An Overview for Foreign Entrepreneurs
Germany is a beautiful country – but that is not relevant here. First and foremost, Germany has a strong economy, high purchasing power, well-trained employees, political stability and a reliable legal system.
Therefore, it does not come as a surprise that foreign enterprises of all sizes consider setting up their own business on the German market. The spectrum is huge: On the one hand, you will find the multinational players that evidently have their German subsidiaries as well. And on the other, there are large numbers of small and medium-sized foreign companies or even individuals who also want to offer their services and do business in Germany.
The following overview will focus on some of the aspects that have to be taken into account when establishing a business in Germany.
1. Business Entities
There is a number of possibilities how a foreign entrepreneur can work the German market. To start with, a foreign company could just sell and deliver its goods from their home country to German customers, be it directly or through commercial agents. But let´s leave that aside for now and focus on those models that involve an actual physical presence on the German market.
a) Liaison Office, Unregistered Branch
The least permant presence would probably be a mere liaison office or (unregistered) branch. This is not an independent legal entity, and it will not be reigistered in the commercial register. It has to be notified to the local trade office, though.
All actions of the liaison office will be automatically attributed to the foreign enterprise, which is also fully responsible for the liabilities of its German branch.
b) Registered Branch
Although a registered branch is not an independent legal entity, either, it still has some existence of its own on the German market. Typically, a registered branch will have its own local manager, bookkeeping and accounting.
Under section 13g of the German Commercial Code, the German branch of a foreign corporation has to be registered in the German commercial register at its place of business. And the start of the business will also have to be notified to the trade office.
Again, all actions of the branch are attributed to the foreign entrepreneur. However, registration means that a lawsuit against the foreign business owner can now also be brought before the German courts at the place where the branch is registered (see section 21 of the German Code of Civil Procedure).
In order to strengthen its position on the German market, the foreign entrepreneur should consider setting up a subsidiary in Germany. One popular option is to found a GmbH (German limited liability Company) whose shares are 100% held by the foreign parent company (wholly owned subsidiary).
The German GmbH will be registered in the commercial register. It is managed by a managing director (Geschäftsführer) whose name will also be registered in the commercial register. Under German law, the managing director has to follow the shareholders´ directions at all times, which means that the parent company has full legal control over its German subsidiary.
A GmbH is an independent legal entity of its own with its own assets. Contracts are usually entered in the name of the (German) GmbH, making the GmbH itself liable for its contractual obligations.
Liability is thus restricted to the assets of the German GmbH alone. Unlike a liaison or branch office, a GmbH will shield the foreign parent company from the obligations entered into by its German subsidiary.
Alternatives to a GmbH: (small) AG (stock corporation), KG (limited partnership), GmbH & Co KG (limited partnership with a GmbH as the general partner), and others.
One legal entity can be transformed into another, although this entails some expenses in the form of fees for attorneys, tax consultants and a notary.
2. Taxes and Accounting
Let me make this short:
a) A GmbH, which is the most popular legal entity in Germany, has to pay VAT, corporate tax and (municipal) trade tax. The profits that the GmbH earns can be freely distributed to the foreign parent cpmpany.
b) Managing a GmbH means that you have to properly take care of accounting and bookkeeping. It is usually a good idea to delegate that task to a tax consultant or CPA who is familiar with international taxation and double taxation treaties.
3. Immigration and Residence for the Purpose of Economic Activity (Non-EU-Nationals)
a) Immigration and residence issues will arise when foreigners from outside the EU want to work personally in Germany, for instance as a one-man business or as the managing director of a GmbH or UG haftungsbeschränkt (Entrepreneurial Company with limited liability). In order to do so, they usually need a so-called temporary residence permit for the purpose of self-employment under section 21 of the Aufenthaltsgesetz (Act on the Residence, Economic Activity and Integration of Foreigners).
Foreign employees who want to work for the company in Germany need a (temporary) residence permit for the purpose of employment under sections 18 and 39 AufenthG.
b) The formation of a GmbH or UG haftungsbeschränkt (or any other company for that matter) does not mean that the foreign shareholder or managing director is automatically entitled to a residence permit for the purpose of economic activity. A temporary residence permit for the purpose of self-employment rather requires that there is an economic interest or regional need for such a business in Germany, that the activity is expected to have positive effects on the economy and that the foreigner has personal capital or an approved loan to realise the business idea (see section 21 AufenthG).
Assessment of the prerequisites will focus in particular on the viability of the business idea, the foreigner´s entrepreneurial experience, the level of capital investment, the effects on the employment and training situation and the contribution to innovation and research.
The competent trade and industry authorities will examine the application on the basis of the business plan that the foreigner will have to submit.
c) On the other hand, there is no need for a residence permit if the German branch or subsidiary is managed from abroad, that is if the managing director will not personally reside in Germany.
d) Alternatively, the position of the managing director can be filled with a German (or EU) national. The foreign shareholder in turn, based solely on his position as a shareholder in a German company, does not need a residence permit, and neither will he get one.
a) In case the German subsidiary wants to employ personnel, the rules of German employment law have to be observed.
b) Let me name just one and maybe the most important aspect: If a company has more than 10 employees, the German Employment Protection Act (KSchG) applies.This Act allows the termination of an employee only for an objective reason. - („Objective reason“ is less than a termination without notice for cause, but still). – Such an objective reason can be found in an employee´s conduct, personal disposition or in compelling operational requirements. In case of operational requirements, due consideration must be given to „social criteria“ such as an employee´s age, seniority or obligations to support a spouse and/or children.
To cut it short: German employment law does not allow „hiring and firing at will“, as it may still be practised sometimes in the US.
5. Contracts, Standard Terms
To avoid legal controversies and disputes, doing business in Germany should be based on solid contracts.
a) That usually starts with the lease agreement for the office space or showroom or storage facilities.
b) In addition, sales and distribution need proper agreements (sales contract, service agreement, licensing agreement and so on). If the foreign entrepreneur prefers to work under its own domestic law, contracts should include adequate choice of law and venue clauses.
c) In Germany it is very popular and common to use Standard Terms and Conditions, called „Allgemeine Geschäftsbedingungen“ or just „AGB“. Although „standard“, those conditions should still be tailored to the specific needs of the respective business operation.
6. To sum it up
Setting up a proper business in Germany is often a worthwhile, yet rather complex undertaking for a foreign entrepreneur. This step should be carefully planned and executed. Since there are a lot of legal aspects to be taken into consideration, you should – last but not least - also set aside a certain budget for legal services.
Dr. Wolfgang Gottwald
Rechtsanwalt/Attorney at Law