The majority of Start-ups deem financial accounting annoying rather than beneficial for their business. Entrepreneurs are passionate about the purpose of their Start-up and concentrate on solutions that will grow their Start-up to the next level and into a sustainable business with more customers, more employees and extended operations.
But there are of course obligations each business has to obey. Accordingly, we pulled together the most burning questions about financial accounting and reporting in Germany. We will discuss the minimum requirements and the minimum costs, time and efforts you must spent for financial accounting and reporting issues.
However financial accounting and reporting may also produce benefits for your Start-up, depending on your business model, your development stage, your size and your investors. We will also hit theses area in our Q&As.
It is pretty simple. Almost everybody who is doing business in Germany must keep books. To be more specific: If your Start-up has received all its licenses and permits and if you are filed as a company, i.e. as a GmbH, in the trade register in Germany you are required to keep books. The same applies to permanent establishments of a foreign company.
The basic requirements how to keep the books is detailed in the German trade law (“Handelsgesetzbuch = HGB”). However, bookkeeping is also required by tax laws. Bookkeeping in Germany is primarily based on trade law. Tax laws are mainly identical with trade law. However, specific tax rules must be applied for specific issues, i.e. for deductibility of travel and hospitality expenses, expenses for company events, depreciation and amortization expenses, expenses for accruals and interest expenses, to just name a few. Specific tax rules also apply for capitalization of self-generated intangible assets, allowances on receivables, deferred taxes, tax losses, transfer prices and transactions with related parties. Accordingly, the profit or loss shown in your statutory financial statements
Bookkeeping does require at the minimum that all business transactions are completely entered into your bookkeeping system, in a timely and orderly manner, maintained and accessible for 10 years, in German language, supported by original documents and accrual based with special requirements for fixed assets, accruals and deferred items. As your accounting is also the basis for either monthly or quarterly filings with the tax authorities, you should prepare your accounting on a regular basis (i.e. monthly), although that is not legally required.
Bookkeeping also requires corporations to prepare statutory financial statements. The extent is based on the size of your company. As a Start-up you are most likely considered a “small size company” and must prepare at the minimum a balance sheet, a profit and loss statement and notes to the accounts with limited content. If you exceed in two consecutive years two of the following criteria : total assets of TEUR 6.000, revenue of TEUR 12.000 or 50 employees (at the average) you qualify as a “medium size company” and must prepare a full set of notes and in addition a management report (“Lagebericht”).
Small sized companies must prepare statutory financial statements within 6 months after fiscal year end. These accounts must be approved by your shareholders within 11 months after fiscal year end at the latest. If your Start-up has grown into a medium sized company your financial statements must be prepared within 3 months and being approved by your shareholders within 8 months. However, there is no governmental oversight and thus no penalty if you miss these deadlines. You are just not in compliance with German law.
Fiscal year end for the majority of companies in Germany is December 31. However, you are allowed to choose any other date for your fiscal year end, which must be included in your corporate agreements and filed with the trade register. For tax reasons, however, you must prepare all tax filings based on December 31, which requires additional work for you or your accountant at year end. Thus, it’s more convenient to also choose December 31 as the end of the fiscal year.
You are allowed to change your fiscal year end, but a fiscal year may never exceed 12 months, thus, you must have a short fiscal year with less than 12 months if you change your fiscal year end.
Statutory audits are not required for small sized companies by law. There might be, however, a contractual obligation in your investment agreement even for small sized companies, especially if you receive governmental funding.
Audits are required for medium and bigger size companies and of course for all public companies. The audit must be performed by a one of the 15.000 German certified public accountants (“Wirtschaftsprüfer”) before your shareholders approves the financial statements. Audits are governed by the regulations of the institute of German certified public accountants (“Institut der Wirtschaftsprüfer”). The auditor must prepare a special report about the results of the audit. The report may be prepared in English language. The shareholder meeting must have accepted this report before approving the statutory financial statements.
Each German corporation must file statutory financial statements with the filing authorities, the “Bundesanzeiger” within 12 months after year end. Small size companies must file its balance sheet and a short version of the notes only. Medium sized and bigger companies must file everything, balance sheet, profit and loss statement, a full set of notes and the management report including the audit opinion.
The Bundesanzeiger reviews if financial statements are filed. If they are not filed in time you get notice and another six weeks to file. If the statutory financial statements are not filed after six weeks you have to pay penalties, starting from EUR 1.000 to up EUR 25.000 with further acceleration depending on the delay.
Different to other countries a German certified public accountant is not necessarily a public tax accountant (“Steuerberater”). Almost all 85.000 German public tax accountants do offer tax and bookkeeping services, especially for small companies without own accounting department. The software applied by all German public accountants is DATEV, a widely accepted accounting software with different applications, including cloud solutions.
The biggest and most time consuming task when hiring a public tax accountant is to communicate with the person in charge of your accounts. And you pay more than doing your own bookkeeping, although the fees are considered fair and acceptable. Besides this, the external solution is considered the best solution if you start a business in Germany because the public tax accountant is reliable and has the knowledge you need to settle all necessary fiscal obligations and requirements. He should also be in charge to prepare your statutory financial statements, tax returns and to prepare the monthly payroll accounting, including payment and settlement of wage taxes and social security payments. Thus, you are in save heaven in respect of deadlines and also in respect of all tax questions.
If you need to save money, have the time, are really small I size and are qualified to do bookkeeping by yourself it’s an option. It even has the benefit that you have the data available all the time and know where you stand with your financials.
There are several software solutions on the market with good and reliable quality. Most of them are not only applicable for bookkeeping purposes but also for other applications such as payments, payroll and /or controlling purposes. Most common programs are Agenda, Lexware, Sage, Wiso and FastBill. You may also consider applying pure cloud solutions, also offered by Lexware, Sage and FastBill but also from various other providers such as Debitoor, Collmex, freeFIBU etc. Costs are considered low, i.e. software programs for less than EUR 300 and cloud services for less than EUR 10 per month.
In the early phase your financial accounts usually do not play a role for investors if it comes to decide to invest into your Start-up or not. Accounting is always looking back, covering historic information. And these historic information do not provide any basis for the valuation of your Start-up. Investors are interested in the future of your venture, in your team qualification, in your ideas and innovations and in technology. And this is not reflected in your accounts at all.
This changes after the transaction is being completed and you need to gain oversight about your spending and must prepare monthly investor reporting. If you provide solid financial statements even if you are in your early phase that might positively contribute to your credibility as a reliable management team.
Bookkeeping data must be made available for controlling purposes as much as possible. That is why reporting for statutory purposes and for tax purposes should be fully integrated with controlling and investor reporting and your software should provide these options.
The faster the growth of your Start-up the more important to monitor and control your business. It is essential especially for fast growing B2C Start-ups with important KPIs such as liquidity and cash-flow, customer acquisition cost, customer live time value, marketing and other cost relevant to your business.
The need for controlling is different for all Start-ups. If you are in your early phase and use a public tax accountant for accounting services DATEV provides options for valuable, curated investor reporting if you clearly communicate your needs and expectations. In house software solutions do provide limited solutions and must be supplemented by external software to receive valuable controlling information. However, once your Start-up has reached the critical mass, is expanding and in the B2C business or B2B and heavily going international it’s time to consider implementing ERP solutions anyhow. ERP solutions are available for small enterprises and are able to growth with your company. During the expansion stage it if essential to have control over your business. The most bankruptcy cases relate to Start-ups in this phase.
Payroll is an integral part of your accounting. German labor and tax laws are complex. Accordingly, you should in any case use a public tax accountant to do payroll on a monthly basis.
As an employer you must calculate and pay payroll taxes, church taxes and social security contributions on behalf of your employee. Taxes must be filed and paid 10 days after each end of the month. You also must sign-in new employees with the health care plans and social security as soon as the start working for your company. Payroll data are very sensitive and should be protected and stored with special care. You also must adhere to specific tax regulations if your employee request reimbursement for travel expenditures in order to avoid costly mistakes.
If you are working with freelancers, you should assure that he/she is not working too long for your company because you might get liable for social security and payroll taxes (“Scheinselbständigkeit”), even he/she is not an employee. Special rules also apply to interns, parents etc.
In general all records of a German company must be kept in Germany. Accounting software and documents must be hosted on servers located in Germany.
However, there are exemptions to the rule. But Companies must apply with the tax authorities for exemption. Basically you must convince the tax authorities that records are accessible and available for tax audits as if they were stored in Germany.
There are some ground rules that should be considered. Always important: No booking without document. Compliance in bookkeeping is the responsibility of the management (“Geschäftsführer”), those individuals that are filed with the trade register. The management team is liable for correct accounting. That includes completeness, orderly manner, correct valuation, compliance with laws and regulations, correct storage and accessibility and German language.
There are specific requirements by regulators if you are doing business in the banking and insurance industry and are registered with the authorities, i.e. BaFin (“Bundesanstalt für Finanzdienstleistungsaufsicht”).