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Home » Countries » Europe » Germany

Global expansion is a step to make for any business, regardless of what you wish to achieve. The opportunities that can come with an expansion can be both incredibly exciting as well as intimidating and confusing, especially when you consider all of the registration procedures that needs to be done and documentation required.

Expanding to countries such as Germany – which is characterized by a highly-skilled, efficient, and international workforce, intricate employment and tax laws, and a first-class communications and transport infrastructure network linking the country to the rest of Europe, boasting the title of Europe’s No. 1 logistics market – can bring both excitement to the possibilities, but also significant stress to ensuring the entity with the country’s rigorous legal structures and laws.

Ensuring compliance without the sufficient knowledge of the country’s laws also adds to the stress of getting your new entity off the ground and ready to test new markets. Going at it without the proper support can increase the costs, time and risks involved.

Each new markets bring new challenges, and these can be worked through more efficiently and cost-effectively with the support of an International Professional Employer Organization (PEO) such as Bradford Jacobs, especially through our Employer of Record (EOR) framework. This can be best utilized when businesses are just beginning their expansion process and require more information before committing to incorporating an entity and fully establishing themselves in that market.

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Germany – The Economy

Germany is one of the founding members of the European Union and the Eurozone. It ranks 9th in the 2020 Global Innovations Index, as well as 7th in the 2019 Global Competitiveness Index, both published by the World Economic Forum and IMD.

It is the Europe’s strongest and largest national market, as well as the fourth largest in the world by nominal GDP, and the fifth largest in the world by GDP or PPP.

The country’s economy is based on the social market economy, that is highly diversified and placing equal focus on services and production. Its influence stretches throughout Europe and beyond – Germany is one of the largest exporters globally, recording over EUR 1600 billion worth of goods and services exported in 2019, and over EUR 1.2 trillion in 2017.

Geographically, Germany is ideally placed in the European continent, and holds state-of-the-art logistics and communications networks. This includes a strong and world-renowned transportation infrastructure of airports, railways, ports, and highways that connects the country domestically and internationally.

Germany is one of the main gateways to European talent for companies expanding abroad and serves as a magnet for business ventures from the United States, Australia, and Asia. World-renowned companies such as Allianz, Diamler, BMW, SAP, and Volkswagen are headquartered in Germany. It is also the world’s top location for trade fairs.

When it comes to production, Germany possesses the largest manufacturing economy in Europe. It also invests into a strong research and development infrastructure with practical industrial value, gaining the reputation as the bridge between current university insights and industry-specific improvements.

Germany also has its eyes on the future, embracing innovation, sustainability, and digitalization with the EU Innovation Scoreboard (2021) ranking the country highly in human resources, information technology, research and development, and environmental sustainability.

Small and Medium-Sized Companies

Small and Medium-Sized Businesses (SMEs) have a huge role to play in Germany’s economy, as well as world trade.

Currently, close to 50% of the world’s leading SMEs are located in Germany.

It is recorded by Statista that, in 2021, there are approximately 2.5 million small and medium sized businesses (SMEs) to be operating in Germany.

SMEs in Germany also have a huge impact on employment, creating over 1.5 million jobs.

No. of States/Provinces5 regions, split into 11 provinces
Principal CitiesCopenhagen, Aarhus, Odense, Aalborg, Frederiksburg, Esbjerg, Randers, Kolding, Vejle, Horsens
Language(s)Danish (German, for certain regions)
Local CurrencyDanish Krone (DKK)
Major ReligionChristianity
Date Formatyyyy-mm-dd
Time ZoneCentral European Standard Time (GMT +1)
Country Dial Code+ 45
Border CountriesGermany, Norway, Sweden, Poland, Netherlands
Tax Year1st January – 31st December
VAT %25%
Minimum WageNo national minimum wage; but approximately earn DKK 17, 000 per month ($2,647) or DKK 204,000 per year ($31,766) – gross pay.
Taxpayer Identification NumbersDanish Tax Number [ID Number] (CPR)
Danish Tax Number [Corporations] (CVR)
Danish Social Security Number (CPR)
Leading Sectorsagriculture, energy, wind turbines, shipbuilding and refurbishment, chemicals, food processing, textiles and clothing, electronics, wood products, construction, machinery and transportation equipment, steel, and medical equipment
Main importsCars, refined petroleum, packaged medicaments, crude petroleum, broadcasting equipment
Main exportsPackaged medicaments, electric generating sets, pig meat, refined petroleum, blood, antisera, vaccines, toxins, and cultures
Main trading partnersGermany, United States, Sweden, United Kingdom, Norway, Netherlands, and China
Government TypeUnitary parliamentary constitutional monarchy
Current Prime MinisterMette Frederiksen

The Main Sectors of the German Economy

The country focuses on the following key sectors, which all have a significant impact on the country’s economy:

The country focuses on the following key sectors, which all have a significant impact on the country’s economy:

  1. Machinery, Automotive, and Aviation – This sector drives the nation’s reputation as in high-tech innovations, like robotics. The country has a strong engineering tradition and takes the lead in modern manufacturing solutions. The sector currently employs more than 6,400 people and generates approximately 498 billion euros per year.

    The Germans lead in both production and sales in the European automotive industry. There is also considerable investment in this sector for both the qualifications of the workforce and improvements in infrastructure. In the case of aviation, it is on a constant rise, with projections of Germany producing approximately 35,000 new aircrafts within the next 20 years.

    A competitive advantage for this sector is its combination of the available talent pool, the country’s powerful manufacturing base, and cost efficiency.
  2. Chemical and Medical – This industry in Germany also takes the lead in Europe in terms of sales within Europe and exports to other continents, with medical equipment and pharmaceutical good among the top exports.

    The country benefits from a well-developed chemical research and development infrastructure, with the education system producing quality graduates that are ready to work and provides a fertile and ready market for investors.

    In 2021, this sector is estimated to bring in an estimated revenue of the industry in 176.3 billion euros and currently employs over 450,000 people. The country also invests billions into research and development.

  3. Consumers and Services Industry – Germany is Europe’s largest consumer goods producer and market in terms of population and purchasing power. The country also has the vantage position to access both Western and Eastern European consumer markets. The leading consumer industries include food and beverage, textiles, garments, shoes, office supplies, computers, telecommunication equipment, furniture, tourism, and home improvements.

    Food and beverages are the largest consumer industry in Germany, with textiles, garments, and shoes being the second largest. Germany also ranks fourth globally in the export of clothes and textile products. Germany’s tourism industry, which is based on both domestic and international tourism, also generates over 90 billion euros in revenue.

    The continue growth of this industry is due to flexible retailers with both online and offline systems, as well as the increasing tech-savvy customers. Most retailers have a ROPO (Research Online and Purchase Offline) effect, which bodes well with local consumers.

  4. Energy – Germany is a leader in the production of green energy and environmental technologies. The country has investments in offshore wind energy, solar panels, bioenergy, photovoltaics, energy grids, electric vehicles, charging infrastructure, and energy storage projects.

    The country also provides incentives, infrastructure, and a good environment for photovoltaic investments and energy storage. The industry recorded 121.7 thousand jobs in 2019.

  5. Electronics and ICT – Germany has the fifth-largest electrical and electronic industry in the world, receiving a revenue of 162.1 billion euros in 2020. This industry develops a variety of products, such as home appliances, nanotechnology equipment, commercial lighting, automation systems, and luminaries (among other products).

    This industry employs about 29% of all Research and Development employees in Germany and accounts for over 12,000 new patents annually.

    For ICT, the country enjoys the largest market of its kind in Europe. Most ICT firms and startups are products of Mittelstands (family-owned, small to medium-sized companies). Young people are spearheading the ICT sector, offering solutions to save industries money as well as offer government solutions for service delivery.
  6. Mittelstands Industries – 99% of German companies are small to medium-sized companies, or Mittelstands. These company types are largely family-owned with emotional attachments. They generally display generational continuity, but are independent, nimble, flexible, customer-oriented, innovative, and socially responsible. They also have lean hierarchies and benefit from strong regional ties.

    These company types generally employ less than 500 worker, but engage over 80% of the country’s workforce, as well as export a significant number of products.

Compliance Highlights

  • The Federal Central Tax Office/BZSt (Bundeszentralamt für Steuern) – a branch of the German Federal Ministry of Finance, which deals with national tax matters such as issuing Tax IDs and VAT numbers for entrepreneurs, supporting anti-fraud initiatives in each German state, and providing information for foreign investors.
  • Tax Office (Finanzmat)– the local authority which administers taxes on behalf of the municipality, federal state, and federal government. There are 650 tax offices across Germany, which are responsible for the collection of a number of taxes for individuals and businesses, processing annual tax returns, and registering freelancers and new businesses.
  • Online Tax Office (ELSTER) – an online platform created by the BZSt, for the management of an individual’s or business’ tax affairs.
  • Federal Employment Agency (Bundesagentur für Arbeit) – the contact point for both people and employers on anything to do with German employment. The agency offers job and training placements, financial support such as unemployment and child benefits, and consultation and mediation services.
  • The Federal Ministry of Labor and Social Affairs (Bundesministerium fur Arbeit und Soziales) – identifies inter-ministerial solutions to labor and social issues and liaises with the relevant states and municipalities to implement the new measures. The implementation of its policies depends on its cooperation with the Committee on Labor and Social Affairs, which is the primary parliamentary decision-making body.

Labor Contracts Law

In Germany, an employment contract is required by law to be concluded in writing, and this must be given to the employee no later than one month after the commencement of their employment. All employment contracts must contain the following:

  • Name and address of the employer and the employee
  • Information about the commencement date of employment
  • Anticipated duration of employment (for fixed-term contracts only)
  • The place of work
  • The nature of the activity involved
  • The composition and amount of the employee’s salary
  • The working hours
  • The duration of annual leave
  • The notice period
  • A reference to any collective bargaining agreements, works or services agreements that are applicable to the employment relationship (if there are any)

Also, to avoid any miscommunications or disputes, a version of this contract must be translated to German. There are two types of contracts that are applied in Germany:

  1. Indefinite employment contract – the standard type of employment contract in Germany, and as a general rule, employment contracts are entered into for an unlimited period. Termination of this contract requires a notice period and a set of dismissal policies.
  2. Fixed-term employment contract – Fixed-term contracts are possible, as long as the employment term is agreed upon in writing before the employment relationship commences. Fixed-term relationships must be justified on objective grounds – such as a temporary increase in workload, or a substitution of an employee on parental leave.

    A fixed-term contract is limited to a maximum of two years, and ends automatically, without a written notice at the end of its term.
  3. Collective Agreement: Collective bargaining and agreements in Germany are practiced, but their influence in employment varies according to the sector. This mainly occurs at industry level between individual trade unions and employers’ organizations. Collective agreements, however, also provide for greater flexibility at company level.

    There is more than one kind of collective agreement, depending on the issue being covered. Agreements covering pay last at least one year, and sometimes over two years or more – depending on the industry or sector. Collective agreements covering other issues normally last over five years, whilst others are valid until one side wishes to change the terms.

Any changes to the employment contract must be made with the consent of both the employee and employer. If the employer wishes to amend the employment terms, they must discuss and agree to the changes with the employee before doing so.

Payroll – Tax Contributions and Benefits

Income Tax – Income Tax in Germany is progressive, depending on how much the individual/employee earns.

Employers need to calculate income tax payments for each employee – based on their tax class – and pass the withheld tax to the authorities by the 10th of the following month. Late submissions incur a 10% penalty on the assessed tax with a further interest of 6% per year.

Income taxes returns must also be filed by the 31st of July of the following year.

Social Taxes – Statutory social security contributions must be withheld from the employee’s salary, as well as separate contributions by the employer for the following funds:

Annual Leave:  Employees in Germany are entitled to a minimum of 20 days of paid leave per year. Most employers, however, provide between 25-30 days of leave. The employee must use their vacation days during each calendar year, but unless stated otherwise by the employer, vacation days can be carried over until March 31st of the following year.

Sick Leave and Pay: The first 6 weeks of sick leave is covered by the employer and is paid at 100% of the employee’s salary. After that time, any additional payment is paid by the health insurance.

Employees must notify their employers if they are ill. If sick leave is longer than 3 days, employees must submit a doctor’s certificate.

Maternity Leave: Pregnant employees in Germany are entitled to six weeks of paid leave prior to the child’s birth, as well as 8 weeks of paid leave after birth. For premature or multiple births, the employee is entitled to 12 weeks of paid leave.

All leave types are compensated at the employee’s full pay. Maternity leave in Germany is compensated by the employer and reimbursed by the Health Insurance company.

Paternity Leave: There is no leave benefit that is specific to fathers, although either parent can take advantage of parental leave.

Parental Leave: Parental Leave in Germany is 36 months and may be divided between the parents as they see fit. The eight weeks of maternity leave after labor are also counted as part of this leave. In the mother’s case, however, the parental leave starts after her maternity leave stops.

Parental leave must be requested in writing and submitted to their employer at least seven weeks before its start.

During this time, parents may choose to work part-time for up to 30 hours per week. At least 12 months of parental leave must be taken within the first three years after labor, and the rest can be taken until the child reaches the age of eight.


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