Entering the German Market

The German Market

Foreign companies expanding into Germany will be entering Europe’s strongest economy – its leading exporter and the third largest exporter globally. More than 45,000 foreign companies operate in Germany, employing around three million workers equating to 25% of jobs in the export sector.  However, the success of the German economy creates a challenge for foreign companies moving in, as standards are high and they will have to be matched by newcomers, along with compliance to labor, registration, tax, and payroll regulations.

There are speedier and cost-effective alternatives, with Bradford Jacobs opening the door to a hassle-free route into the French economy for your company. Work alongside our Professional Employer Organization (PEO) recruitment specialists, then our Employer of Record (EOR) in-country experts to handle every aspect of compliance. Employers can depend on our in-depth knowledge of Germany, its work culture and business practices. Here we have set out some basic summaries of what you need to make the transition into the German market, whichever sector you operate in.

Starting a Business in Germany

Germany boasts a well-educated, skilled workforce motivated by low unemployment, high earnings and strong measures protecting employees’ rights. The economy has a strong manufacturing and industrial base underpinning a robust economy. €200 billion worth of goods pass through Germany – more than any other country in the European Union. In the first quarter of 2020 Germany had an account surplus of €24.4 billion. Beyond its own borders Germany has close to 200 million consumers within an 800km radius. The procedure to open a company in Germany is detailed and many-layered. Germany scores highly as a country for doing business – but beware. When the International Finance Corporation ranked 190 countries for various factors in operating a business, Germany ranked in the top 50 in all categories bar one – ease of starting a business. Germany ranked 114th.

The necessary steps to open a company in Germany include:

• Register a business address
• Decide on the type of company. The most popular choices are a private limited liability company (Gesellschaft mit beschränkter Haftung – GmbH) or a branch (Zweigniederlassung)
• Confirm the company name with the Commercial Register after checking the name is unique with the Unternehmensregister website
• Open a bank account. Obtain proof of identity through a post office, notary or lawyer and a “certificate of registration” (Meldebescheinigung) as proof of residence
• Present documentation to the Trade Office (Gewerbeamt) relating to tax and social security authorities, Labour Office, relevant professional bodies, works councils, trades unions
• Register with the relevant Trade Chamber
• Enroll with the Commercial Register by providing all documentation through a notary, detailing registered company name, registered office, authorized personnel, confirmation of share capital at minimum amount of €25,000. The company name will then be published on the Handelsregister website
• Register with the local tax office and provide the Articles of Association certified by a notary within four weeks of commencing business

Expanding Business into Germany

Foreign companies expanding into Germany want to tap into a dynamic economy renowned for an innovative business culture and huge consumer spending power. Germany is Europe’s most powerful economy, ideally placed as a springboard for further expansion into neighboring European Union states such as France, Belgium, the Netherlands and Austria as well as further afield to more recent EU members in Eastern Europe.

Business opportunities in Germany include machinery, chemicals, motor industry, metals manufacturing and processing, consumer electronics, foodstuffs, aerospace, textiles and fabrics, transport, IT and construction.

All of these sectors can be targets for international expansion, in such locations as Berlin, Hamburg, Munich, Cologne, Frankfurt, Essen, Dortmund, Stuttgart and Dusseldorf.

German Business Facts

• Capital City – Berlin
• Population – 82.9 million
• States – Baden-Wurttemberg, Bavaria, Berlin, Brandenburg, Bremen, Hamburg, Hesse, Lower Saxony, Mecklenburg-Vorpommern, North Rhine-Westphalia, Rhineland-Palatinate, Saarland, Saxony, Saxony-Anhalt, Schleswig-Holstein, Thuringa
• Official language – German
• Economy and world ranking – World’s fourth largest economy and largest in the European Union (EU), GDP €3.7 trillion
• Leading sectors – Car manufacture, mechanical and plant engineering, consumer and service, energy and environmental technology, and electronics and IT
• Main exports – Machinery including computers, vehicles, electrical machinery and equipment, pharmaceuticals, optical and medical apparatus, plastics, aircraft and spacecraft
• Main imports – Machinery including computers, vehicles, electrical machinery and equipment, mineral fuels, pharmaceuticals, plastics, optical and medical apparatus
• Main trading partners – EU, USA and China
• Government – Germany is a parliamentary and federal democracy
• Currency – Euro

Advantages and Challenges of the German Market

Advantages of expanding into the German market, according to GTAI (Germany Trade and Invest) include:

• Leading economy: Germany drives Europe’s economy, is the world’s fourth biggest economy, has a large domestic market and easy access to developing markets in the enlarged European Union
• Global player: Germany is the world’s third highest exporter, behind the USA and China
• High productivity: Steadily decreasing unit labor costs make Germany one of Europe’s most cost-effective production locations
• Highly-educated workforce: 81% of population trained to university entrance level or possess vocational qualification, above the OECD average of 67%
• Innovative power: Europe’s No. 1 location for research and patent applications, backed by billions of Federal funds
• Logistics: Rail, air, ports and roads infrastructure facilitate smooth transportation of goods
• Incentives: Comprehensive programs support business investment, from cash incentives to reimbursement of labor and research and development costs
• Taxes: Reform program is reducing corporate tax levels and indirect labor costs

Challenges facing companies expanding into the German economy include.

The World Bank and International Finance Corporation ranked Germany outside the top 100 nations for ease of starting a business, which is at the heart of problems facing companies wanting to establish subsidiaries in the country. Barriers that have to be cleared include:

• Dealing with local chambers of industry and business standards, the professional associations of the relevant trade associations, plus enrolling on the Commercial Register.
• Obtaining construction permits and connections for water and telephones can all be lengthy procedure.
• Property registration is complex and takes an average of 40 days. Companies must obtain an extract from the Land Registry, a notarised transfer agreement, a rights waiver from the local municipality and pay transfer tax.
• The German monetary system demands a meticulous approach as companies must make nine tax payments a year and could have to pay up to 14 taxes.
• Cross-border trading requires four sets of documents for exports and five for imports.
• German business etiquette, culture and practices also demand research as policies and procedures can slow down the business process.

The 100 per cent solution is to consider the alternative to setting up a subsidiary by working with Bradford Jacobs. Our Professional Employer Organization (PEO) international recruitment specialists will find the perfect fit for the roles you need to fill. Then our Employer of Record (EOR) in-country consultants will handle all the complexities of Germany’s employment laws, tax regulations and payroll, ensuring your German expansion plans move smoothly into gear.

Limited Company / Subsidiary or Branch in Germany

A subsidiary established in Germany is considered a legal entity separate from its parent company, with its own capital and independent administration. There are many advantages for companies expanding by this route – the chance to explore a new market, enhancing their international credibility and opening a gateway to mainland Europe. A branch is entirely different. A branch established in Germany is not independent of the foreign parent company is not treated as a German resident corporation.

Main characteristics of a subsidiary:

• A 100% legal German entity, typically a private limited liability company (GmbH)
• Has full independence from the overseas parent company and can perform additional and independent business activities
• Investors must undertake incorporation procedures that apply to all German companies
• Subject to the same taxation principles as a German resident company
• Main characteristics of a branch:
• A local structure not treated as a German resident company
• Not independent of the parent company and must have identical name and business activities
• Taxed according to German laws and any double tax treaties that may apply

Other differences apply:

• The parent company is liable for all debts and obligations of its branch, but has no liabilities towards its subsidiary in Germany
• A subsidiary needs its own Articles of Association, whereas a branch can use those of its parent company
• Resident companies such as subsidiaries are taxed on their worldwide income, whereas non-resident structures (branches) are taxed only on their German income
• Legal Structures for German Market entry
• Establishing a subsidiary or opening a branch are the two most popular options for foreign companies entering the German economy. A subsidiary is incorporated under German law, whereas a branch of a foreign-based company is incorporated under the laws of the parent company’s home country and uses that company’s Articles of Association.

The GmbH is suitable for domestic subsidiaries of international groups and is by far the most frequently used corporate legal form in Germany.

The legal structures of a GmbH include:

• The minimum share capital is €25,000.
• The GmbH is led by one or more directors (not necessarily domiciled in Germany).
• Formation of a single-shareholder GmbH is possible, and both German or foreign natural and legal entities can be founders of a GmbH.
• Only the company’s assets are liable to creditors.
• Personal liability of the shareholders is excluded if the capital for which they have subscribed is fully paid up.
• The Memorandum of Association and each transfer of shares must be notarized.
• The comparatively high minimum share capital of €25,000, although only one-half of the amount need be paid in cash on formation.

The UG, a sub-type of the GmbH, was introduced in 2008. Most of the GmbH rules apply to the UG, in particular the exclusion of personal liability. The minimum capital is €1, but 25% of each fiscal year’s net profit must be transferred to reserves. As soon as the reserves amount to €25,000 the UG can change its registered legal form to GmbH. The UG is quite popular for founders of new businesses in Germany because of its low minimum capital and flexibility, although its creditworthiness is sometimes subject to criticism.

The legal structures for a branch in Germany include:

• A branch is considered to be a permanent establishment, and must have a local, registered business address, as well as a local bank account.
• A branch does not require any share capital for incorporation.
• A branch must be classified as one of two types – dependent or independent. For dependent branch offices, management in Germany cannot make any decisions without approval from the head office. Independent branch offices have decision-making powers, but only in respect to its local activities.
• Branches in Germany are subject to pay local taxes, such corporate income tax, the surcharge tax, and municipal taxes. Dependent branches must rely on the parent company’s accounting system, but the independent branches may use their own accounting system.

Branch offices must have a designated manager, who will handle the day-to-day activities of the branch and conduct business activities on behalf of the parent company. Documents of incorporation must be prepared the parent company. The parent company must also appoint a legal representative in Germany to complete the registration procedure.