Doing Business in Germany
In our office we provide you with information about Doing Business in Germany.
Company Registration in Germany
Subsidiary Subsidiary When a subsidiary is established, a legally independent company is formed. The subsidiary trades under its own name and prepares its own balance sheet. When choosing the legal form of the company, a corporation is usually the best option for larger, established companies. The German private limited liability company (GmbH) is the most widely used legal form for corporations. It combines high flexibility with relatively few obligations. Subsidiaries must be registered in the local Commercial Register and with the competent trade office. Registration in the Commercial Register must be in a legally certified form.
Autonomous Branch Office
Autonomous branch offices are intermediate between forming an independent company and simply forming a division of a company. A branch office would typically on the one hand be dependent of the company, and on the other hand have a certain degree of autonomy.
The branch office is described as an office that is spatially separate from the main branch, and which was created as an additional, long-term Limited Liability Company (Gesellschaft mit beschränkter Haftung, GmbH) Stock Corporation (Aktiengesellschaft, AG) Partnership Limited by Shares (Kommanditgesellschaft auf Aktien, KGaA) focus of the business. While it cannot conduct all the business of the main office, it does conduct the type of transactions which characterise and form the essence of the business. The independence, which the branch office must demonstrate, comes from it being spatially separate and having its own management with a certain freedom of authority, possibly its own accounting, its own balance sheet and its own business assets.
The criteria of an autonomous branch office are:
- Dealings of a branch office (i.e. activity of a certain duration must be involved and the dealings must in essence correspond with those of the head office;
- in particular, no merely subordinate auxiliary and executive dealings must be involved); Spatial independence of the branch office (e.g. its own bank account, separate bookkeeping, not necessarily, however, its own assets);
- Independence of the branch office in terms of human resources (i.e. the head of the branch office must strictly be authorised to represent the branch office autonomously during legal transactions).
- The founding of a branch office becomes effective through the actual procedure of its establishment in accordance with the indicated criteria. A business registration certificate, along with entry in the Commercial Register, is required; German law applies during the registration process. The application must be certified and submitted by a notary.
Die Gründung einer Zweigniederlassung erfolgt durch den tatsächlichen Vorgang ihrer Errichtung entsprechend den genannten Kriterien. Eine Gewerbeanmeldebescheinigung sowie die Eintragung in das deutsche Handelsregister ist erforderlich. Auf das Registerverfahren findet dabei deutsches Recht Anwendung.
Hinweis: Die Gewerbeanmeldebescheinigung wird auf den Leiter der Zweigniederlassung ausgestellt.
Dependent Branch Office (permanent establishment)
Permanent establishments are additional branches of the enterprise as a whole, which are set up as business premises but are dependent upon the head office abroad. Therefore, they do not constitute independent branches, and as such are not permitted to trade under any name other than that of the head office. The permanent establishment performs auxiliary dealings that serve the purpose of the preparation, brokerage or execution of the foreign enterprise's main dealings.
Manufacturing sites, with no sales, Points of storage, receipt and shipping, Mere points of brokerage, Sales points without their own purchasing. Dependent offices are not entered in the Commercial Register.
However, each site must be registered in the Business Register.This process can be done in our Chamber of Commerce, via the Point of Single Contact, or at the appropriate trade office.
The term "representative office" is often associated with establishing branch offices, particularly by foreign companies. However, the term is not known by German commercial and trade law.
The company’s office in question in Germany is either itself commercially active as part of the main office, in which case it is a dependent permanent establishment (as described above). It would then have to be registered under commercial law.
Alternatively, the company opens an office which is managed by an external, independent businessman (e.g. a commercial representative) who has been instructed accordingly. In this case, the company is not conducting independent commercial operations in Germany.
Business registrations and special approvals
Registration of business is required for commercial activity in Germany. Under some circumstances, additional licences are required.
Not all businesses must be registered with the Commercial Register, but all businesses must be registered with the Business Register.
Entry in the Commercial Register
Subsidiaries must be registered in the local Commercial Register. Registration must be in a legally certified form. The process is handled via a notary.
When registering an autonomous branch office, an application for entry in the Commercial Register must be made directly to the court in the district in which the branch office is located. Registration of the branch office of a foreign company will then be handled as it if were a main office.
When registering, evidence of the existence of the company as such must be presented and, if the company's purpose or authorization to trade in Germany requires a license, evidence of this should also be provided. Registration should also include the branch office's address and purpose. The registration should also state:
- The register in which the company is maintained and the registration number provided legislation in the country in which the company has its registered office provides for a register entry;
- A certified and translated copy of the statutes/articles of association;
- The company's legal form;
- The company's trading name and corporate headquarters;
- The persons authorised to represent the company legally and out of court for the company's branch office activities, stating what authorisations they have.
Permanent establishments do not need to be entered in the Commercial Register. Business registration is sufficient in this case.
The commercial activity of subsidiaries, branch offices or permanent establishments in Germany must be registered, according to German commercial law, with the responsible trade office. As mentioned above, the process of registration can be handled via our Chamber of Commerce, or online via the Point of Single Contact.
In the process, the following documents must be presented to either of the mentioned competent authorities:
a) Concerning the applicant
- Proof of identity by means of identity card or passport + certificate of personal registration; Proof of authorisation to act on the part of a third party where applicable;
- For managing director, board or individual with power of attorney: extract of the company's entry in the Commercial Register;
- Licences where applicable (e.g. handicrafts trading permit, estate agency operating licence etc.).
Foreign nationals must present a residence permit issued by the competent foreigners’ registration office which includes an authorisation to be self-employed.
b) Concerning the enterprise
- A company entered in the Commercial Register must provide evidence of this by means of an extract from the Commercial Register;
- A translation of any documents from foreign commercial registers must also be provided;
- Foreign companies are required to produce a power of attorney for Germany as well as an address in Germany. An individual with power of attorney in Germany must produce an authorisation in his own name.
According to German law, business registration as such does not yet provide entitlement to commence commercial activity if a special permit (a catering concession, for example) or entry in the register of qualified craftsmen is required. Therefore, if necessary, the corresponding approval must be applied for with the responsible authority or a trade association under public law before the activity is commenced.
Requirements under immigration law for foreign company principals
- If the German subsidiary or branch is going to be managed by foreign nationals in Germany, a valid passport for the business registration and, if necessary, confirmation of application for the business registration is sufficient in the case of EU citizens and citizens of countries of the European Economic Area (EEA).
- For arrival and residence, state nationals from non-EU states (third states) require a valid and recognized national passport, as well as a residence permit in the form of residence approval in order to carry out an independent activity. This approval will be granted by the foreigners’ registration office for duration of three years maximum, and only on request upon fulfilment of the following pre-requisites:
- economic interest or a regional need;
- prospect of positive effects on the economy;
- verified funding.
To be taken into consideration at the same time: what effects on the training and employment situation in Germany can be expected; whether the underlying business concept is sustainable and how high the capital expenditure is; and the professional qualifications of the company principal / applicant. Applicants aged 45 and above must, in addition, provide evidence of appropriate old-age provision.
- Applications for a residence permit must be submitted to German Embassy or Consulate in the applicant’s home country.
- Employment activity is not deemed to take place if the person in question maintains their usual residence abroad and merely conducts meetings or negotiations within Germany, provided the total stay does not exceed three months within one year.
The most important Tax Types
Personal Income Tax
The income of private individuals is subject to personal income tax. Income is defined as: the total income from all sources during one calendar year after deductions of losses and certain personal expenditures.
A specific procedure is used for the collection of taxes on wages and salaries (income of non-self-employment). Employers, including foreign employers, must calculate the tax from wages and salaries of each employee and forward that amount directly to the appropriate Tax Office.
This procedure applies only to foreign employers with business operations in Germany. The amount of tax to be withheld from wages and salaries, corresponds to the rates applicable to personal income tax as stated in the tax rate for wages and salaries table.
Additionally, income received by foreigners from other sources, such as dividends, royalties, and membership contributions to the supervisory board, is also subject to tax deduction at the source.
Corporate Income Tax
Corporate income (for example GmbH) is subject to corporate income tax. Corporate tax is calculated from net income, as specified by the regulations of the Income Tax Law and of the Corporate Income Tax Law. All normal and reasonable business expenses, including the payment of the manager or management board, are tax deductible. Personal taxes, fines, and similar legal penalties, as well as 50 percent of the payment to the supervisory board are not tax-deductible. As of January 1, 2008, undistributed and distributed profits are taxed at a rate of 15 percent.
Solidarity Surcharge Between 1995 and 1997, an unlimited solidarity surcharge of 7.5 percent of the taxes due was imposed as a surtax on personal income and corporate income taxes. This solidarity surcharge is designed to help finance the costs of German reunification. Taking effect on January 1, 1998, this amount was reduced to 5.5 percent of taxes due.
Trade Tax (Gewerbesteuer) is to be paid by every stationary business operating in Germany and is calculated on the basis of the business–earnings.
Business earnings are composed of profits from business activities, as determined by the Income Tax Law or by the Corporate Income Tax Law and adjusted by the deduction and addition of certain items.
The level of taxation is dependent on the locality. For Trade Tax it ranges between 13 and 15 percent. The final tax rate at which a business will be taxed is about 30 percent of business earnings
Sales Tax/ Value Added Tax (VAT)
All supplies and services rendered by an enterprise in the course of its domestic business activities are subject to the VAT. Foreign enterprises, including those with no permanent establishment or representative in Germany may also be subject to the VAT. In addition to supplies and services, VAT will be levied on goods imported from non-EU countries and on the application of goods from a business enterprise for private purposes. The general VAT rate is 19%. For certain goods and services, particularly agricultural products, food stuffs, and books, the tax rate is reduced to 7 percent.
The VAT of goods and services supplied to another business, which is itself responsible for paying the value added tax, must be listed separately on the invoice. The purchasing business of these goods or services may deduct this tax amount from its own tax payments as a so called pre-paid tax-in order to avoid paying the value added tax twice. In the case where a foreign business is unable to claim this tax amount as a pre-paid tax on its own tax declaration, a special pre-paid tax refund procedure applies.
Real- Estate Transfer T
ax Real-Estate transfer tax (Grunderwerbsteuer) is imposed on all transfers of real-estate located within the Federal Republic of Germany. Possession of real-estate is also transferred in cases where all the shares of a company in possession of real-estate are transferred in a single or in several transactions.
In most cases, the rate of taxation is calculated from the purchase price. This is also the case, since January 1, 1997, in the event that the real-estate itself is not transferred, rather only the shares of the company in possession of the real-estate. The rate of taxation in both cases in the Federal State of Baden-Württemberg is 5 percent.
Real Estate Tax
Real Estate Tax (Grundsteuer) is imposed by local authorities on real estate. The rate of taxation depends on the type of real estate. For most real estates it is 3.5 percent. Higher rates apply to agriculture and forestry. Family homes are assessed a bit lower. The level of taxation is dependent on the locality.
Special tax regulations for Iraqi companies
Double Taxation Agreement Law
There is a so called Double Taxation Agreement Law for foreign companies in Germany, which prevents double taxation, but unfortunately Iraq is not listed in this agreement.
Value-Added-Tax Refund Agreement
Nevertheless there is a Value-Added-Tax refund agreement between Germany and Iraq which means you can apply for VAT refunds. In order to do so the company has to be registered at the Tax Office. This can be done once the company has been registered in the Business Register.
Tax Office registration
Tax Office Every trade business must be registered with the tax office. The tax office assigns a tax number to the entrepreneur after registration and usually sends him questionnaires where he has to provide information about his fiscal situation, as well as turnover and profit expectations. The tax office needs this information to be able to correctly classify the entrepreneur fiscally.
In addition, the tax office also checks which tax declarations the entrepreneur has to hand in in future and whether advance tax payments need to be determined.
If an entrepreneur intends to import items from another member state of the European Union value-added tax-free, he also requires a so-called value added tax identification number. The value-added tax identification number is issued by the Federal Central Tax Office upon application.
References are :
- Hamburg Chamber of Commerce
- Federal Central Tax Office (Bundeszentralamt für Steuern)