How to form a business in Germany?

Step 1: What is the right business structure for me?

Any foreign company with headquarters and business operations outside of Germany can establish either a fully owned subsidiary or a branch office.

Forms of Establishment

1.Limited Liability Company (GmbH or UG)

Gesellschaft mit beschränkter Haftung (GmbH) (Limited Liability Company) and haftungsbeschränkt or so called "Mini GmbH” or UG. These two are by far the most common types of companies in Germany. Shareholders of GmbH or UG are not personally responsible for the company's debts.

For both GmbH and UG, the shareholders can be individuals or entities, and there is no citizenship requirement for shareholders. GmbH and UG are managed by managing director(s) who can be an employee, shareholder or a third party. There is no citizenship requirement with respect to the managing director(s), but they are required to have a valid visa to enter Germany.

The minimum share capital and profit distribution are different between GmbH and UG. A GmbH’s minimum share capital is €25,000, with €12,500 available upon the initial registration, compared to €1 for UG. A UG is statutorily required to reserve 25% of its profit to increase its share capital, until it reaches €25,000 when it becomes a GmbH. It is required in Germany to file for insolvency if assets are unable to meet obligations, such as rent, accounting services, etc. A €1 share capital is, therefore, quite unrealistic to maintain operations.

The contribution of share capital to a GmbH can be in cash or in kind (equipment, intellectual property or other assets) whereas the contribution of share capital to a UG has to be in cash.

Other forms of a subsidiary in Germany include a Stock Corporation (Aktiengesellschaft, AG) or a Partnership Limited by Shares (Kommanditgesellschaft auf Aktien, KGaA). They are less frequently used. A minimum of five members is required to set up one of these. The minimum required share capital is €50,000, and these shares are the only ones that may be (but need not be) listed on the stock exchanges.

2.Registered Branch

A foreign company can register a permanent branch in Germany. The branch office is described as an office that is spatially separate from the main branch, and which was created as part of the additional, long-term focus of the business.

The criteria of an autonomous branch office are:

1. Dealings of a branch office (i.e., activity of a certain duration and the business must, in essence, correspond with those of the head office, not just subordinate, auxiliary and executive dealings);
2. Spatial independence of the branch office (e.g., a spatial and organizational separation, independent participation in the course of business, own management with the required proxies, separate accounting and separate business assets);
3. Independence of the branch office in terms of human resources (i.e., the head of the branch office must be strictly authorized 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 an entry in the Commercial Register, is required; German law applies during the registration process. The application must be certified and submitted by a notary.

3.Unregistered Branch

When a branch office conducts ancillary services to only serve the main operating company, it can be operated as a permanent establishment without a registration with the Commercial Register (although Business Register registration is still required).

Sample activities that can be carried out by an unregistered branch include:

1. Manufacturing sites, with no sales,
2. Points of storage, shipping and receiving,
3. Sales points without their own purchasing activities.

Document Preparation Checklist for Foreign Parent Company

A subsidiary such as a GmbH, UG or registered branch office must be registered in the local Commercial Register. The documents to be prepared by the parent company generally include the following:

1. Register Applications addressed to the competent “Amtsgericht” running the companies register. Such applications need to be signed by the (designated) “Geschäftsführer” (managing directors) of the German GmbH, notarized with apostille. The original documentation has to be mailed to the German notary.
2. Shareholders’ Resolutions: These resolutions need to be signed by an authorized representative of the parent company to approve the formation and appoint the right representatives. No notarization or apostille is required, copies or scans are sufficient. However, the Amtsgericht might require proof of the power of representation of the signatory for the parent company, in particular if that signatory is not already known to the Amtsgericht from previous transactions.
3. Notarized power of attorney and the physical copy of it to allow remote formation.
4. Power of representation: Proof of a given signatory on behalf of the parent company can be proven by an excerpt from a company's register. For countries that do not have such registration, a company secretary certificate is permitted with German translation, notarized with the paper original sent to the German notary.
5. Instruction for designated managing director: These are letters addressed to the designated managing directors individually by the German notary. They are required by German law to ensure directors are properly informed before they sign a register application containing certain representations about themselves. These letters have to be countersigned by the respective director once completed and returned to the German notary (scan or fax suffices). No notarization or apostille is required.
6. List of shareholders signed by the managing directors.
   

Step 2: Who will be operating for me in Germany?

Managing Director (equivalent to CEO)

Every UG or GmbH must have at least one managing director. Only an individual can become a managing director. It is not possible to appoint a legal person as a managing director. A managing director is appointed by the shareholder meeting of the UG or GmbH. If the shareholder meeting appoints several managing directors, they are still usually referred to as the 'managing directors' and not as the 'board', even though governance is the same in both. All managing directors are executive directors. A managing director cannot be non-executive. If a person is appointed as managing director with the idea of being a non-executive director, he can, as a practical matter, abstain from participating in the affairs of the company. But as a matter of law, he is under the same obligations as every other managing director.

In addition to the managing directors, the shareholder meeting can introduce a board of non-executive directors that is usually referred to as a supervisory board (Aufsichtsrat), advisory board (Beirat) or shareholder committee. The shareholder meeting is relatively free to define the rights and obligations of the board. In many cases, the board is given the authority to control the managing directors. The board can even be given the authority to appoint and dismiss the managing directors. The board must not have executive functions. With a few exceptions, the executive functions of the company are reserved for the managing directors. If requested by the employees, companies with more than 500 employees (in Germany) must have a supervisory board whose members are partly elected by the employees. This is called 'co-determination' of the employees (Mitbestimmung der Arbeitnehmer).

Foreigner as Managing Director

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 an appproved residence permit in order to carry out independent activity. It is issued by the immigration authority for a period of at least three years and only upon application, in compliance with the following conditions:

1. Superior economic interest or special regional need
2. The prospect of positive impact on the economy
3. Secure financing

Applicants aged 45 and above must, in addition, provide evidence of an appropriate pension plan.

The foreign managing directors are required to stay in Germany for more than three months in any given year.

Articles of Association

When forming any UG or GmbH, an appointment with the notary is a must: For this, all shareholders sign the Articles of Association (known as the Gesellschaftsvertrag or Satzung in German), which is then certified by the notary. Only after this action can the documents for the UG be sent by the notary to the commercial register (Handelsregister). For the Articles of Association, either a model protocol (Musterprotokoll) prepared by legislators or individual statutes can be used. By reading this article, you’ll get to know the advantages and disadvantages.

Germany’s Model Articles of Association for companies, called the Musterprotokoll, is a cost-effective, simple and quick way to start your own UG (this is a German article). The Musterprotokoll conveniently combines the Articles of Association, the list of shareholders (Gesellschafterliste) and the appointment of the managing director in one document. However, there are certain limitations when forming the UG using the Musterprotokoll. For example, a maximum of three shareholders and one managing director may be appointed.

Step 3: How do I ensure compliance with the local regulations?

Shareholder information

German companies have to submit specific information to the transparency register about their beneficial owner if an individual holds 25% or more, directly or indirectly. Such a filing with the transparency register is not required if the same information can be retrieved from the German commercial register or the 25% threshold is not triggered.

Annual account

Micro-capital companies have the option of submitting a condensed balance sheet and a simplified profit and loss report for accounting. Under certain circumstances, no notes are required, but the balance sheet details must be more detailed. There is no auditing requirement.

Small companies must disclose their balance sheet and their notes. The profit and loss account is not mandatory. In addition, the audition requirement is dropped.

Medium-sized companies must present the balance sheet in the same form as small-cap companies and provide additional information. There is also a shortform appendix. The additional information is treated in the same way as with large capital companies. The annual financial statements and management report must be audited by a certified accountant or auditor in accordance with the provisions of § 316 et seq. HGB.

Large corporations must disclose the annual accounts, the balance sheet and an income statement. These include the notes, the management report and an audit certificate or note detailing its refusal. Furthermore, a report from the supervisory board, the declaration of compliance from the management board and the proposal for the appropriation of profit must be included. As with medium-sized corporations, there is an obligation to audit the annual accounts and the management report.

Failure to disclose your company’s data will result in fines and other punitive measures. In that case, the electronic Federal Gazette informs the German Federal Office of Justice (BdJ). You will be given a period of six weeks to submit the missing documents. If the deadline is not met, the BdJ initiates a fine-filing procedure which can be between €2,500 and €25,000. A procedure is then initiated against both you and your corporation.

The classification of a German company is determined based on the chart below (for each class, two out of three characteristics cannot be exceeded for a company to stay in that class):

Taxes

The standard rate of corporate tax (Körperschaftssteuer) is 15% (15.825% including a 5.5% solidarity surcharge). Effective tax rate including trade tax (assessed independently by each municipality from 7% to 17.5%) is estimated at 30-33%.

Both corporate and trade taxes are imposed on the taxable income of a foreign company's German entity.

Value Added Tax (VAT), also referred to as Umsatzsteuer (USt) or Mehrwertsteuer (MwSt) is generally 19% with a reduced rate of 7% applicable to food, agricultural products, public transport, books, e-books and magazines, hotels (short-term accommodation) and certain cultural services, social services, medical equipment for disabled persons and firewood.

In general, preliminary VAT returns are filed on a monthly or quarterly basis by the tenth day of the following month. Each taxpayer must file an annual return for each calendar year. To obtain a VAT refund, a company must have a tax identity number.