Establishing a business in Germany

A Q&A guide to establishing a business in Germany.

This Q&A gives an overview of the key issues in establishing a business in Germany, including an introduction to the legal system; the available business vehicles and their applicable formalities; corporate governance structures and requirements; foreign investment incentives and restrictions; currency regulations; and tax and employment issues.

To compare answers across multiple jurisdictions, visit the Establishing a business in... Country Q&A Tool.

This article is part of the global guide to establishing a business worldwide. For a full list of contents, please visit www.practicallaw.com/ebi-mjg.

Axel Reeg, Jochen Wilhelm, Ricarda Fahrbach and Ulrich Schiener, REEG RECHTSANWÄLTE- InternationalBusinessLaw
Contents

Legal system

1. What is the legal system in your jurisdiction based on (for example, civil law, common law or a mixture of both)?

The legal system in Germany is not a common law, but a civil law system. Statutory law codified in acts or statutes plays the leading role. Decisional law is only of comparatively minor significance, although decisions of the German Federal Supreme Courts sometimes create an effect similar to case law under a common law system. However, German judges are never bound by precedents but only by the codified law enacted by Parliament.

 

Business vehicles

2. What are the main forms of business vehicle used in your jurisdiction? What are the advantages and disadvantages of each vehicle?

The main forms of business vehicles used in Germany are the following.

Private limited company (Gesellschaft mit beschränkter Haftung) (GmbH) and the entrepreneurial company (Unternehmergesellschaft) (UG)

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

The minimum share capital is EUR25,000. The GmbH is led by one or more directors (not necessarily domiciled in Germany) who must sign a specific declaration that there are no incompatibilities barring their appointment. Formation of a single-shareholder GmbH is possible, and both German or foreign natural and legal entities can be founders of a GmbH.

The GmbH has the following advantages:

  • Only the company's assets are liable to the creditors.

  • Personal liability of the shareholders is excluded if the capital for which they have subscribed is fully paid up.

It has the following disadvantages:

  • The memorandum of association and each transfer of shares must be notarised.

  • The high minimum share capital of EUR25,000, although only one-half of the amount must be paid in cash on formation of the GmbH.

UG. 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 EUR1, but 25% of the year's net profit must be transferred to reserves. As soon as the reserves amount to EUR25,000 the UG can change its legal form name to GmbH. The UG is very popular for founders of new businesses in Germany because of its low minimum capital and flexibility, although its creditworthiness is sometimes subject to criticism.

Private limited partnership (Kommanditgesellschaft) (KG)

The KG can be established without a public notary being involved. It is formed by at least two shareholders. It must include one or more general partners, who manage and represent the company and are (without limitation) personally liable, and one or more limited partners who invest in the KG and are liable only to the extent of their contractual contribution. A minimum capital is not required.

Many family-led businesses choose the KG because it ensures a high level of influence and keeps investors away from strategic decisions. It may also have tax-related advantages for family businesses, for example the option to offset losses against other income.

Limited partnership with a limited liability company as general partner (GmbH & Co. KG)

The GmbH & Co. KG represents a modification of the KG. The general partner is a GmbH, which effectively results in a limited liability for the GmbH & Co. KG, because the limited partners are liable only for their share in the partnership's capital anyhow. A GmbH & Co. KG is the legal form of choice when there are a number of investors and it is necessary to exclude personal liability.

It is more advantageous in terms of personal liability than a KG, as the general partner (GmbH), which has full liability, is a limited company, similar to the private limited company in the UK. This means that the members of the general partner (whether natural persons or legal entities) are not liable themselves. In addition to this, it is treated as a partnership for tax purposes, avoiding any taxation of profits at the corporate level. Its disadvantages are a high administrative burden and an increased need for legal advice due to the complex company structure. This is a widely used form in the commercial context.

Public company (Aktiengesellschaft) (AG)

The AG is the most important business vehicle for top-end businesses, especially for those operating internationally. The minimum capital is EUR50,000 and the memorandum of association must be notarised. The shares can be traded freely, and on a stock exchange when the AG is listed. Apart from the management board (consisting of at least one person) it is necessary to install a supervisory board of at least three members. This "dual-board-system" is mandatory. The AG enjoys easy access to capital markets. Due to the many regulations and heavy administrative burden the AG can only be recommended to bigger businesses.

European company (Societas Europaea) (SE)

Since 2005 the SE can be used in the EU. The minimum capital is EUR120,000 and the formation expenses are quite high. But the SE's advantages are clear:

  • The SE can transfer its registered office between member states of the EU without being dissolved and going into liquidation. Therefore, it is easy to enter into a transfer for tax reasons.

  • The SE can, unlike the AG, choose whether the "dual-board-" or "unitary-board-system" be incorporated into the articles of association.

 

Establishing a presence from abroad

3. What are the most common options for foreign companies establishing a business presence in your jurisdiction?

Company or partnership

The most common options are to acquire or to found a private or public limited company (GmbH or AG), or a partnership with its seat in Germany (ordinary or limited partnership (KG)) (see Question 2). The GmbH is the most common option for permanent or long-term investments.

Branch office

A foreign company with its registered seat and head office outside Germany can establish in Germany either:

  • An autonomous branch office (selbstständige Niederlassung).

  • A dependant branch office (unselbstständige Niederlassung).

A branch office can be a suitable business form for foreign investors wanting to establish a presence in Germany for the mere purpose of initiating business and getting in contact with local partners.

Agent/distributor

The appointment of an agent or the conclusion of a distributor agreement requires fewer initial organisational efforts and costs than acquiring or founding a company. A distributorship agreement is commonly used for new sales because of the flexibility to renew or terminate the agreement relatively quickly.

For long-term investments, this arrangement is less preferable because agents and distributors are highly protected by German legislation. Cost-intensive compensation may be required to be paid to agents and (under certain circumstances) to distributors when contractual relationships are terminated.

Joint venture company

One of the most popular ways for an investor to enter the German market is to become a partner of a joint venture company. Although this vehicle bears a substantial potential for conflict, detailed contractual agreements can avoid disputes and ensure reliable exit strategies for the investor.

 
4. How can an overseas company trade directly in your jurisdiction?

There are no special licensing requirements for a foreign investor that contracts with an independent, self-employed agent or distributor or agrees on a franchise contract with a third party located in Germany.

A dependant branch office has no separate legal personality and remains part of the foreign head office company, and is therefore subject to the law governing the head office, and the head office remains liable for the activity of its branch office. A branch office, however, is subject to German taxation if it is considered to be a permanent establishment (Betriebsstätte) under the applicable double taxation treaty. Autonomous branch offices are generally deemed to be permanent establishments; dependant branch offices are only permanent establishments in certain circumstances, for example, where the dependant branch's involvement in business operations is not only incidental to the main business of the company.

Autonomous branch offices, on the other hand, are to a certain extent independent from their parent company and usually have their own bank account and accounting. Their relationships with customers are subject to German law but the parent company remains liable for the transactions concluded by the branch. Invoices must be made out in the name of the head office company.

 
5. What are the formalities for setting up a partnership?

There are four major forms of partnerships, all of which require at least two partners. The main differences are the extent of the partners' liability and the registration requirements.

All of them require at least two partners, and none require a minimum share capital.

Civil law partnership (Gesellschaft bürgerlichen Rechts) (GbR)

A GbR is the basic legal form but is unusual in the business context as the partners are subject to unlimited liability.

General commercial partnership (offene Handelsgesellschaft) (OHG)

The OHG can be established without a public notary being involved. All partners of the OHG are fully liable. In contrast, limited partners of the KG (Kommanditisten) are only liable where they have not paid up their shares.

KG

See Question 2, Private limited partnership (Kommanditgesellschaft) (KG).

GmbH & Co. KG

This is the most widely used commercial partnership in Germany (see Question 2, Limited partnership with a limited liability company as general partner (GmbH & Co. KG)).

 
6. What are the formalities for setting up a joint venture?

There are no special formalities for setting up an international joint venture in Germany.

Usually it is structured as either a:

If the joint venture agreement includes call- or put-options relating to GmbH shares the whole agreement must be notarised as each obligation to transfer shares of a GmbH must be notarised (see Question 2). Depending on the market shares and sales volume of the partners involved, the proposed transaction can become subject to a German or European merger control proceedings. It is highly recommended that the parties agree on a written joint venture agreement, including provisions for issues likely to be the object of a dispute.

 
7. Are trusts available in your jurisdiction?

Trusts as understood in the UK and US are not available in Germany. Contractual trust arrangements with regard to private limited company (GmbH) shares, however, are common practice.

 

Forming a private company

8. How is a private limited liability company or equivalent corporate vehicle most commonly used by foreign companies to establish a business in your jurisdiction formed?

Regulatory framework

Foreign companies most frequently use the GmbH as a subsidiary to be founded in Germany (see Question 2, Private limited company (Gesellschaftmitbeschränkter Haftung) (GmbH) and the entrepreneurial company (Unternehmergesellschaft) (UG)). GmbHs are subject to very rigorous capital maintenance rules, so it is essential to open a bank account for the GmbH as soon as the deed of formation has been notarised. Authority to issue directives to the managing directors is given to the shareholder(s). There is no binding code of conduct for GmbH-directors besides the law codified in the GmbH-Act and other German law Acts; German law establishes the business judgement rule as a general guideline for the management of the GmbH. The business judgement rule prevents the director being liable if the transaction in question is based on a business decision, in which case the director is assumed to act in the best interests of the company. However, on the formation of a GmbH, it needs its own articles of association, which must be deposited with the Commercial Register.

Tailor-made or shelf company

Experience shows that it takes approximately two to four weeks to establish a tailor-made GmbH combining high flexibility with relatively few obligations for investors. Articles of association and bye-laws can be set out in short terms. Investors can thereby ensure that from the very start the statutes of the GmbH comply with the investor's code of conduct. Furthermore, specific needs can be taken into account, in particular the establishment of an optional supervisory or advisory board or the protection of minority shareholder rights. In addition, appropriate rules to squeeze-out a local co-partner that will be the shareholder of the GmbH for a transitional period are advisable.

Although a GmbH can be established in that way quite expeditiously, it is not unusual in Germany to use shelf-companies (Vorrats-GmbH). However, it remains necessary to have the transfer of shares notarised as well as the amendment of the articles of the company. As a precaution, GmbH shelf-companies should only be used provided that they have never been operating before and that foreign investors strictly comply with mandatory German capital maintenance rules. Therefore it is strongly recommended to respect the rules of incorporation of the GmbH-Act even in cases of so-called economic re-establishments (wirtschaftliche Neugründung) of shelf-companies that are being reactivated after a period of inactivity. Otherwise shareholders and managing directors of the GmbH could later on be held liable in the event of insufficient contributions in cash to the GmbH at the point of foundation of the GmbH, for example.

Formation process

The GmbH must be registered with the Commercial Register, which is maintained by the local courts. The founding director must provide the register, through a public notary, with:

  • The notarised deed of formation.

  • Signed articles of association.

  • A list of all shareholders indicating:

    • name;

    • date of birth;

    • place of residence;

    • amount of the nominal value of their participation;

    • the serial number of the share of each shareholder.

The founding managing director must declare and confirm that:

  • The minimum contributions to the share capital have been paid in and are at the free disposal of the GmbH.

  • There are no obstacles to his appointment.

In the case of a contribution-in-kind the shareholder must provide a report with a valuation certificate, usually prepared by an auditor, confirming that the contributions meet the nominal value of the shares taken over.

As the application for entry in the Commercial Register must be presented in a notarially certified form, the public notary himself executes the notarisation and submits the documents electronically.

The fees for registering the GmbH are regulated by the Fees Regulation for the Commercial Register and depend on the commercial value of the transaction. For a GmbH founded with the minimum share capital of EUR25,000, the fee for the public notary for the application and for notarisation of the application is EUR532.60. An additional fee of EUR150 for the registration at the commercial register must be paid to the competent state treasury.

The foundation will take place in one of 16 federal states. Depending on the state, it takes between one to eight weeks until registration takes place.

There are a few naming requirements. Towards third parties the limitation of liability of the GmbH must be made transparent by adding "GmbH". The name itself can be chosen at will. However, it must not be misleading and must be suitable to individualise the company and provide a certain degree of distinctiveness. Changing the name of a shelf company requires an ordinary resolution of the shareholders' meeting. This resolution must be notarised and the public notary will file it electronically with the Commercial Register.

Company formation is completed by registration and publication of the GmbH's registration in the Commercial Register. The main effect of registration is that the legal entity is created and that the limitation of liability becomes effective.

Company constitution

For a GmbH to be validly constituted it is mandatory that the investor(s) establishes a notarised deed of formation and articles of association in the presence of a public notary.

The articles of association are available for third parties at the Commercial Register and often only include the main mandatory minimum aspects prescribed by law. Shareholders usually also conclude confidential bye-laws simultaneously to agreeing the articles, if there is more than one shareholder.

Standardised model documents can be used, provided that the GmbH is being founded by a maximum of three shareholders, has only one managing director and provided that the contributions are made exclusively in cash. The standardised articles of association will be notarised at a reduced fee.

 

Financial reporting

9. What financial reports must the company submit each year?

The managing directors of the GmbH must file the company accounts (including annual financial statements, and depending on the size of the company, management reports) with the electronic Federal Gazette not later than 12 months following the close of the fiscal year. Any person may inspect the accounts at www.unternehmensregister.de.

Depending on the size of the company, additional rules may apply, for example:

  • The requirement to submit management reports does not apply to companies whose total assets do not exceed EUR4.84 million (section 267(1), Commercial Code).

  • There is a duty to disclose the financial documents of the principal place of office if it is within the EU and the company has a branch in Germany.

 

Trading disclosure

10. What are the statutory trading disclosure and publication requirements for private companies?

Until 2009 it was mandatory to place a company sign in cases of direct sales to the public, restaurants and other public establishments. Since then it has been voluntary, but it is still common practice to affix a company sign.

Private companies (GmbHs) must also mention certain obligatory information on all business letters including electronic mails, orders and invoices, such as the:

  • Name.

  • Place of business.

  • Number under which the corporation is registered.

Service providers offering telemedia (electronic information and communication) on a commercial basis must provide certain information in a way that it is readily identifiable, directly accessible and continuously available. This information includes (but is not limited to) the provider's (Telemedia Act):

  • Legal form.

  • Name.

  • Legal representative.

  • Place of business.

Therefore, business websites are required to disclose the respective information in a legal notice.

Private limited companies (as well as public companies (AGs)) must file their annual accounts, including notes, to the electronic Federal Gazette where they are being published. Depending on its size, the company may be required to publish additional reporting documents, such as the management report (see Question 9).

 
11. How do companies execute contracts or deeds?

Generally, companies are free to conclude contracts without observing any formal requirements; contracts become legally binding by simple oral or written agreement. German law only requires a notarised form in certain areas of law, in particular in real estate contracts and for the transfer of private limited company (GmbH) shares. The GmbH is represented by the general manager without the need of any special powers.

 

Membership

12. Are there any restrictions on the minimum and maximum number of members?

The minimum number of members for a private limited company (GmbH) is one. A sole shareholder can be the same person as the managing director. There is no specified maximum. The formalities governing a single member company do not differ from those governing a company with more than one member.

 

Minimum capital requirements

13. Is there a minimum investment amount or minimum share capital requirement for company formation?

The minimum share capital for the private limited company (GmbH) is EUR25,000. It can be contributed in cash or in kind. However, the entry application can be filed with the Commercial Register, if at least one-half of the minimum share capital (either in cash or in kind) is provided. Shareholders are personally liable for the payment of the other half of the minimum share capital.

 
14. Are there restrictions on the transfer of shares in private companies?

Pursuant to the statutory provisions, the shares of the private limited company (GmbH) can be traded freely, but the transfer must be notarised. It is not a legal requirement to obtain the co-shareholders' approval to the transfer. However, the articles of association usually restrict the sale of shares, in particular by requiring the co-shareholders' approval.

 

Shareholders and voting rights

15. What protections are there for minority shareholders under local law? Can additional protections be given?

Minority shareholders of a private limited company (GmbH) are only protected by law in exercising their core rights: a minority holding at least 10% of the voting rights can request that a shareholders' meeting be held and specify matters to be included on the agenda. The managing director of a GmbH must inform each shareholder (regardless of his participation) on request about the company's affairs. Shareholders are also granted the right to inspect the company's books and records.

Voting rights of minority shareholders cannot be separated permanently from their membership and must not be restricted by delegating core competencies from the shareholders' meeting to other organs such as family councils or advisory boards without a corresponding shareholder decision.

Additional protection to minority shareholders can be agreed in the articles of association or in the bye-laws, for example by making it a requirement for certain subject matters to be the subject of a unanimous decision, such as a modification of the articles of association.

A minority shareholder's participation in the share capital is unsecured capital and therefore that shareholder's contribution can be lost if the GmbH becomes insolvent. The GmbH Act itself does not provide for an obligation of minority shareholders to automatically pay additional contributions, but such obligations can be laid down in bye-laws or articles of association.

 
16. Are there any statutory restrictions on quorum or voting requirements at shareholder meetings? Do quorum or voting rights need to be proportionate to shareholdings?

Provided that a general shareholders' meeting is duly convened, shareholders present at the meeting can validly decide on agenda items that were communicated to the shareholders at least three days in advance. Although each participation of EUR1 entitles the holder to one vote at the shareholders' meeting, this rule is non-mandatory and can be altered by the parties (section 47, GmbH Act).

The law permits agreements to grant multiple voting rights to certain shareholders, although the grant can only be made if all affected shareholders agree. It is also possible to agree on a voting right on a per capita basis, to limit the maximum amount of voting rights of one shareholder and to link the voting right to the payment of the agreed cash contribution.

 
17. Are specific voting majorities required by law for any corporate actions (for example, increasing share capital, changing the company's constitution, appointing and removing directors, and so on)?

Specific requirements apply for modifications of the articles of association:

  • A qualified majority of 75% of the votes cast at the meeting.

  • Notarisation.

Certain corporate actions require an amendment of the articles of association, and therefore a qualified majority:

  • An increase of share capital.

  • A decision to dissolve the company.

The appointment and removal of directors can be resolved with a simple majority of the votes, unless the articles require additional voting majorities.

 
18. Can voting majorities required by law be disapplied to protect a minority shareholder (for example, through class rights or weighted voting)?

In general, a pure majority government applies to the private limited company (GmbH). There might be cases where minority shareholders can appeal against resolutions and the courts will then examine whether there are additional legal barriers under the principle of loyalty between shareholders. For example, according to a judgment of the German Federal Supreme Court, violations of non-retractable rights of outvoted minority shareholders can lead to an invalid resolution, but the majority voting clause itself remains valid. The GmbH Act even permits the creation of non-voting preferred shares without any priority with regard to profit that may be privileged with regard to dividends, although the Stock Corporation Act requires such priority rights.

 

Sectoral restrictions

19. What are the conditions or restrictions on establishing a business in specific industry sectors? Are there industry sectors in which it is not permitted to establish a business?

Businesses can be established in every industry sector, but in certain sectors the authorisation of the local authorities is required. For example, in the fields of banking and insurance, the authorisation of the German Financial Services Supervisory Office is necessary.

Foreign investors are not prevented from offering financial services as long as the pre-requisites for that authorisation under the Banking Act or the Insurance Supervision Act are met. Generally, these pre-requisites are, among others, providing suitable evidence of having:

  • The resources needed for business operations.

  • The data required to assess the trustworthiness of the applicants.

  • The necessary professional qualifications for the proprietors to manage the institution.

  • A viable business plan showing the:

    • nature of the planned business;

    • organisational structure;

    • institution's planned internal control mechanisms.

 

Foreign investment restrictions

20. Are there any restrictions on foreign shareholders?

In principle, investments in Germany are not restricted. However, there are certain cases where the Federal Ministry for Economic Affairs and Energy is entitled to examine acquisitions.

Arms industry and IT security

A foreigner (all non-German persons or partnerships) must report an intended acquisition to the Federal Ministry in writing where that foreigner intends to acquire a domestic company or a direct or indirect participation in a domestic company that will enable the acquirer to reach or exceed 25% of the voting rights, and where the company:

  • Manufactures or develops certain types of weapons.

  • Manufactures or develops specially designed engines or gears to drive battle tanks or other armoured military tracked vehicles.

  • Either:

    • manufactures products with IT security functions to process classified state information or components essential to the IT security function of those products; or

    • has manufactured those products and still disposes of the technology if the overall product was licensed with the knowledge of the company by the Federal IT Security Agency.

The Federal Ministry will examine this intended acquisition to assess whether the essential security interests of the Federal Republic of Germany might be endangered. Within one month after the receipt of the report and of the necessary documents to assess the intended acquisition, the Federal Ministry can prohibit the person required to report the acquisition from making the acquisition. Alternatively, it can issue instructions to operate safeguards to ensure the essential security interests of the Federal Republic of Germany.

The law does not prescribe a period within which the foreigner must report the intended acquisition to the Federal Ministry. Where the acquirer, however, has not reported the intended acquisition, from a civil law perspective the legal transaction is pending and remains without effect. If the Federal Ministry for Economic Affairs and Energy prohibits the acquisition, the legal transaction becomes finally ineffective.

Other business sectors

The Federal Ministry has a general right to examine whether the public order or security of the Federal Republic of Germany is endangered if a non-EU resident acquires a domestic company or a direct or indirect participation in a domestic company so that the acquirer reaches or exceeds 25% of the voting rights. To exercise that right, it is necessary for the acquisition to be a present and sufficiently serious threat affecting the fundamental interests of society, for example, in the supply of:

  • Telecommunications.

  • Electricity.

  • Water management.

  • Services of strategic significance.

The Federal Ministry can exercise the right of examination only if it informs the direct acquirer about the opening of the examination procedure within three months of the conclusion of the contract. However, unlike with acquisitions in the arms and IT security fields, the acquirer does not have to inform the Federal Ministry in advance of the acquisition.

The Federal Ministry can prohibit the direct acquirer from making an acquisition or issuing instructions until the end of two months after the receipt of the complete documents. However, the Federal Ministry must obtain approval from the Federal Government to issue prohibitions or orders.

 
21. Are there any exchange control or currency regulations?

There are no exchange control or currency regulations. However, the circulation of cash money and equivalent means of payment across the borders of EU member states like Germany is monitored by the customs control units at the borders. Equivalent means of payment include:

  • Shares.

  • Precious metals.

  • Gemstones (raw or cut).

  • Electronic money.

Every person entering or leaving an EU member state from or to a third country that is not a member state of the EU with cash money or equivalent means of payment in a total of EUR10,000 or more must report this amount of money to the customs officer on entry or exit.

These checks do not restrict the free movement of capital. Cash money and equivalent means of payment can be carried in unlimited amounts without need of permission. The purpose of the checks is to combat money laundering and the financing of terrorism.

 
22. Are there restrictions on foreign ownership or occupation of real estate, or on foreign guarantees or security for ownership or occupation?

There are no restrictions on foreign ownership or occupation of real estate or on foreign guarantees or security for ownership or occupation.

 

Directors

23. Are there any general restrictions or requirements on the appointment of directors?

There are no restrictions on the appointment of directors.

A director can have any nationality; neither a German citizenship nor a domestic residence in Germany is required. He is, however, banned from directorship, if he is subject to a final judgment for insolvency offences, fraud, false accounting or other "white-collar-crimes".

Further, there are some minor exceptions, where some restrictions have been imposed on a directorship, where in some cases official approval is required. For example, directors of a transport company, real estate agents and property developers must prove their relevant expertise.

 

Board composition

24. What are the legal requirements for the composition of a company's board of directors?

Structure

Stock corporations (AGs) are led by the management board, which must be supervised by the supervisory board (Stock Corporation Act).

In a private limited company (GmbH) the mandatory rules are only that at least one managing director must be appointed to represent the GmbH (GmbH Act). A GmbH, therefore, generally has a unitary board structure. However, shareholders are free to create an advisory or a supervisory board and delegate all areas of management that are not reserved by law to the shareholders to this advisory board. The advisory board can even (at least in the case of small and medium-sized corporations) be formed in accordance with the Anglo-American law model of a unitary board of directors.

A GmbH regularly employing more than 500 employees must create a supervisory board.

Number of directors or members

GmbHs and AGs must have at least one director or management board member. AGs with a share capital of more than EUR3 million must have at least two board members. The supervisory board of an AG must have at least three members. An AG or GmbH can provide for a maximum number of board members in its articles of association.

Employees' representation

In a GmbH or AG that employs more than 500 employees, one-third of the mandatory supervisory board (see above, Structure) must be occupied by employee representatives. The number of representatives depends on how many employees are regularly employed in the company. In GmbHs and AGs with more than 2,000 regularly employed employees, half of the supervisory board must be occupied by employee representatives. The total number of members of the supervisory board depends on the size of the company. Special rules apply to companies active in the mining and iron industry.

 

Reregistering as a public company

25. What are the requirements for a business to reregister as a public company?

Membership

In Germany, the equivalent to a public company is the AG.

A private limited company (GmbH) can be transformed into an AG, when the requirements for establishing an AG (as laid out in Question 2) are met. A supervisory board (at least three members) and a management board (at least one member) must be established. A one-tier board system can only be installed, when an SE is established instead of an AG (see Question 2). There is no minimum or maximum number of members.

Share capital

The minimum share capital of an AG is EUR50,000 and can be contributed in cash or in kind. There is no minimum number of shares that must be held by the public.

 

Tax

26. What main taxes are businesses subject to in your jurisdiction?

Taxes

Corporation tax. Corporations are subject to corporation tax. The tax rate is currently 15%, in addition a solidarity surcharge is levied (5.5% on the amount of the corporate tax to be paid). Corporation tax is assessed on the basis of the gains of the corporation within the fiscal year.

Income tax. The income tax rate for individuals (such as employees) is between 15% and 45%. In addition, a solidarity surcharge of 5.5% is levied on this rate.

Trade tax. Corporations pay trade tax, which varies from community to community and is between 14% to 17% of income. It is credited against income tax.

VAT. The VAT standard rate is 19%. There is a reduced rate is 7% (for food stuff, educational material and the like).

Capital gains tax (withholding tax). The rate is 25% on return on capital employed.

Date of tax return

The tax return must be filed with the competent tax authorities by 30 April of the subsequent year.

 
27. What are the circumstances under which a business becomes liable to pay tax in your jurisdiction?

The tax liability of a business depends on whether it is tax resident in Germany or not. In addition, any double tax avoidance treaties should be considered.

Tax resident

A corporation is tax resident in Germany if it has a registered seat or at least a place of management in Germany.

Non-tax resident

A corporation is non-tax resident in Germany if it has neither its registered seat nor a place of management in Germany. A non-tax resident corporation is subject to limited tax liability on its German income.

 
28. What is the tax position when profits are remitted abroad?

There is no branch remittance tax in Germany. Corporation tax is assessed on branch income, regardless of whether the profits are retained in Germany or remitted abroad (see Question 26, Taxes).

 
29. What thin-capitalisation rules and transfer pricing rules apply?

Generally speaking, expenses are deductible if they are incurred in the course of the company's business. Certain expenses, however, are not deductible or are only deductible up to a limited amount. In addition, there are transfer pricing rules in Germany (which regularly follow the relevant Organisation for Economic Co-operation and Development (OECD) rules). A transfer price is to be determined on an arm's length basis. There are different standard pricing methods available, that is, the comparable price, the resale price or the cost plus method. Adjustments may be necessary to determine the relevant price. Tax authorities correct unreasonable prices. Transfer pricing documentation may be required.

 

Grants and tax incentives

30. Are grants or tax incentives available for companies establishing a business in your jurisdiction?

There are grants and tax benefits available for companies establishing a business in Germany. The German Subsidy Report provides general information about grants and tax benefits available in Germany: www.bundesfinanzministerium.de/Content/EN/Standardartikel/Press_Room/Publications/Brochures/2013-10-10-24th-subsidy-report-summary-pdf.pdf?__blob=publicationFile&v=8.

In addition, there is a database enabling searches for certain grants or special loans: www.foerderdatenbank.de.

The following sites are useful in specific areas:

Support can be granted either as a low interest loan, as a guarantee or a tax benefit (even though low interest loans are more common than tax benefits).

 

Employment

31. What are the main laws regulating employment relationships?

The freedom of choice of applicable laws applies to the laws regulating employment relationships. The parties of an employment contract are entitled to explicitly agree on the applicability of German law, the laws of the country of origin of the other party involved or even the laws of a third country without reference to the employment relation.

If there is no explicit agreement on the applicable law, the applicable law can also be governed by an implied agreement between the parties involved. The following are an indicator for the applicable laws, among others:

  • Clauses assigning jurisdiction.

  • Arbitration clauses.

  • Contractual references.

If the contract is in the German language and/or makes reference to German labour law provisions, this argues in favour of the applicability of German law.

If no explicit or implied agreement has been made, the applicable law is generally determined by the law of the country in which the employee regularly meets his contractual duties, that is, his or her place of work. If that place cannot be determined, the laws of the business that engaged the employee are applicable.

However, when explicitly or impliedly agreeing on the applicable law regulating the employment relationship, the choice of laws is limited. The choice of laws must not derogate the so-called "mandatory rules" protecting the rights of employees that would have been applicable if no explicit or implied choice of laws was made. These mandatory rules are not explicitly defined; examples include the German act governing protection against unfair dismissal.

Additionally, the choice of laws must not violate the German public order (ordre public).

 
32. What prior approvals (for example, work permits, visas, and/or residency permits) do foreign nationals require to work in your jurisdiction?

The following are covered by freedom of movement and therefore do not require any kind of permit to enter into employment in Germany: citizens of EU member states, and citizens of Iceland, the Principality of Liechtenstein, Norway and Switzerland.

The following do not require a visa in advance to enter the Federal Republic of Germany: citizens of Australia, Israel, Japan, Canada, South Korea, New Zealand and the US. Before entering an employment they require a residence permit allowing them to enter into employment. This residence permit can be obtained at the competent German Foreigners' Registration office at the employee's future place of residence.

Citizens of other countries require a visa entitling the citizen both to enter the Federal Republic of Germany as well as to enter into employment in Germany. The respective visa must be applied for before entering the territory of the Federal Republic of Germany at the competent German mission of the employee's home country.

Alternatively, highly qualified non-EU-member citizens with a German university degree, a recognised university degree or a university degree equivalent to a German university degree can apply for a so-called "EU Blue Card". As well as the university degree the employee must be able to present a valid employment contract for a highly qualified employment with a minimum gross annual remuneration of EUR47,600.

For highly qualified non-EU-member citizens from the disciplines of mathematics, information technology, science and technology as well as medical doctors, the minimum gross annual remuneration is lowered to EUR37,128, but the local Federal Agency of Employment must give its approval.

 

Proposals for reform

33. Are there any impending developments or proposals for reform?

In 2008, the GmbH Act was reformed. The objective was to simplify and accelerate business start-ups, to increase the attractiveness of the private limited company (GmbH) and to make an abuse of this business form more difficult. At the moment, case law and literature focus on the reform's effects rather than on new proposals. A reduction of the GmbH's minimum share capital from EUR25,000 to EUR10,000 has already been discussed. But with the newly created entrepreneurial company (UG), this approach will probably no longer be pursued, as the minimum share capital of the UG is EUR1.

 

The regulatory authorities

Federal Ministry for Economic Affairs and Energy

Main activities. The Ministry is, among others, responsible for economy, technology, foreign trade and technology.

W www.bmwi.de/EN/root.html

National Association of Notaries

Main activities. The National Association of Notaries provides contact details for notaries.

W www.bnotk.de/en

Federal States' Fiscal Authority

Main activities. The Federal States' Fiscal Authority gives information on German taxation in English, especially for foreign investors.

W www.steuerliches-info-center.de/EN



Online resources

Company Register (Unternehmensregister) (UG)

Description. The Federal Ministry of Justice and for Consumer Protection provides this central platform to store official and up-to-date company data.

W www.unternehmensregister.de

Legal Database

Description. The Federal Ministry of Justice and for Consumer Protection maintains a website containing German legislation in full. Some of the laws contained are translated into a non-binding English version.

W www.gesetze-im-internet.de



Contributor profiles

Dr Axel Reeg, Partner

REEG RECHTSANWÄLTE- InternationalBusinessLaw

T +49 621 127 17 0
F +49 621 127 17 17
E reeg@reeglaw.com
W www.reeglaw.com

Professional qualifications. Germany, 1990; Spain, 1992

Areas of practice. International arbitration; cross-border M&A; litigation; labour; contracts.

Recent transactions.

  • Damage claim and discovery order against a former fellow shareholder.

  • Enforcement of a judgment of Malaysian local directors against a shareholder.

Languages. German, English, Spanish

Professional associations/memberships. Chartered Institute of Arbitrators; Club Español de Arbitraje; Practice Group International Economic Law of the German Lawyers Association, DIS (German Institution of Arbitration).

Publications.

  • Litigation and enforcement in Germany: overview, Practical Law Dispute Resolution Multi-jurisdictional Guide 2013/2014, (jointly with Matthias M Weiß).

  • The New Arb-Med-Arb Protocol of the Singapore International Arbitration Centre, in: IWRZ 2015, 15.

  • The preparation of witnesses in International Arbitration – the Need for an Active Role of the Tribunal, in: Global Wisdom, Festschrift für Gerhard Wegen.

Jochen Wilhelm, Partner

REEG RECHTSANWÄLTE- InternationalBusinessLaw

T +49 621 127 17 0
F +49 621 127 17 17
E wilhelm@reeglaw.com
W www.reeglaw.com

Professional qualifications. Germany, 2007

Areas of practice. Labour; M&A; international trade law; customs law.

Recent transactions. Advising prominent automotive suppliers on staff reduction measures.

Languages. German, English

Professional associations/memberships. Labour Law Practice Group of the German Lawyers Association.

Ricarda Fahrbach, Senior Associate

REEG RECHTSANWÄLTE- InternationalBusinessLaw

T +49 621 127 17 0
F +49 621 127 17 17
Efahrbach@reeglaw.com
W www.reeglaw.com

Professional qualifications. Germany, 2015

Areas of practice. M&A; corporate; litigation; arbitration; IT and IP law.

Recent transactions

  • Legal advice and representation in post-M&A disputes (both nationally and internationally, main proceedings and interim measures).

  • Incorporation of a subsidiary of a European corporation in Germany.

  • Litigation (both nationally and internationally) following an international distribution agreement.

  • Advising on negotiations for a complex IT outsourcing contract.

  • Advising on management buy-out at a Malaysian subsidiary of a German engineering company.

  • Legal advice in connection with the conclusion and termination of a distribution agreement.

Languages. German, English, Swedish

Professional associations/memberships. DIS-40 (Association of young German Arbitrators), VGRUR (German Association for Protection of Intellectual Property), DIS (German Institution of Arbitration), IT Law Practice Group of the German Lawyers Association.

Ulrich Schiener, Associate

REEG RECHTSANWÄLTE- InternationalBusinessLaw

T +49 621 127 17 0
F +49 621 127 17 17
E schiener@reeglaw.com
W www.reeglaw.com

Professional qualifications. Germany, 2015

Areas of practice. Corporate; M&A; international trade law; commercial contracts; dispute resolution.

Recent transactions

  • Advising on legal matters related to M&A transactions. Representing shareholders in meetings of shareholders.

  • Advising various automotive suppliers on sales and distribution issues.

  • Advising on cross-border employment issues, with regard to Spanish labour law.

Languages. German, English, Spanish

Professional associations/memberships. German-Spanish Lawyers' Association, German Initiative of Young Arbitrators (DIS40).


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