Doing Business in Germany This document describes some of the key commercial and taxation factors that are relevant on setting up a business in Germany. dfk.com Prepared by Peters, Schönberger & Partner mbB +44 (0)20 7436 6722 2 Doing Business in Germany Background Country overview As Germany is a part of the European Monetary Union, the Euro has been Situated in the heart of Europe, Germany its official currency since January 1, covers an area of 357,340 square 1999. After a period of weakness at the kilometers. The German landscape varies beginning, the Euro and the US dollar from high mountains in the south, to flat have almost achieved parity (EUR 1.00 regions with coast areas in the north, vs USD 1.07 in April 2017). Concerning and numerous low mountain ranges in exchange controls, the Euro is freely between. The German population, about convertible into other currencies and 82,8 million, is predominantly German there are no restrictions for the money native speakers, though learning at import and export, except for money least one foreign language is common laundering regulations which now require (preferably English). Concerning its a declaration of cash of EUR 10,000 political system, Germany is a federal or more. republic consisting of 16 federal states (Bundesländer). Within its capital, Although many legal regulations exist, Berlin, the main German governmental specific working conditions, wages and institutions – Federal Parliament salaries are often agreed in course of a (Bundestag) and Federal Council collective bargaining process between (Bundesrat) – are located. trade unions and employers’ associations. Compared with most other countries, the influence and power of the German trade Economic overview unions is extremely high. Being especially strong in terms of its exports (2016 exports: EUR 1,207 billion, Transport infrastructure imports EUR 955 billion (both goods and services accumulated)), Germany has With its 12,993 kilometers of motorways become one of the largest exporters in the and its very extensive railway system, world and, due to the size of its population, Germany offers good conditions for Germany is the largest consumer market the exchange of services and goods. In in Europe. Like most of the major addition, more than 100 international economies, Germany has been affected airlines fly to Germany. by the financial crisis in 2008 and 2009, but the impact was less in Germany than elsewhere. In the meantime, the gross domestic product increased materially from EUR 2,737 billion in 2013 to EUR 2,904 billion in 2014, to EUR 3,026 billion in 2015 and to EUR 3,133 billion in 2016. For 2017, a moderate onward increase is predicted. dfk.com +44 (0)20 7436 6722 Doing Business in Germany 3 Choice of Legal Form Branch A representative office which is not engaged in trade or business is not There are no formal restrictions on regarded as a branch, although for operating a branch of a foreign company taxation purposes the definition of a in Germany. A branch is not a separate permanent establishment in an applicable legal entity distinct from its parent. double tax treaty must be considered. The Consequently, a branch cannot enter mere establishment of a branch does not into agreements without either its head trigger any German taxes. office or its parent. The branch which is operating in Germany can sue and be sued in Germany only through its foreign parent Subsidiary which is liable to the full extent of its assets for the liabilities of the branch. A possible option of setting up a subsidiary is the establishment of a stock corporation It is possible that a branch may be (Aktiengesellschaft). Nevertheless, by registered with a German local commercial far the most common and flexible legal register as a “registered branch” by filing form for subsidiaries of foreign investors the foreign incorporation documents if operating in Germany is the “limited the branch exercises essentially the same liability company” (Gesellschaft mit activities in Germany as the foreign parent beschränkter Haftung or GmbH). company. dfk.com +44 (0)20 7436 6722 4 Doing Business in Germany The minimum statutorily required capital (haftungsbeschränkt)” or “UG for the GmbH is EUR 25,000. 25% of the (haftungsbeschränkt)” as a supplement in subscribed capital (but at least EUR 12,500) its firm, to underline the limited liability. must be paid in at the time of formation The legal entity shall reach sufficient (only if the share capital is capitalization by retaining a quarter of its being contributed in cash). profits in the capital reserves. By reaching a nominal capital of Euro 25,000 a business A GmbH can be established by a sole company with restriction may alter its firm investor. If the GmbH has only one to a GmbH. shareholder at least 25% of the subscribed capital (but a minimum of EUR 12,500) The statutory seat of all German must be paid in. In such case, the payment corporations previously had to be of the capital contribution into the assets registered in Germany but from 2009 of the newly established GmbH must onwards the operating seat can be be objectively recognizable. Capital situated in foreign countries. contributions in kind are possible, but the contributed assets must be fairly valued and the value is subject to examination Other forms of business organization by the registrar. In addition to corporations such as the The obvious advantage of a GmbH stock corporation and the GmbH, German over a branch is that the liability of the law permits further forms of business shareholder is limited to the amount organization. The limited partnership with of the share capital of the GmbH. Like share capital (Kommanditgesellschaft a branch, the mere establishment of a auf Aktien) is another form of a GmbH does not trigger German taxes. The corporation. Furthermore, a business costs of establishing a simple GmbH with a can be run in the form of a partnership. subscribed capital of EUR 25,000 is about The most common partnership forms EUR 2,500. are the general partnership (offene Handelsgesellschaft - OHG) and the limited At the end of 2008, German legislation partnership (Kommanditgesellschaft - changed the provisions governing KG). Although both types of partnerships investments by small corporations. To play an important role in business life in facilitate doing business throughout Germany, foreign investors usually choose minor capitalized legal entities, investors the limited partnership. In a KG only the can set up a so-called business company general partner(s) (at least one - e.g. a (Unternehmergesellschaft or UG). This GmbH then forming a GmbH & Co. KG) new type of a limited liability company is (are) fully liable and the liability of the mainly follows corporate rules of the limited partner(s) (at least one - e.g. an GmbH but its required capital starts from individual) is limited to the subscribed and EUR 1. Nominal capital has to be paid registered contribution to the partnership. in, contributions in kind are excluded. The business company should include the wording “Unternehmergesellschaft dfk.com +44 (0)20 7436 6722 Doing Business in Germany 5 Audit Requirements Requirement and thresholds amend the financial statement by a cash flow statement and a statement of The German Commercial Code changes in equity (if they are not obliged (Handelsgesetzbuch) determines to prepare a group financial statement). regulations concerning the preparation Implementing several EU regulations in of the financial statements (balance sheet 2005, the application of IFRS became part and profit and loss account) which should of the German Commercial Code. Thus, be complied with by all business entities the application of IFRS is mandatory for regardless of their company form. All the group financial statements of capital corporations must complete the financial market-oriented companies. In 2009, statements by notes. Medium sized and certain new rules were passed to make the large corporations should additionally German Commercial Code an equal but prepare a management report. Capital more cost-effective alternative to the IFRS market oriented corporations should (e.g. hedging and cost of goods). dfk.com +44 (0)20 7436 6722 6 Doing Business in Germany For limited partnerships with a corporation as an unlimited partner (e.g. GmbH & Co. KG), widely the same regulations apply as for incorporated companies. The German Commercial Code defines three size classes: small, medium sized and large companies. The criteria used to determine to which size class the company belongs are balance sheet total, turnover, and the number of employees. In order to allocate a company to a particular size class the company must meet two of the three criteria in two successive years: Balance sheet total in Turnover in Mil EUR Annual average Mil EUR number of employees Micro up to 0.35 up to 0.7 up to 10 Small up to 6 up to 12 up to 50 Medium size up to 20 up to 40 up to 250 Large more than 20 more than 40 more than 250 According to its classification into the In principle, each sole proprietor is three size groups, a company must obligated on bookkeeping, but if the meet disclosure requirements, e.g. large turnover is EUR 600,000 or less and corporations must disclose the balance the profit keeps below EUR 60,000 in sheet, the profit and loss account, two consecutive business years, sole the notes as well as the management proprietors are exempted from report, whereas for small corporation mandatory bookkeeping. simplifications in respect of the financial statements are granted. An audit of the financial statements as well as of the management report is mandatory for medium sized and large companies. dfk.com +44 (0)20 7436 6722 Doing Business in Germany 7 Taxation General tax information treaties to which Germany is a partner.