DOING

BUSINESS IN GERMANY

HLB Deutschland GmbH Wirtschaftsprüfungsgesellschaft .

doing business in Germany

foreword

This booklet has been prepared for the use of clients, partners and staff of HLB International member firms. It is designed to give some general information to those contemplating doing business in Germany and is not intended to be a comprehensive document. You should consult us, therefore, before taking further action. HLB Germany and HLB International cannot be held liable for any action or business decision taken on the basis of information in this booklet.

HLB Germany May 2011

1 Doing Business in Germany about HLB International

Formed in 1969, HLB International is a world-wide network of independent professional accounting firms and business advisers. The network comprises member firms in over 100 countries who, collectively, have over 1,700 partners with 14,000 staff in 450 offices. Member firms provide clients with a comprehensive and personal service relating to auditing, taxation, accounting and general and financial management advice.

Up-to-date information and general assistance on international matters can be obtained from any of the partners of HLB Germany listed in this booklet or from the Executive Office in London:

HLB International Executive Office

21 Ebury S treet London SW1W 0LD UK

Telephone +44 (0)20 7881 1100 Fax +44 (0)20 7881 1109 Email: [email protected] Website: www.hlbi.com

HLB International is a world-wide network of independent professional accounting firms and business advisers, each of which is a separate and independent legal entity and as such has no liability for the acts and omissions of any other member. HLB International Limited is an English company limited by guarantee which co-ordinates the international activities of the HLB International network but does not provide, supervise or manage professional services to clients. Accordingly, HLB International Limited has no liability for the acts and omissions of any member of the HLB International network, and vice versa.

Doing Business in Germany 2

contents

FOREWORD 1

ABOUT HLB INTERNATIONAL 2

GENERAL INFORMATION 4 Introduction Location, Climate and Infrastructure Population Government and Legal System Economy and Currency

INVESTMENT FACTORS Special Features Government Incentives Banking System and Sources of Finance

Foreign Exchange Controls Employment Regulations

TYPES OF BUSINESS ORGANISATIONS Principal Forms of Business Legal, Accounting and Audit Requirements

TAXATION General Structure Corporate Taxation Personal Taxation

Other - Withholding Taxes - Double Relief and Treaties - Indirect Taxes - Capital Taxes - Transfer Taxes & Stamp

3 Doing Business in Germany general information

Introduction Globalisation presents new challenges and competitiveness demands flexibility. Germany is Europe’s economic Germany is taking advantage of its engine. The world’s third largest economic upswing to reform its economy offers a large domestic economic structures, consolidate public market and easy access to growth financing, and invest for the future in markets in the enlarged European order to remain the leading business Union. As world champion in location in Europe and one of the most , Germany accounts for competitive investment locations in the around 10% of world . High world. performance combined with declining unit labour costs are the Location, Climate and Infrastructure decisive factors for competitiveness. The professional standards of Germany lies at the heart of Europe and clerical, technical, and managerial covers an area of approximately 357,104 staff are high. Labour relations are square kilometres (137,878 square stable and industrial disputes rare. miles). Neighbouring countries are The geographical location and Austria, Belgium, the Czech Republic, excellent infrastructure contribute to Denmark, France, Luxembourg, the the importance of Germany as a Netherlands, Poland and Switzerland. strategically outstanding investment location. The climate is maritime in the northern parts, continental in the south and Investments require security. eastern parts, but mild in general with Germany actively maintains a legal only few extremes. environment known for its integrity, safety, reliability and transparency. Germany has Europe’s most advanced Contractual agreements are secure telecommunication infrastructure and the and intellectual property is strictly most reliable energy infrastructure. All protected. Social, economic and trans-continental paths meet here in political stability provides a solid Europe’s Centre, offering excellent bases for corporate projects. proximity to customers, suppliers, and Germany has incentives ready up to sources. A dense network of roads, 50% of capital expenditure. There are seaports, inland ports, waterways, a great many ways to use public airports and railroads ensure on-time funds for investment projects. delivery. Germany offers many opportunities for doing business all over Germany is one of the world’s leader Europe and worldwide – regardless of east in innovation. Creativity and courage or west. have generated countless innovative solutions. R & D is one of Germany’s favoured causes, promoted with funds from the federal government of some € 6 billion annually.

Doing Business in Germany 4

Population In addition, around 2,100 federal laws govern practically all areas of life. Some The population of Germany is about 82.3 areas are governed by the 16 Federal million. Due to the size of its population, States on a regional basis (e.g. Education, Germany is the largest consumer market Police-Law). within the European Union. An excellent standard off living leads over 7 million The judicial system is operated by the foreigners to make their home in Federal Constitutional Court Germany. Educational opportunities are (Bundesverfassungsgericht) and Courts in diverse, accessible, and excellent. Besides five different judicial branches. Each German, many citizens speak one or two branch has its own Federal Supreme other languages of which English, French Court and lower courts in each Federal and Russian are the most common. State. Additionally, there is a Supreme Court for Intellectual Property as a sixth Government and Legal System Supreme Court (but without specialised lower courts). For business success a reliable framework of underlying conditions is • The ordinary courts, Lower Court one of the most important factors. (Amtsgericht), District Court Germany has been successfully (Landgericht), Court of Appeal established as a democratic home for (Oberlandesgericht) and Supreme modern, pluralist and open-minded Court (Bundesgerichtshof) have people. Germany is a modern jurisdiction over civil matters not constitutional Republic. The principle of assigned to special courts, and are the divisions of power guides the overall responsible for criminal matters. parliamentary democracy, which is based • Labour courts rule on disputes on a multiparty, coalition-based system. between parties to a collective labour The Government is committed to agreement, between employers and transparency, citizens rights, freedom of employees as well as certain special speech and press. cases. There are Labour Courts, High Labour Courts and the Federal 16 Federal States called “Länder ” (Baden- Labour Court. Württemberg, Bavaria, Berlin, Bremen, • Administrative courts decide on public Hamburg, Hesse, Lower Saxony, North law disputes if they are not assigned to Rhine-Westphalia, Rhineland-Palatinate, another court. There are Schleswig-Holstein, Saarland, Administrative Courts, High Brandenburg, Mecklenburg-Vorpommern, Administrative Courts and the Federal Saxony, Saxony-Anhalt and Thuringia) Administrative Court. form together the Federal Republic of • Tax courts decide on all matters of tax Germany. law and duties. Surprisingly, there are no lower courts, but only the Companies can benefit from a reliable Tax Courts as High Courts (normally legal system. The Constitutional Law one per Federal State) and the Federal provides freedom and stability – although Tax Court. initially only for the Germans in the West • Social courts are responsible for of the nation that remained divided until disputes relating to social security 1990. The primacy of constitutional insurance, unemployment insurance rights, the definition of the principles of a and other sectors effecting social democratic and social federal state, and rights. Again, there are Social Courts, the foundation of a Federal Constitutional Higher Social Courts and the Federal Court that watches over adherence to the Social Court. constitution – these are the basic cornerstones of German democracy.

5 Doing Business in Germany Economy and Currency German firms have been able to increase their competitive strength considerably in Germany is an industrialized nation with recent years. Exports are flourishing and stable economic conditions, an efficient an increasing number of enterprises have industry and highly qualified workers. been established, in particular by foreign The geographic location and excellent investors. With € 460 billion in foreign infrastructure contribute to the investments, Germany is a much sought- importance of Germany as a strategically after business destination. Approximately outstanding investment location. 40,000 foreign companies – including the Germany provides a good and solid world’s 500 largest corporations – investment climate and the economic operate here. policy generally welcomes foreign investment. Germany pursues a very open approach to international trade which plays an Germany is a founding member of the important role in the economy of the European Union and takes a leading role country. Germany has only a few natural in the harmonisation process. Germany resources, but has a specialised and supported the admission of further efficient industry. Foreign trade policy is Member States, most of them Eastern intended to encourage the freedom of European states. Situated in the centre of movement in each sector of trade and to the enlarged European Union, Germany is have a free attitude towards worldwide a gateway to Eastern European markets. trade and capital movement.

The official currency in Germany and the The German Office for Foreign Trade other fourteen Member Countries of the Affairs (www.bfai.de) offers a wide range European Monetary Union (EMU) is the of useful information about business Euro. The participating countries were opportunities. They can assist you in deemed by the European council to have establishing business relations with satisfied the convergence criteria “price German companies. The free internet- stability”, “no excessive government based service enables foreign and deficits” and “no excessive government German companies to record and publish debt”. their business interests easily and quickly by completing an online form. The Germany is the world third largest German Business Portal (www.german- economy. Accounting for 27% of the EU’s business-portal.info) is the central contact GDP, it is also the engine driving Europe’s platform that steers all inquiries about economy. The Gross Domestic Product Germany through the right channels. The (GDP) in 2009 amounted to 2,36 billion goal is to make Germany and its domestic Euro. The GDP per sector of the economy market more transparent to foreign (2008) was: Services 50.9%, Industry & companies interested in Germany as a Construction 30.4%, Trade 17.8%, location for their businesses. Invest in Agriculture 0.9%. The average inflation Germany (www.invest-in-germany.de) is rate in 2009 was about 0.4%. the inward investment promotion agency of the Federal Republic of Germany. They One of the factors for the German assist and advise potential investors in economy’s great success is the principle Germany. Information about fairs and of a social market economy. The exhibitions is provided by www.auma.de. relationship between the government and the private sector is based on the concept of a economy with fairly clear-cut boundaries. The state should restrict itself to setting up the framework in which the economic decisions of all parties can freely be taken.

Doing Business in Germany 6

investment factors

Special Features means provided by the European development programme funds are other Many regional, federal and European significant investment incentives. The Union incentive programmes exist to main emphasis of the support measures promote investment in Germany. In has shifted to the New Federal States, particular, programmes exist to support because that is where investment investments in certain economic regions incentives are needed most, especially for as well as in less developed regions of the starting of a business or profession the country and especially in the East (Existenzgründung) and maintaining it, German States (“New Federal States”). In environmental protection measures as principle the level of grants available well as research and development depends on the size of the enterprise and projects. But there are also some other may, in individual cases, amount to as regions in the western part of Germany, much as 50% of the investment. especially in the North, where firms may apply for support from the European Government Incentives Union programme. These are regions with a weaker and less developed Public incentives may be classified infrastructure. as follows: However, especially in the New Federal • Federal Programmes States, the setting up and expansion of • Regional Programmes businesses as well as general investment • Incentives by the European Union in fixed assets are supported by numerous regional and federal aid programmes. The support is mainly provided in the shape of grants and allowances, In principle, there are also a number of advantages in the depreciation of assets, possible ways of obtaining grants from beneficial interest rate loans and the EU institutions. Public invitations to apply provision of security bonds, guarantees for this type of funding may be found in and other securities. the Official Journal of the European Union. Assistance from European funds One of the most important federal may be in the form of subsidies, loans at incentives is the public investment grant concessionary rates of interest, equity (Investitionszulage). It is supervised by investments or the provision of venture the federal tax authorities. In general, the capital. investment grant means that certain manufacturing businesses in the New However, support for enterprises is Federal States (Brandenburg, usually given indirectly through the Mecklenburg-Western Pomerania, provision of federal and regional grants Saxony, Saxony-Anhalt and Thuringia) funded by EU capital. The European may claim a certain percentage of their Union provides support measures by investment in new assets as a grant. It is means of the European Investment Bank important that the assets are used only (EIB), the European Coal and Steel for manufacturing purposes and only in Community (ECSC) as well as the the region of the New Federal States for a European Regional Development Fund period of five years. (ERDF). The EIB provides loans and guarantees for investment projects, Furthermore, the European Union which contribute to the support of a programme on the “improvement of the balanced regional development as well as regional economic structure” and the

7 Doing Business in Germany serving the modernisation and for customers and their own account. restructuring of companies in the interest They are also allowed to own shares and of the community. These include other equity interests in other industries. development and implementation of new technologies, cross border technical and The credit institutes incorporated under economic cooperation as well as public law (mainly savings and loan investments in the area of environment banks) are mostly municipal and regional and energy. The ERDF is intended to help banks coordinated through central level out regional differences in institutions, which serve as regional development and wealth within the EU. clearing houses. They offer the same type The measures of the EU also support of services as the private commercial investments in the New Federal States to banks. a major extent. Credit cooperatives for trade Banking System and Sources (Volksbanken) and for agriculture of Finance (Raiffeisenbanken) generally grant credit lines and long-term loans to their The German banking system consists of members – generally smaller businesses, the German Federal Bank and a large but also individuals. Regional and federal number of private commercial banks, central institutions serve as clearing credit institutions incorporated under houses and sources of refinancing. public law, cooperative credit institutions and specialised banks. All together, there Mortgage banks (Hypothekenbanken) are are about 2,277 banks and credit specialised in long-term mortgage loans institutes with an extensive network of and long-term loans to federal, state and about 38,000 branches. Banks, financial local governments. They issue bonds services institutions and insurance secured by mortgage loans and loans to enterprises in Germany are governed by public authorities. the state regulator, the Federal Financial Supervisory Authority (Bundesanstalt für In addition, a number of private and Finanzdienstleistungsaufsicht – BaFin) public banks provide highly specialized and are regulated by the German Banking services and special forms of financing. Act (Kreditwesengesetz – KWG). Insurance banks and leasing companies also play an important role in the The German Federal Bank (Deutsche financing of industrial business. Bundesbank) is part of the European System of Central Banks (ESCB) which Foreign Exchange Controls comprises the European Central Bank (ECB) and the National Central Banks of The Euro is freely convertible into other all 27 EU Member States. The duties of currencies, and the import and of the German Central Bank include country- capital is free, subject only to reporting specific tasks, within the framework of requirements. European monetary policy, such as, for example, joint decision-making and the A free European capital market was implementation of a common European introduced by the relevant EU directive monetary policy, the management of which completely abolished all currency reserves and provision of a non- restrictions on the transfer of capital competitive giro system for the banks. between EU Member States.

In Germany, there are several hundred Employment Regulations private commercial banks of which the largest are: Deutsche Bank AG, In Germany, there are a number of HypoVereinsbank AG (Uni Credit Group), general legal regulations which establish and Commerzbank AG. They grant short- a general framework for wages and term loans and credit lines, medium and salaries as well as for other terms and long-term loans, and trade in securities conditions of employment. Detailed terms

Doing Business in Germany 8 and conditions (e.g. the level of wages consulate or embassy abroad must and salaries, working hours, notice provide evidence at the time of periods, holidays, social security application for the visa that the local payments etc.) are generally agreed upon employment authority has assured him or in collective negotiations between her that a work permit will be granted. employee unions and employers’ Members of the management board of associations. Companies which are not corporations are inter alia exempt from member of such a board of the requirement of a work permit. representatives, in principle, can negotiate their employment conditions In general, all employees working in independently. However, certain statutory Germany are subject to mandatory social requirements must also be taken into insurance, regardless of their citizenship account. or the residence of the employer. Employees temporarily delegated by a A foreign national who intends to work in foreign employer to a German branch of Germany for a resident or non-resident the enterprise are generally exempt from employer generally needs a residence German social security payments. permit and a working permit. The German social security system Before entering Germany, a foreign provides for pension insurance, national from outside the EU must obtain unemployment insurance, health a prior residence permit insurance and nursing care insurance. (Aufenthaltsgenehmigung) in the form of The contributions are shared equally or – a visa from an official representative of the in the case of health insurance – nearly Federal Republic of Germany in his equally by the employer and the home country, if he or she intends to stay employee. Contributions in 2010 in more than three months or to take up percentages of gross salary are: paid work. The granting of a visa needs prior approval by the immigration • pension insurance 19.9 % authority (Ausländerbehörde) of the place • unemployment insurance 2.8 % where the foreign person intends to settle • health insurance (average) 14.9 % if he or she intends to stay longer than • nursing care insurance 1.95 % three months in Germany or intends to work in Germany. In the latter case, the The percentages are applicable only up to employment authority (Agentur für a maximum base income. In 2010, this Arbeit) must also approve the granting of maximum base is € 66,000 p.a. for the visa. pension insurance and unemployment insurance, and € 45,000 p.a. for health Nationals of EU Member States enjoy insurance and nursing care insurance. In special privileges. They will usually be excess of this maximum, neither granted residence permit without any employer nor employee pay further difficulties and they do not required contributions. As mentioned before, separate work permits. However, there foreign employees are subject to the are certain special requirements for the same social security regulations as citizens of the new EU member states. German employees. By contrast, there is no insurance obligation for a stay of less In addition to a residence permit, foreign than three months and for certain part- nationals from outside the EU who are not time employment. However within the self-employed and intend to work in European Union, employees may remain Germany need a work permit. A work in their national security system, if certain permit is issued by the local employment requirements of European law are authority for the geographical area where fulfilled. the job is located. The foreign person who intends to work in Germany and applies for an entry visa at a German

9 Doing Business in Germany types of business organisations

Principal Forms of Business In a sole proprietorship the owner is engaged in a typical commercial German law offers a broad variety of legal business. He is personally liable for all forms for conducting business. An debts and has to register his business in individual may wish to start business as the Commercial Register. a sole proprietor (Einzelkaufmann) or as a branch (Zweigniederlassung) of a foreign Setting up a sole proprietorship incurs entity. An investor may, however, prefer little cost: Only registration with the to set up an independent entity in Commercial Register and the local Germany, which is legally separate from authorities is necessary, but they require his home country’s business. In this case, low registration fees. the investor can select between a variety of forms of partnerships II. Partnerships (Personengesellschaften) and corporations (Kapitalgesellschaften). These legal forms 1. General Partnerships are: A General Partnership (Gesellschaft I. Sole Proprietorship (Einzelkaufmann) bürgerlichen Rechts) is a partnership which does not pursue a certain business II. Partnerships (Personengesellschaften) and has no registered business name. It must have a certain non-commercial 1. General Partnership (Gesellschaft purpose. The General Partnership is bürgerlichen Rechts) useful e.g. for associations for 2. Business Partnership (offene professionals, for individual transactions Handelsgesellschaft – oHG) or contracts (e.g. construction projects). 3. Limited Partnership (Kommanditgesellschaft – KG) A General Partnership can be set up 4. GmbH & Co. KG as a special form of without any costs. As it has a non- limited partnership with complete commercial purpose, no registration is limitation of liability necessary. The Partnership may have – 5. Silent Partnership (Stille Gesellschaft) but does not need to have – a written partnership agreement. A written version III. Corporations (Kapitalgesellschaften) is certainly better to prevent disputes, but it can also be made by oral or even non- 1. Limited Liability Company verbal consent. (Gesellschaft mit beschränkter Haftung – GmbH) including the new limited 2. Business Partnerships liability entrepreneurial company [Unternehmergesellschaft A business partnership (offene (haftungsbeschränkt)] Handelsgesellschaft – oHG) is a 2. Stock Corporation partnership in which all partners are (Aktiengesellschaft – AG) jointly and severally liable for all debts. 3. Limited Partnership by Shares The relationship between the partners (Kommanditgesellschaft auf can be stipulated in a partnership Aktien – KGaA) agreement. Each partner has the right I. Sole Proprietorship and the duty to be involved in the management. Although not a legal person, a general partnership can acquire

Doing Business in Germany 10 rights and liabilities and obtain real advantages in taxation and administration property and other rights over land. Legal which corporations do not have. Another actions may be brought by or against the important factor in the past was that partnership, and not against the interests in partnerships were privileged individual partners as a whole (such as in for purposes. This was the case of a General Partnership). interesting especially for family owned businesses. In 2009, the rules of A business partnership has to register inheritance tax were subject to with the Commercial Register and with fundamental reforms. The inheritance of the local authority, as it is a business partnership stakes is generally taxed at an organisation. A written partnership equal level as shares in corporations. agreement is not necessary, but Nevertheless, it is still possible to pass recommendable. partnership stakes on to heirs without any tax liability, if certain criteria are met. 3. Limited Partnership Therefore, for a period of seven years, the average sum of salaries must amount to A limited partnership 700 per cent of the origin sum and the (Kommanditgesellschaft – KG) is a special stake must not be transferred. If these form of business partnership. The major criteria are not fulfilled within this period, difference is that there is at least one the tax is only due pro rata. A tax free limited partner who’s liability is limited to transfer of 85 per cent of the stake is his fixed contribution to the partnership possible if the stake is held for five years (Kommanditist). Equally as the business and the sum of salaries amounts to 400 partnership, a limited partnership has a %. Furthermore, there are still advantages general partner (at least one) who is fully for partnerships in the normal course of liable (Komplementär). The partners own the business. all partnership property in joint tenancy. The general partners are entitled to It would be wrong to consider that the manage and to represent the partnership, GmbH & Co. KG is preferable in every whereas the limited partners may only case. It depends very much on the participate in the management if the demands and needs of the investor or partnership agreement so provides. The businessman whether a GmbH & Co. KG is partnership has to be registered in the useful or not. Generally speaking, it can be Commercial Register. said that the GmbH & Co. KG is preferable for smaller or family owned businesses 4. GmbH & Co. KG and for those businesses where gains are not necessarily reinvested into the A very popular form of limited partnership business but distributed to the partners. is the “GmbH & Co. KG”. This type of By contrast, foreign investors often choose partnership offers a complete limitation of a corporation as the legal form of their liability. The general partner holding company. It must not be (Komplementär) is a GmbH, a corporation neglected that a GmbH & Co. KG is often with limited liability. The result is that all less useful to a foreign investor especially partners benefit from a limited liability: in the context of treaties. the general partner because of its legal form as corporation, the limited partners 5. Silent Partnership because of their role as limited partners within the limited partnership. A silent partnership is a specific legal form of granting mezzanine capital. Depending An investor who comes e.g. from a on the partnership agreement, the capital common law country may now ask why can usually be qualified as equity rather the whole business is not run in a than debt mezzanine capital. corporation where liability is effectively limited to the same extent. The answer is In a silent partnership a person that the partnership offers a lot of

11 Doing Business in Germany contributes an amount of capital to an for start-ups in the service sector. This existing business without incurring any kind of GmbH cannot, however, make liabilities towards creditors. In return, the a full distribution of profits in order to silent partner shares in the profits save the minimum nominal capital (possibly also in loses). Besides for required for a normal GmbH. certain tax planning purposes, silent • The minimum value of one share has partnerships are used especially to allow been reduced to € 1,-. third parties to share profits and risks of • Some administrative regulations will the business without the need to acquire be abolished, e.g. the need for a one- rights and obligations not specifically man-company to present a bank covered in the silent partnership guaranty if the fixed share capital has agreement and to avoid the disclosure of not fully been paid into the company their investment since silent partnerships at the time of registration with the are generally not registered in the company’s register. Commercial Register. However, it has to • The currently very difficult rules be registered if the business in which it concerning the qualification of a participates is a stock corporation shareholder ’s loan as equity or debt because this arrangement would be have been simplified, partly abolished considered an agreement to transfer a and partly transferred to the portion of the profit. Also a silent Insolvency Code. partnership agreement with a limited • The statutory provisions have been liability company (GmbH) requires adapted to the jurisdiction of the registration within the Commercial European Court of Justice of recent Register. years, especially concerning the location of the company. German III. Corporations companies are able to choose administration headquarters abroad 1. Limited Liability Company deviating from their seat of incorporation. The limited liability company (GmbH) is • The danger of fraudulent misuse of the the most common form of incorporated company will be reduced. companies under German commercial • Cash-management-systems, currently law. Due to the flexibility it offers, the permitted under uncertain conditions, GmbH is generally preferred as a vehicle will get clear statutory regulations. A for closely held companies and cash-management-system is a system subsidiaries for foreign corporations. within a company group that ensures Limited liability companies have a legal the solvency of each member personality of their own. It can be formed company. by one or more persons. The persons may be individuals or corporate bodies, The statutory minimum share capital residents or non-residents, foreign or amounts to € 25,000. If contributed by domestic companies. cash, at least half of the capital, € 12,500, needs to be paid in at the time of A comprehensive reform of the law registration in the Commercial Register. governing limited liability companies The foundation of a Limited Liability came into force on 1 November 2008. Company must be stated by a notary The major issues arising from the new public. The usual costs of foundation are law are: about 1,500 Euro. The costs can be lower if the model articles of association are • The limited liability entrepreneurial used because the notarial deed certifying company [Unternehmergesellschaft the articles of association is not necessary. (haftungsbeschränkt)] regulated in section 5a is a GmbH without needing The shares of a GmbH are, subject to the to have a certain minimum nominal articles of association, freely negotiable. capital which is particularly attractive

Doing Business in Germany 12

The transfer of shares has to be agreed statements, distribution of profits, upon in the presence of a notary public. appointment and removal of the This effort makes the GmbH relatively managing directors and amendments to inconvenient for companies with a greater the Articles of Association. Decisions are number of shareholders. made by simple majority of votes, subject to the provisions of the articles. In some Any transfer of ownership can be made cases, a 75 % majority is required by law. conditional upon the consent of the GmbH or the other shareholders or any 2. Stock Corporation other restriction in the articles of association. A stock corporation (AG) is the most suitable business vehicle for a large scale The Articles of association, which have to operation, especially an international be drawn up by a notary public, must business. The principal advantage of a contain: stock corporation is that the shares of the corporation may be transferred with • the company’s name and relative ease and can be listed on a stock registered office exchange. • the purpose of the enterprise • the amount of fixed capital The holder of shares has no personal • the amount of capital contributed by liability to creditors of the AG, but he is each member. liable to the corporation for any unpaid consideration for his shares. Creditors can The articles of association can include attach all of the assets of a corporation further arrangements. They can be and thereby endanger or even wipe out the designed to the specific needs and interests of the shareholders, they can not demands of the company and its claim the personal assets of the members. shareholders.

The company is properly formed when it The statutory minimum capital stock has been registered in the Commercial (Grundkapital) for an AG is € 50,000. The Register of a local court. The appointment shares of a stock corporation can be held of one or more persons to manage the privately by individuals or publicly quoted company can be provided for either in the on stock exchanges. The foundation of a articles or by agreements between the Stock Corporation must be stated by a members. A managing director must be notary public. an individual person rather than a company but does not need to be a An AG can be formed by one or more citizen or resident of Germany. The persons. These persons may be supervisory board is mandatory only if the individuals or corporate bodies, residents GmbH has more than 500 employees. or non-residents. The formation of an AG starts with the drafting of a deed, Shareholders’ resolutions are taken at certified by a German public notary, in shareholders’ meetings. Shareholders’ which the founders (or single founder) meetings are normally called by the issue a declaration of formation, managing directors (or the supervisory undertake the obligation to pay in the board, if any) or by holders of at least share capital and lay down the articles of 10% of the share capital (as a means of incorporation. These articles must minority protection). The meetings do not include: need to be held in Germany. Votes can be cast through the use of telefax, etc. • the corporation’s name and Unless otherwise provided within the registered office articles of association, shareholders’ • the purpose of the corporation meetings include decisions of e.g. basic • the initial amount of fixed share capital company policy, approval of the financial • the composition of statutory minimum

13 Doing Business in Germany capital (the par value shares and non- meeting include decisions regarding the par value shares and the issue appointment of members of the premium) supervisory board, formal approval of the • the composition of the board of supervisory board and the board of directors management with respect to their • the method by which corporate activities during the preceding business announcements will be published. year, the appointment of auditors, amendments of the articles of The name of the corporation must always incorporation and reorganisation. include the designation “AG” Decisions are made by a simple majority (Aktiengesellschaft). The stock of votes; in some cases a majority of 75 % corporation exists only when an entry is is required by law. made in the Commercial Register. There are certain regulations for the so- Each stock corporation needs to have a called “small stock corporation”, e.g. board of directors and a supervisory fewer formalities with regard to dividend board consisting of at least three persons. distribution, merger and invitation to the The shareholders meet and vote in the general meeting. Furthermore, smaller general meeting (Hauptversammlung). stock corporations are allowed to renounce the need to have the general meeting’s The AG is managed and represented by decisions certified by a notary public. This the board of directors. Subject to the applies especially to companies not listed articles, all members of the board of at a stock exchange. directors must act jointly in both managing the corporation and 3. Limited Partnership by Shares representing the corporation vis-à-vis third parties. The board of directors has a A partnership partly limited by shares duty to report periodically to the (Kommanditgesellschaft auf Aktien – supervisory board about the business. KGaA) has elements of a stock There are no statutory restrictions on corporation and a partnership. It is a nationality or residence. A managing separate legal entity with legal rights and director may be a shareholder, but cannot obligations separate from those of its be a member of the supervisory board partners. The capital stock is divided into and vice versa. par value shares. The liability of shareholders is limited to the amount of The supervisory board of the AG controls their investment of the company. and supervises the board of directors, but However, there must be at least one may not participate in the corporation’s partner who is fully and personally liable day to day management. Members of the for the company’s debts. This special supervisory board are allowed to inspect form of corporation is not very common books and records at any time and call in Germany. extraordinary shareholder meetings. In addition, certain decisions of the board of directors have to be approved by the supervisory board. It consists of at least 3 members, the number of members has to be divisible by three. Residence or citizenship in Germany is not required.

A general meeting of the shareholders has to be held annually. The meeting is normally held in Germany at the place where the AG has its registered office. The statutory rights of the general

Doing Business in Germany 14 legal, accounting and audit requirements

Commercial Register prepare financial statements every year. The financial reporting requirements vary In most cases, registration with the according to the size and legal form of Commercial Register is mandatory. The the company concerned. Commercial Register is a public record maintained by the local Lower Court Irrespective of the legal form of the (Amtsgericht). It contains information enterprise, every business is required to about the legal affairs of the enterprises maintain accounts and to record in them existing in the area. The Commercial its business transactions and its financial Register is divided into two sectors: position in accordance with German principles of proper accounting. These Sector A: for the sole trader, oHG and KG principles are derived from a variety of Sector B: for the AG, KGaA and GmbH sources and are constantly being updated. Specifically, German accounting principles Depending on the type of business require that entries be complete, correct organisation, companies are subject to and made in chronological order, that special registration rules, e.g. a limited annual financial statements be prepared, liability company is required to state: that all computations be made in Euros and that books and records be maintained • the name of the company in German and kept for a certain period of • the head office of the company time. • the commercial purpose of the company The questions as to which accounting • the amount of initial capital of rules apply and whether or not some the company more specific rules may be neglected • the date when the Articles of depend on the size of the enterprise and Association were signed of its legal form. In general, companies • the names of the managing directors. and partnerships where all partners with unlimited liability are corporations rather Changes of managing directors need to than natural persons (especially GmbH & be registered. Notices of appointment Co. KG’s) must adhere to the principles of which have to be reported to the the commercial Code (HGB). Enterprises Commercial Register must be certified by with at least one natural person without a notary public. limited liability are subject to the rules of the Disclosure Code (Publizitätsgesetz) Anyone is entitled to inspect the which is more generous with the duties Commercial Register. of accounting and disclosure. The size and the legal form of the company is also Financial Statements vital to the question of disclosure. If income and accounting statements have With regard to accounting duties, all to be disclosed, they have to be business enterprises are obliged to

15 Doing Business in Germany transferred to the Electronic German All foreseeable risks and losses arising Federal Gazette (E-Bundesanzeiger). The up to the balance date have to be taken Electronic Federal Gazette published all into account, but profits may only be required information and is accessible to taken up if they are realised at the anyone. balance sheet date. • The valuation methods applied in the The classification of corporations and preceding financial statements should GmbH & Co. KG’s in different sizes be retained. depends on the following figures. To • The going concern principle has to include a corporation or GmbH & Co. KG be followed. within a larger size, the company must • The financial year usually corresponds meet two of the three criteria on two with the calendar year. The length of successive balance sheet dates: the financial year may not exceed twelve month.

euros small medium large The financial statements have to give a true and fair view of the financial affairs balance up to up to above 4,840 19,250 19,250 of the company. sheet total million million million up to up to above The Accounting Law Reform Act turnover 9,680 38,500 38,500 (Bilanzrechtsreformgesetz – BilReG) was million million million enacted in December 2004. The

up to up to above Accounting Law Reform Act introduced employees 50 250 250 international accounting standards and ensures quality of annual audits. It Small companies are allowed to prepare implements into national law several EU an abbreviated balance sheet in which directives in addition to the IAS only specific items need to be included regulations. separately. There are some other exceptions for small and medium sized The Act to Modernise Accounting Law companies relating to the profit and loss (Bilanzrechtsmodernisierungsgesetz - statement and to the notes to the BilMoG) which came into force on 29 financial statements. Furthermore, the May 2009 made some important changes disclosure requirements vary according to to German accounting rules. Generally, the size of the company. the changes come into force on 1 January 2010. The aim of the Act is to adapt The financial statements of all medium and German accounting principles to large sized corporations and GmbH & Co. international standards without leaving KG’s have to be audited by a German the field of accounting legislation to Public Auditor (Wirtschaftsprüfer). European IAS or US-GAAP. Some of the important changes may be summarised Accounting Principles as follows:

Accounting and valuation principles are • Rights of variable valuations of assets laid down in the Commercial Code have been abolished. (Handelsgesetzbuch – HGB) as follows: • All Self-made intellectual properties have to be carried as assets. • Financial statement have to be correct, • Changes in the valuation of pension understandable and complete. liabilities. • Values must be determined prudently. • The influence of tax accounting rules

Doing Business in Germany 16

on business accounting rules has been reduced, while the opposite principle, the influence of business accounting rules on tax accounting rules, will stay in force. • The key figures for the classification of corporations and GmbH & Co. KG’s as small, medium or large, as outlined above, have been raised by about 20 %. • Companies have the right to account according to IFRS-standards. If they take this opportunity, they are allowed to produce HGB-based annual accounts in a shorter version only.

17 Doing Business in Germany taxation

Tax Year management in Germany. The central place of management is where key In general, taxes are levied on a calendar decisions are regularly made. Otherwise, year basis. In the case of a non-calendar a corporation is considered non-resident. business year, tax is due for the calendar year in which the business year ended. In general, is calculated VAT is always levied on a calendar year on the profit of the operating business basis in line with the European VAT under German GAAP (HGB) with certain regime. add-backs and/or deductions. The main adjustment item is the financing cost General structure deduction (“Zinsschranke”). For corporations within an affiliated group, the First of all, a company’s tax status deduction of the surplus of financing depends on whether or not it is costs over interest income is restricted to incorporated. Corporations are treated as 30% of the income before depreciation, taxable entities and are subject to federal financing costs and interest (EBITDA). corporation tax (Körperschaftsteuer), to This does not apply, if financing costs do the solidarity surcharge not exceed interest income by more than (Solidaritätszuschlag) and to the € 3,000,000. municipal trade tax (Gewerbesteuer). Disallowed financing costs can be carried

forward for future deduction. In contrast, partnerships are transparent entities for corporation or Trade Tax purposes. The income determined at the level of the partnership is allocated to the Every business operating in Germany is individual partners. The partnership files subjected to trade tax on income returns only for information purposes, (“Gewerbesteuer ”). This also includes and each partner declares his respective foreign owned business operations. share of the partnership’s profits or losses in personal income/ corporation tax The tax base for trade tax is calculated on returns. The partnership itself is only the profit of the business with certain subject to trade tax. The main aspects of adjustments. The most important corporation tax are explained below. adjustment is the partial addition of

financing costs. One-quarter of the Corporation Tax financing costs exceeding the amount of € 100,000 has to be added. For trade tax Stock corporations (“AG” and “KGaA”) purposes, also annuities, share in profits and limited liability companies (“GmbH”) of silent partners, 20% of rents for resident in Germany are subject to chattels and 50 % of property rentals taxation on their world wide income must be regarded as deemed financing (unlimited tax liability). Non-resident expenses. corporations are subject to taxation on income from sources in Germany (limited tax liability). A corporation is considered resident in Germany, if it maintains either its seat or its central place of

Doing Business in Germany 18

Trade tax is based on federal law, but is Loss relief levied by local municipalities. The provisional assessment rate is established Corporations can apply for a loss on business profits. 3.5 % of business carryback into the previous year of up to profits is determined and multiplied by € 511,500 for corporation tax purposes 200 to 490% depending on local (not for trade tax). Losses exceeding this circumstances. As from 2008, this tax is threshold may be carried forward to be a non-deductible business expense for offset against profits in future years. the calculation of trade tax, income tax However, the utilization in future years is and corporation tax. limited to an amount of € 1m plus 60% of the income exceeding € 1m each year, An allowance of € 24,500 on profits (of which applies for corporation and individuals and general partnerships) is municipal trade tax purposes. This leads granted. Most of the trade tax on profits to a so-called “minimum taxation” of 40% of a partnership or sole trader can be set of the aforementioned excess in the off against the respective income tax respective tax year. during the same year (no carryforward or carryback available), provided certain Withholding taxes rules are observed. Corporations, whether with unlimited or Dividend Taxation limited liability to tax in Germany, are required to withhold taxes at source for Germany applies the so-called “part- the following types of payment and to income system” remit such taxes to the tax authorities (“Teileinkünfteverfahren”). Under this (the same applies to individuals and method, distributed profits are in principle partnerships): subject to double taxation, which is, • Wage tax (“Lohnsteuer”) must be however, reduced through a relief both at withheld by the employer and remitted the level of the company and the level of to the tax authorities. the shareholders. • Dividends (incl. deemed dividends), other profit distributions and income As from 2009, the taxable portion of from a silent partnership or profit dividends received after costs by participating loan are subject to individuals through a partnership has withholding tax at a rate of 26.375 % been raised from 50 % to 60 %, so the as from 2009. effective rate will be 28.49 % in the • If applicable, the amount of highest bracket. Dividends from privately withholding tax on payments to held shares will be subject to a in foreigners depends on the double the amount of 26.375 % effectively taxation treaty (DTA; (“Abgeltungssteuer”). It is optional to “Doppelbesteuerungsabkommen” = declare these dividends in the income tax “DBA”). return, so if the taxpayer ’s personal is below 26.375 %, any exceeding According to the EU Parent-Subsidiary- withholding tax can be refunded. Directive the withholding tax rate on dividends to a parent company in another If the shareholder is a corporation, only 5 EU member state can be reduced down % of the distributed profits is taxable, so to 0 %. Please note that anti-avoidance the effective tax rate is approx. 1.5% (incl. legislation requires certain conditions to solidarity surcharge and trade tax). This be met by the foreign parent company to applies both to domestic and foreign be eligible for a reduction of withholding dividend income. taxes.

19 Doing Business in Germany Solidarity surcharge Other income includes annuities, certain gains from speculative transactions (e. g. Since 1995, corporation and income tax gains from the disposal of real property in Germany has been subject to a within 10 years after acquisition), occasional activities and rent of movable solidarity surcharge property. Income which is not covered by (“Solidaritätszuschlag”). The solidarity one of the seven categories is not taxable. surcharge is levied on the assessed amount of income or corporation taxes, In order to determine the total amount of income or corporation tax prepayments taxable income on a calendar-year basis, and withholding taxes. The rate of the the amounts of income from the different solidarity surcharge is 5.5 %. The tax rate categories must be calculated separately. for corporations of 15 % is therefore For the first two categories of income increased by the solidarity surcharge to (from agriculture and forestry/from a trade 15.825 % (15 % plus 5,5% of 15 %). If, or business), the normal method of computing the gross income relevant for however, a is in place which income taxation is the accrual method reduces the withholding tax on dividends, based generally based on German GAAP. no solidarity surcharge can be levied According to this method, the relevant upon the withholding tax. The gross income is the difference between aforementioned effective tax rates have the net worth of the assets pertaining to always been calculated considering the each category of income at the end of the solidarity surcharge. proceeding compared to the current assessment period. In the case of income Personal Taxation from agriculture and forestry or trade or business where the annual profits do not Income tax exceed € 50,000 and sales revenue does not exceed € 500,000, the “net income Individuals are required to pay individual method” maybe used. Under this method, income tax (“Einkommensteuer”). The tax the taxable income is computed by year for income tax purposes is the reducing the gross income by income- calendar year. The tax liability of an related expenses in accordance with a individual depends on his residence. cash receipts and disbursement method. Citizenship is not a relevant factor. Business related expenses are generally According to the concept of unlimited deductible under both methods. liability to tax, individuals resident in Germany are subject to income tax on Net income from agriculture and forestry, their world-wide income. The status of from a trade or business and from self- unlimited liability to tax is also relevant employment must be determined by for various tax allowances and filing deducting business expenses from gross options (e.g. joint returns for married receipts. people, child benefit payments, child allowances). Net income from employment, investment income, rental income and certain other Residents are subject to income tax on income is determined by deducting any seven categories of income: expenses that are incurred to produce,

• income from agriculture and forestry maintain and safeguard that income • income from a trade or business (income related expenses) from gross • income from self-employment receipts (cash accounting method). For • income from employment employees, these expenses include • income from capital investment (for commuting expenses, tools, work clothes, assets acquired after Dec 31st, 2008 certain membership dues and certain also capital gains) away-from-home expenses. In case of • income from real estate and leasing rental income, interest expenses, activities depreciation and other related expenses • other sources of income can be deducted.

Doing Business in Germany 20

The basic level of tax-exempt income payable in Germany. A (“Grundfreibetrag”) is € 7,834. For with progression is in particular granted married tax payers (joint filing), the basic for income from immovable property, level of tax-exempt income is doubled. business profits and employment. This For tax payers having children, there is a means that the taxable income in child allowance of € 7,008 per child. Germany is taxed at the tax rate that would result if the worldwide income Within a taxation period, earnings and were to be taxed in Germany. losses can be fully offset against each other. If a loss still exists for an Other Taxes assessment period, it can be used to offset income in other assessment periods. The first option is to carry the losses back into the preceeding year, but There is no stamp duty levied in only to a maximum of € 511,500 (double Germany. in case of joint filing). If a loss still exists after the carry-back, it can be carried Value Added Tax (VAT) forward to future assessment periods to a maximum of € 1 million (double in case of VAT (“Umsatzsteuer”) applies to supplies joint filing).To the extent the loss carry of goods and services which an forward exceeds € 1 million, it can only entrepreneur delivers or renders, for neutralise 60 % of the remaining positive consideration (monetary or non-monetary) taxable current income. Any remainder is within Germany. It also applies to the carried forward further. Individual income importation of taxable goods and services tax is imposed at rates (import – depending on the amount of taxable “Einfuhrumsatzsteuer”) which are subject income. In 2008, effective tax rates of 0 % to the same taxes as domestic products up to 47.475 % are levied. The top tax and services. rate of 47.475 % is levied on an annual taxable income exceeding € 250,000. Since 2007, the standard rate for supplies of goods or services taking place in Withholding tax on investment Germany has been 19 %. Certain goods income and services (e.g. books, newspapers, food, and, as from 2010, accommodation Investment income, in particular interest services) are subjected to the reduced and dividend income, is subject to a rate of 7 %. withholding tax on investment income Certain goods and services are either (“Kapitalertragsteuer”) at a rate of 25 %, zero-rated for VAT (e.g. export of goods to which can be credited against domestic EU and non-EU destinations) or exempt income tax. from VAT (such as medical services and real estate supplies). The latter supplies If applicable, the amount of withholding do not qualify for an input VAT deduction. tax on investment income to be paid by foreigners depends on the double A German entrepreneur is normally taxation treaty (“DTA” – allocated a single tax reference number “Doppelbesteuerungsabkommen – DBA”). for all taxes including VAT. Furthermore a VAT identification number is issued for Double Taxation Treaties each registered entrepreneur by the Bundeszentralamt für Steuern Germany has concluded double taxation (www.bzst.de). treaties with more than 100 countries. In these conventions two methods to avoid In general, an entrepreneur has to issue an double taxation are applied. Generally, the invoice showing VAT due on a supply, foreign tax arising from dividends, foreign which becomes due to the tax interest is credited against the tax authorities. Most German entrepreneurs

21 Doing Business in Germany must submit a preliminary VAT return to transmitted to the competent tax the tax authorities on a monthly basis authority in the country of the (under certain circumstances, such VAT entrepreneur. The respective domestic tax returns are only requested quarterly or authority is to submit the application to not at all) and pay the net VAT amount the German tax office. Further questions due to the tax authorities at the same in regards to the application may be time. The normal deadline for submission asked by the German tax office to the and payment is the 10th calendar day entrepreneur directly. Non-EU after the end of the calendar month. A entrepreneurs without a presence within permanent extension of time for filing and the EU may choose one country to lodge payment of 1 month is available, if the the application for the whole of the EU. entrepreneur pays a deposit of 1/11 of the preceeding tax year ’s VAT liability. In Real Estate addition, an annual VAT return has to be filed for the calendar year, summarising The transfer of Real Estate triggers Real the information already reported in the Estate Transfer Tax (Grunderwerbsteuer) preliminary monthly returns and at 3.5 % (4.5 % in the City of Berlin) of the correcting eventual areas. This annual purchase price or any value received in return must be submitted by May, 31st of exchange for the property. the following year (December 31st, if tax If 95 % or more of the shares in a adviser is employed). corporate holding real estate are transferred (directly or indirectly), the tax In cases of intra-EU supplies and services falls due, as well. There is no exemption (as from 1st January 2010), a so-called for intra-group transfers/restructuring EC Sales List (“Zusammenfassende transactions. Likewise, the transfer of 95 Meldung”) must be completed for each % or more in a partnership triggers the month in general and submitted to the tax as well. The 95% limit is monitored tax authorities electronically within the over a period of five years. same deadline as agreed for the As a consequence, restructuring and submission of preliminary VAT returns. acquisition operations require thorough The EC Sales List must show the VAT analysis of the underlying real estate identification number of the recipient of portfolio. the goods and services and the value of the supply made to the recipient. Real Estate Tax

Foreign entrepreneurs not registered for Real Estate Tax (“Grundsteuer ”) is an VAT in Germany can attempt to recover annual tax levied by German VAT incurred in German purchases only Municipalities on real property (land and if they do not supply goods or render buildings). It is payable by the owner of services in Germany and if they do not the property irrespective of residence. The have a there. When applying for a refund, foreign tax is levied on the assessed value entrepreneurs must submit the form (“Einheitswert”) of the property using the “USt 1T” basic federal tax rate of 0.35 %. On the (www.bzst.de/003_menue_links/006_ust- resulting base amount verguetung/061_ausl_untern/index.html) (“Steuermessbetrag”), the municipalities along with the original VAT invoices from apply their respective multipliers to arrive the German suppliers to the at the final tax due. The multipliers vary Bundeszentralamt für Steuern, Dienstsitz by municipality and may be different for Schwedt, Passower Chaussee 3b, 16303 industrial or agricultural property. Average Schwedt/Oder. As from 1st January 2010 multipliers for industrial property range European entrepreneurs have to claim from 150 % to 600 %, depending on local back the German input VAT via an circumstances. electronic application (invoices have to be submitted electronically as well) till 30th September of the subsequent year of the supply. The application has to be

Doing Business in Germany 22

Withholding Tax on Building/Construction Services

In order to fight in the construction sector, a withholding tax regime ("Steuerabzug bei Bauleistungen") has been imposed. Service providers suffer a 15 % withholding on their gross invoice amounts, unless they can present an exemption certificate. The certificate is issued by the competent tax office upon application.

Other Taxes on Consumption

Numerous taxes are levied on the consumption of goods (tobacco, petrol, alcohol) and services (insurances, electric energy). Except for the tax on electric energy (Stromsteuer), they are not refundable. They are levied by the dealer and are not stated separately on the invoice.

23 Doing Business in Germany HLB in Germany how to contact us

HLB Deutschland GmbH National Secretariat Steinstrasse 27 40210 Düsseldorf

Tel +49 (0)211 323 91 93 Fax +49 (0)211 323 91 95 Email [email protected] Web www.hlb-deutschland.de

HLB Deutschland GmbH

National Secretariat, Steinstrasse 27, 40210 Düsseldorf Telephone: +49 (0)211 323 91 93 Fax: +49 (0)211 323 91 95 E-mail: [email protected] Web: www.hlb-deutschland.de HLB Deutschland GmbH is a member of HLB International. A world-wide network of independent accounting firms and business advisers