Entering the German Market

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Entering the German Market
 

Foreign companies expanding into Germany will be entering Europe’s strongest economy – its leading exporter and the third largest exporter globally. More than 45,000 foreign companies operate in Germany, employing around three million workers equating to 25% of jobs in the export sector.

Germany boasts a well-educated, skilled workforce motivated by low unemployment, high earnings and strong measures protecting employees’ rights. The economy has a strong manufacturing and industrial base underpinning a robust economy. €200 billion worth of goods pass through Germany – more than any other country in the European Union. In the first quarter of 2020 Germany had an account surplus of €24.4 billion. Beyond its own borders Germany has close to 200 million consumers within an 800km radius.

However, the success of the German economy creates a challenge for foreign companies moving in, as standards are high and they will have to be matched by newcomers, along with compliance to labor, registration, tax and payroll regulations.

Establishing legal subsidiaries in Germany’s highly-developed economy poses many questions - from finding highly-qualified staff to complying with strict employment laws plus tax and payroll regulations. The alternative solution overcomes these issues – by working alongside a Professional Employer Organization (PEO) such as Bradford Jacobs, then using our Employer of Record (EOR) in-country experts to handle every aspect of compliance. Employers can depend on our specialists’ in-depth knowledge of Germany, its culture, customs and business practices. Here we have set out some basic summaries of what you need to make the transition into the German market, whichever industry you are in.

https://www.basch-consult.com/blog/entering-the-german-market

https://www.business.hsbc.com/business-guides/germany/economy

Starting a Business in Germany

The procedure to open a company in Germany is detailed and many-layered. Germany scores highly as a country for doing business – but beware. When the International Finance Corporation ranked 190 countries for various factors in operating a business, Germany ranked in the top 50 in all categories bar one – ease of starting a business. Germany ranked 114th.

The necessary steps to open a company in Germany include:

  • Register a business address
  • Decide on the type of company. The most popular choices are a private limited liability company (Gesellschaft mit beschränkter Haftung - GmbH) or a branch (Zweigniederlassung)
  • Confirm the company name with the Commercial Register after checking the name is unique with the Unternehmensregister website
  • Open a bank account. Obtain proof of identity through a post office, notary or lawyer and a “certificate of registration” (Meldebescheinigung) as proof of residence
  • Present documentation to the Trade Office (Gewerbeamt) relating to tax and social security authorities, Labor Office, relevant professional bodies, works councils, trades unions
  • Register with the relevant Trade Chamber
  •  Enroll with the Commercial Register by providing all documentation through a notary, detailing registered company name, registered office, authorized personnel, confirmation of share capital at minimum amount of €25,000. The company name will then be published on the Handelsregister website
  • Register with the local tax office and provide the Articles of Association certified by a notary within four weeks of commencing business

https://altios.com/altios-news/news/7-steps-to-create-your-subsidiary-in-germany/

https://www.howtogermany.com/pages/busi-setup.html

Expanding Business into Germany

Foreign companies expanding into Germany want to tap into a dynamic economy renowned for an innovative business culture and huge consumer spending power. Germany is Europe’s most powerful economy, ideally placed as a springboard for further expansion into neighbouring European Union states such as France, Belgium, the Netherlands and Austria as well as further afield to more recent EU members in Eastern Europe.

Business opportunities in Germany include machinery, chemicals, motor industry, metals manufacturing and processing, consumer electronics, foodstuffs, aerospace, textiles and fabrics, transport, IT and construction.

All of these sectors can be targets for international expansion, in such locations as Berlin, Hamburg, Munich, Cologne, Frankfurt, Essen, Dortmund, Stuttgart and Dusseldorf.

https://marketfinder.thinkwithgoogle.com/intl/en_gb/guide/doing-business-germany/#business-opportunities-germany

https://www.startupoverseas.co.uk/expanding-a-business-in-germany

German Business Facts

  • Capital City - Berlin
  • Population – 82.9 million
  • States – Baden-Wurttemberg, Bavaria, Berlin, Brandenburg, Bremen, Hamburg, Hesse, Lower Saxony, Mecklenburg-Vorpommern, North Rhine-Westphalia, Rhineland-Palatinate, Saarland, Saxony, Saxony-Anhalt, Schleswig-Holstein, Thuringa
  • Official language - German
  • Economy and world ranking – World’s fourth largest economy and largest in the European Union (EU), GDP €3.7 trillion
  • Leading sectors – Car manufacture, mechanical and plant engineering,
  • Main exports – Machinery including computers, vehicles, electrical machinery and equipment, pharmaceuticals, optical and medical apparatus, plastics, aircraft and spacecraft
  • Main imports – Machinery including computers, vehicles, electrical machinery and equipment, mineral fuels, pharmaceuticals, plastics, optical and medical apparatus
  • Main trading partners – EU, USA and China
  • Government – Germany is a parliamentary and federal democracy
  • Currency – Euro

https://www.tatsachen-ueber-deutschland.de/en/germany-glance/strong-hub

http://www.worldstopexports.com/germanys-top-10-exports/

Advantages and Challenges of the German Market

Advantages of expanding into the German market, according to GTAI (Germany Trade and Invest) include:

  • Leading economy: Germany drives Europe’s economy, is the world’s fourth biggest economy, has a large domestic market and easy access to developing markets in the enlarged European Union
  • Global player: Germany is the world’s third highest exporter, behind the USA and China
  • High productivity: Steadily decreasing unit labor costs make Germany one of Europe’s most cost-effective production locations
  • Highly-educated workforce: 81% of population trained to university entrance level or possess vocational qualification, above the OECD average of 67%
  • Innovative power: Europe’s No. 1 location for research and patent applications, backed by billions of Federal funds
  • Logistics: Rail, air, ports and roads infrastructure facilitate smooth transportation of goods
  • Incentives: Comprehensive programs support business investment, from cash incentives to reimbursement of labor and research and development costs
  • Taxes: Reform program is reducing corporate tax levels and indirect labor costs

Challenges facing companies expanding into the German economy include:

The World Bank and International Finance Corporation ranked Germany outside the top 100 nations for ease of starting a business, which is at the heart of problems facing companies wanting to establish subsidiaries in the country. Barriers that have to be cleared include:

  • Dealing with local chambers of industry and business standards, the professional associations of the relevant trade associations, plus enrolling on the Commercial Register
  • Obtaining construction permits and connections for water and telephones can all be lengthy procedures
  • Property registration is complex and takes an average of 40 days, involving the Land Registry, a notarized transfer agreement, a rights waiver from the local municipality and paying transfer tax
  • The German monetary system demands a meticulous approach as companies must make nine tax payments annually and face up to 14 taxes
  • Cross-border trading requires four sets of documents for exports and five for imports
  • German business etiquette, culture and practices also demand research as policies and procedures can slow down the business process

The 100 per cent solution is to consider the alternative to setting up a subsidiary by working with Bradford Jacobs. Our Professional Employer Organization (PEO) international recruitment specialists will find the perfect fit for the roles you need to fill. Then our Employer of Record (EOR) in-country consultants will handle all the complexities of Germany’s employment laws, tax regulations and payroll, ensuring your German expansion plans move smoothly into gear.

https://www.gtai.de/gtai-en/invest/business-location-germany/10-reasons-to-choose-germany

https://www.basch-consult.com/blog/entering-the-german-market

https://www.tmf-group.com/en/news-insights/business-culture/top-challenges-germany/

Why Companies like doing Business in Germany

Germany is one of the world’s strongest and most stable economies, with a highly developed economic infrastructure and trading framework. The largest economy in Europe thrives on a highly educated, skilled and motivated workforce, providing compelling reasons for investment and expansion.

Numerous multinationals have offices throughout Germany’s major cities and its geographical location close to Europe’s biggest economies is perfect to exploit the high purchasing power of hundreds of millions of Europeans.

Germany’s network of airports – 25 of which have international connections – are part of a highly-rated transport infrastructure, including major ports such as Hamburg, Europe’s third largest container port. More goods, worth over €200 billion, pass through Germany than any other European nation. Germany also has Europe’s largest rail network.

Limited Company/Subsidiary or Branch in Germany

A subsidiary established in Germany is considered a legal entity separate from its parent company, with its own capital and independent administration. There are many advantages for companies expanding by this route – the chance to explore a new market, enhancing their international credibility and opening a gateway to mainland Europe.

A branch is entirely different, not being independent of the foreign parent company is therefore not treated as a German resident corporation.

Main characteristics of a subsidiary:

  • A 100% legal German entity, typically a private limited liability company (GmbH)
  • Has full independence from the overseas parent company and can perform additional and independent business activities
  • Investors must undertake incorporation procedures that apply to all German companies as the subsidiary is subject to the same taxation principles as a resident company

Main characteristics of a branch:

  • A local structure not treated as a German resident company, and is taxed as per German laws
  • Not independent of the parent company and must have identical name and business activities

Other differences apply:

  • The parent company is liable for all debts and obligations of its branch, but has no liabilities towards its subsidiary in Germany
  • A subsidiary needs its own Articles of Association, whereas a branch can use those of its parent company
  • Resident companies such as subsidiaries are taxed on their worldwide income, whereas non-resident structures (branches) are taxed only on their German income

Assessing the comparative advantages and disadvantages of choosing between a subsidiary and a branch is best done with expert guidance. The sensible approach to have your business up-and-running in the shortest time possible is to use a Professional Employer Organization (PEO) global recruitment authority such as Bradford Jacobs to source your staff. Even before they are in place, our Employer of Record (EOR) specialists will have dealt with all the complexities of compliance with the relevant authorities. Your company can have a presence in Germany within days rather than months.

Legal Structures for German Market entry

Establishing a subsidiary or opening a branch are the two most popular options for foreign companies entering the German market. A subsidiary is incorporated under German law, whereas a branch of a foreign-based company is incorporated under the laws of the parent company’s home country and uses that company’s Articles of Association.

The main features of the legal structure of a private limited liability company (GmbH) and an entrepreneurial company (UG) are:

The GmbH is 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 €25,000. The GmbH is led by one or more directors (not necessarily domiciled in Germany). 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 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 notarized
  • The comparatively high minimum share capital of €25,000, although only one-half of the amount need be paid in cash on formation

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 €1, but 25% of each fiscal year's net profit must be transferred to reserves. As soon as the reserves amount to €25,000 the UG can change its registered legal form to GmbH. The UG is quite popular for founders of new businesses in Germany because of its low minimum capital and flexibility, although its creditworthiness is sometimes subject to criticism.

https://uk.practicallaw.thomsonreuters.com/2-584-3669?transitionType=Default&contextData=(sc.Default)&firstPage=true

Germany Corporate Tax

Corporate tax must be paid by corporations domiciled or managed in Germany, which means that their domestic and foreign earnings are all taxable. Non-resident companies are subject to tax on German-sourced income. Business enterprises operating in Germany are also subject to a trade tax on business income, levied by each municipality.

The corporation tax rate is 15% plus a ‘solidarity surcharge’ of 5.5% of corporation tax. Businesses also face paying trade tax, a combination of a uniform tax rate of 3.5% (base rate) and a municipal tax rate (Hebesatz). Depending on where the business has a permanent establishment this can be as much as 19%.

Corporate tax advance payments must be made punctually on March 10, June 10 and December 10 each year after being assessed by the tax office. The tax return must be filed by July 31 of the following year.

https://www.business.hsbc.com/business-guides/germany/taxes-and-wages

Opening a business bank account in Germany

Corporate accounts are mandatory for companies such as a private limited liability company (GmbH) or entrepreneurial company (UG) and are necessary to register a company and deposit share capital.

Necessary documentation includes:

  • Explanation of the company’s shareholding structure and Certificate of company registration; bylaws; decision of the board of directors and Articles of Association
  • Business plan including future projection and description of the company’s activities

All EU countries have strict laws on opening bank accounts online to follow directives on anti-money laundering, leading to a protracted process.

https://www.gbofintech.com/how-to-open-business-bank-account-in-germany/

https://www.firma.de/en/company-formation/opening-a-business-bank-account-comparison

Registering a Company in Germany

There are four major forms of corporation in Germany:

  • Limited liability company (GmbH)
  • Limited liability entrepreneurial company (Mini GmbH or UG)
  • Stock Corporation (AG)
  • Partnership limited by shares (KGaA)

The most popular form of business for foreign companies is the private limited liability company, with the following registration procedure:

  • Obtain a German business address
  • Confirm the company name with the Commercial Register after checking it is unique with the Unternehmensregister website
  • Open a bank account. Proof of identity can be obtained through a post office, notary or lawyer. Applicants must also have a “certificate of registration” (Meldebescheinigung) as proof of residence
  • Present documentation to the Trade Office (Gewerbeamt) relating to tax and social security authorities, the Labor Office, relevant professional bodies, works councils, trades unions
  • Register with the Trade Chamber to which the company will belong
  • Enroll with the Commercial Register by providing all documentation through a notary, detailing registered company name, registered office, authorized personnel, confirmation of share capital at minimum amount of €25,000 deposited in the bank. The company name will then be published on the Handelsregister website
  • Register with the local tax office and provide the Articles of Association certified by a notary within four weeks of commencing business

https://altios.com/altios-news/news/7-steps-to-create-your-subsidiary-in-germany/

https://www.howtogermany.com/pages/busi-setup.html

Finding an office in Germany

Germany hosts a growing network of tech innovators in the heart of the European Union and has a strong economy rooted in manufacturing, a diverse workforce, flourishing start-ups and creative innovators with quick connections to the rest of Europe. Germany offers a strategic landing spot for teams of all sizes, so opening your office in the optimum location is vital to boosting business.

Over recent years, the Federal Government and the states have initiated a series of projects to create networks and clusters that promote new technologies involving both industrial and academic institutions in research and development activities.

A cluster is an association of businesses, universities, research institutions and other organizations in one region that share a common field of activity. Germany’s 16 federal states have launched numerous measures to support the development of efficient clusters.

Locating your office in the relevant business hubs/clusters can provide:

  • Free support to grow on the international stage, utilizing joint potential
  • Coaching, guidance and networking opportunities, creating trust and synergy
  • Ideas, knowledge, research and development opportunities, generating new partnerships
  • Innovative ideas which can transform into marketable solutions and services

Examples of Cluster initiatives

  • Go Cluster provides a stimulus to improve cluster management and help turn German clusters into highly effective international centers. Members of the Go Cluster program can obtain funding for novel solutions
  • The Zukunftscluster-Initiative supports research-strong regions throughout Germany under the motto "Clusters4Future"

To search through hundreds of clusters throughout Germany for the best office location for your company, visit https://www.clusterplattform.de/SiteGlobals/CLUSTER/Forms/Suche/EN/Clustersearch_Form.html?oneOfTheseWordsEN=cluster

Bradford Jacobs, as part of their international expansion services, can act as office brokers for companies expanding into Germany. Contact Bradford Jacobs

https://www.clustercollaboration.eu/cluster-networks/german-programme-go-cluster-successful-clusters-through

https://www.research-in-germany.org/en/research-landscape/research-organisations/networks-and-clusters.html

https://www.wework.com/en-GB/l/germany

Finding a German Manufacturer

Companies may need to partner manufacturers in Germany. Developing ideas into products is pointless if you can't adequately produce it. This presents additional problems when expanding into a foreign country. Companies should consider these points when looking for a manufacturer.

  • Do they hold relevant quality certificates?
  • What experience do they have and who are current clients?
  • Can they deliver direct to customers?
  • Can they keep up with demand or do they outsource?
  • Can they source materials?
  • Are they financially sound?
  • How will local customs impact production?
  • How will language impact on communication?
  • What is their minimum order quantity?
  • Discuss possible penalties for poor quality or late deliveries
  • Payment options

You may also want to consider:

  • Market Research to avoid manufacturing a product in a saturated market
  • Licensing to a company that can handle manufacturing, marketing and distribution
  • Can the manufacturer build and test a prototype
  • Protecting your intellectual property

Research and check their reputation in the industry and explore links to German manufacturers.

Reach out to local business groups and check out local business directories.

  • Euro Pages

https://www.europages.co.uk/companies/Germany/Manufacturer%20producer/oem.html

  • ABC der deutschen Wirtschaft - Directory of German companies. https://abconline.de/
  • All.biz - Directory of companies in Germany. https://de.all.biz/
  • Flix.de - Business directory in Germany. https://www.flix.de/
  • Gelbe Seiten - Find a business in Germany. https://www.gelbeseiten.de/
  • Gemeinsames Registerportal der Länder - Register of German companies.

https://www.handelsregister.de/rp_web/mask.do?Typ=n

  • German Business Directory - Doing business in Germany. http://www.german-business-directory.com/
  • Germany Business Hub – Worldwide business directory. https://www.go4worldbusiness.com/
  • Gewerbeverzeichnis Deutschland - German business directory. www.gewerbeverzeichnis-deutschland.de
  • MacRAE'S Blue Book - Business directory with detailed information of companies in Europe. https://www.maceuro.com/germany/
  • Unternehmenregister - Register of German companies. https://www.unternehmensregister.de/ureg/index.html?dest=ureg&language=en
  • Wer liefert was? - Leading supplier search engine in B2B: manufacturers, service providers and distributors in Germany. https://www.wlw.de/

Manufacturing is the most important sector in German industry and accounts for 79% of total production. The largest segments within manufacturing are: Machinery and equipment (12% of total production); motor vehicles, trailers and semi-trailers (12%); basic metals and fabricated metal products (10%); and computers, electronic and optical products and electrical equipment (10%). Construction accounts for 11% of total output and energy production for 10%.

https://www.businessnewsdaily.com/8820-how-to-find-factory.html

https://tradingeconomics.com/germany/manufacturing-production

Finding a German Distributor

A successful move into Germany will prove wasted without a front line distributor to move the products around the country, or farther afield into Europe.

Explore links to distributors, such as:

  • Local Enterprise Europe Network - https://een.ec.europa.eu/about/branches/germany
  • German Chamber of Commerce - https://www.ahk.de/en/about-us
  • EU Distributors - https://www.eu-distributors.com/
  • CPI - https://www.channelpartnerinsight.com/analysis/3079652/ranked-meet-germanys-25-largest-distributors-by-revenue
  • Association of the German Trade Fair Industry - www.auma.de
  • Confederation of German Employers’ Association - www.arbeitgeber.de

https://www.globaltrade.net/m/c/agent-distributors/Germany.html

https://opentoexport.com/questions/how-can-you-find-good-distributors-in-germany-quickly/

https://www.deutschland.de/en/topic/business/globalization-world-trade/chambers-and-association

Enter new Markets with Bradford Jacobs

Bradford Jacobs open the door for companies like yours seeking to explore new markets in Germany, farther into mainland Europe and worldwide by recruiting the staff for your expansion plans. Our Professional Employer Organization (PEO) specialist teams have in-depth global knowledge of how to recruit in new territories. Our Employer of Record (EOR) services will guarantee your company complies with laws relating to employment, registration, taxation and payroll. This is essential for Germany, where employment regulations depend on case law, collective bargaining arrangements and agreements with trades unions and works councils.

Bradford Jacobs provide ongoing consultation on human resources based on our understanding of individual cultures and customs of every country being targeted for global expansion. Work with Bradford Jacobs to expand into Germany and put the brightest and most talented staff in place, and find us here.