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. 

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.

There are speedier and cost-effective alternatives, with Bradford Jacobs opening the door to a hassle-free route into the French economy for your company. Work alongside our Professional Employer Organization (PEO) recruitment specialists, then our Employer of Record (EOR) in-country experts to handle every aspect of compliance. Employers can depend on our in-depth knowledge of Germany, its work culture and business practices.

Here we have set out some basic summaries of what you need to make the transition into the German market, whichever sector you operate in.

Starting a Business in Germany

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.

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, Labour 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

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 neighboring 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.

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, consumer and service, energy and environmental technology, and electronics and IT 
  • 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

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 procedure.
  • Property registration is complex and takes an average of 40 days. Companies must obtain an extract from the Land Registry, a notarised transfer agreement, a rights waiver from the local municipality and pay transfer tax.
  • The German monetary system demands a meticulous approach as companies must make nine tax payments a year and could have to pay 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. 

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. A branch established in Germany is not independent of the foreign parent company is 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
  • Subject to the same taxation principles as a German resident company

Main characteristics of a branch:

  • A local structure not treated as a German resident company
  • Not independent of the parent company and must have identical name and business activities
  • Taxed according to German laws and any double tax treaties that may apply

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

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

The legal structures of a GmbH include: 

  •  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.
  • 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.
  • 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.

The legal structures for a branch in Germany include:

  • A branch is considered to be a permanent establishment, and must have a local, registered business address, as well as a local bank account.
  • A branch does not require any share capital for incorporation.
  • A branch must be classified as one of two types – dependent or independent. For dependent branch offices, management in Germany cannot make any decisions without approval from the head office. Independent branch offices have decision-making powers, but only in respect to its local activities.
  • Branches in Germany are subject to pay local taxes, such corporate income tax, the surcharge tax, and municipal taxes. Dependent branches must rely on the parent company’s accounting system, but the independent branches may use their own accounting system.
  • Branch offices must have a designated manager, who will handle the day-to-day activities of the branch and conduct business activities on behalf of the parent company.
  • Documents of incorporation must be prepared the parent company. The parent company must also appoint a legal representative in Germany to complete the registration procedure.

Open a business bank account in Germany

Germany is considered a stable and respected country for banking and German bank accounts are among the most sought after in the world.

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. The company’s share capital will be deposited in the account and it is vital to have all the necessary paperwork.

Foreign investors applying for a business bank account in Germany should prepare the following documents among others:

  • Explanation of the company’s shareholding structure
  • Certificate of company registration, bylaws, decision of the board of director, and Articles of Association
  • Business plan including future projections
  • Description of the company’s activities

Foreign investors should consider German banks that are known to work with non-German customers. The process can be drawn out as banks can take time checking the backgrounds. Deutsche Bank is one of the best regarded for non-residents of foreign companies and private individuals.

Laws and Regulations for Opening a German Bank Account Online: Each country in the EU, including Germany, has its own laws relating to opening bank accounts online and which customers the banks can accept. They must abide by the EU directives on anti-money laundering which are necessary for “Know Your Customer” regulations. For this reason opening a German corporate bank account online can be a complicated process.

Company Formation 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
  • 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

Find 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 in Germany include:

  • 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, you can visit The Cluster Platform

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

Finding a German Manufacturer

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%.

Companies may need to partner with manufacturers in Germany in order to help their expansion plans. 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. It is best practice to also reach out to local business groups and check out local business directories.

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. Finding the perfect match among the distributors is critical to accomplishing objectives. Treat distributors as long-term partners to formulate goals and business plans. Working with local agents or distributors helps to overcome the language barrier: Germans speak German. Also finding these agents or distributors requires promotional materials in German and preferably a German intermediary to make the first contact.

Explore links to distributors, such as:

Enter new Markets with Bradford Jacobs

Bradford Jacobs opens 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 - and our Employer of Record (EOR) services will guarantee your company complies with laws relating to employment, registration, taxation and payroll. 

Bradford Jacobs also provides 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 your company and ensure the best people are on your team.