What this is: Germany has a strong, dynamic economy; a stable political environment; is home to tens of thousands of businesses and is the second-largest exporter in the world. With its international prominence, Germany is an appealing choice for foreign investors eyeing European expansion.
What this means: Setting up a company in Germany requires the understanding of several requirements and restrictions. Talk to an experienced service provider who offers professional assistance to help you efficiently establish a company in Germany.
Germany is the largest economy in Europe, which is one of the key reasons why this favored jurisdiction sees a consistent influx of international investors looking to set up a business.
With over 22,000 foreign companies operating in Germany, many investors have realized the benefits of having a base in this part of the European Union (EU).
The legal system that Germany follows is the civil law system and the most popular type of company to establish in this jurisdiction is the GmbH, which is the equivalent of a limited liability company.
Limited Liability Companies: GmbH and the Mini-GmbH
In principle, there are 2 types of limited liability companies: The Gesellschaft mit beschränkter Haftung (GmbH) and a smaller version, the Unternehmergesellschaft (UG, sometimes also referred to as Mini-GmbH).
Whilst both the GmbH and the UG fall under the same law, the primary difference between these 2 entity types is that the UG requires less of an investment to set up. The mini-GmbH can be incorporated with a minimum share capital of one Euro. While this can be an interesting option for foreign investors looking to establish a company as a "starter," it needs to be mentioned that it has, after several years, still not received much acceptance in the market, as the low share capital raises doubts with business partners as to the financial viability of a business.
The classic limited liability GmbH is the most widely used business entity in Germany. The minimum share capital required is €25,000, of which 50% (€12,500) must be paid into the company’s bank account upon founding the company. The remaining 50% can be contributed at a later date.
Both the UG and the GmbH require a notary for their establishment. Once the notary has verified that the share capital has been paid into the company’s bank account, they will proceed to submit the company deeds to the court for entry to the trade register.
Foreign Funding Restrictions
The German policy on foreign funding is relatively liberal. For example, if a foreign investor makes a bank transfer that exceeds the amount of €10,000, the bank may need to file an informatory report with the authorities, which would run in the background and unless the authorities see anything untoward, the German Federal Bank will not contact the client. Any amount below this threshold, if transferred digitally, incurs no foreign investment-related restrictions. However, if the individual is bringing in cash exceeding €10,000, then it’s important to make certain anti-money laundering (AML) registrations with the customs officer at the port of entry and if exceeding €12,500, for statistical reasons, also with the German Federal Bank.
Shareholder Restrictions and Requirements
The minimum number of shareholders and directors required to set up a company in Germany is one. Having a single shareholder and a single director is a relatively common occurrence. In principle, there are no restrictions on shareholding in Germany; you can reside anywhere in the world and be a director. Foreign nationals who are residents or habitual residents abroad may therefore be accepted as directors of a company.
That being said, it is essential to have proof that you are able to travel into Germany to attend any potential court hearings. The German Trade Registry makes this a dependency, stating that anyone can be a shareholder, but there must be at least one director who can represent and answer for the company and therefore needs to be able to freely attend appointments in this jurisdiction if they are summoned.
Some restrictions can occur on the side of the banks, for example, some banks will not allow an individual from a country that is on a "sanctions list" to open a bank account, especially if this individual is also a director at the company, meaning that they are not able to register a business.
Over the past year and a half, restrictions by the banks have significantly increased, especially if the bank sees potential risks to doing business with companies that have shareholders or directors in jurisdictions that are considered tax havens or too liberal in its AML laws. For instance, a number of banks in Germany have made it increasingly difficult for companies to open or maintain a bank account, if any stakeholder is a resident or national of certain jurisdictions, a prominent example is the United Arab Emirates.
Practical Considerations: Taxation
In Germany, the current corporation tax rate is 15% across the whole country and it applies to every company. Trade tax, which is paid by corporations, typically ranges between 13-17%. The tax range differs depending on the area in which you establish your business. For example, many cities will have a higher tax rate than many rural areas. This means that setting up in a rural area may incur lower trade tax rates.
For companies expanding into Germany, it’s important to note that the trade tax is to be added to the corporation tax, so that the overall tax to be paid in Germany amounts to approximately 30%.
VAT Registration
The general VAT rate in Germany is 19% (only certain products incur a lower VAT rate of 7%, among them groceries). When a company is formed, the VAT registration is not automatic; companies must submit an application for German VAT registration with their local tax office.
Any change to the statutes or the company documents needs to be notarized again and then filed with the Trade Registry. You must file the annual tax returns as well as monthly/quarterly VAT returns (it depends on turnover, which of the 2 applies). Essentially, you are in touch with the tax office at least every 3 months.
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Business Address
For a foreign company that doesn't have a main base in the country, there is relative freedom when it comes to the location in which you can register your business’s address. That being said, if you are a business that has a production site in Germany, then you are typically required to have your registered address where you do the main part of your business and/or where the management decisions are made.
The Key Documents
There are 3 essential documents that must be submitted once the share capital is brought in and the notaries are engaged. The first documents to be notarized are the shareholder resolution, wherein the agreement to establish the company is recommended as well as the articles of association, which establish the regulations under which the business is formed.
The third document is a statement by every director of a company and that needs to be personally made in the presence of the notary confirming that they have never been criminally prosecuted or convicted of a crime that is relevant to their role as directors, such as fraud, money laundering or abuse of insolvency.
These 3 documents will be submitted by the notary for registration with the Trade Registry following receipt of the previously mentioned bank statement.
The Average Timeline for Incorporation
Due to the COVID-19 pandemic, timelines have changed. Pre-COVID, an average timeline for setting up a company in Germany would have been 3 to 4 weeks. The average timeline for setting up a business in Germany currently is at minimum 4 to 6 weeks, often longer, as many Trade Registry staff are still working remotely.
Branches in Germany
Another vehicle that can be used when expanding into this jurisdiction is registering a German branch of a foreign company. This is a favorable model for foreign investment and typically acts within the scope of the parent company.
Germany Has 2 Specific Types of Branches:
- Dependent branch: This is very specific to Germany. A dependent branch is one that is registered with the tax authorities with an address in Germany but depends almost entirely on the parent company, as there will be no entry into the Trade Registry. Dependent branches are typically set up as a support function in the country for employment purposes.
- Independent branch: The independent branch office, conversely, does have decision-making authority in accordance with German laws and can also have its own bank account. The independent branch is as close as you can get to being a fully equipped company, as it does get registered with the Trade Registry under the name of the main company, often with the ending “Germany.” They have legal representatives.
Of course, their existences are all still reliant on the foreign, parent company.
Beneficial Ownership Register
With the introduction of the beneficial ownership register, all of the ownership information now needs to be centrally registered and updated/reviewed on an annual basis or whenever there are any changes, whichever occurs first. So if you are a shareholder investing in a company or are simply an individual exercising a significant level of control over an entity, there are no privacy shields; everything needs to be registered with the UBO registry. This is now a European standard; the requirement to disclose ownership information needs to be strictly maintained as penalties can be prohibitively expensive for business.
Germany has a strong, dynamic economy and a stable political environment. It is home to tens of thousands of businesses and is the second-largest exporter in the world. As an international hub, this jurisdiction is an attractive option for foreign investors looking to expand into Europe. An experienced service provider can offer professional assistance and help you efficiently establish a company in Germany.
This content is provided for informational purposes only and should not be considered, or relied upon, as legal advice.
