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Investing and Market Entry in Germany

Anyone can establish a business in Germany, irrespective of the nationality. There are no barriers for foreign investors, but the local representative of the business should be in Germany. Read this article for more information on the processes to set up a business in Germany & tax compliances.

Germany is considered the largest market in Europe and as one of the top countries in the world for Foreign Direct Investment (FDI). As of 2019, around 1851 business projects were set up by companies from outside Germany, excluding mergers and acquisitions. The volume of FDIs in Germany rose by almost 6% in 2019, amounting to EUR 5.1 bn from EUR 4.8 bn in 2018.

In current times, besides a host of factors that makes Germany an attractive site for investments, one of the key reasons has also been the way it has handled the COVID 19 pandemic. Germany’s GDP fell by 4.9% in 2020 but the growth is expected to be 3.5% in 2022, 4.15% in 2023, getting Germany to reach the pre-crisis levels in 2022.
 

Setting Up Business in Germany


Anyone can establish a business in Germany irrespective of the nationality. There are no barriers for foreign investors to establish a business in Germany. But the local trade office registration requires that the local representative of the business should be in Germany.

Processes for setting up business in Germany

Subsidiary
  • Establishment of a   new legal entity.
  • Different legal forms available (e.g., GmbH, AG)
 
Branch Office 
  • No establishment of a new legal entity.
  • Registration of a German physical business presence.
 
 

Subsidiary


A Subsidiary is an autonomous company established and held by a parent company.
  • In subsidiary system, the corporation is the holder of rights and obligations instead of any individual.
  • The corporation can be established by one or more shareholders.
  • The corporations are liable to corporate income tax and trade tax.
 

Legal forms for Subsidiary

GmbH The most common corporate form is the private limited liability company (Gesellschaft mit beschrankter Haftung – GmbH) which means high flexibility with a few obligations. The other feature of GmbH is that the liability of the business activities is limited to the assets of the GmbH. 
AG This form is for the larger companies with many shareholders. If the company qualifies for the stock listing, then it will be easier to attract the capital. The company enjoys the highest reputation. 
 

Branch Office


Any foreign company that has its head office and registered business outside of Germany can establish its branch office in Germany. The main role of establishing a branch office is to establish a presence in Germany and maintain contacts with close business partners.
Legally, the branch office is the part of the head office and is subject to the law governing the head office. If there are any obligations incurred by the branch office, it will be the legal responsibility of the foreign head office. There are two forms of branch establishments which require at least one representative to be in Germany.
  • Autonomous Branch Office: It has its own management with executive powers, a separate bank account and independent business assets. It is responsible for the tasks that exceed administration support.
  • Dependent Branch Office: It focuses on maintaining the business contacts and business development activities in Germany. It is responsible for support and implementation related tasks and, as the name suggests, it is entirely dependent on the head office.
  • Taxation: The branch office is subject to taxation in Germany and double taxation agreement is applicable as it is considered as a permanent establishment, especially the autonomous branch office.
 

Corporate Taxation in Germany


Germany offers a competitive tax rate as all the corporations including GmbH, AG and permanent establishments are subject to the corporate tax. The income tax meant for the corporations has three elements:
  • Corporate Income Tax: It is a flat nationwide tax applied at the rate of 15% of the taxable income of the companies. Taxable income forms the base for the tax to be levied.
  • Solidarity Surcharge: It is a fixed and flat component of a company taxation. This tax is added to the corporate income tax at a rate of 5.5% of the corporate income tax rate, not the income. When added together, the total taxable rate is calculated to be 15.83%.
  • Trade tax: Trade is regulated by the Federal law, but it is a municipal tax. One can find that the trade tax is same for every business within one municipality. But each municipality determines its individual tax rate. This individual trade tax rate of every single municipality does impact the overall tax burden. As per 2019 figures, the German average trade tax rate was 14.07%. The trade tax rate is higher in urban areas than in rural areas. The solidarity surcharge is not added in the trade tax.
 

Why is Germany a top investment destination in the world?

  • Ease of doing business: Germany’s research and development capabilities, efficiency of legal and regulatory processes, supply chain connections, and political stability have often been reported as the main criteria for business leaders willing to invest in the country. Also, what has added to this is that Germany handled pandemic related measures successfully at a very early stage, thereby creating a sense of trust in the minds of investors.
  • High labour productivity: Germany is a preferred destination for businesses because of the labour productivity that its highly skilled workforce brings. The German workforce makes the largest labour pool in the European Union, with more than 41 million people. More than 80% of the workforce possesses technical degrees or certificates that benefit the companies operating in Germany. In fact, Germany also has the highest rate of graduates with a doctorate degree in the natural sciences and in engineering.
  • Innovation: Germany has a stronghold when it comes to the power of Innovation. In recent times, it has been recorded that almost 20% of the companies want to use Germany as a production or Research and Development location in the future.
  • Strategic Location: Germany’s central location is what the investors look forward to in terms of connecting the trans-Atlantic economies. It is situated at the cross- roads of north-south Europe traffic.
  • Free and Open markets: The market is open to various businesses and industries, and it also offers a regulatory free environment for businesses to thrive. There is no difference between a German and foreign entity with regards to the establishment of business in the country. The overall framework provides equal freedom for foreign trade and payment. There are literally no restrictions or so-called barriers to currency transfers, transactions, etc.
  • World’s top ranked infrastructure & logistics hub: The country provides an easy access to the domestic and international markets through its wide transportation network. Germany has a dense network of airports including 21 international airports, more than 250 inland ports and its highway system has one of the highest kilometer density levels in Europe. Germany also has a big share of the overall Euro logistics market as it has the maximum number of goods pass-through than any other European nation.
  • Leading Industrie 4.0 nation: Industrie 4.0 means intelligent networking of machines and the industry processes using information technology. Germany is the world’s leading Industrie 4.0 nation and has positioned itself as a strong international brand. The Internet of Things can change the way industries work and this concept promises to increase manufacturing productivity by more than 50% and decrease the number of resources required by almost half. Germany’s market for Industrie 4.0 solutions increased from EUR 4 bn in 2015 to EUR 6 bn in 2017. Hardware, software and IT services all recorded a double-digit growth in 2016-17, a cumulative growth of more than 20%. Higher levels of growth are expected in the immediate future in this segment. The extra value-add potential of up to EUR 425 bn is forecasted in Germany for the duration up to 2025.
 
Germany also provides Investment Grants (GRW programme) of up to 20% to support new production or service facilities.

For assistance with setting up a business in Germany, you can visit our German desk & connect with us. 

 

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