DOING BUSINESS IN GERMANY
Before starting an operation in Germany, you first should become familiar with the legal framework.
This article shall give you a rough idea what to expect. It cannot be complete, but intends to give you some highlights.
Details can only be judged and fixed considering your specific situation and need an extensive individual consideration and consultation.
1. Legal forms of doing business
1.1. Branch office
1.2. Subsidiary
2. Tax considerations
2.1.Trade income tax
2.2. Income taxes
2.2.1.
Corporate income tax
2.2.2.
Income tax on profits
2.2.3.
Withholding tax
2.2.4.
Solidarity surcharge
2.3. Other taxes
2.3.1.
Value-added tax (VAT)
2.3.2.
Real estate transfer tax
2.3.3. Net asset
tax
3. Labor law and visa issues
3.1. Contract of employment
3.2. Rights arising from
dismissal
3.3. Protection against
termination
3.4. Social security
3.5. Miscellaneous
employment rights
3.6. Labor unions
3.7. Work/residence permit
4. Commercial law
4.1. Distribution
4.2. General
terms and conditions/warranties
4.3. Product liability
4.4. Unfair competition
4.5. Antitrust
5. General regulatory rules
1. Legal forms of doing business
Any foreign company planning to establish a commercial presence in Germany may operate either through a German branch office or through a German subsidiary.
In order to be recognized as a branch office under German law, the business establishment generally has to
A branch is not a separate legal entity. Still the main company becomes party to contracts and thus liable.
The headquarter has to appoint a legal representative in charge of the branch who together with the branch office itself must be registered in the commercial register at the local court (Amtsgericht), submitting the required information and documents.
Working through a corporate subsidiary in Germany means establishing a separate legal entity.
Though that can be done by establishing a (Stock-) Corporation (Aktiengesellschaft) or a Limited Partnership (Kommanditgesellschaft), most foreign parent companies decide to set up a limited liability company, a "Gesellschaft mit beschränkter Haftung" (GmbH).
The statutes have to be notarized and a GmbH must have a minimum capitalization of Euro 25,000 (about $25,000), the maximum amount is not limited. These, along with other information (such as name, corporate seat and purpose, name of the managing director(s) and their powers of representation) are registered with the local commercial register and thus publicly available.
The liability of the GmbH - shareholders is limited to the registered capital.
Though the capital can be represented by real estate, equipment or other values, we strongly recommend to use monetary assets. The assets then are later purchased.
There can be one or more shareholders and they may be individuals or corporate entities as well, irrespective of whether they reside in Germany or abroad. A GmbH is represented by one or more managing directors (Geschäftsführer) who may also hold an interest in the GmbH. Managing directors may be individuals of any nationality and they do not need to reside in Germany.
Investors have to be aware that the power of managing directors to represent the GmbH may not be limited under German law. Even if the employment contract or the bylaws of the company restrict the manager's power of representation, a contract signed by the manager on behalf of GmbH in violation thereof would still be legally valid and enforceable against the GmbH. The manager, however, would be liable to the GmbH as a consequence.
The shares of a GmbH, which do not physically exist in the form of share certificates (like stocks) are transferable by a contract that has to be notarized in a deed – like transaction.
As the GmbH-company law is quite flexible and thus well suited for practically all kind of different business needs, this is normally the structure to choose.
One of the shortfalls of establishing an AG is that its incorporation and its day-to-day operation are more expensive and subject to much more extensive regulations. A GmbH, however, may be converted into an AG at any time under applicable statutory procedures, for example if the access to capital markets is needed.
One of the most important considerations establishing a business is to find the right tax structure. Here follows an outline of the basic taxes:
The first tax on the profits of any business operation is the trade-tax which is levied by the local municipality and may amount to 20% ore more of taxable profits. This tax is a deductible expense for income tax purposes, however.
Big and attractive cities will normally impose the highest trade tax rates, economically less attractive locations usually impose a lower one in order to be more attractive for investors.
Any business entity registered in Germany is treated as a tax person and subject to corporate income tax.
German corporate income tax currently is structured as imputation system: any corporate income tax paid by the corporation is fully credited against the corporation tax or income tax payable by the domestic recipient of any dividends.
Corporations subject to German corporate income tax are taxed on their worldwide income. A split corporate income tax rate applies which amounts to 40% of retained profits and to 30% of distributed profits.
Like most foreign jurisdiction, German tax law provides for specific thin capitalization rules. As a general rule, interest paid on a shareholder loan exceeding certain safe heavens is deemed constructive dividend.
Corporations which have neither their seat nor their major place of management in Germany are considered nonresident corporations. These corporations are subject to taxation on their income from German sources only. The net profit of nonresident corporations, e.g. of branch operations or of profits of a partnership allocable to the foreign corporation, is subject to a single 40% charge.
2.2.2. Income tax on profits of partnerships and single entrepreneurs
The net profit after deduction of the trade tax realized by a partnership will be allocated to the partners as agreed in the partnership deed. The profit or loss as allocated is taxable as part of the income of the respective, partner. Profit allocable to an individual partner is subject to income tax at his individual income tax rate; profit allocable to a corporate partner is subject to corporate income tax at the level of the corporation.
The net profit after trade tax realized by a single entrepreneur is subject to income tax at the entrepreneur's individual tax rate.
Dividends paid by a German corporation to its shareholders are subject to a 25% withholding tax. Such withholding tax is a tax credit for German resident shareholders. Applicable double taxation treaties which follow the OECD Model Convention provide for limitations and exemptions with respect to applying withholding tax.
In addition to income tax and withholding tax, there is a temporary solidarity surcharge, calculated at a rate of' presently 5.5% of the income tax amount.
VAT is charged on goods supplied or services rendered in Germany by a taxable entity in the course of business. In preparing the VAT return, the taxable entity adds up all its output tax (+) and all its input tax (-). The resulting not output tax is payable to the tax authorities, thus taxing the value added in the respective stage of production. There are special rules for export and import.
VAT presently is charged at a tax rate of 16% which is reduced to 7% for certain items such as books and food. A VAT return with the tax authority has to be filed on a regular, in most cases monthly, basis.
2.3.2. Real estate transfer tax
The sale of real estate, buildings and equivalent rights is subject to a real estate transfer tax of 3.5%, based on the transaction price. Be aware, that the direct or indirect acquisition of 100% of the shares of a corporation or other entity holding real estate is deemed equivalent to the acquisition of the real estate and thus subject to real estate transfer tax as well.
Net asset tax is not imposed as of January 1, 1997. According to current discussions, there are, however, considerations to reintroduce this tax in the future.
In Europe, labor laws protect employees more than in the U.S. and especially labor laws in Germany can be a big trap for employers.
Although a written employment contract is not required to establish an employment relationship, the employer is obliged to state in writing certain basic terms of the employment, for example the identity of the parties and beginning, planned term of employment and payment.
3.2. Rights arising from dismissal
German law distinguishes between termination for cause and termination with notice.
Termination for cause is a remedy available in situations where either party to the employment relationship has heavily breached its duties constituting a substantial and incurable breach of the contractual duties.
Among other specifications such notice for cause must be expressed within two weeks after the terminating party has noticed the existence of the cause giving cause to termination. The party must not base a termination on this cause at any time thereafter.
For termination with notice, the employer has to observe contractually agreed notice periods or at least certain statutory minimum periods of notice which increase from four weeks at the beginning of the contract to up to seven months after several years of continued employment.
In most cases the employee is entitled to a compensation.
3.3 Protection against termination
If an employee has worked for at least six months for an employer with more than five employees, this person enjoys special termination protection under the German Termination Protection Act.
According to the Act, the employment may be terminated only for reasons based on the employee's person, his or her conduct or important business requirements. Certain employees enjoy full protection against termination, like members of the works council during their period of office and for one year thereafter, or women during their pregnancy and until the end of the fourth month after the birth of the child.
Each employee is a member of the mandatory German social security system (pension, health insurance, unemployment insurance etc). Half of the respective premiums are paid by the employee and half by the employer. Thus the total of the cost for an employee are increased by roughly one third of the agreed salary.
3.5 Miscellaneous employment rights
Further specific rights are maternity payment, maternity vacation and special rights for disabled.
Employees in companies with at least 5 employees are entitled to demand for the installation of a work council.
This council has strong rights with respect to working conditions and sometimes can affect the overall business.
Labor unions are especially strong in the areas of industry and production. In these areas wages are normally negotiated directly between the union and the employers associations. If no understanding can be reached, there are extensive rights to call for a strike.
In order to work in Germany for an extended period of time any foreign national –except from within the EU- has to obtain a work permit and a residence permit. The process usually takes 2 to 3 months.
Americans do not need such a permit, if they spend less than 3 months of a calendar year in Germany, but in this case are not allowed to work. If they want to stay longer or want to work, they can apply for these permits from within the country.
A foreign company usually will use agents and distributors when it starts in a new country.
Agents are self employed businesspersons contracting in the name and for the account of another business. They are protected through extensive legislation. For example upon termination the agent is entitled to up to 100% of his average annual commission of the past 5 years (depending from the duration of the agreement etc.)
Distributors are self employed persons buying and selling products and services for their own account. Though their situation is significantly different, in some cases they are qualified like agents and therefore entitled to a termination-compensation as well.
Distributor agreements and especially exclusivity arrangements may be in conflict with European antitrust legislation. The European Commission therefore created several exemption rules, because the necessity of such agreements in general has been accepted.
Another possibility to enter the German market is franchising. There are no specific laws, the general legislation for sale-agreements and rental agreements are considered to be sufficient. There is also a specific EU-exemption for franchise agreements.
It is very important, to draft the single agreements considering all relevant aspects.
4.2. General terms and conditions/warranties
A U.S. company selling products and services in Germany must be aware that general terms and conditions as well as warranties are subject to specific rules of German law.
First, the German Civil Code (BGB) and the German Commercial Code (Handelsgesetzbuch) provide for a multitude of relatively well-balanced rules on forming and terminating contracts and fulfilling contractual obligations. For example, the statutory period of limitations for warranties in sales agreements is six months for moveable goods and one year for real property, unless the seller intentionally deceived the buyer, in which case there is a 30-year period of limitations.
Under the German Commercial Code, business people lose their right to make warranty claims if they do not examine received goods immediately and raise claims without undue delay. The statutory warranty period for regular work performance is six months and for work performance on buildings five years.
Because business people are often satisfied with the statutory rules applying, sales contracts in Germany may be quite short.
It is customary, however, that companies marketing to private end-customers attempt to include at least a short set of general terms and conditions in their sales contracts. Often, such terms attempt to establish rules which are more favorable to the seller than the normal statutory rules. In order to protect the consumer, considered the weaker partner in commercial negotiations, German law provides that general terms and conditions must comply with the stipulations of the Standard Terms Act (AGBG). As a central mandate, the Standard Terms Act prohibits all general terms and conditions that lead to an unfair disadvantage for the other party, which has led to a large amount of specific case law on this subject matter.
U.S. product liability is more stringent than the German one. Among others German law does not use the concept of punitive damages, there are no jury trials and the payment of compensation for pain and suffering is very restricted.
The Product Liability Act establishes mandatory and strict product liability rules. Damages to persons and material damage from defective products may be recovered in civil court. Liability in these cases is limited to a maximum amount of DM 160 million. Therefore it is possible for the manufacturer to get insurance protection. The act makes liable not only the manufacturer, but also every distributor, importer and every person or company attaching its name to the product.
In addition to this strict liability the German Civil Code qualifies negligence as a tort. There is no limitation in the amount.
As both aspects overlap, the claim can be based on both concepts.
The burden of proof lies with the manufacturer, if the consumer proves the existence of a defective product and a link to the specific damage.
Many familiar U.S. business practices in this area, such as detailed comparative advertising or sales promotions by giving away free add-on products, are illegal under unfair competition rules, rebates are limited to special occasions like going out of business sales, end-of summer sales and the like.
Accordingly all agreements, arrangements or attempts to limit competition are unlawful.
Takeovers, mergers and acquisitions are equally subject to strong legislation and strong control, in order to avoid monopolies.
In general the German rules are superseded by the European laws and controls, especially if big companies with great market impact are involved.
Authorities are entitled to charge fines and outlaw actions or agreements.
Business activities in Germany may also require various permits by governmental agencies.
Among others German states have established building codes: construction of new buildings and modifications of existing ones are only allowed, if the respective, detailed permission is granted.
Another example is the general permission for business activities: at least the start of a business has to be registered, some activities, like brokering or investment require permissions, normally based on the individuals trustworthiness and reliability.
But there are no specific rules for foreigners with that respect.
last modified: 05/30/06 11:33