Doing Business in Germany The different legal entities and tax law issues Contents 1. Limited Liability Company – GmbH 2 2. Stock Corporation – AG 5 3. Partnership Limited by Shares – KGaA 8 4. GmbH & Co. KG 9 5. Branch offices 11 6. Developments in European Law 12 7. Relevant German tax law 14 FURTHER INFORMATION Should you require further information on any aspect of Doing Business in Germany, please contact one of the persons mentioned below or the person with whom you usually deal. Contact Düsseldorf Dr. Christoph Louven [email protected] Frankfurt Dr. Tim Oliver Brandi [email protected] Hamburg Dr. Andreas H. Meyer [email protected] Munich Dr. Michael Rose [email protected] Tax Dr. Ingmar Dörr [email protected] This note is written as a general guide only. It should not be relied upon as a substitute for specific legal ad- vice. Doing Business in Germany 1 Doing Business in Germany The different legal entities and tax law issues German law offers a number of legal vehicles for the The establishment of branch offices of foreign compa- carrying on of entrepreneurial business activities. The nies is then dealt with briefly followed by an overview of available corporate legal forms are defined in German European corporate law developments. The brochure statutory regulations which can to a greater or lesser concludes with an examination of the various German extent be tailored using contractual provisions. tax law issues applicable to businesses. This brochure gives an overview of the various legal Please regard this client note as a brief summary pro- frameworks within which businesses can operate in vided merely to give an initial overview of the various Germany and outlines the main characteristics of the possible entrepreneurial models in Germany. Given the different legal forms and their differences, the require- complexity of company law, it cannot serve as a substi- ments for formation and management, and the liability tute for legal advice which our German offices will glad- regime of the respective corporate entities. It first ad- ly provide to you as necessary. dresses the German limited liability company (GmbH) which is the most common form of incorporation in Germany and then deals in turn with the German stock corporation (AG) whose shares may be traded on a stock exchange, the partnership limited by shares (KGaA) and the limited liability partnership (GmbH & Co. KG). 2 Doing Business in Germany 1. Limited Liability Company − GmbH 1.1 Description and legal characteristics The shareholders can stipulate further provisions in the articles such as a limitation of the life of the company to The German limited liability company (Gesellschaft mit a certain period of time, the release of the shareholders beschränkter Haftung, GmbH) is a commercial compa- from non-compete covenants or the obligation to make ny with a separate legal personality which can be estab- additional contributions. lished for any legally permissible purpose. The share- holders (Gesellschafter) participate in the company For a GmbH to be validly constituted, it must be regis- through ownership of one or more shares (Geschäfts- tered with the competent commercial register. The anteile) in the company's share capital. As a result of its managing directors and shareholders should wait until separate legal personality, when the company enters registration is completed before entering into transac- into transactions with third parties, its shareholders are tions on behalf of the GmbH in order to avoid running not personally liable towards those third parties. the risk of incurring personal liability. The German Limited Liability Companies Act (GmbHG) Name and registered office is the primary legal source governing the GmbH which There are no restrictions on the name given to a GmbH was amended significantly in 2008 in order to simplify provided that the name: and accelerate its formation and enhance its overall clearly distinguishes the GmbH from other busi- attractiveness in comparison to foreign limited liability nesses in the same location; companies. is not misleading; and contains a reference to its limited liability. 1.2 Formation A GmbH's registered office (as stipulated in the articles of association) must be located in Germany. This loca- A GmbH can be established by one or more persons. tion can differ from the location of the company's opera- Any natural or legal person or partnership in terms of tional facilities, the company's management, and the private or public law (domestic or foreign) may partici- company's administration. Unlike the registered office, pate in a GmbH. the seat of management or administration (Ver- waltungssitz) of a GmbH can be located outside Ger- The valid creation of a GmbH takes place in two steps: many (at least in another EU country or the US; in other first the establishment of the company by a notarised countries this may depend on their respective corporate agreement between the shareholders (or by a notarised laws). model protocol as attached to the GmbHG (Muster- protokoll)) which embodies the company’s articles of Registered share capital association, and secondly its registration and entry in the competent commercial register. In terms of German law, the registered share capital (Stammkapital) of a GmbH cannot be less than Eu- The company's articles of association (Gesellschafts- ro 25,000. The shareholders are free to stipulate for any vertrag, or Satzung as it is often referred to in practice) amount of the registered share capital above Eu- set forth in detail the specific characteristics of the par- ro 25,000, provided it is in whole units of Euro. Each ticular GmbH, such as its organisation (in particular the shareholder can hold as many shares (Geschäftsan- name and registered office of the company, the object teile) as desired provided that the aggregate of all the of the enterprise as well as the aggregate amount of the shares subscribed equals the company's registered registered share capital) and the relationship between share capital. the company and its shareholders. The articles of asso- ciation constitute the instrument by which the company The list of shareholders includes consecutive number- is established and incorporated and contain the found- ing of the shares and only those shareholders shown in ing shareholders' undertaking to make an agreed initial the list are recognised legally as shareholders of the contribution to its registered share capital. company. The list, therefore, forms the basis for the acquisition of shares in good faith. Doing Business in Germany 3 Contributions towards the capital of the company can adopted by simple majority). The appointment and re- be made in cash or in kind. moval of managing directors takes effect as soon as the resolution is adopted (or on the date specified in the Contributions in kind must always be made in full, resolution) and such resolution is entered in the com- whereas payment of one quarter of the subscribed con- mercial register. tribution suffices in the case of cash contributions. However, the total of all cash contributions and contri- Generally, a managing director's service contract butions in kind must amount to at least half of the regis- (Dienstvertrag) sets out his/her contractual duties to the tered share capital. company and is usually concluded at the time of his/her appointment. However, the two legal relationships are Contributions in kind are only permissible if expressly not necessarily linked to each other (eg, a managing provided for in the articles of association and include all director's service contract is not, in principle, affected by non-cash contributions, for instance contributions of his/her dismissal). assets. The relevant asset must have an ascertainable economic value. Typically, assets contributed in kind Normally, managing directors are appointed to repre- include movable and immovable property, rights in in- sent the company jointly. However, the articles of asso- tangibles, membership rights (such as shares), receiva- ciation can provide that either a managing director act- bles, goodwill, customers and know-how. Services (e.g. ing alone or two managing directors acting jointly can consulting services) cannot be provided as a contribu- represent the company. It is also possible to appoint tion in kind. To minimise the risk of the value of the other representatives, (eg authorised representatives contribution in kind falling short of the required amount (Prokuristen)) and to link their power of representation of the initial contribution subscribed and the consequent to the managing directors' and vice versa. Outside par- risk to the company's creditors and co-shareholders, ties may generally rely on the information provided by German law requires all shareholders to draw up a the commercial register regarding the representatives of written and personally signed "report on formation by the company. contributions in kind" (Sachgründungsbericht). This report must detail an intelligible summary of the meth- The managing directors are responsible for the man- ods used to value the non-cash assets. As a rule, the agement of the company, for internal decision making competent court also requests an expert opinion by a within the company – outside of the shareholders' meet- certified public accountant (Werthaltigkeitsgutachten). ing – and for managing the business, including hiring, management and supervision of the employees. 1.3 Management structure and organisation Managing directors can become liable to the company if they do not comply with the standard of "due care of a As a legal person, the GmbH can only act through its prudent businessman" and, in mostly rare cases, man- representatives. The only management bodies pre- aging directors can be held liable to third parties. scribed by German law for every GmbH are the manag- ing director(s) and the shareholders. German legislation Shareholders' meeting regarding employee participation or, alternatively, the The shareholders' meeting is the GmbH's highest au- GmbH's articles may require a supervisory board or an thority/decision making body.