount are paid up, and that the amounts paid up are at the free and final disposal of the board of directors. Moreover, contributions in kind are possible.

Shareholders not making their capital contribution may be declared devoid of their shares.

Board Structure

The company’s business is managed by one or several partners with unlimited liability, just as the “Kommanditgesellschaft” (KG) or the “Offene Handelsgesellschaft” (oHG). To the extent that the articles of incorporation do not provide otherwise, each partner with unlimited liability is empowered to exclusively represent the company in all regular business operations. By law, transactions of an extraordinary volume require prior approval by all unlimited partners, under certain circumstances, also the approval of the shareholders’ assembly.

Any restriction of the power of representation is invalid vis-à-vis third parties.

In its relationship to the unlimited partners, the association limited by shares is represented by the board of directors.

The general meeting of the “Kommanditaktionäre” generally follows the rules applying to the “AG”. An unlimited partner has no vote in the general meeting as long as he does not hold shares. Even if he does hold shares, he is not entitled to take part in votes of the general meeting on the appointment and dismissal of members of the board of directors, the formal approval of actions of the unlimited partners and of the board of directors, and the enforcement or waiver of claims for damages. Furthermore, his vote is also excluded in the election of auditors and appointment of special auditors.

On the other hand, all decisions of the general meeting concerning amendments of the articles of incorporation, transactions of principal importance, and even transactions of unusual reach, always require the approval of the unlimited partners. For transactions of an unusual scope, the approval of both the unlimited partners and the “Kommanditaktionäre” is necessary.

The appointment and dismissal of the unlimited partners is made by amendment of the articles of association. According to more recent jurisprudence, legal entities (e.g., a GmbH) can now also qualify as unlimited partners.

In most regards, the regulations governing the supervisory board are consistent with those on the stock corporation. The principal duty of the supervisory board is to supervise management by the unlimited partners.

The unlimited partners have the duty to report to the supervisory board. The supervisory board is not entitled to appoint or dismiss unlimited partners. By way of contrast to the regulation governing the AG, there are no specific categories of decisions that depend on the consent of the supervisory board.

The unlimited partners of the association limited by shares have to comply with a mandatory restraint of competition that includes every self-employed activity for their own account or for the account of a third person. It equally forbids exercising an office as member of the board, managing director or unlimited partner of an association of similar type. An exemption from the restraint of competition can be granted with the consent of the board of directors and the other unlimited partners.

Liability: The unlimited partners are personally liable without limitation for the association’s obligations.

Annual Costs

Annual costs will arise in the form of legal, information and control costs especially as regards accountancy, auditing and publicity. Other possible items are legal and tax consultancy as well as costs for various supervisory and managing individuals.

The amount of these costs varies and depends on size, structure and equity requirements of the company. Costs tend to be lower for partnership structures than for corporations.

Corporate Taxation and Financial Reporting

The revenue of the association limited by shares is subject to corporation tax. Corporation tax is raised on the basis of the German Corporation Tax Act(“Körperschaftssteuergesetz” [KStG]), as last amended on 20.12.2007 (BStBl 2008 I p. 218), as well as the "Körperschaftsteuer-Durchführungsverordnung” (KStDV). The assessment basis of corporation tax is the association’s revenue within one legal year. The revenue and its determination are governed by the German Income Tax Act (“Einkommensteuergesetz” [EStG]) as well as secs. 8–10 of the German Corporation Tax Act, including the hidden profit distributions that are to be added for this purpose although not shown in the balance sheet (cf. sec. 8 para. 3 of the German Corporation Tax Law). The determination of the association’s revenue is not affected by (non-)distribution. Distributions of all kinds of participation certificates will not reduce the revenue as long as they confer no rights regarding profit participation and participation in the remaining assets after liquidation. By contrast, revenue that is distributed to unlimited partners regarding either their initial capital share that was not rendered to fulfill an obligation concerning the registered capital (1) or in remuneration of their business management (management bonus) (2) may be deducted from the revenue of the association limited by shares, cf. sec. 9 para.1, no. 1 of the German Corporation Tax Act. German corporation tax amounts to 15% from 01.01.2008 (until 31.12.2007: 25%). A “solidarity surcharge” of 5.5% of the amount of corporation tax will be added.

Trade Income Tax

The association limited by shares is subject to trade income tax (“Gewerbesteuer”) Welche Abkürzung? Richtig ist, dass das Wort „Gewerbesteuer“ gestrichen werden könnte, das ist nur eine Frage der Einheitlichkeit.on its commercial revenue. Trade income tax is raised on the basis of the German Trade Income Act (“Gewerbesteuergesetz” [GewStG], as last amended on 20.12.2007 [BStBl 2008 I p. 230]) as well as the "Gewerbesteuer-Durchführungsverordnung” (GewStDV), as last amended on 20.12.2007 (BStBl 2008 I p. 230).

Trade income tax catches every domestic business establishment (itinerant or with a fixed place of business) (object of taxation).

For fixed business establishments, trade income tax is levied by the municipality where the business establishment is located. The commercial revenue is determined on the basis of the business revenue following the rules set up by the income and corporation tax acts, reduced by the relevant deductions and augmented by the relevant additions. Revenue generated by the sale or waiver of a share by an unlimited partner of an association limited by shares is in principle attributed to the association’s revenue.

A tax assessment figure expressed in per cent is computed on the basis of the association’s revenue. From the collection period of 2008 on, the tax assessment figure uniformly amounts to 3.5 %. Up to the collection period of 2007, the tax assessment figure for the association limited by shares was 5 %.

Trade income tax is calculated by multiplication of the tax assessment figure with the assessment rate as fixed by the municipality. The assessment rate is at least 200%; in larger communities it can amount to over 400%. Thus, the tax burden ranges from a minimum of 7% of the association’s revenue (3.5% x 200%) to more than 14%, the latter being more realistic than the former.

Prepayment on trade income tax is mandatory.

“Solidarity Surcharge“

The „solidarity surcharge“ („Solidaritätszuschlag“ [SolZ] is a supplementary levy that is collected on the basis of the “Solidaritätszuschlagsgesetz“, as last amended on 20.12.2007 (BStBl 2008 I p. 218). The “solidarity surcharge” is a surcharge tax. It amounts to 5,5% of income and corporate income tax, salary tax the capital returns tax.

Accounting and Financial Reporting

For the association limited by shares, the rules of the German Commercial Code (“Handelsgesetzbuch”) concerning accounting (secs. 283–335) apply. Due to its being a capital company, the association limited by shares must produce an annual tax balance sheet. It is also subject to the supplemental regulations of secs. 264 et seq. of the German Commercial Code which define certain deviations concerning accountancy, auditing and disclosure requirements.

An annex as well as a statement of affairs have to be provided with the annual report.

Employee Participation in Corporate Bodies

The association limited by shares largely follows the rules governing the AG also regarding employee participation.

If the workforce "generally exceeds 2,000 employees“, the Co-Determination Act is applicable. In this case, the supervisory board must consist of shareholders and employees in equal shares.

If the workforce "generally“ ranges between 500 and less than 2,000 employees and if the association was registered in the commercial register after 10.08.1994, a third of the seats on the supervisory board must be held by employee representatives. In case the association was registered before 10.08.1994, this rule also applies if the workforce is "generally“ lower than 500. There is an exception for family-owned companies.