FACTS & FIGURES Investor’s Basics Setting Up Business in

ISSUE 2021 INVESTOR’S BASICS Important Legal Issues

This publication explains how the business establish- Corporate Taxation ment process in Germany works. It focuses on the ques- implications must be taken into account when choosing tions most often posed by foreign companies. These a legal company form, since company taxation details mainly can be grouped into four key categories: entry and resi- depend on the company form. Germany has a comprehen- dence requirements, business establishment, corporate sive regime of agreements with foreign taxation, and employees and social security. You will countries which, for instance, handle double taxation of find essential information on these matters and many distributed profits. useful tips on how to establish a new business in Ger- many – both quickly and easily. We inform about:

· the German tax environment, Entry and Residence At some point within the process of establishing a business · tax implications of certain company forms, in Germany, foreign entrepreneurs usually have to come · applicable double taxation agreements, to Germany in person. Depending on the country of origin, · how to register with tax authorities. individuals may require a visa to enter Germany. Long-term stays require a residence permit. Different types of residence titles are available subject to the intended business activities. Employees and Social Security Attention should already be paid to the question of how to Our legal experts provide information helping you prepare recruit required specialists and employees at the company your business trip to Germany by checking: formation stage. Moreover, knowledge of the different employment models and the terms and conditions of · whether a visa is needed before entering Germany or not, employment help successfully complete the hiring process. · what type of visa or residence permit might be required for the planned business activity, Our legal experts help you optimize the hiring process in · granting requirements for different kinds of advance by providing information on: residence permits, · flexible models of employment,

· how the application procedure works. · different terms of employment,

· the social security system and payroll accounting, Business Establishment · registering employees for the social security system. German company law offers a variety of different legal structures suitable for every type of business. Formation procedures are swift and efficient, with only a few steps needed to establish a company in Germany.

Our legal experts help you in preparing business establish- ment in Germany. We inform about:

· general ways to take up commercial activities in Germany,

· different company forms,

· the establishment procedure in detail,

· registration with the commercial register and office.

FACTS & FIGURES 2021 | gtai.com INVESTOR’S BASICS Legal Structures for Your Business

Anyone can establish a business in Germany – irrespective of GmbH nationality or place of residence. There is no specific invest- The most common corporate form in Germany is the private ment legislation when setting up a branch office or a new limited liability company (Gesellschaft mit beschränkter subsidiary in Germany; nor is a minimum percentage of Haftung – GmbH), which combines high flexibility with German shareholdings required for foreign entrepreneurs relatively few obligations. Another advantage of the GmbH setting up business in Germany. The basic structure of all is that the liability for German business activities is limited company forms is stipulated by law which provides for to the assets of the GmbH. Please find further information predictability and legal certainty. The same legal conditions about the GmbH form in the "Business Establishment" fact apply for foreign and local entrepreneurs. sheet.

Foreign companies often report that engaging with business AG partners, suppliers, public institutions and banks on the The German stock (Aktiengesellschaft - AG) is German market generally is easier if a German company is a company form intended for larger companies with a large established. In practice, a separate company held by a foreign number of shareholders. Eligibility for a stock exchange list- company – a subsidiary – in the form of a corporation is ing and the easy assignability of the shares makes it ideal for often established. However, it is also possible to set up a attracting capital. In contrast to the GmbH, the founding and company held by individual entrepeneurs. organizational formalities of an AG are relatively numerous and inflexible due to mandatory rules. This said, the AG form Existing companies can also conduct business via a German enjoys a high market reputation. branch office. Either way, the establishment procedure is straightforward with well-defined steps. Generally speaking, there are no restrictions placed upon foreign nationals who Company Forms for Setting up Business Activities wish to establish a company in Germany. However, the local in Germany trade office registration generally requires that a local repre- sentative of the business be located in Germany.

Subsidiary Branch Office

Subsidiary · Establishment of a · No establishment of new legal entity a new legal entity A subsidiary is an autonomous company established and pre- · Different legal · Registration of a dominantly held by another company (parent company). The forms available German physical corporation form is often chosen for subsidiary formation. (e.g. GmbH, AG) business presence The main feature of a corporation is the contribution of capi- tal by shareholders. A corporation is a legal entity, meaning that the holder of rights and obligations is not the individual shareholder, but the company itself. The corporation itself concludes contracts, holds assets and is liable for taxation. are liable to corporate , trade tax and the solidarity surcharge. Shareholders have limited per- sonal liability. As such, a minimum share capital is required. A corporation can be established by one or more shareholders.

FACTS & FIGURES 2021 | gtai.com INVESTOR’S BASICS

Branch Office The profit attributable to a German permanent establish- ment of a foreign corporation is taxed in Germany according Any foreign company with a head office and registered busi- to German taxation rules for corporations (corporate income ness operations outside of Germany can establish a German tax, solidarity surcharge and municipal trade tax). For further branch office. A branch office may be a suitable business information about corporate taxation please refer to the form for a foreign company seeking to establish a presence respective fact sheet. in Germany for the purpose of initiating business and main- taining contacts with business partners. In order to determine the of the , an analysis of its functions and risks is neces- Main Characteristics sary. This means that its people functions, assets, risks, and A branch office has no independent or separate legal per- capital have to be identified and documented. Special rules sonality distinct from the head office itself. In legal and apply for tax returns. organizational terms, it is part of the head office business and is therefore subject to the law governing the head office. Moreover, any transactions between the permanent estab- In this context, the foreign head office company is fully liable lishment and the head office company or other affiliated to the extent of its own assets for any claims creditors might companies must comply with rules. assert against the branch office. Any obligations or debts incurred by the branch office are the legal responsibility of the foreign company. Other Forms In Germany, there are two kinds of branch establishment which primarily differ due to the degree of the independence Offices that purely serve to observe the market and from the head office company. Both forms require at least pave the way for initial customer contacts are often one representative be located in Germany. described as “representative offices.” However, this term does not exist in German commercial law. Once Autonomous Branch Office an office is used by a foreign company for commercial The autonomous branch office (selbständige Zweignieder- activities (thus forming part of the foreign company lassung) fulfills tasks that exceed mere implementation and organization), it generally must at least be registered support-related tasks. It has a certain degree of business dis- as a dependent branch office. cretion that is limited by the scope of the business objective of the head office. The autonomous branch usually has its This is typically the case if the foreign company has a own management with executive powers, a separate bank permanent representative who conducts the commer- account, and accounting (on its own or via the head office cial activities of the company in a sustained manner company) as well as independent business assets (allocated and, in doing so, is subject to its instruction. by the head office company). An office managed by a self-employed third party (e.g. Dependent Branch Office a commercial agent authorized by the company) might The dependent branch office (unselbständige Zweignieder- be considered a case in which no direct business activ- lassung) focuses on maintaining contacts and initiating ity is conducted by the foreign company itself. In this business in Germany. It performs support and implementa- case, registration of the foreign company with the local tion-related tasks without having any individual business trade office is generally not required. Decisive here is discretion and is entirely dependent on the head office. the actual level of independence of the agent and their freedom to act without instruction from the company. Please find more information about the registration pro- cedure of the two different branch office categories in the "Business Establishment" fact sheet.

Branch Office Taxation A branch office is subject to taxation in Germany if it is considered to be a permanent establishment according to the applicable double taxation agreement. An autonomous branch office is generally regarded as a permanent establish- ment, whereas a dependant branch office is only ever con- sidered a permanent establishment under certain conditions.

FACTS & FIGURES 2021 | gtai.com INVESTOR’S BASICS

Business Establishment GmbH Incorporation Procedure

There are different ways to enter the German market. Step 1 Expanding foreign companies normally opt to establish Drafting of Articles of Association a local subsidiary or register a local branch office. The The articles of association shape the identity and consti- establishment procedures are swift and efficient, in both tution of the company. Thanks to the large scope for con- cases requiring only a few clearly defined steps. tractual design, the GmbH is a very flexible corporation form. Mandatory content includes share capital, share- A subsidiary is an independent company established and holders and respective shares held, business name, regis- predominantly held by another company (parent company). tered office, and company purpose. Foreign companies often choose the private limited liability company option (Gesellschaft mit beschränkter Haftung – Step 2 GmbH) for local subsidiary formation. A branch office forms Notarization of Articles of Association part of the foreign head office company’s organization. There The drafting and notarization of the articles of association are two kinds of branch establishments: the autonomous are normally performed in one session by a German notary. and dependent branch office. These differ primarily due to The founding shareholder(s) adopt(s) its articles of associa- the degree of independence from the head office company. tion and appoint(s) one or more managing directors in a notarial deed.

Setting Up a GmbH Step 3 € Payment of Share Capital The GmbH is the most widely used legal form for corpora- Once the articles of association have been notarized, a tions in Germany. It combines high flexibility with relatively company account should be opened and the share capital few obligations and enjoys a good reputation. Another deposited. A payment of EUR 12,500 in total is sufficient advantage of the GmbH is the limitation of liability to its for registration with the commercial register of a standard corporate assets. At least one shareholder (private individual EUR 25,000 GmbH (cash contribution). or legal entity) is required in order to establish a GmbH. The nationality and residence of the shareholder(s) and the Step 4 managing director(s) of a GmbH are irrelevant. However, the Commercial Register Registration company must have a German business address and a local When the required share capital has been verifiable con- representative. The GmbH requires a minimum share capital tributed to the GmbH, the managing director(s) apply for of EUR 25,000. It can be contributed in cash or in kind (e.g. the registration of the GmbH in the commercial register real estate or patents). A contribution in kind must, for exam- (Handelsregister). The application is electronically filed by ple, be agreed upon in the articles of association, a valuation a notary. This must be personally signed by all managing report is necessary, and the asset must be fully contributed. directors of the GmbH (power of attorney not possible) and accompanied by documentation pertaining to the Necessary Documentation GmbH. If the commercial register considers all formation In order to successfully register a business in Germany, requirements to be fulfilled, the GmbH is registered and certain documentation verifying the existence of any parent starts to exist as a legal entity with limited liability. company as well as the power of representation for persons acting on behalf of it is needed. Generally, an excerpt of the Step 5 foreign commercial register as well as articles of association Trade Office Registration of the foreign parent company will be required. The docu- Before business operations are started, the trade office mentation must be notarized and either legalized or issued (Gewerbe-/Ordnungsamt) of the municipality in which with an apostille. It should also be accompanied by a certi- the business is located, must be notified about the planned fied translation into . Please notice that activity. A business license or permit is not necessary for the documentation required can differ depending on the registering the business in the majority of cases. However, legal form and origin of the foreign company. It is advisable a permit or authorization may be required for some busi- to consult a German notary at an early stage for individual ness sectors. The trade office registration requires at least advice. one local representative.

FACTS & FIGURES 2021 | gtai.com INVESTOR’S BASICS

Setting Up a Branch Office Branch Office Registration

Any foreign company with a head office and registered business operations abroad can establish a German branch Commercial Register Registration office. There are two different categories of branch offices: Registration in the commercial register (Handels- the autonomous branch office (selbständige Zweignieder- register) is only required by the autonomous branch office. lassung) and the dependent branch office (unselbständige The application, which is electronically filed by a German Zweigniederlassung). A branch office has no independent or notary, must include detailed information pertaining to separate legal personality distinct from the head office itself. the foreign head office company and the branch office. In legal terms, it is part of the head office business, which This includes, for example, documentation verifying the also is liable for any of its business obligations. A formation existence of the foreign company as well as the power of procedure is therefore not applicable – only the registration representation for persons acting on its behalf. Please note of the branch with German business registers is required. that the documentation required can differ subject to the legal form and country of origin of the foreign company. The autonomous branch office is dependent upon the head It is also advisable to consult a German notary at an early office company at the internal level but engages in business stage. A dependent branch office only requires registration activities independently. At the organizational level, auto- with the trade office. nomous branch offices are to a certain extent independent from the head office company: The autonomous branch usually has its own management with executive powers, a Trade Office Registration separate bank account, business assets and accounting (on Before starting their business operations, all busi- its own or via the head office company). The dependent ness operators must inform the competent local trade branch office focuses on maintaining contacts and initiating office (Gewerbe-/Ordnungsamt). This applies to all com- business in Germany. It performs support and implementa- panies regardless of company form (excluding freelance tion-related tasks without having any individual business professionals). Accordingly, both the autonomous and discretion and is entirely dependent on the head office. dependent branch must register in the trade office before business operations are started. Generally, the same proce- dure applies as for the GmbH. As with registering a GmbH, Legal Certainty trade office registration of a branch office requires at least one local representative in Germany. A business Business establishment procedures in Germany provide license or permit is not required in the majority of cases. entrepreneurs legal certainty in the commercial law field – However, it may be required for some business sectors. creating transparency and offering companies the highest level of security in their day-to-day business activities. Important functions are fulfilled by German civil law nota- ries, and Germany's unique commercial register. Commercial Register The public commercial register (Handelsregister) ensures German Notaries legal certainty in the area of commercial law by providing Civil law notaries are appointed lawyers sworn to impar- important information about registered companies. It is tiality and entrusted with public functions. Depending on administered by the local courts (Amtsgericht). Some of the where in Germany the notary is appointed, he or she prac- company data is also available online. This means that it is tices either as a “single profession notary” or as an “attorney- fairly quick and easy to check the existence and power of notary.” The number of notaries in each federal state is representation of any given company. All corporations – as limited in order to ensure independence and impartiality. In well as many other enterprises requiring business opera- Germany notarization is required, amongst other things, for tions to be set up in a commercial manner – have to be establishment of corporations and applications for entry in registered in the commercial register. Any application for the commercial register. Notary fees are stipulated by law registration in the commercial register must be submitted and subject to the value of the transaction. The notary fees by a German notary. for a GmbH establishment depend, among other things, on the share capital. The estimated total costs for a standard → www.unternehmensregister.de GmbH are approximately EUR 800.

→ www.notar.de

FACTS & FIGURES 2021 | gtai.com INVESTOR’S BASICS Entry and Residence

Germany distinguishes between different kinds of residence Non-EU Citizens: Entry and Short-term Stays titles for specific purposes subject to the length of stay and Non-EU citizens generally require a Schengen visa for entry intended (business) activity in Germany. These include: and short-term stays in Germany. However, individual rules apply for certain countries. For example, nationals from · Visa (Schengen visa and national visa) Argentina, Australia, Brazil, Canada, Israel, Japan, Mexico, New · Residence permit Zealand, South Korea, UK, the USA, and Hong Kong can stay · Settlement permit in Germany for up to 90 days (in any 180-day period) without a visa. A visa enables the holder to entry and short-term stays (up to 90 days in any 180-day period) in Germany. A resi- Non-EU Citizens: Long-term Stays dence or settlement permit is required for long-term stays For long-term stays, non-EU citizens require a residence or (more than 90 days in any 180-day period) or for work on settlement permit. The respective local German mission a self-employed basis or as an employee in Germany. initially issues a national visa for entry into Germany. The national visa is subsequently converted into a residence per- The relevant residence title required depends on the inves- mit by the competent local immigration office (Ausländerbe- tor’s nationality, and particularly on the specific area of busi- hörde). Non-EU citizens from those countries exempt from ness activity intended in Germany. A residence permit is not the short-term stay visa requirements also require a national normally required for the setting up of a business. However, visa when entering Germany for long-term stay purposes. a residence permit is required in those cases where the for- Exceptions apply for nationals from Australia, Canada, Israel, eign national intends to run the business on-site. Japan, New Zealand, South Korea, UK, and the USA who may enter Germany for long-term stay purposes without a national visa. These foreign nationals can directly apply for Who Needs a Residence Title? the necessary residence or settlement permit at the immi- gration office in Germany. EU citizens and citizens of the states of Iceland, Norway, and Liechtenstein do not require any residence title to be able Application Procedure to settle or work in Germany. Swiss nationals have to notify The residence title generally has to be applied for at the the local immigration office about their long-term stay in competent German embassy or consulate general prior to Germany in order to get a residence permit certifying their entering Germany. The respective visa is then issued in the right to free movement. applicant’s home country. The application fee is in general EUR 80 for a Schengen visa and EUR 75 for a national visa. Additional fees of up to EUR 100 for a residence permit are also payable.

Residence title Entitlement Foreign nationals who require a residence title

Entry into Germany followed by a Non-EU citizens excluding nationals from Argentina, Australia, Brazil, short-term stay (up to 90 days in Canada, Israel, Japan, Mexico, New Zealand, South Korea, UK, the USA, any 180-day period). Hong Kong, and some other countries. Visa (Schengen visa and national visa) Entry into Germany followed by a long- Non-EU citizens excluding nationals from Australia, Canada, Israel, term stay (for which an additional resi- Japan, New Zealand, South Korea, UK, and the USA. dence or settlement permit is required).

Residence permit or Long-term stays and stays with Non-EU citizens excluding nationals from Iceland, Norway, settlement permit the intention to take up gainful Liechtenstein, and Switzerland. occupation.

FACTS & FIGURES 2021 | gtai.com INVESTOR’S BASICS

Visa for Incorporation Residence Permit for Employment

A Schengen business visa is sufficient for most activities In March 2020, the new Skilled Immigration Act came into in the company formation phase. It enables its holder to force. It further opens up the German labor market to skilled stay in Germany for up to 90 days, during which time workers and stipulates the conditions under which qualified all fundamental establishment activities can be performed. professionals from outside the EU can work in Germany. Setting up a company in Germany using a Schengen visa Qualified professionals include university graduates and does not alone warrant residence permit issue at a later persons who have successfully completed quality vocational date. If necessary, a residence permit for self-employment training. The Act makes clear that foreign qualifications – or employment should be applied for in due time. A resi- both academic and vocational – must be checked for equiva- dence permit must also be applied for if the incorporation lence with German qualifications and officially recognized in phase exceeds 90 days. advance. A new feature is the introduction of an accelerated administrative procedure for an extra fee. In the event of a specific job offer, the German employer can initiate the Incorporation Activities with a procedure at the competent immigration office, provided Schengen Business Visa: authorization by the applicant employee has been granted. This will significantly shorten the duration of the administra- • adopting and notarization of articles of association, tive procedure.

• registration in the commercial register, In general, residence permits for qualified professionals are • trade office registration (provided at least one only issued where applicants have a concrete job offer, a representative on-site in Germany is available), qualification recognized in Germany and approval from the • other preparatory activities (e.g. the opening of Federal Employment Agency (FEA). Qualified professionals a bank account, conclusion of contracts). can be granted a residence permit for up to four years. A per- manent settlement permit can be granted after four years.

EU Blue Card The EU Blue Card allows qualified professionals with a Residence Permit for Self-Employment university degree to be fast-tracked into employment in Germany. Non-EU citizens may apply for this type of resi- Entrepreneurs from non-EU countries managing a company dence permit if they hold a German university degree (or a on-site in Germany in a self-employed capacity require a proven comparable qualification) and a job contract with an residence permit for the purpose of self-employment. This annual gross salary of at least EUR 56,800 (2021). The annual permit may be granted if the planned business is expected gross salary level is lower EUR 44,304 (2021) in professions to have a positive economic effect and has secure financing with a particular skill shortage (e.g. engineers, IT specialists). in place. An individual assessment of the intended business Moreover, the employment must be appropriate to the project is then made, taking into account, e.g.: the viability professional’s qualifications. This category requires FEA of the underlying business idea, the foreigner’s entrepreneur- approval. A permanent settlement permit can be granted ial experience, the level of capital investment, and whether after 33 months – or after 21 months if the foreign citizen an economic interest or regional need regarding the intended has attained a specified German language proficiency level. business activity exists. A residence permit for the purpose of self-employment is limited in time for up to three years. ICT Card A settlement permit (permanent) can be granted after three Germany has also facilitated long-term intra-corporate years if the investment project has been successfully realized transfers of specific staff categories through the introduction and has stable income prospects. of the ICT Card. This enables an intra-corporate transfer from a sending entity outside the EU to a host entity in Germany. Both entities must be part of the same company or company Who is considered self-employed? group. Eligible employees are non-EU managers and special- ists who have been employed in the sending unit for at least • Entrepreneurs (including freelance professions) six uninterrupted months immediately preceding the trans- fer. Moreover, the work contract and, where necessary, the • Partners in a assignment letter e.g. need to state details of the transfer • Majority shareholders of a GmbH who are also and proof of the employee’s professional classification. The managing directors of the GmbH ICT card must be applied for at the competent German mis- sion abroad and is subject to FEA approval.

FACTS & FIGURES 2021 | gtai.com INVESTOR’S BASICS Corporate Taxation

Germany offers a competitive system of corporate taxation. Trade Tax All corporations – including the limited liability company (GmbH), the stock corporation (AG) and German permanent Even though trade tax (Gewerbesteuer) is regulated by fed- establishments of foreign corporations – are subject to eral law, it is a municipal tax. The rules for determining the corporate income taxation. Income taxation of corporate taxable income (business profits plus certain statutory addi- companies generally consists of three components: tions and allowances) are the same throughout Germany. Moreover, the trade is the same for all businesses · Corporate income tax within one municipality. However, the tax rate applicable in · Solidarity surcharge a municipality is individually determined by each municipal- · Trade tax ity. The individual trade tax rate of a specific site is therefore the decisive factor for the overall burden. The There is no consistent nationwide tax rate for corporate minimum trade tax rate must be at least seven percent. There income taxation due to locally set varying trade tax levels. is no statutory ceiling of the trade tax rate, but the German Corporate income tax rate plus solidarity surcharge are, average trade tax rate is 14.07 percent (2019). As a rule, the however, determined nationwide. As a result, the total cor- trade tax rate tends to be higher in urban than in rural areas. porate tax burden can be as low as 22.83 percent in some The solidarity surcharge is not levied on trade tax. areas. The German corporate tax average is 29.9 percent. Germany Trade & Invest can support you in identifying Calculating Trade Tax attractive locations in Germany. For more detailed infor- The individual trade tax amount depends on two factors: mation on the taxation of branch offices as permanent · the multiplier (Hebesatz) stipulated individually establishments of foreign corporations in Germany, please by every municipality, refer to the folder of this publication. · the tax base rate of 3.5 percent (across Germany).

Corporate Income Tax The taxable income is multiplied with the tax base rate resulting in the so-called tax base amount. This tax base Corporate income tax (Körperschaftsteuer) is levied as a amount is then multiplied by the applicable municipal multi- flat nationwide tax at a rate of 15 percent of the taxable plier. The multiplier is set by each municipality. On average, it corporate income. Taxable income (i.e. annual business prof- is slightly above 400 percent, but may not total less than 200 its) forms the tax base for corporate income tax. Under Ger- percent. There is no upper limit for the municipal multiplier. man commercial law, corporate companies' annual profits are calculated and recorded in the annual financial statement. This also forms the basis for determining taxable income. Model Calculation – Trade Tax However, German provides different accounting options and income correction rules, meaning that the · A GmbH with an annual taxable income of taxable income usually differs from the annual profit deter- EUR 1,000,000 is based in city A. mined in the financial statement under commercial law. · City A has stipulated a municipal multiplier Solidarity Surcharge of 400 percent. The solidarity surcharge (Solidaritätszuschlag) is a fixed · The tax base amount for the GmbH is 3.5 percent and flat nationwide component of company taxation. It is of its annual taxable earnings or EUR 35,000. added to the corporate income tax and set at a rate of 5.5 · The EUR 35,000 is multiplied by the municipal percent of the corporate income tax rate (and not 5.5 percent multiplier of 400 percent, resulting in a total trade of income). Taken together, the corporate income tax and tax amount for the GmbH of EUR 140,000. solidarity surcharge amount to a total taxable rate of 15.83 percent.

FACTS & FIGURES 2021 | gtai.com INVESTOR’S BASICS Taxation of

Germany provides an extensive network of double taxation Input VAT Deduction agreements to ensure that double taxation in international Companies themselves regularly pay VAT when they pur- business relations is ruled out. If a German subsidiary pays chase goods or services. The collected and paid can out dividends to a foreign parent corporation, generally a be balanced out in the VAT return as input VAT deduction withholding tax (Kapitalertragsteuer) of 25 percent plus (Vorsteuerabzug). For companies, value-added tax represents solidarity surchage is due. a transitory item only.

In the case of an existing double taxation agreement (DTA) with a foreign country, the withholding tax is usually levied Value-added Tax in Selected European Countries at a significantly lower rate, e.g. 15, 10 or 5 percent. With- standard rate in percent holding tax still paid in Germany can be credited against existing foreign tax obligations or the parent company has been exempted from -payable tax in the respective Germn 19 DTA state. Different rules may apply for dividend payments Frnce 20 by .

Belum 21 → The double taxation agreement with the USA, for example, even allows a reduction of - Netherlnds 21 ation to zero percent where certain requirements are fulfilled. Moreover, EU law, under certain conditions, Spn 21 allows tax-free transfer of dividends between all EU member states. Itl 22

Polnd 23 Value-added Tax (VAT) Sweden 25

Value-added tax (VAT) is a tax on the exchange of goods Hunr 27 and services. Companies are generally obliged to add value- added tax to the prices of their goods or services and to Source: Germany Trade & Invest January 2021 invoice their customers accordingly.

In specific business-to-business transactions, the business client has to transfer the VAT to the tax authority – so-called “reverse charge” procedure (applicable for example to certain types of construction work carried out by subcontractors). Tax Office Registration The reverse charge procedure is also generally applicable for “intra-community supplies,” i.e. the sale of goods or services All companies have to register with the local tax au- from an entrepreneur in one EU member state to a commer- thority (Finanzamt) in order to be issued with a tax cial customer in another EU member state. In general, the number required for corporate income taxation as well commercial customer has to pay VAT in his or her EU member as national German VAT purposes. A state in these cases (“intra-community acquisition”). questionnaire must be completed before a tax number is issued. Where the company intends to deliver/im- VAT Rate port goods to or from other EU member states, it re- The 19 percent VAT rate in Germany is below the European quires a specific VAT identification number issued by average. A reduced rate of seven percent applies to certain the Federal Central Tax Office. The VAT identification consumer goods and everyday services (such as food, news- number application can be filed online or even be com- papers, local public transport, and hotel stays). Some services bined with the application for the regular tax number. (such as bank and health services or community work) are completely VAT exempt. Value-added tax which is collected has to be paid to the responsible tax office on a monthly, quarterly or annual basis. The exact time frame depends on the company’s level of turnover.

FACTS & FIGURES 2021 | gtai.com INVESTOR’S BASICS Employees and Social Security

Germany is internationally known for its highly qualified, Wage Level motivated, and conscientious workforce. Employers are free to tailor the recruiting process to their individual needs. Only Wages are generally subject to individual negotiations. It a few guidelines need to be observed; such as offering jobs must be noted that a general minimum wage of EUR 9.50 in a non-discriminatory manner (meaning that employers an hour applies (2021). It will rise to EUR 9.60 in July 2021 and are required to hire on an equal opportunity basis without to EUR 9.82 in January 2022. Higher minimum wages may discrimination in terms of race, ethnicity, gender, religion, be set in certain industries (e.g. those with universally appli- conviction, disability, age, or sexual orientation). Recruitment cable collective wage agreements). services are offered by the Federal Employment Agency (Bundesagentur für Arbeit). There are several programs offer- There are also general exemptions from the national mini- ing extensive public support for hiring employees. mum wage. For instance, the following group categories are not covered by the minimum wage regulation: Employment Models · young people under 18 years of age, · students completing compulsory internships/ Regular Employment internships up to three months, Regular employment contracts are unrestricted and can · long term unemployed (one year or longer) be terminated by a written letter of termination, provided a for the first six months in employment. mandatory notice period has been observed. In companies with more than 10 employees, a justified reason is required for regular termination. In a regular employment contract, Working Times and Vacation employer and employee usually agree upon a six-month probationary period during which the contract may be termi- Under German labor law employees are allowed to work nated by either party at any time with two weeks’ notice. eight hours per day - 48 hours per week. Saturday is con- sidered to be a normal working day. With a five-day week, Fixed-term Contracts the permitted weekly working time totals 40 hours. Most Fixed-term contracts expire automatically on a specified business is conducted from Monday to Friday but retailers date without a formal dismissal requirement. It is for the and manufacturing industries usually operate on Saturdays employer to decide whether to renew the contract or not. as well. Sundays and public holidays in contrast, are gener- Fixed-term contracts are generally limited to a maximum of ally considered to be days off. However there are numerous two years and may be extended up to three times provided exceptions from this general rule, permitting Sundays and the total duration of contract does not exceed the maximum public holiday work. An extension of the working time to a of two years. During the first four years of a company’s exis- maximum of ten hours per day is possible under certain tence in Germany, employment contracts may be limited or conditions. extended several times up to a total duration of four years. Full-time employees working six days per week are entitled Temporary Employment to a minimum of 24 paid vacation days (the equivalent of Temporary employment means that a company leases four weeks) per year. Accordingly, full-time employees employees from a temporary employment agency. The working five days per week are entitled to a minimum of 20 employee is legally employed by the temporary employ- days per year. ment agency and receives the salary from them – as no contractual relationship exists between leasing company and employee. General working conditions such as weekly → Our Economic Overview Germany provides detailed working hours and wages are usually determined in collec- information and statistics on the German labor mar- tive agreements. They can modify the “equal treatment”- ket, the high qualification and productivity of the principle of leased employees and permanent staff to a workforce in Germany. limited degree. The service contract between the hiring www.gtai.com/economic-overview-germany company and the temporary employment agency regulates the duration and terms of termination of service of the employee in the hiring company. The statutory maximum hiring term for the same leased employee at the same com- pany generally is 18 months.

FACTS & FIGURES 2021 | gtai.com INVESTOR’S BASICS Social Security Payroll Accounting

In Germany, core social security provision is collectively Employees in Germany receive a net wage – meaning a financed by means of a process of redistribution. The current salary from which tax and social security contributions costs for pensioners, sick people, those in need of nursing have already been deducted. care, and unemployed people are paid directly from contri- butions by employees and employers alike. The contributions Wage Tax are roughly shared equally by employer and employee with Employees pay wage tax (Lohnsteuer) – a special term for the exception of accident insurance costs which are solely the income tax paid by employees. The employer is obliged borne by the employer. Each share corresponds to approxi- to deduct the wage tax due directly from the salary of mately 20 percent of the employee's gross wage. the employee and to pay it to the tax office. This must be completed electronically with authentication on a monthly, Components of Social Security Insurance quarterly or annual basis depending on the amount of total The German social security insurance system consists of: wage tax. To obtain the electronic certificate required for authentication, the employer has to register him or herself · Pension insurance and all employees electronically at the "Elster" online tax · Health insurance portal (www.elster.de). · Unemployment insurance Social Security Contributions · Nursing care insurance Social security contributions are also withheld by the em- · Accident insurance ployer after calculation of the gross wage and transferred to the employee's health insurance company (which passes Common funds exist for all social security components. Only on the contributions excluding accident insurance to all the statutory public health insurance provider can be chosen relevant parties). The employer must register each individual individually by the employee. Employees can also choose employee with their respective health insurance company. to opt out of the statutory health insurance in favor of a The company number (Betriebsnummer) is a prerequisite for private health insurance scheme subject to satisfaction of registration. Employers must apply for a company number at a minimum monthly gross salary level. the Federal Employment Agency Saarbrücken.

Statutory accident insurance contributions have to be trans- ferred separately by the employer to the Employer's Liability Allocation of Social Security Contributions (SSC) Insurance Association (Berufsgenossenschaft). To do so, the employer has to register separately with the Berufsgenos- senschaft in advance.

Employer's Share of SSC International Social Security Agreements In order to facilitate the international transfer of employees, approx. 20% Germany has signed social insurance agreements with coun- of gross wage tries including Australia, Brazil, Canada, China, India, Israel, Employee's Share of SSC Japan, South Korea, Turkey, and the USA.

approx. 20% Within the EU, the posting of employees is facilitated by of gross wage EU regulations. This allows transferred employees to remain within the national social insurance system of their home country if they are relocated to Germany for a certain time. In this case, the employer does not have to pay German social security contributions for the employees temporarily located in Germany.

Pension insurance Employee's gross wage gross Employee's Health insurance Unemployment insurance Nursing care insurance Accident insurance

FACTS & FIGURES 2021 | gtai.com INVESTOR’S BASICS Germany Trade & Invest Helps You

Germany Trade & Invest’s teams of industry experts will Our team of consultants is at hand to provide you with the assist you in setting up your operations in Germany. We relevant background information on Germany’s tax and legal support your project management activities from the system, industry regulations, and the domestic labor market. earliest stages of your expansion strategy. Germany Trade & Invest’s experts help you create the appro- priate financial package for your investment and put you in We provide you with all of the industry information you contact with suitable financial partners. Incentives specialists need – covering everything from key markets and related provide you with detailed information about available incen- supply and application sectors to the R&D landscape. tives, support you with the application process, and arrange Foreign companies profit from our rich experience in identi- contacts with local economic development corporations. fying the business locations which best meet their specific investment criteria. We help turn your requirements into All of our investor-related services are treated with the concrete investment site proposals; providing consulting utmost confidentiality and provided free of charge. services to ensure you make the right location decision. We coordinate site visits, meetings with potential partners, universities, and other institutes active in the industry.

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FACTS & FIGURES 2021 | gtai.com CONTACT Investor Support Services

The Tax & Legal Services team is part of Germany Trade & For questions on how to establish your business in Germany Invest's Investor Support Services division. A team of experts please contact us at [email protected] supports foreign companies seeking to establish a business in Germany with information about Germany's tax and legal For more information about the tax and legal framework system. Information provided addresses the questions most in Germany please visit our website: often posed by international companies regarding incorpora- www.gtai.com/investment-guide tion; corporate taxation; entry and residence regulation; and employee and social security obligations.

The Investor Support Services division also provides a range of other services including financing and incentives informa- tion support and industry-specific market analyses.

The Investor Support Services division has more than a decade of experience and a proven track record in helping international companies set up their business operations in Germany.

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Publisher Author Notes Germany Trade and Invest Tax & Legal Services: All rights reserved ©Germany Trade & Gesellschaft für Außenwirtschaft Christina Schön Invest, February 2021 und Standortmarketing mbH [email protected] Friedrichstraße 60 Udo Sellhast Reproduction, in whole or in part, 10117 Berlin [email protected] only permissible with express prior Germany authorization. All information provided Layout is based on the most current market T +49 30 200 099-555 Danielle Röbbenack, GTAI information available at the time of F +49 30 200 099-999 publication. ­Germany Trade & Invest [email protected] Print accepts no liability for the actuality, www.gtai.com Kern GmbH, 66450 Bexbach accuracy, or completeness of the www.kerndruck.de information provided. Executive Board Dr. Jürgen Friedrich, Chairman/CEO Picture Credits Dr. Robert Hermann, CEO Cover: fotolia/JFL Photography

Editor Order Number William MacDougall, GTAI 20859 For more information on how to set up business in Germany, please contact Germany Trade & Invest’s Tax & Legal team.

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