Europe’s top economy is full of opportunities, but its legal system, tax law, business environment and social security system are complex. Here’s how to avoid costly mistakes when doing business in Germany
Germany retains its position as Europe’s leading economic powerhouse thanks to a strong export sector, resilient job market and highly developed industrial competence.
The service sector is the leading employer, engaging about 72% of German workers, followed by the industrial sector, automotive and specialised sectors such as mechanical engineering, electric and electronic equipment and chemical products. Statistically, Germany has 277 international patents per million inhabitants – the highest in the world.
1. Decide what sort of enterprise you want to establish
There are no restrictions on foreign investors wanting to set up a company in Germany. No minimum percentage of German shareholdings is required for foreign businesses. Foreign companies can opt for a domestic German limited liability company, a (public) corporation, a partnership, or conduct business via a Germany-based branch office.
The limited liability company (Gesellschaft mit beschränkter Haftung or GmbH) is the most widely used legal form for companies in Germany. It combines limited liability, high flexibility in relation to its business purpose and clear requirements that need to be fulfilled. A German GmbH is subject to corporate income tax, value-added tax (VAT), solidarity surcharge – an additional levy to fund socially useful projects– and trade tax, a special municipality tax that varies from city to city.
Alternatively, companies headquartered outside Germany and intending to expand into the country may think of establishing a German branch. Special purpose vehicles (SPVs), property companies and so on can be established most commonly in the form of a GmbH or as a limited partnership.
2. Understand the costs of setting up a business in Germany
A limited liability company (GmbH) requires a paid-in minimum share capital of €25,000. In case the GmbH only has one shareholder, at least 50% of the share capital must be available in a German bank account as a condition for registration. The costs of registration and for the mandatory involvement of a German notary should also be considered when setting up a GmbH.
When setting up a German branch there is no requirement for share capital to be paid in. The costs of registration and a notary will also apply here.
If a partnership is chosen, there are no capital requirements at partnership level but they might apply at the level of the general partner and/or the limited partner(s). Again, there will be costs for registration and a notary.
In addition to the above, and depending on complexity of the business or transaction, third-party costs must be taken into account, such as for law firms, tax advisors, auditors and any corporate services.
Note that all documents must be submitted in German.
3. Become familiar with tax regulations
All companies doing business in Germany, including branches of foreign corporations, are liable for corporate income tax. They must register with local tax authorities within four weeks of incorporation. The general tax number is required for all taxes in Germany, including corporate income tax and VAT; however, VAT registration must be handled separately – if applicable – and only once the business is registered for income tax.
In general, tax declarations must be submitted by 31 May of the following year (although this can be extended on request).
The average tax burden for companies in Germany is around 30%.
4. Financial incentives for Germany businesses
Depending on the company’s business and where it will be located, tax or subsidy incentives might be available, as well as loans with preferred conditions or guarantees. In some cases, capital and/or shareholding investments by state authorities may also be available. For example, small enterprises in the eastern states (Mecklenburg-Vorpommern, Brandenburg, Saxony, Saxony-Anhalt, Thuringia) may receive up to 40% funding if local requirements are fulfilled.
Germany has two free zones (Freihafen/Freizone): the ports of Bremerhaven and Cuxhaven, which are not subject to domestic sales tax, import duties and other charges in relation to the warehousing of non-EU-products.
5. Know local employment and labour rules
Employers must contribute towards employees’ health insurance, nursery, disability, pensions and unemployment insurance. These contributions, together with social security contributions, amount to about 20% of the employee’s gross salary and are matched by the employee, bringing the total to about 40% of gross salary.
Employers must deduct tax directly from employees’ salaries.
Employees who are not nationals of the EU, Liechtenstein, Iceland, Norway or Switzerland need a residence title and a work permit to enter the country for work. After Brexit, this applies to British nationals from January 1, 2021.
How Intertrust Group can help you invest in Germany
Germany has 16 states (Länder), each with its own local governments. Local rules must be considered when setting up business in Germany. The states have a high degree of independence from the federal government.
That’s why understanding the complex legal and fiscal system, dealing with local commerce and industry chambers or registering properties can be a challenge for foreign companies setting up a business in Germany. Taking professional advice and working with a trusted partner is essential for avoiding costly mistakes.
In Germany, we assist clients to set up or expand their business by providing all necessary support and assistance to help them comply with local regulations and requirements.
Why Intertrust Group?
Intertrust Group is a publicly listed company with more than 65 years’ experience in providing world-class trust and corporate services to clients around the world.
- Our 4,000 professionals work together across 30 jurisdictions to help clients achieve their goal
- Our Germany team includes specialists in administration services dedicated to servicing multinational, private equity and fund clients
- We can help corporate clients expand into Germany with a full suite of services
- We can advise on the best type of entity when setting up a business in Germany and how best to structure it
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