Europe’s elite economy is full of opportunities, but its legal system, tax law, business environment and social security system are complex. How to avoid costly mistakes when doing business in Germany
Germany maintains its position as Europe’s leading economic power thanks to a strong export economy, a robust labor market and highly developed industrial competence.
The service sector is the leading employer and employs about 72% of the German workforce, followed by industry, the automotive industry and specialized sectors such as mechanical engineering, electrical and electronic equipment and chemical products. Statistically, Germany has 277 international patents per million inhabitants – the highest in the world.
1. Decide what type of business you want to start
There are no restrictions for foreign investors who want to set up a company in Germany. No minimum percentage of German holdings is required for foreign companies. Foreign companies can opt for a domestic German GmbH, a (public) corporation, a partnership or a domestic branch.
The limited liability company (GmbH) is the most common legal form for companies in Germany. It combines limited liability, a high degree of flexibility with regard to its business purpose and clear requirements that need to be met. A German GmbH is subject to corporation tax, value added tax, the solidarity surcharge – an additional levy to finance socially useful projects – and trade tax, a special municipal tax that varies from city to city.
Alternatively, companies based outside of Germany that want to expand domestically can consider establishing a German branch. Special purpose vehicles (SPVs), property companies, etc. can most commonly be incorporated in the form of a GmbH or as a limited partnership.
2. Understand the costs of starting a business in Germany
A limited liability company (GmbH) requires a paid-up minimum share capital of €25,000. If the GmbH has only one shareholder, at least 50% of the share capital must be available in a German bank account as a prerequisite for registration. The costs for the registration and for the mandatory involvement of a German notary should also be taken into account when founding a GmbH.
When setting up a German branch, no share capital has to be paid up. Here, too, the costs of registration and the notary are incurred.
If a partnership is elected, there are no capital requirements at the partnership level, but they may apply at the general partner and/or limited partner(s) level. Here, too, there are costs for registration and a notary.
In addition, depending on the complexity of the business or transaction, third-party costs must be taken into account, such as for law firms, tax consultants, auditors and any corporate services.
Please note that all documents must be submitted in German.
3. Familiarize yourself with tax regulations
All companies operating in Germany, including branches of foreign corporations, are subject to corporate income tax. They must register with the local tax authorities within four weeks of incorporation. The general tax number is required for all taxes in Germany, including corporation tax and sales tax; However, VAT registration – where applicable – must be done separately and only after the company has been registered for income tax.
In principle, tax returns must be submitted by May 31 of the following year (can be extended upon request).
The average tax burden for companies in Germany is around 30%.
4. Financial incentives for German companies
Depending on the business and location of the company, tax or subsidy incentives, as well as loans with concessional terms or guarantees, may be available. Equity and/or equity investments from government agencies may also be available in some cases. For example, small companies in the eastern federal states (Mecklenburg-Western Pomerania, Brandenburg, Saxony, Saxony-Anhalt, Thuringia) can receive up to 40% funding if the local requirements are met.
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 levies in connection with the storage of non-EU products.
5. Know local employment and labor regulations
Employers must make contributions to the employees’ health, kindergarten, invalidity, pension and unemployment insurance. These contributions, together with social security contributions, amount to approximately 20% of the employee’s gross salary and are apportioned by the employee to approximately 40% of the gross salary.
Employers must deduct the taxes directly from the employee’s salary.
Employees who are not citizens of the EU, Liechtenstein, Iceland, Norway or Switzerland need a residence permit and a work permit to enter Germany for gainful employment. Post-Brexit, this will apply to UK nationals from January 1, 2021.
How Intertrust Group can help you invest in Germany
Germany has 16 federal states, each with their own regional authorities. When branching out in Germany, local regulations must be taken into account. The states have a high degree of independence from the federal government.
Therefore, understanding the complex legal and tax system, dealing with the local Chambers of Commerce and Industry or registering real estate can be a challenge for foreign companies setting up in Germany. Taking professional advice and working with a trusted partner is essential to avoid costly mistakes.
In Germany, we support clients in starting or expanding their business by providing them with all the necessary support and assistance to help them comply with local regulations and requirements.
Why Intertrust Group?
Intertrust Group is a publicly traded company with more than 65 years of experience providing premier trust and corporate services to clients around the world.
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Our 4,000 professionals work together in 30 jurisdictions to help clients achieve their goals
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Our Germany team comprises of administrative services specialists dedicated to serving multinational, private equity and funds clients
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We can support corporate clients expanding into Germany with a comprehensive range of services
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We advise you on founding a company in Germany and the optimal structuring
