Looking to expand your business into Germany?
Looking to expand your business into Germany? Well, that’s a noble business move for several reasons. First and foremost, Germany is a global powerhouse boasting the largest economy in Europe. Moreover, it has a highly skilled workforce, over 450 million consumers, an innovative business culture, 45 preferential international trade agreements, and manufacturing dominance responsible for 22% of Europe’s GDP.
Even though it is this lucrative, there are several business and regulatory factors you need to take into consideration before expanding into Germany. To help you out, we have created this comprehensive guide to assist you to establish any kind of entity in Germany be it a sole proprietorship, partnership, or corporation.
How to set up an entity in the German market
Before setting up a business in Germany, it’s imperative to be aware of what form of entity you are looking to start. There are 3 types of entities you can establish. Let’s have a look at each.
1. Sole Proprietorship (Einzelunternehmen)
This is the most popular option for people looking to start personal companies or businesses. In Germany, a Sole Proprietorship is commonly referred to as a Gewerbe. As a sole proprietor, you will be responsible for all business debts and actions. In case the company makes less than 22000 Euros in its first year and not over 50000 Euros in the second year, you can opt to re-register it as a small business (Kleingewerbe) and benefit from less bureaucracy
2. Business Partnership (Personengesellschaft)
Partnerships in Germany are described as sole proprietorships with 2 or more actors. There are different forms of partnerships but the most common include:
– General commercial partnerships OHG (offene Handelsgesellschaft)
– Civil law partnerships GbR (Gesellschaft bürgerlichen Rechts)
– limited partnerships KG (Kommanditgesellschaft)
Apart from limited partnerships (KG), all others are liable for business actions and debts.
3. Corporation (Kapitalgesellschaft)
Corporations are the most favorite entities among funded companies and startups. There are 2 types of corporations you can establish in Germany. These are:
– Limited liability companies GmbH (Gesellschaft mit beschränkter Haftung). These require 250000 Euros as capital but your personal finances are protected.
– UG (Unternehmergesellschaft). This is an ideal option if you don’t have enough capital to start a limited liability company since you only need 1 Euro as a starting capital.
How to register an entity in Germany
When establishing an entity in Germany, the process will vary depending on the type of business. However, it is typically similar in most cases. The most important milestones you need to complete will be something like this.
Obtain a Business Visa for Germany
A business visa grants you up to 6 months of stay as you establish your business and complete necessary paperwork. To get one, you will need to declare your address, prove financial support, and have short-term health insurance Register Your Address Once you have arrived in the country, you will be required to register your address with the local Bürgeramt.
Get Your Trade License
After registration and permission to stay in Germany, you will be required to register your entity with the trade office (Gewerbeamt) so that you can be granted a trading license. The trade license (Gewerbeanmeldung) permits you to get involved with business activities. To get registered with the trade office, you are required to fill out an online form, sign it, and send it to a local Gewerbeamt. Register With The Tax Authorities Once you have a trade license, you will be required to register your entity with tax authorities. This can be a tedious task since it requires you to complete a 7-page questionnaire. Fortunately, we can help you with the process.
Tax Structure in Germany for Foreign Companies
Germany’s taxation system is grounded on over 40 types of taxes established under strict rules. The tax burden also varies depending on the taxpayer’s benefits from various deductions and exemptions. However, foreign investors and non-resident individuals are only levied income tax on the income they generate. The same applies to foreign corporate entities which are levied corporate tax and municipal trade tax depending on where they have been registered.
Corporate Tax Rules for Germany
Foreign entities in Germany are categorized under the foreign tax act which was put into effect in 2010. These regulations apply to German resident taxpayers with over 50% stake in a foreign company and to foreign entities established in Germany that receive passive income.
The German corporate income taxâ€¯is charged to corporations at a 15% flat tax rate but an additional 5% solidarity tax may apply. Moreover, foreign companies or German subsidiaries are levied a 25% withholding tax on their dividends. However, in case there is a double taxation agreement between another country and Germany, this dividend tax may be reimbursed.
The trade tax applied to foreign companies in Germany
Foreign corporate entities are required to pay municipal trade tax if they generate income this also applies to foreign entities that have been permanently established in the country and the municipal tax trade ranges from 6% to 17% depending on the location of operation.
In case capital gains are repatriated to another corporation, the foreign entity may benefit from tax exemptions for trade tax purposes. This exemption is effected by reducing the tax burden to about 1.5%. To qualify for this exemption, the foreign entity needs to have about 15% of shares in a permanent German establishment.
What Visas are available to expanding companies? (Work Permits vs. Business Visas)
Work Permits Germany
Anyone can live in Germany and conduct business activities even if they are not EU citizens as long as they meet eligibility criteria. To be allowed to work and live there legally, you will need a residence and work permit. You don’t have to apply for each individually since they are granted together. Categories of Work Permits in Germany Based on your employment type and qualifications, there are different types of work permits. These include:
General Work Permit – if you have found a job in Germany that could not be filled by an EU national, you can apply for this type of work permit. There are no requirements for extraordinary skills. All you need is to be qualified for the job.
Highly Skilled Worker Permit – if you are a highly skilled worker with a lot of experience and high income, this is the work permit to apply for.
The EU Blue Card for Germany – if your annual salary ranges between €44,304 and €56,800, you can apply for the EU Blue Card more so if you are in a shortage occupation. Work Permit for Freelancers- If you are self-employed or a freelancer, you can apply for this type of visa. However, you need to prove that you have prospective clients.
Visa options for Germany
The Germany Employment Visa provides an opportunity for foreigners to settle and establish entities in Germany in any given field. It offers an individual the chance to work, enter, and reside in the country for 2 years with the possibility to extend the stay with an EU blue card or other work permits.
Long-Stay Visa Types for Working in Germany
The Germany Long-Stay Visa can be used for the following purposes:
Employment – if you have landed a job in Germany
Self-Employment – if you want to open an entity or work as a freelancer
Jobseeker – if you are looking for a job while staying in Germany.
Working as an Au Pair – for people looking to immerse themselves in the German language and culture.
Working Holiday Visa – for young people from countries that have working holiday agreements with Germany.
Reasons to expand to Germany
Germany is the largest economy in Europe and ranks among the top 5 economies of the world. In 2020, it accounted for about a quarter of the EU’s gross domestic product. Since its economic crisis ended in 2019, the GDP has grown in bounds making it an ideal to expand your business or start a new one.
Largest consumer market
Besides having the largest GDP in Europe, its population of 83.2 million tops the population of all other EU countries. This implies that it is the largest consumer market in Europe both in terms of purchasing power and number of people.
Skilled German Workforce
Germany’s reputation for innovation and productivity is largely owed to its highly skilled workforce. It boasts a robust vocational and education system and over 50% of upper secondary graduates have a vocational qualification. This means that you will always have qualified employees in the business that you want to set up in Germany.
The country offers a wide array of incentive programs and funding instruments that can be very beneficial for expanding businesses. The most common are:
– GRW cash grants
– Research and development grants
– Grants for hiring
Top challenges of expanding to Germany
Though there are several benefits of doing business in Germany, there are also several drawbacks. The social market may be prosperous but expanding businesses come across extensive regulations and high labor costs. Some of the challenges include:
Lengthy process for starting a business
The biggest challenge of expanding into Germany is the complicated and long process of starting a business. Germanyâ€¯ranks 125th on the World Bank’s starting business index and this accounts for procedures, time, and cost.
Robust employee protections
Individuals looking to tap into the German market need to be aware that Germany has the strongest employee protections in the world. Employment laws set strict requirements that employers should enforce on their employees. For instance, employees in Germany are entitled to 20 days of paid holidays and 13 public holiday offs.
High cost of labor
Germany’s competent labor force is a draw to many investors but the cost of labor is not. The average hourly rate in the country is 35.6 euros which is higher than the EU average of 27.7 euros. The minimum wage is currently 9 euros but is bound to increase to 10 by the end of 2022.
Complicated tax laws
Setting up a business is not the only complexity. Notably, the fiscal system is very convoluted so anyone looking to set up a business needs to partner with local finance experts to help them file taxes and organize their finances.
Despite these challenges, Germany is still a global powerhouse that is very lucrative for international investors. The bureaucracies of doing business might be harsh but once you are established, you are bound to reap the benefits. To help investors get a share of the German market, we have a German company formation service that simplifies the process of establishing entities. Please contact us for further details on how we can help you set up a business in Germany.
With our intelligence on 170countries, OPEN FOR BUSINESS Guide rounds up the best countries to consider for international expansion including Germany with up-to-date tax and immigration systems to guide you through the maze of business practices and make good decisions. Download it below.