Damalion Germany desk

Doing business in Germany

Germany is one of the founding members of the European Union (EU), and is a part of several organizations, including the United Nationals, OECD, NATO, G8, G20, and the European Monetary Union (EMU).

Being the largest economy in Europe and the fourth largest in the world, its GDP is at 3.5 billion in 2021. Crucial economic sectors include services, industry, and construction. The most competitive industries in Germany include mechanical, electrical engineering, commercial vehicle, automotive, and chemical industries. Internationally significant industries include business software and insurance.

The German market is open for foreign investments of any kind. The Federal Ministry for Economic Affairs and Climate Action However can evaluate, limit, and restrict transactions to uphold public order and security.

The legal system in Germany is based on civil law, made up of a legislature and independent judiciary. The country’s Constitution assumes that all legislative powers remain at the state level unless otherwise stated. Many fundamental laws and matters that are administrative in nature fall within the jurisdiction of individual federal states.

Foreign Investments in Germany

• Non-EU investors who acquire a certain percentage of the shares of voting rights in a German enterprise, regardless of the nature of business, will be examined by the Ministry.
• Applicable thresholds depend on the activities of a German enterprise.
• For critical infrastructures, such as software development and cloud computing services, the threshold is 10%.
• For active companies in the health and emerging technologies sector, such as artificial intelligence, robotics, and military goods, the threshold is 20%.
• All other companies, the threshold is 25%.

Voting rights calculations include third-party rights, where either an investor holds 10% or 20% of voting rights in the third party, or if an investor has concluded an agreement on the joint exercise of voting rights with the third party.

Foreign investments are also subject to notification requirement that have invested in partially critical sectors, including energy, information technology and communications, transparent haulage, health, water, nutrition, finance and insurance.

Limitations and Prohibitions on Doing Business with Certain Entities

The EU has enacted several sanctions and restrictive measures within the framework of its security policy. It has expressed various regulations against third parties, including North Korea, Iran, Russia, Syria, and Venezuela. Sanctions are also imposed on non-state entities such as terrorist groups and terrorists. Other restrictions are in accordance with the resolutions of the UN Security Council and may include the following:

• Arm embargoes
• Specific import and export bans
• Financial restrictions, including restrictions related to the capital market
• Visa restriction or travel bans
• Service restrictions

Comprehensive list of sanctions imposed on North Korea and Crimea Region of Ukraine. The list of country-specific sanctions and restrictive measures can be viewed here.  http://eeas.europa.eu/cfsp/sanctions/docs/measures_en.pdf.

Available Business Structures for Foreign Investors in Germany

The two most commonly used types of corporations in Germany are as follows:

• Stock corporation (Aktiengesellschaft, AG) that is similar to the English public limited company.
• Limited Liability Company (Gesellschaft mit beschränkter Haftung, GmbH) similar to the English Private Limited Company (Ltd).

Both of these business structures benefit from the limited liability of their shareholders.

GmbH is the legal form and most commonly used business vehicle for foreign investors doing business in Germany. Corporate governance is easier to handle. The capital maintenance rules are also lenient compared to a stock corporation. There are also several partnerships structures that exist. It is also possible for foreign investors to set up a trust. Partnership and trusts in Germany have complex governance structures with some exposing its members to unlimited liability.

Foreign companies organized under laws of EU member nations are common in Germany. This is especially true in the case of Dutch limited liability company (NV) or a Dutch private company with limited liability (BV). The legal framework of at least two EU member states is applicable to such business vehicles; hence their governance regime is more complex.

Company Formation and Registration in Germany

• A GmbH can be established with at least one shareholder by notarizing the company’s Articles of Association.
• A GmbH come into force on its registration with the commercial register kept at the competent local court.
• Registration process takes a couple of days to a couple of weeks. Completion of requirements are necessary and typically involves the notary.
• A company’s commercial register will include its company name, share capital, object of the company, and information about the managing directors.
• Commercial registers are centrally accessible through the common register portal of the German Federal State (handelsregister.de)and can be accessed upon payment of a fee.

Business Reporting Requirements in Germany

• A GmbH is required to file financial statements with the German Federal Gazette, an online database. Applicable fees will be assessed to be registered in the Federal Gazette.
• Reporting requirements will be based on the size of the GmbH.
• A small GmbH does not have to report or have its accounts audited.
• An auditor must be appointed during the general meeting.

Company Share Capital

• GmbH requires a minimum registered share capital of EUR 25,000.
• Shares in a GmbH can be issued in cash or kind.

Company Rights Attaching to Shares

• Based on the corporate governance regime of a GmbH, it is more flexible than that of a stock corporation (AG).
• Articles of Association of a GmbH can attach special rights to specific shares or limit rights attached to other shares within a certain legal framework.
• A stock corporation (AG) is required to report reaching of certain shareholding thresholds in a GmbH.
• Any violation of obligation means a stock corporation cannot exercise its shareholder rights in the GmbH.

Company Management Structure

• There are two decision-making bodies in a GmbH, namely the managing director(s) assuming executive management role and the general meeting as the shareholder’s forum.
• The general meeting will decide all important issues surrounding a GmbH by law and certain decisions that require majority of votes, representing at least three quarters of a company’s share capital.
• Shareholders can decide a catalogue of business measures which require consent.
• General meeting of a GmbH in principle is responsible for the appointment, revocation, and replacement of its managing directors.

Management Restrictions

• Managing editors must be individuals.
• Appointment of a legal entity as a managing director is not possible.
• Managing directors do not have to be German or EU residents. So long as they are able to enter the German territory, they can be a managing director.
• There are no legal restraints on the managing directors’ term.

Director and Officer Liability

• Managing directors of GmbH are bound by duties of the care to the company.
• Formal approval of the actions of the managing directors by shareholders’ resolution relieves the managing editor from known liability.
• To protect managing directors against personal liability, directors and officers insurance can be taken out.

Parent Company Liability

• Parent company is not liable for the obligations of a GmbH.
• However, there exists a law on the piercing of corporate veil of a GmbH, resulting in the liability of the parent company.
• Parent company may be liable to its subsidiary on the basis of tort law.
• Most common event triggering liability of the parent company under tort law is destruction of the existence of a GmbH.

Taxation Regime in Germany

For Non-Tax-Resident Businesses

• These entities are subject to limited tax liability on German income.
• Non-tax resident business can become subject to limited tax liability from German source income in case no permanent German establishment exists.
• Income tax rate for individuals conducting business in Germany varies between 14% and 45% , with a solidarity surcharge of 5.5%.
• Corporations subject to corporate income tax rate of 15%, with solidarity surcharge of 5.5%. Quarterly advanced payments are due every 10th of March, 10th of June, 10th of September, and 10th of December.
• Trade tax is assessed between 7% and 17.5%, depending on the municipality where the taxpayer’s business is located.
• Quarterly advanced payments are due every 15th of February, 15th of August, and 15th of November.
• Value added tax assessed on services and deliveries rendered by German entrepreneurs. Standard German VAT rate is 19%. A reduced rate of 7% as well as exemption are applicable in specific cases.
• Preliminary VAT returns should be filed on a monthly or quarterly basis by the 10th of the following month and combined in an annual VAT return.
• Annual tax returns for income tax, corporate income tax, trade tax, and VAT are until 21st of July of the year which follows the respective tax year to be filed.
• Filing extension is applicable in cases wherein annual tax returns are prepared by a professional tax advisor.

Business Dividends, Interest, and IP Royalties

Dividends Paid

• Foreign corporate shareholders are assessed with 25% withholding tax, plus 5.5% solidarity surcharge.
• Subject to compliance with the German Anti-Treaty or Directive Shopping Rules.
• Withholding tax can be further reduced as per domestic law, Directive 2003/123/EC amending Directive 90/435EEC pertaining to the taxation of parent companies and subsidiaries, or a double tax treaty.

Dividends Received

• Dividends received from a domestic or foreign company are 95% tax exempt.
• For trade tax purposes, the 95% tax exemption is applicable in case of a shareholding of at least 15% in the domestic or foreign company at the beginning of the assessment period.
• Any individual receiving dividends as a business income benefit from partial income exemption, which is 60% of dividends of dividends taxed.
• Dividends received by individuals as non-business income are assessed with 25% withholding tax plus 5.5% solidarity surcharge and church.

Interest Paid

• No withholding tax on interest payments on standard loans to non-residents, however, there are general exceptions.
• One exception is that if the debtor is a German branch of a bank or financial services institution, and another for interest which is profit related.

IP Royalties Paid

• Subject to reduction under an applicable double tax treaty or Directive 2003/49/EC on interest and royalty payments as per the Interest and Royalty Directive.
• IP Royalties paid to non-resident corporate shareholders are subject to withholding tax at a rate of 15%, with solidarity charge of 5.5% thereon.

Transfer Pricing Rules

• There are transfer pricing rules in Germany.
• As per OECD guidelines, transfer prices must be determined in an arm’s-length basis from a German perspective.
• Standard transfer pricing methods accepted under German tax law are comparable uncontrolled price method, resale price method, and cost-plus method.

Double Tax Treaties

Germany has a wide network of double taxation treaties with more than 100 countries, including the United States and all countries in Europe.

Damalion is a premier business consulting firm offering a comprehensive suite of services to foreign investors and corporate entities looking to establish a company in Germany. We have a stellar track record in the formation and registration of foreign-owned companies in premier jurisdictions, ensuring efficient management and compliance with local regulations.

Our global service network consists of lawyers, accountings, tax planning experts, and other service providers, all working towards providing you with a smooth company formation process and successful business operations over the long term. Whether you need assistance in the incorporation of a company or an investment fund to fully managed solutions to inspire long-term growth, Damalion is here with you every step of the way. For more information about how to successfully establish your business in Germany, contact a Damalion expert today.