Doing Business In Germany Guide 2017
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A guide covering everything
you need to know about
doing business in
Germany – from corporate
and labour law to nance,
regulatory matters and tax.
January 2017
Doing business
and investing in
Germany
Doing business
andinvesting in
Germany
A guide covering everything
you need to know about
doing business in
Germany – from corporate
and labour law to nance,
regulatory matters and tax.
January 2017
Doing business and investing in Germany 5
© March 2017 PricewaterhouseCoopers GmbH Wirtschaftsprüfungsgesellschaft. All rights reserved.
In this document, “PwC” refers to PricewaterhouseCoopers GmbH Wirtschaftsprüfungsgesellschaft, which is a
member firm of PricewaterhouseCoopers International Limited (PwCIL). Each member firm of PwCIL is a separate
and independent legal entity.
Preface
Doing business and investing in Germany
January 2017, 112 pages, softcover
This guide has been prepared for the assistance of those interested in doing business in Germany. It does not
cover exhaustively the subjects it treats, but is intended to answer some of the important, broad questions that
may arise. When specific problems occur in practice, it will often be necessary to refer to the laws, regulations
and legal decisions of the country and to obtain appropriate professional advice.
Whilst we have made every attempt to ensure the information contained in this guide is accurate, PwC cannot
accept any responsibilities for errors or omissions in the factual content.
The material contained in this guide reflects the position on January 1, 2017.
Despite the uncertainties the latest annual PwC
Global CEO survey of 1,379 top managers from
79 countries showed more confidence in future
economic expansion. 29% of respondents predicted
worldwide growth in 2017.The level of confidence
was essentially unchanged compared to the prior
year.
The German CEOs were a bit more confident
compared to their international colleagues. 31%
of respondents from Germany saw future world-
wide economic development in a positive light.
Only every tenth German top manager expect a
recession.
This underlines the value of the political stability,
the innovative capacity, the flexibility and the
overall quality of the German economy. The major
economic and political challenges mentioned by
German CEOs are arising geopolitical uncertainty,
over-regulation, protectionism and the future
of the EU/euro zone. However opportunities
for further growth in Germany are more than
satisfactory. 17% of all respondents predicted
the country as the third most important source
of future growth.
This Guide to Doing Business and Investing in
Germany is intended to be of interest to business
owners and executives looking to enter the German
market or to grow their German operations. It
has chapters on the important topics common
to all industries and thus discusses the economy
generally, business regulation, the employment
situation, corporate and legal forms, accounting
and auditing and, last, not least, taxation. However,
it cannot answer every specific question you may
have, so please feel free to turn to your usual PwC
contacts or one of our German Business Groups
located in PwC offices around the world.
On behalf of PwC Germany, I wish you every
success in our country.
Norbert Winkeljohann
Prof. Dr. Norbert Winkeljohann
Doing business and investing in Germany 7
www.pwc.de/en/standorte
22
PwC has 22 offices in Germany. Addresses and
contact details can be found online:
Frankfurt am Main
Bielefeld
Düsseldorf
Essen
Hanover
Osnabrück
Bremen
Hamburg
Kiel
Schwerin
Erfurt
Saar-
brücken
Stuttgart
Munich
Nuremberg
Cologne
Kassel
Freiburg
Leipzig
Mannheim
Duisburg
Berlin
Doing business and investing in Germany 9
http://www.pwc.de/de/internationale-maerkte/index.jhtml
25 PwC has 25 German Business Groups in over
80 countries worldwide. Contact details can be
found online.
India
Southeast Asia
China
Japan
South Korea
Canada
Brazil
Mexico
USA
Central and Eastern Europe
Southern Africa
Belgium
Denmark
France
Italy
Luxembourg
Netherlands
Spain
Sweden
Switzerland
Turkey
United Kingdom
Australia
Middle East
Israel
Doing business and investing in Germany 1110 Doing business and investing in Germany
6.6 Partnership limited by shares ....................................................................49
6.7 Partnerships .............................................................................................. 49
6.8 European economic interest grouping .......................................................50
6.9 Branches of foreign companies ..................................................................50
6.10 Change of legal form .................................................................................. 51
6.11 Foreign legal forms .................................................................................... 52
7 Labour relations and social security ....................................... 53
7.1 Availability of labour .................................................................................54
7.2 Employment relations ................................................................................54
7.3 Workers’ councils and unions ....................................................................54
7.4 Wages and salary levels .............................................................................55
7.5 Fringe benefits ........................................................................................... 55
7.6 Working hours and holidays ...................................................................... 57
7.7 Health and safety ....................................................................................... 57
7.8 Termination of employment ......................................................................58
7.9 Social security ...........................................................................................58
7.10 Working and residence permits for foreigners ........................................... 59
8 Audit requirements and accounting practices .........................61
8.1 Statutory requirements ..............................................................................62
8.2 Accounting principles ................................................................................63
8.3 Form and content of annual reports ........................................................... 63
8.4 Valuation ...................................................................................................64
8.4.1 Shareholders’ equity ..................................................................................64
8.4.2 Fixed assets ...............................................................................................64
8.4.3 Inventories ................................................................................................64
8.4.4 Accruals and provisions ............................................................................. 64
8.4.5 Payables and other liabilities .....................................................................65
8.4.6 Foreign currency balances ......................................................................... 65
8.4.7 Taxes .........................................................................................................65
8.4.8 Pensions ....................................................................................................66
8.4.9 Leasing ......................................................................................................66
8.5 Consolidated accounts ...............................................................................66
8.6 International Financial Reporting Standards ............................................. 67
8.7 Enforcement .............................................................................................. 67
8.8 Auditing profession and auditing standards ............................................... 67
9 Tax system and administration ............................................... 69
9.1 Principal taxes ........................................................................................... 70
9.2 Sources of tax law ......................................................................................70
9.3 Returns ......................................................................................................71
9.4 Assesment notices ......................................................................................72
9.5 Payments ................................................................................................... 72
9.6 Audits ........................................................................................................72
9.7 Interest on tax payments............................................................................73
9.8 Penalties .................................................................................................... 73
9.9 Tax office rulings and APAs .......................................................................73
9.10 International exchange of information ...................................................... 74
10 Taxation of corporations ......................................................... 75
10.1 Tax rates and total tax burden ...................................................................76
10.2 Taxable income – corporation income tax .................................................. 76
10.2.1 Deviations between German GAAP accounts and tax accounts .................. 76
Preface .................................................................................................. 5
Contents .............................................................................................. 10
1 Germany: a profile ................................................................... 13
1.1 Geography ................................................................................................. 14
1.2 Population and social patterns ...................................................................15
1.3 Language ................................................................................................... 16
1.4 Political system .......................................................................................... 16
1.5 Legal system .............................................................................................. 17
1.6 The economy ............................................................................................. 18
2 Economy and investment environment ................................... 19
2.1 Economic climate ......................................................................................20
2.2 Major industries .........................................................................................20
2.2.1 Automotive ................................................................................................ 20
2.2.2 Energy ....................................................................................................... 22
2.2.3 Healthcare ................................................................................................. 23
2.2.4 Industrial products ....................................................................................24
2.2.5 Pharma and MedTech ................................................................................24
2.2.6 Retail and consumer .................................................................................. 25
2.2.7 Technology, media and telecommunications .............................................26
2.2.8 Transport and logistics .............................................................................. 27
2.3 Ownership trends ......................................................................................28
2.4 Investment environment............................................................................28
2.5 Government policy ....................................................................................28
2.6 Local considerations ..................................................................................30
3 Regulatory environment .......................................................... 31
3.1 Government policy ....................................................................................32
3.2 Corporate governance ...............................................................................32
3.3 Trade registers ........................................................................................... 33
3.4 Work safety, consumer aid and the environment .......................................33
3.5 Regulated industries and professions .........................................................34
4 Banking and finance ................................................................ 35
4.1 Currency ....................................................................................................36
4.2 Banking system ......................................................................................... 37
4.3 Capital markets.......................................................................................... 37
4.4 Money laundering......................................................................................38
5 Exporting to Germany .............................................................. 39
5.1 Import restrictions .....................................................................................40
5.2 Import duties .............................................................................................40
5.3 Authorised economic operator ................................................................... 42
5.4 Local representation ..................................................................................43
5.5 Consumer sales from foreign websites .......................................................44
6 Business entities ...................................................................... 45
6.1 Types of entity ...........................................................................................46
6.2 Companies .................................................................................................46
6.3 Capital requirements .................................................................................47
6.4 Shareholders, directors and officers .......................................................... 47
6.5 The European Stock Cooperation ..............................................................49
Contents
Doing business and investing in Germany 1312 Doing business and investing in Germany
10.2.2 Off-balance-sheet-adjustments ..................................................................77
10.2.3 Participation Exemption ............................................................................77
10.2.4 Interest limitation rule ...............................................................................77
10.2.5 Amortisation and depreciation ..................................................................79
10.2.6 Inventories ................................................................................................79
10.2.7 Liabilities ...................................................................................................79
10.2.8 Provisions .................................................................................................. 80
10.3 Taxable income – trade tax ........................................................................80
10.3.1 Add-backs for trade tax purposes ...............................................................80
10.3.2 Deductions for trade tax purposes ............................................................. 81
10.4 Loss relief ..................................................................................................81
10.4.1 Loss carry-forward .................................................................................... 81
10.4.2 Loss carry-back .......................................................................................... 81
10.4.3 Forfeiture of tax loss carry-forwards for corporations ................................ 82
10.4.4 Continuance-bound loss carry-forward .....................................................82
10.5 Group taxation and group relief .................................................................83
10.6 Related-party transfer pricing ...................................................................84
10.7 Special features of branches ......................................................................85
10.8 Foreign Tax Credit .....................................................................................86
10.9 Anti-abuse provisions ................................................................................86
10.9.1 General ......................................................................................................86
10.9.2 Requirements of substance and anti-treaty shopping rules ........................ 87
10.9.3 German CFC rules (Sec. 7–14 FTTA) ..........................................................87
11 Taxation of individuals ............................................................ 89
11.1 Territoriality and residence .......................................................................90
11.2 Income determination ...............................................................................90
11.2.1 Employment Income .................................................................................. 90
11.2.2 Equity compensation ................................................................................. 91
11.2.3 Income from capital investments ............................................................... 91
11.2.4 Business Income ........................................................................................92
11.3 Deductions ................................................................................................92
11.3.1 Income related expenses ............................................................................92
11.3.2 Personal deductions ...................................................................................92
11.3.3 Losses ........................................................................................................93
11.4 Tax credits .................................................................................................93
11.5 Tax returns and assessments .....................................................................93
11.6 Tax rates ....................................................................................................94
11.7 Other taxes on income ...............................................................................94
12 Taxation of Partnerships ......................................................... 95
12.1 General taxation of partnerships in Germany ............................................96
12.2 Special business income and expenses of partners at the
level of the partnership .............................................................................. 96
13 Transaction and Excise Taxes .................................................. 97
13.1 Value added tax (VAT) ...............................................................................98
13.2 Excise taxes ...............................................................................................99
13.3 Real estate transfer tax ..............................................................................99
13.4 Land tax .................................................................................................. 102
Appendix: Withholding taxes ........................................................... 103
Contacts ............................................................................................ 108
Germany:
a profile 1
Doing business and investing in Germany 1514 Doing business and investing in Germany
1 Germany: a profile
1.1 Geography
Germany covers an area of about 357,000 square km (138,000 square miles) in
the central part of Northern Europe. The country borders on Denmark, Poland,
the Czech Republic, Austria, Switzerland, France, Luxembourg, Belgium and the
Netherlands, and on the North and Baltic Seas. As might be expected from her
geographical location, Germany enjoys a temperate climate; there are no great
extremes of heat or cold, although the weather can often only be described as
wet. The topography rises progressively from the flat plains of the northern coasts
through the undulating hills and forests in the centre of the country (Eifel, Harz,
Taunus, Black Forest and Erzgebirge) to the Alpine foothills in the south. Indeed,
the southern border passes through the Alps themselves, giving Germany her own
area for skiing and other winter sports.
Except for the Danube in the south of the country and its tributary, the Inn,
Germany’s rivers all flow in the general direction of south to north. The Danube
flows east, ultimately into the Black Sea south of Odessa. The other main rivers
are the Rhine with its tributaries, the Main, the Elbe and Oder. The Rhine and the
Main are linked to the Danube by a canal and all three rivers are navigable by large,
freshwater barges. This system is a recognised international waterway between
Rotterdam and the Black Sea ports.
Düsseldorf
Essen Dortmund
Bremen
Hamburg
Munich
Cologne
Berlin
3.5m
1.8m
671,000
586,000
583,000
1.0m
733,000
624,000
1.5m
612,000
Country facts
Capital Berlin
Constitutional form Federal Republic of
Germany
Area 357,000 km2
Population 82.2m
Language German
Currency Euro
Stuttgart
Frankfurt am Main
1.2 Population and social patterns
The German population on December 31, 2015 was estimated at 82.2m on the
basis of extrapolations taken from a mini-census taken in May 2011. Annual deaths
regularly exceed births, so the general tendency is that of a falling and ageing
population. For the present, this is compensated by immigration from abroad.
Official estimates suggest that the population will fall to some 68m by 2060, if
current trends remain unchecked. However, the short-term and long-term effects
of the current influx of refugees from Africa and the Middle East are not yet clear.
Germany is more densely populated than either of her two largest neighbours,
France and Poland. The population density is greatest in the traditionally industrial
areas of the Ruhr and parts of the Saar, the commercial centres of Cologne/
Düsseldorf, the Rhine-Main area of Frankfurt/Wiesbaden, Berlin, and on a smaller
scale in and around the other larger cities. Few areas can be described as under-
populated.
There is no significant tendency on the part of the population to emigrate, although
all residents are free to do so, and to take all their assets with them. There is still a
certain amount of migration within Germany herself, generally from east to west,
although this trend is now slowing as living standards and costs in the east rise
towards the national average.
The German population does not have a tradition of mobility within the country.
Movement is hampered by cultural differences and by other factors, such as the
decentralised education system with a different syllabus for the schools of each
province. There are only two indigenous national minorities, a small Danish
minority in northern Schleswig-Holstein (just south of the Danish border) and a
small Sorb population living in the general area to the south east of Berlin. The
foreign population numbers some 9.1m (12% of the total), of which Turkish citizens
form by far the largest single national group, numbering 1.5m. Other significant
groups are Poles, Italians, Romanians and Greeks.
From the early 1950s to the early 1970s, the then West German state actively
encouraged the recruitment of foreign labour, particularly in other European
countries with high unemployment, to live and work in Germany for a temporary
period. This policy was reversed in 1973 to one of restriction, with the general
aim of reducing or at least containing the number of non-EU citizens working in
Germany. The restriction gave foreign workers already resident a considerable
inducement to remain if they possibly could, so the foreign population tended to
become permanently, rather than temporarily, resident. Indeed, by now, at least half
the foreigners living in Germany have been here for more than ten years and many
of the younger individuals are second or third generation residents who have never
lived anywhere else.
Doing business and investing in Germany 1716 Doing business and investing in Germany
1.3 Language
The official language is German. English is by far the best known foreign language
and is generally accepted as the common medium for all forms of communication
abroad. It is also quite usual for educated Germans to have a good command of
at least one other foreign language, the most widespread being French, Italian,
Spanish, and the various Slav languages.
1.4 Political system
The constitutional form is the Federal Republic of Germany (Bundesrepublik
Deutschland). Sixteen provinces (Länder) form the federation implied by the name.
Each level of government (federation, province, district and local community) is
directed by an elected body competent to take decisions on all matters remitted to
it by the constitution. Berlin is the capital and the home of both chambers of the
federal parliament. Many government departments are located in various other
German towns, particularly in Bonn, the former West German capital.
The federal parliament has two chambers. The lower chamber (Bundestag) is
elected by the population for a four-year term. Its seats are allocated on a system of
proportional representation. The government is formed by the party or coalition (in
practice, invariably a coalition) with a majority of the seats. The remaining parties
represented in the Bundestag form, collectively, the opposition. The upper chamber
(Bundesrat) is made up of members delegated by the parliaments of the individual
provinces with votes in rough proportion to the size of their populations. The party
allegiances of its members reflect the identity of the governing party or coalition in
each province.
Most acts of parliament are initially proposed and debated in the Bundestag. The
Bundesrat does have certain rights to propose, or to propose changes to, bills,
although its primary function is to safeguard the interests of the provinces against
acts of expropriation by the federation. Since all laws affecting the interests of the
provinces are subject to its approval, very few laws of national importance can be
passed by the Bundestag without the support of the majority of the Bundesrat. This
division of political functions and responsibilities encourages a spirit of compromise
on all major political issues.
Bills are enacted on signature by the federal president (Bundespräsident) to whom
they are submitted after acceptance by both chambers of parliament. The signed
acts then take effect on promulgation in the Federal Journal of Statutes (Bundes-
gesetzblatt).
The present government is a coalition of the Christian Democrats (CDU/CSU) and
the Social Democrats (SPD). The parliamentary term expires in September 2017.
Germany is a founder member of the European Union (EU) and takes an active part
in the activities of all its subordinate institutions.
1.5 Legal system
The ultimate source of all law is the constitution or “Basic Statute” (Grundgesetz).
Acts of either the federal or a provincial parliament are void if they conflict with the
constitution or are passed in an unconstitutional manner. Similarly, all acts of the
provincial parliaments must be in accordance with the provisions of the constitution
of the relevant province.
The government, individual ministries and other authorities have the power to issue
guidelines, decrees and other pronouncements. These ordinances are of varying
degrees of authority and require the approval of differing levels of government.
Tax guidelines, for example, but not decrees, require the consent of the Bundesrat.
These extra-statutory instruments bind, at least to the extent of their own terms, the
issuing authority and its subordinate authorities, but not courts of law. They cannot
amend the law as it stands, but give guidance on the issuing authority’s preferred
interpretation thereof.
The German court system is decentralised. Initially, cases are held locally and
appeals are made to a higher court responsible for a wider geographic area. The
courts are divided into a number of different streams, each specialising in its own
field of law. There are for example separate courts to try suits on tax or labour law.
At the head of each stream is a single, federal supreme court to which appeals can
be made by either side on points of law, but not of fact. The ultimate arbiter is the
Constitutional Court in Karlsruhe to which final appeal can be made, although only
on the grounds of conflict with the constitution.
The judgments of the Federal Constitutional Court are binding on all other courts.
The judgments of all other courts including the supreme court of each stream are
only binding in respect of the case tried and do not set binding precedents for other
cases of a like nature. They may, however, give guidance to other courts, especially
to lower courts of the same stream, although even a lower court is free to depart
from an established precedent if it feels that circumstances warrant a change.
18 Doing business and investing in Germany
1.6 The economy
Almost all forms of industry are represented within the broad-based German
economy. As befits a country with high employment costs but with a well-educated
population and a well-trained workforce, the most exciting prospects today
are offered by industries in the forefront of technology and by the providers of
sophisticated technical, commercial and financial services. Agriculture and tourism
are less significant, although they are of social and cultural importance, especially
for the preservation of living and recreational standards.
Traditionally, the German economy is oriented towards manufacturing. This
extends to the service sector, where there are many companies developing and
applying leading-edge technologies for industrial use. For decades, manufacturing
output has exceeded the consumption requirements of the domestic economy;
in effect, Germany is and remains a major exporting nation in order to maintain
domestic employment. In keeping with this tradition, Germany’s recovery from the
economic crisis was export-led. Nevertheless unemployment remains a concern. In
December 2016 it was running at 5.8%, slightly below the previous year end level.
228
169
Motor vehicles, trailers and semi-trailers
Machinery and equipment n.e.c.
Chemicals and chemical products
Computer, electronic and optical products
Electrical equipment
Basic pharmaceutical products and preparations
Other transport equipment
Base metals
Food products
Rubber and plastic products
76
43
71
51
59
48
107
100
The main German trading goods, 2016 (in euro bn, export)
Source: Statistisches Bundesamt, Wiesbaden 2017
Economy and
investment
environment 2
Doing business and investing in Germany 2120 Doing business and investing in Germany
2.1 Economic climate
Germany has a social market economy, meaning that she embraces the spirit of free
enterprise, but tempered with controls and other administrative legal measures
designed to prevent large economic participants from seriously damaging other
interests. Laws against unfair competition, including the antitrust provisions,
and for the protection of the environment, as well as those protecting employees,
all illustrate this latter point. In general, the work force is highly motivated, and
highly trained and disciplined. The strong and well-established trade union
movement usually keeps to established bargaining procedures and, over the years,
has achieved an impressive degree of protection for employees. As a result, cases
of serious industrial unrest are rare except for demarcation disputes (conflicts
between rival employee representations, rather than between labour and
management) in the passenger transport sector.
Most German industry is dynamic and, except in the depressed areas, expanding.
The state does not encourage the development of specific industries as a deliberate
act of policy, but it does offer substantial subsidies and other support for, in
particular, research and development likely to lead to new marketable products.
There is thus a move towards high-tech industries and the more sophisticated parts
of the services sector are also expanding. The labour force numbers some 43.5m
gainfully employed by 3.6m enterprises. 18% of the latter are corporate entities, the
remainder being partnerships, sole traders and public utilities.
The typical business in Germany is a small family-owned unit. Any outside
shareholders are usually long-term employees or others with long-standing
personal relations with the original family. Most large businesses are publicly held
corporations with many shareholders. However, the original family owners often
retain a significant minority holding and there are still a few large businesses
closely held by only a few individuals. Many medium-sized publicly-listed
corporations issue a different class of shares to the public (quite frequently non-
voting preferred stock) in order to give the original owners a greater degree of
control and influence than warranted by their investment.
2.2 Major industries
2.2.1 Automotive
The automotive industry is one of the most important economic sectors; it was
responsible for the employment of 837,000 employees in 2015, an increase of 1.3%
over 2014. Of this total, 64 percent were directly employed by Original Equipment
Manufacturers (OEMs), and the remainder by suppliers. Labour organization is
fairly strong, as trade unions negotiate uniform wage rates for the entire auto-
motive industry. Labour representation is legally required, but generally works
constructively, while employment contracts are fairly rigid.
In 2016, car and light commercial vehicle production increased by 1.8% over 2015,
to 6.1m units. Of the total production, about 77% was exported. Germany continues
to be number one in terms of light vehicle production in Europe and the fourth
largest in the world behind China, the USA and Japan. Total sector revenue reached
nearly €432bn in 2015.
For the future, PwC Autofacts forecasts an increase in further production of 7%
between 2016 and 2023. This increase will be largely due to an improvement
in manufacturing efficiency. One in six cars built worldwide is from a German-
headquartered manufacturer. The Volkswagen AG, based in Wolfsburg, with its
subsidiary Audi AG, located in Ingolstadt, is the largest vehicle manufacturer.
In 2016, its local market share amounted to 37.6% in Germany. Daimler AG and
BMWAG hold the second and third place with new car market shares of 10.4%,
and 9.1% in 2016 respectively. The brand with the greatest production increase in
2016 was Daimler’s Mercedes-Benz with a reported production increase of 6.8% or
76,409 units.
The automotive industry, including automotive suppliers, is geographically
clustered mostly in the south of Germany between Munich, where the headquarters
of BMW AG is based, and Stuttgart, where Daimler AG and Porsche AG are
located. Automotive production is supported by dedicated suppliers such as Bosch,
Continental and ZF which are ranked among the six largest automotive suppliers.
Of the world’s 100 largest automotive suppliers in 2016, 18 were based in Germany.
In 2016, the diesel share in German new car registrations amounted to 46%, a
decrease of 2 percentage points against 2015. Light commercial vehicles are almost
entirely powered by Diesel engines. The share of direct new-car registrations to
private buyers was only 35.0% in 2016, while commercial registrations feeding
indirectly into the private sector such as manufacturer, dealer and rental fleets
accounted for another 40.2%. Real business registrations accounted for 24.7% due
to favorable tax regulations. In 2016, new electric vehicle (EV) and plug-in hybrid
vehicle sales account for only a minute share of sales in Germany with only 1,562
units. During the same period, mild and full hybrid vehicle sales have recorded a
strong growth of 56.1% to 34,165 units – about 1% of the total market.
2021 will see the full implementation of the strict EU average emission target of
95g CO2/km for all new cars. Due to the significant share of heavy premium-brand
vehicles in Germany, the actual target is expected to be above EU target. Still, OEMs
are set to offer more alternative-fuel vehicles to reach the new strict standards.
Accordingly, PwC Autofacts forecasts a significant increase in the production of
alternative-fuel vehicles in Germany by 2023, including EV, fuel cell, plug-in and
hybrid powertrains, reaching rise over 2016.
Due to its global nature, the German automotive industry not only serves domestic
and European consumer demand, but also follows worldwide trends leading to
ongoing globalization of production, R&D, and sourcing. In addition, companies are
investing in new technologies such as automated driving and vehicle connectivity.
The local banking system of both international and national commercial banks
as well as communal banks take great interest in debt financing of automotive
companies. After a surge in the early 2000s, IPOs have become a rarity as
consolidation starts to weigh in, as well as an increase in takeovers by Asian
investors. Equity investments, venture capital and early-stage funding are still
scarce in Germany, partially due to the lack of tax incentives.
2 Economy and investment environment
Doing business and investing in Germany 2322 Doing business and investing in Germany
2.2.2 Energy
Ensuring a sustainable energy supply is the primary aim of German energy policy.
In the summer of 2015, the federal government produced a white paper “An
electricity market for energy transition” following the discussions on the power
market design of the future. Based on this, the Power Market Act came into effect on
30 July 2016. In the transition phase following the expansion of renewable energies,
the termination of nuclear energy use in Germany in 2022 and the merging of the
European power market, this law is supposed to ensure that electrical power supply
in a developed power market is cost efficient and environmentally safe. After years
of political control on the power generation mix in Germany, market mechanisms
are to be strengthened now. In this context, the legislator recognizes a liberalized,
European electricity market. The integration of the European domestic market
ought to be promoted. Competition is supposed to set incentives for innovation and
sustainability, improve the integration of sources of renewable energy and decrease
the extraction costs of renewables.
The plan is to determine the funding amount for wind energy onshore and offshore,
photovoltaics and possibly also for biomass, via competitive calls for proposals and
to end the determination of funding on a national basis.
Energy efficiency, energy saving and renewables are the cornerstones of the
future energy system that Germany is heading towards in its energy transition.
The results of current studies show that increased energy efficiency as well as
the extension of renewables has a positive impact on macroeconomics in terms of
increased economic performance and additional employment. This is possible due
to additional investments on the one hand and decreasing energy costs on the other.
Achieving the energy policy goals is likely to require the investment of between
€31bn and €38bn per annum by 2020.
This is a long-term process opening up promising export opportunities, if Germany
can prove that the energy transition can succeed in a leading industrial country and
bring added benefits
The Energy Transition – Digitisation Act came into effect in September 2016; it
defines the schedule for the rollout of the smart meter. This is an important step
towards facilitating the infrastructure necessary for the integration of Renewables.
In 2015, the German federal government set up the programme “Sinteg” to support
the development of intelligent grids. A foundation for the digitization, not only of
energy systems but of the economy as a whole, is the ongoing broadband expansion.
The expansion will be fueled by the “Act facilitating the expansion of digital high
speed networks”. The draft law was passed by the Bundesrat in 2016. In addition to
these political developments entrepreneurial investments are also being made to
promote digitisation through process optimisation and new business models.
Germany has immense deposits of coal which accounted for about 24.5% of primary
energy consumption in 2015. Around 42% of power generation is coal-fired.
However, a decision has been taken to phase out subsidies for domestic production
of hard coal and to decommission all mines by 2018. Oil remains a main source of
energy in Germany, making up for one third of the country‘s total primary energy
consumption in 2015. The country has only a few oil deposits of its own and relies
largely on imports to meet demand. All in all, with 454 mio t SKE, Germany was
the largest energy consumer in Europe and the seventh-largest primary energy
consumer in the world in 2015.
Germany currently imports about 62% of its energy needs. One of the main goals of
government policy is to reduce the country’s dependence on imports. The increase
of energy efficiency and renewable energies could solve this problem and contribute
to the long-term security of supply.
Germany remains a popular location for direct investment by international
companies in the energy sector. Renewable energy continues to be one of the most
popular and profitable areas for international investors. Nearly one-quarter of all
investment projects are in photovoltaics and wind energy. The Renewable Energy
Sources Act has made renewable energy sources an attractive prospect for the
future. It encourages further development in the interests of keeping electric power-
hungry manufacturing in Germany competitive.
2.2.3 Healthcare
The health industry continues to expand more rapidly than the economy as a whole.
It is now one of the most important industries, employing some 6.2m or over 15% of
the total workforce in Germany.
Medical care in Germany enjoys an enviable reputation for efficiency and quality.
The service is universal and comprehensive, both for inpatients and outpatients.
As the biggest European market, Germany offers excellent local conditions for
healthcare companies. The healthcare industry is very attractive to private investors
due to above-average growth and strong cash-flows, without being dependent on
economic cycles. In particular, there are major investment opportunities in the
hospital sector. Currently, more than one third of hospitals are operated privately.
The healthcare industry generated gross turnover of €328bn in 2014. This turnover
was spread among 230,000 companies and institutions, mainly consisting of
hospitals, public health funds and private health insurers. Health organisations can
be found all over the country since German policy is to ensure a full range of locally
available care. Important future topics for the health sector are preventive medicine,
innovation in medical technologies and maintenance of present standards. eHealth
has been identified as a major topic for the future and although encouraged through
respective legislation at the end of 2015, it is still struggling over a number of legal
and reimbursement hurdles.
Although the German healthcare system is highly regulated, it promises high
growth, not least due to the increasing demand of an ageing population.
Doing business and investing in Germany 2524 Doing business and investing in Germany
2.2.4 Industrial products
The major sectors of industrial production in Germany are metals, engineering and
construction, chemicals, and industrial manufacturing. Around 6.5m employees
were employed by at least 40,000 companies in these sectors in 2015, generating
more than €1.100bn in revenues and about 40% of German exports.
The companies – mostly situated in the west or southwest of Germany – supply their
products to all major industry sectors all over the world. They create value at all
points in the supply chain, be it by providing basic materials (basic chemicals, gases,
metals) or mid-tech and high-end products (such as specialised chemicals, special
tools and laser technology).
Key players in these market segments include BASF, Bayer, Siemens and
ThyssenKrupp. Their products typify the brand “Made in Germany”. Preserving
the symbolic power of this prestigious brand without being cut off from new
developments like IoT, 3-D-printing, Blockchain, Robotic process automation etc.
will be one of their main challenges in the future. It will be necessary for them
to defend their leading market position against global competitors by developing
innovative business models, products and services, exploring new markets and
digitalising their supply chain (Industrie 4.0). One of the biggest tasks for German
industrial players will be expanding and investing in emerging and developing
markets by building up production lines and sales services whilst maintaining their
quality standards.
2.2.5 Pharma and MedTech
The pharmaceutical and medical technology industries are important sectors for
Germany. Direct access to internationally renowned scientists, outstanding research
units, and major pharmaceutical markets make Germany a unique business
location. According to government statistics, larger companies (of 20 or more
employees) employed some 153,000 in the pharmaceutical industry and 155,000 in
the medical technology industry in Germany in 2015. These companies generated
revenues of €38.9bn and €27.6bn from the pharmaceutical and medical technology
industries respectively. Revenues are expected to increase in both sectors over the
coming years: In 2016 pharmaceutical exports grew by about 13.6% compared to
2014. Hence Germany is the second biggest exporter after the US with a world trade
share of 14.6%.
The German health market is characterised by extensive development of medical
technology products, innovative medicines and new methods of treatment and
care. Global players such as Roche, Hexal, Novartis, Sanofi-Aventis, Ratiopharm
and Pfizer have chosen Germany as one of their central locations in order to take
advantage of a strong and central infrastructure within Europe and a powerful
combination of different industrial sectors. A growing health market, the ageing
population, rising health awareness and comparatively high average income
ensure an increasing demand for new and high-quality medicine. Furthermore, the
workforce in Germany is considered to be excellent.
The Pharma and MedTech industry in Germany as in other European countries
must comply with a complex range of regulations and statutes. Nevertheless,
Germany remains an attractive location for innovative pharmaceutical and medical
technology companies.
2.2.6 Retail and consumer
The retail and consumer goods industry is one of the most important sectors of the
German economy. In 2016, 3.0m people were employed in the retail sector; another
1.5m worked in the branded consumer goods industry. With a market volume of
€482.2bn in 2016 (15% of Germany’s GDP), Germany has the largest retail market
within the EU. Food retailing accounts for almost 50% of retail sales followed by
apparel and shoes (12%) and consumer electronics (8%). Germany has a leading
role as a food exporter. The food sector generated a record level of €55.3bn exports
in 2015, a nominal rise of 1.9% over the previous year.
The leading five German food retailers, Edeka Group, Rewe Group, Schwarz Group
(Lidl, Kaufland), Aldi and Metro Group account for 75% of food retail sales. The
largest fashion retailers are Otto Group, H&M and C&A. The leading consumer
electronics retailer is CECONOMY, resulting from Metro Group’s demerger, with
the brands Media Markt, Saturn and Redcoon. Consumer goods production is
dominated by global players such as Nestlé, Procter & Gamble, Unilever, Coca-Cola
and Henkel, but there is also a significant number of middle market family-owned
consumer goods companies.
Over the last number of years, online retailing has become a relevant factor in retail
sales. For 2017 online sales are predicted to grow by 11% to €48.8bn compared to
the previous year. With a market share of 10.4%, e-commerce is the main growth
driver for Germany’s retail sector. Leading online retailers are Amazon, Otto Group,
Zalando and notebooksbilliger.de.
The private consumption share of GDP has continuously increased over the last
five years. Germany’s price level for fast moving consumer goods is well below
the Eurozone level. In 2016 prices dropped by 0.4% due to the reduction in prices
for energy products. However in some product categories such as food (+0.8%)
prices increased. In 2015, Germans spent on average 13.56% of their monthly
consumption expenditure on food, drink and tobacco products; 9.5% on leisure,
entertainment and culture and 11.5% on textile, furniture and household
appliances.
Doing business and investing in Germany 2726 Doing business and investing in Germany
There are several trends having an impact on the retail and consumer goods
industry in Germany. The pace of digital change is accelerating and consumers
are becoming more demanding. They expect greater transparency over the origin,
production methods and supply channels for goods as well as products that are
better tailored to their personal needs. Retailers need to perfectly dovetail online
and offline shopping channels. They also need to create a unique and emotionally
stimulating shopping experience to persuade customers to buy their products. In
emerging countries the rapidly expanding prosperous middle class is adopting
Western consumption patterns, opening new sales opportunities for German
companies. At the same time the aging and declining population in industrial
countries is leading to a change in the demand for products, services and shops.
Owing to several food scandals in recent years, topics such as sustainability and
transparency over the supply chain have become more important than ever.
Consumers are asking for sustainably produced products and information about
the origin, production and transport of products. These developments represent
both opportunities and challenges for retailers. They will need to adapt by aligning
their business models and supply chains and develop innovative products and sales
concepts.
2.2.7 Technology, media and telecommunications
The technology industry comprises companies from the IT, electronics, internet
and semiconductor segments and is the backbone of technological development
and innovation, especially in the field of digitisation. In addition to current
trends, including Software as a service (SaaS), mobile and cloud computing,
Augmented and Virtual Reality, big data and Industry 4.0, there are new trends
comprising artificial intelligence and service architecture. Infineon, Siemens and
SAP are among the world’s leading companies in the market. Moreover, there is
a burgeoning of tech start-up companies. Berlin is becoming one of the two most
important start-up hubs in Europe and Düsseldorf is also gaining in significance.
The media industry includes broadcasting, publishing, gaming and music
companies as well as advertising and media agencies. It is also heavily influenced by
the internet economy and digitisation with the main challenge being the conversion
of traditional offline media content into paid-for digital content. Revenues in the
media segment amounted to €70.24bn in 2015 and PwC forecasts an annual growth
of 2.5% up to 2020, mainly driven by digital media. Consumers now seek a seamless
experience across devices, channels and media. They are demanding more lavish
and flexible content and want it for free or at a lower price, but at the same time the
quality of content plays a key factor in influencing their decision on whether to pay
for it or not. Consumers are choosing offerings that combine an outstanding and
personalised user experience with an intuitive interface and ease of accessibility.
Digital media is growing rapidly and is starting to compensate for losses in
traditional media segments such as music, book sales and video games. In 2020,
approximately 40% of media content revenue will be digital. High penetration of
tablets and smartphones are key drivers of these changes and as a result, digital and
mobile shifts are a strategic focus for today’s entertainment and media companies.
In the telecommunications market, digitisation can lead to new opportunities
and service offerings. For example, in the field of big data, telecommunications
companies have an abundance of data, but still struggle to use it effectively. Also,
cloud services can play a significant role in the future of the telecommunications
market. Technological progress is however a challenge, as it requires investment
at a time when the industry is facing extreme cost pressure and struggling
with the high degree of regulation in the market. In Germany, the discussion
around the expansion of broadband and its financing is further impacting the
market, potentially requiring investments from telecommunications companies
in broadband infrastructure. In 2016, the total revenue in telecommunication
services in Germany rose to €60.5bn which is an increase of 0.8% compared to
the previous year. The negative effect of “over-the-top” service is one of the main
reasons for dwindling revenues. The German telecommunications industry used to
be dominated by Deutsche Telekom and Vodafone. However, with the acquisition
of E-Plus by Telefónica in 2013, the competition structure changed. Telefónica
Germany grew to the biggest German provider of mobile telecom services by the
end of 2014, owning a market share of 38% in 2015.
2.2.8 Transport and logistics
As the backbone of industry, the German transport and logistics sector has grown
steadily over the last 20 years. The average annual growth rate between 2009 –
after the only year in recent times when this market declined – and 2015 was 2.5%,
resulting in a total volume of €253bn. With this volume, the German logistics sector
does not only contribute a full 25% to the European logistics market, but is also the
third largest sector in Germany, employing nearly 2.97m people in 2015.
These people work for a large number of logistics companies of differing sizes.
The market is led by the three biggest German key players, Deutsche Post (DHL),
Deutsche Bahn and Lufthansa. These companies are among the world’s leaders
in their fields. Duisport, at the confluence of Rhein and Ruhr, is one of the largest
inland waterway ports in the world. These organisations are supplemented by
a large number of small and medium sized enterprises operating in the logistics
sector.
The good state of German transport infrastructure works as a multiplier for the
country’s exports. According to the World Bank’s Logistics Performance Index (LPI),
which assesses each country’s transport infrastructure, Germany regained the top
position in 2016.
The efficient and effective infrastructure combines with cutting-edge logistics
services and the location at the heart of the European continent – bordering nine
other European countries – to make Germany the most important logistics hub in
Europe. As a gateway, Germany grants access to a consumer market of 250m people
within a radius of 500km
Doing business and investing in Germany 2928 Doing business and investing in Germany
2.3 Ownership trends
A few large German corporations are still in partial state ownership. The general
intention is to dispose of these state holdings at a suitable opportunity to a large
number of individuals rather than to a strategic investor.
There is also a general, but slowing, trend toward industry concentration, and as
a result, mergers and acquisitions are frequent. In addition, new businesses are
constantly being formed (and old ones going out of business), thus keeping German
industry in a state of movement.
The recent economic turbulences forced the government to buy shares in some of
the banks in order to safeguard the public interest during rescue operations. These
holdings are intended to be temporary.
2.4 Investment environment
It is government policy to encourage a wide spread of share ownership among the
general public, and a number of incentive programmes support this objective.
However, these programmes are all rather small in scale and have little effect.
Virtually all shares of publicly held corporations are bearer shares and are usually
deposited with banks. The banks offer caretaking services to the shareholders,
which include collecting dividends on their behalf and also acting as proxies at
shareholders’ meetings. Since the banks generally recommend how shareholders’
votes should be cast, they are often seen as having greater voting power than
justified by their own portfolios.
There are no significant controls preventing or restricting foreign investment
as such and the typical form of foreign participation in German industry is
that of a wholly or substantially majority-owned subsidiary. Joint venture or
minority investments are comparatively rare and are usually the result of special
circumstances.
2.5 Government policy
The social market economy is the guiding principle of German economic policy. It
combines a free market capitalist economic system alongside social policies which
aim to establish both fair competition within the market and a welfare state. As a
result, the main thrust of government industrial and economic policy is to allow
industry and commerce to develop as they please within an environment of social
redistribution.
Whereas unemployment has been a major concern of economic policy in the past,
the German labour market remained resilient during the economic and financial
crisis of 2007/2008 and was stronger in 2016 than ever before. Unemployment has
fallen by more than 40 percent since its peak in 2005, and reached the lowest level
since German reunification in 1990. In 2016 2.6 million people were unemployed
(6.1%).
This development reflects the strength and competitiveness of Germany’s economy,
which is the biggest economy in the EU. However as Germany has both high
standards and high costs of living, overall employment costs remain high and
protection of employees against wrongful dismissal is quite extensive. There is a
high level of compulsory deductions from an employee’s wages and employees have
broad rights to holiday and other benefits. Hence, there is considerable disparity
between the take-home pay of an employee and the corresponding wage costs in the
profit and loss account of the employer. In recent years, the government has put in
place new labour market regulations, such as a statutory minimum wage as well as a
regulation requiring listed companies and those entities subject to co-determination
regulations to have a 30-percent quota for women on seats on the supervisory
board.
Despite the generally good shape of the economy, German economic policy is
facing a number of challenges, including accelerated technological change, an
ageing society and resulting labour shortages as well as the integration of refugees.
Furthermore, the move to renewable energy sources must be designed in a way that
strengthens Germany‘s competitiveness in the future.
While Germany has no overall national economic plans, it does offer various
specific incentives and regional programmes. However, investment activity has
been sluggish in Germany for quite some time. Compared with other countries in
the EU, the increase in public investment has been below average. The government
has therefore set itself the target of strengthening private-sector and public-sector
investment. Furthermore, the government’s investment strategy focuses also
on (digital) infrastructure projects – especially high-performance broadband
networks –, education, as well as on research and development. In order to promote
digitisation, several incentive programs are in place with a strong orientation
toward the industrial sector and German SMEs (Mittelstand). Regional policy
programs – that are mainly funded by the EU – are about supporting regions
that are structurally weak. They are less specific and companies benefiting from
the programmes receive incentives and other support on fulfilment of specified
conditions, most of which are negotiated individually and usually include a
guaranteed minimum employment level.
30 Doing business and investing in Germany
Economy and investment environment
Regulatory
environment 3
2.6 Local considerations
Most German towns have established their own trading estates, in many cases
more than one. Any prospective investor in a green-field project is well-advised
to approach the local authorities at an early stage to ascertain the degree of help
and support the project might enjoy locally. Cheap land, for example, might be
available. The discussions will in any case give the investor access to essential local
information, such as the immediate availability of labour.
There are no free-trade or privileged economic zones within Germany. Similarly,
there is no specific industry encouragement, although there are certain activities,
such as in renewable energy generation, that do find official favour. There is also
an arrangement in place for exempting IT and certain other skilled employees from
non-EU countries from some of the more rigorous aspects of the procedure for work
permits.
Prospective foreign investors can take advantage of the full range of consulting
services readily available in Germany at all levels of sophistication. There is thus
no hindrance to obtaining in-depth marketing information, initiating searches for
potential investment targets, or to obtaining the necessary outside professional
support for the solution of complex problems. General information is freely
available from various government and other authorities, such as the Federal
Ministry for the Economy, from local Chambers of Commerce and Industry, or from
German embassies and consulates abroad.
Doing business and investing in Germany 3332 Doing business and investing in Germany
3.1 Government policy
There is almost no government guidance of business, although there are many
restrictions and prohibitions designed to protect business and non-business interests
and to prevent abuses. Within the business and economic environments, the overall
intention is to ensure as far as possible equality of treatment between the different
players and to avoid hindering the entry of new businesses into a given market.
Some monopolies and semi-monopolies remain, however.
Government policy is to encourage competition on a level playing-field. One of the
principle instruments for this is the Unfair Competition Act, which contains, among
other things, detailed regulations prohibiting unfair advertising, antitrust and anti-
cartel provisions that are particularly relevant to large acquisitions, as well as rules
for the protection of the general public. Stock exchange takeovers are regulated by
a Securities Acquisition and Takeover Act designed to ensure that management‘s
recommendations are not coloured by self-interest. However, it also allows a 95%
majority shareholder to requisition minority interests against reasonable cash
compensation (“squeeze-out” rules).
The pace of development in the digital economy is challenging Germany’s
existing regulatory and policy frameworks. In 2016 the German government thus
approved the amendment of the Act against Restraints of Competition in order to
adapt competition policy to the prerequisites of the digital age. However, further
regulations are currently under discussion.
3.2 Corporate governance
The corporate governance framework for companies doing business in Germany
mainly depends on their legal form. Large companies regularly have a two
tier governance structure with a separation between management boards and
supervisory boards (for details see chapter 6). Most of the corporate governance
regulation results from the German Stock Corporation Act (Aktiengesetz), with some
of the rules only applicable for public listed companies. For companies of several
industries, particularly the financial services sector, additional German and/or
European governance rules apply.
Management Boards and Supervisory Boards of public listed companies are obliged
to comply with the German Corporate Governance Code. The code is written and
gets periodically reviewed by a commission (Regierungskommission Deutscher
Corporate Governance Kodex) appointed by the Federal Ministry of Justice. As
such, it does not have direct statutory force, although the boards of public listed
companies have to disclose annually any instances where they have not followed the
code‘s recommendations (“ the comply or explain Principle”).
In the past few years, some important fields of regulation regarding corporate
governance, particularly for listed companies, have been:
• Executive remuneration and its transparency
• Qualification, time commitment and independence of supervisory board
members
• Substantiation of supervisory boards’ tasks
• Rotation and independence of statutory auditors
3.3 Trade registers
Each entity carrying on a trade or business in Germany must register with the local
registry court (trade register) for the town of its seat or of its principal place of
business. Branches in other towns must also be registered if the branch effectively
trades independently, but not if it solely supports, and is dependent on, the activities
of the main company. The same distinction applies to German branches or other
establishments of foreign companies. A German subsidiary, as a legal entity, must be
registered at least one trade register.
The trade registers are open to public inspection. The publicly accessible file for
each company includes the basic rights of representation (the personal details of the
directors and their respective powers), and a copy of the statutes.
The trade registers are maintained in an electronic format and it is not possible
to file hardcopy documents. Parallel to the local registers, the Federal Gazette
maintains a database of registered businesses. It is open to interrogation by
members of the public on the internet “www.unternehmensregister.de”. Financial
statements (annual reports) of companies are also filed with the Federal Gazette,
where they are open to public inspection at “www.bundesanzeiger.de”. The Federal
Gazette accepts only softcopy filings in a set XBRL (eXtensible Business Reporting
Language) format.
3.4
Work safety, consumer aid and the environment
Apart from the registry court, each town or other local authority maintains a Trade
Supervisory Board. Each place of business must also be registered with the local
Trade Supervisory Board, which supervises operating matters such as public access
and safety, adherence to any applicable regulations regarding the use to which
certain premises may be put, and any compulsory opening and closing times. Since
the objectives of the Trade Supervisory Boards are supervision of local businesses
on behalf of the local authority, their records are not open to the general public.
Germany has a wealth of statute and other law on all aspects of environmental
and consumer protection, including, especially, minimum warranties and product
liability. All the relevant fields of law are intensively regulated by the EU. Often,
the applicable EU directive has been transposed into German national law more or
less as it stands, although there are still a number of instances where the German
version is more restrictive than its EU counterpart.
3 Regulatory environment
Doing business and investing in Germany 3534 Doing business and investing in Germany
3.5 Regulated industries and professions
In general, banks and other financial service institutions, insurance companies,
securities markets and asset managers are subject to supervision by the Federal
Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht or
BaFin). This supervision involves frequent reviews of the financial position of the
business, the risk management system, anti-money laundering and anti-terrorism
financing procedures. In some cases, there are daily reporting requirements for a
day-to-day supervision.
Since November 2014 all, “significant” banks are directly supervised by the
European Central Bank (ECB) in cooperation with the BaFin and the German
Central Bank (Deutsche Bundesbank). “Significant” are those banks that meet
certain given criteria or are deemed significant by the ECB. All tasks and banks not
assigned to the ECB continue to be regulated by the local regulators (BaFin and
Deutsche Bundesbank).
A number of products are subject to specific German government and EU
registration requirements. Pharmaceuticals are the most widespread instance
of this, although there are rules for the technical examination of any electrical
or mechanical product offered on the German domestic market. A technical
examination is not always compulsory for every product, although even where this
is not the case, the supplier or importer often arranges for voluntary examination,
if only to be able to advertise the result. Similarly, a number of services on offer to
the general public must meet certain conditions; an example of this is compulsory
insurance cover for tour operators in the travel trade.
The liberal professions, such as doctors, auditors, tax consultants, engineers,
architects, and lawyers are subject to supervision by their respective professional
bodies. This supervision invariably extends to ethical conduct as well as technical
competence. The relevant EU directives on this subject are, in practice, generally of
secondary importance to the more stringent rules of the supervising professional
bodies themselves.
Regulatory environment
Banking and
finance 4
Doing business and investing in Germany 3736 Doing business and investing in Germany
4.1 Currency
Germany no longer maintains her own currency, having adopted the euro on
January 1, 1999. The euro is managed by the European Central Bank in Frankfurt
led by the Governing Council, consisting of the Executive Board and the Governors
of the National Central Banks of the 19 countries currently participating in the so
called Euro system. Participation is obligatory for EU member states once they meet
certain economic criteria for stability and solvency for a two to three-year period,
although Denmark, Great Britain and Sweden have options not to join. The current
members are Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece,
Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Portugal,
Slovakia, Slovenia and Spain. The euro is the official currency of Andorra, Monaco,
San Marino and the Vatican. It also serves as the domestic currency in Kosovo and
Montenegro, though without a formal agreement with the ECB.
The German Central Bank (Deutsche Bundesbank) is responsible for minting the
German euro coins currently in circulation. Within Germany, it exercises various
supervisory functions over the banking system acting in consort with the European
Central Bank and the Federal Financial Supervisory Authority.
4.2 Banking system
Banking services are offered to the public, both to business and to private house-
holds, by a variety of different types of financial institutions. The commercial
banks offer the most comprehensive services, but there is also a range of savings
banks, cooperative banks, “mortgage banks”, building societies and other financial
intermediaries. The commercial banks, often referred to in Germany as “universal
banks”, offer a full range of services, retail and wholesale, including all forms
of investment banking, corporate finance and related consultancy. They are,
together with the central institutions of the savings and cooperative banks, also the
traditional doorway for German business and for the investing public to the stock
exchange.
Traditionally, no fundamental distinction is drawn between the various types of
commercial banks. Banking business itself is broken down into different categories
by the Banking Act, but this is merely to enable banking licenses to be restricted to
specified activities, so that each bank need only adhere to the specific conditions
and control requirements relevant to its own particular sphere. However, the larger
German banks are active in all fields, although there is still plenty of scope for the
smaller institution specialising in a particular activity or market.
The German financial and money markets are almost entirely free of exchange
controls. Indeed, transactions within the Eurozone are for almost all practical
purposes identical to domestic transactions (statistical reporting requirements
being the main exception). Both local business and foreign entities may deposit or
borrow funds freely through the German banking system; thus, for example, it is
usually possible for a foreign investor to choose the financing source for a German
investment from competing offers from different countries. His choice can be based
on taxation and other business considerations.
For further details we refer to the publication “Banking Business in Germany”,
recently published in its 5th edition.
4.3 Capital markets
Germany operates a flourishing money market and stock exchange. Her bond
market is the third largest in the world, after New York and London, and her stock
market is the fourth, after New York, London and Tokyo. There are nine German
stock exchanges, although they are all linked to the Frankfurt exchange, the centre
of the German money market and the seat of the various organs that ensure the
smooth control and completion of transactions.
Companies seeking a quote on the German stock market do so through a so-called
listing partner. All the major banks and most of the larger accountancy and legal
practices have been granted recognition as listing partners. Basically, a quote is
available to any company with shares open to public trading. Trading is on the
regulated and unregulated (or open) markets. Issuers on the regulated market are
required to meet either the general, or the prime, standard of transparency and
4 Banking and finance
Doing business and investing in Germany 3938 Doing business and investing in Germany
Exporting to
Germany 5
governance. The two standards are not dissimilar, though the prime standard sets
additional reporting requirements. The minimum equity capital for both is €1.25m.
The unregulated market is open to issuers with an equity capital of at least
€250,000. The publication and reporting requirements are less arduous than those
for regulated market quote holders. Issuers fall into two categories, first and second
EU standards and otherwise satisfy the requirements of the stock exchange (and
of the Federal Financial Supervisory Authority) as to the financial standing and
past history of the company. This is referred to as the “entry standard” as distinct
from the prime and general standards of the regulated market. Companies with
an existing quote on another stock exchange automatically fall into the second
category. In this case, there is no need for a further prospectus, and otherwise the
compliance requirements are greatly eased with the acceptance by the German
authorities of effective supervision in the company’s home country. This acceptance
is automatic where the first quote is on a recognised market within the EU and is
largely a formality for companies quoted in the USA or Japan. However, first quote
holders from other countries will need to satisfy the German stock exchange that
they meet standards of transparency and governance in their home countries that
are at least as rigorous as those of the EU.
Foreign companies may meet all stock market filing and publication requirements
in English. Financial statements and disclosures may follow IFRS or US GAAP,
although in practice IFRS has become the accepted norm.
4.4 Money laundering
In concert with other EU members, Germany has equipped herself with an
impressive arsenal of rules and institutional procedures designed to prevent
money laundering, or at least to make it more difficult. The same goes for the fight
against the misuse of German financial institutions for organised crime, drug-
trafficking, terrorism and other serious offences. Most of the rules are impositions
on service providers at risk of being abused, such as banks and other financial
institutions, investment consultants and agents, lawyers, accountants and all
businesses handling large amounts of cash. The customer’s main awareness of
these procedures generally comes from requests to positively identify himself and
to explain the circumstances of particular transactions in rather more detail than
might seem strictly necessary for smooth processing.
Doing business and investing in Germany 4140 Doing business and investing in Germany
5.1 Import restrictions
Since the EU member states constitute a single European market, deliveries between
Germany and other EU countries do not qualify as imports or exports. Within
the EU there are no longer any border controls of any description or any customs
duties or other restrictions on intra-union traffic apart from certain formalities for
travelers or movement of sensitive goods (listed in annex IV of the EC-Dual-Use
Regulation, e.g. weapons, nuclear materials etc). The terms “export” and “import”
therefore technically now only refer to trade between the EU and non-EU countries
(third countries).
Despite the free movement of goods and globalized trade, restrictions on the import
and export of certain goods are in place in order to protect certain vulnerable areas
(e.g. public security, environment, health, animals, plants, culture, trademarks etc).
These special rules, which arise from both national and European law, may restrict
imports, exports and transit.
Products of which the sale is prohibited in Germany will not be customs-cleared and
have to be re-exported or destroyed.
5.2 Import duties
For all types of goods, there is - in the customs tariff of the EU – an individual tariff
number including a third country customs duty rate which will apply to imports
from all third countries as long as there is no exception (see below). This customs
duty rate applied on the customs value determines the payable customs duty for the
imported goods. The customs duty rate is zero for some goods.
Goods, which are used for a certain predefined end-use can be exempt from
customs duties. Tuna for example, is exempt from customs duties if industrially
processed and put in cans. The goods are placed under customs supervision until
the end-use requirements are met. Exempted or reduced customs duty rates may
also be applicable by using preferential treatment.
Preferential treatment apply to goods originating from certain countries and
territories with which the EU has a free trade agreement or customs union. Imports
from Iceland, Liechtenstein, Norway and Switzerland for example can be free
of customs duties due to the European Free Trade Agreement (EFTA). For this,
the customs declarant has to provide evidence (e.g. with an EUR.1, EUR-MED or
declaration of origin) that the goods have preferential origin in one of the EFTA
member states.
There are also customs unions which allow for duty exempt imports on condition
that the privileged goods emanate from the free circulation of an exporting country
with which the EU has a customs union. One major customs union is currently
in place with Turkey. Many goods imported from Turkey can be exempted from
customs duties if the customs declarant can provide an A.TR document proving that
the goods were in free circulation in Turkey.
The EU also levies an anti-dumping duty or a countervailing duty on dumped or
inadmissibly subsidised products in addition to the regular customs duty rate.
This offsets any unjustified price advantages third country sellers would have in
comparison to local sellers within the EU. These measures will only be adopted by
the European Commission after a detailed investigation procedure was initiated.
The initiation of this procedure normally requires a respective application by a
concerned economic branch in the EU.
Within the framework of a tariff quota, certain goods (especially textiles,
agricultural goods, meat and fish) may be imported duty-free or at a reduced rate
within a fixed period (quota period) up to the level of a certain value or quantity
limit (quota volume). Once the volume or value limit has been reached or the quota
period has elapsed, the tariff quota ends immediately. In the case of tariff quotas,
the quantities imported must be closely monitored in order to comply with the
quantity or value limits. The monitoring (administration) is carried out either by
means of licences (licensing contingents) or by the distribution of the contingent
amounts on the basis of the First Come – First Served principle.
The customs duty rates for the individual tariff numbers can either be in form of ad
valorem duty rates (percentage), specific duty rates (e.g. based on pieces, volume or
weight) or a mix of both. Ad valorem duty rates – which are based on the customs
value – are the most common duty rates found in the customs tariff of the EU
(Combined Nomenclature).
5 Exporting to Germany
Example for Ad Valorem duty rates
Machine for counting coins
Customs tariff number 8472 90 10 00 0
Customs Value EUR 1,000.00
Customs duty rate, ad valorem (as per January 2017) 1.7%
Payable customs duty EUR 17.00 (1,000 * 0,017)
Doing business and investing in Germany 4342 Doing business and investing in Germany
The primary basis for the “customs value” of goods is the transaction value, that is
the price actually paid or payable for the goods when sold for export to the customs
territory of the EU. Broadly speaking, the basis for assessing the transaction value
is usually the invoice price on the supplier’s invoice. This basis can be subject to
amendment, either in response to subsequent price adjustments, or because of other
charges and credits raised separately (e.g. with regard to costs of transportation) or
otherwise borne by the importer. An adjustment of the declared customs value may
be required in these cases. Customs auditors regularly inspect the books of German
importers to establish whether they have appropriately accounted for such costs.
The administration of customs duties is for the most part completed at the point
of release of the non-Union goods into the customs territory of the EU for free
circulation. The release for free circulation entails e.g. the following:
• The collection of any import duty due;
• The application of commercial measures and prohibitions and restrictions insofar
as they do not have to be applied at an earlier stage.
The release for free circulation changes the customs status of the non-Union goods
to Union goods. Union goods can be moved within the customs territory of the EU
without any customs supervision.
The customs duties imposed, together with the import VAT (Einfuhrumsatzsteuer–
EUSt) and any excise duties or other taxes levied (see Chapter 12), are typically
charged back by the carrier or forwarding agent to the importer as cash outlays.
The importer must also comply with the reporting and return requirements of the
Intrastat system of the EU and must, of course, establish a suitable filing system for
the retention and recovery of the import documentation as required by customs or
tax audits.
5.3 Authorised economic operator
The increasing globalization and the changed international security situation have
caused the World Customs Organization (WCO) to create a global framework for
modern, effective risk management in customs administrations in the form of a
„Framework of Standards to Secure and Facilitate Global Trade“ (SAFE).
At the European level, security aspects of SAFE were implemented through security
changes in the Customs Code and the Customs Code Implementing Regulation.
The provisions of the new EU Customs Code (UCC), the Implementing Regulation
(IA), the Delegated Regulation (DA) and the Transitional Provisions (TDA) are now
applied after the repeal of the Customs Code and the Customs Code Implementing
Regulation on 30 April 2016. The introduction of the Authorized Economic Operator
(AEO) is an essential element of the EU security concept.
AEOs benefit from a special status: they are considered to be particularly reliable
and trustworthy and can benefit from special simplifications and facilitations in the
context of customs clearance. The status of the AEO is valid in all Member States
and is not time-limited. There are two variants of the AEO:
• AEO approval „Customs simplifications“ (AEO-C)
• AEO approval „Security“ (AEO-S)
Companies may choose to apply for only one variant or both. Some customs
approvals and simplifications either require that the applicant is in possession of an
AEO-C certification or complies with certain requirements for an AEO-C. This is a
new regulation established in the UCC.
5.4 Local representation
The import customs declaration for release into free circulation in the EU needs
to be filed in the name of a declarant established within the customs territory
of the EU. Most companies situated in third countries use the service of a
subsidiary company, European freight forwarder or customs agent for this. This
customs representative then acts in his own name, but on behalf of the one being
represented (indirect customs representation), meaning he is jointly and severally
liable for any customs debts. An indirect customs representative therefore bears a
certain risk for which he may demand adequate compensation.
A foreign business may require access to local German storage and onward delivery
facilities. Logistic services of this nature are offered by most well-known carriers
and courier services.
Foreign exporters may meet the preconditions of a taxable “permanent
establishment” in Germany, e.g. if they station their own employees in Germany
or if they appoint their own German representatives. If the preconditions for a
permanent establishment are fulfilled, the profit to be allocated to the permanent
establishment according to the relevant provisions in tax law becomes chargeable
to German income taxes (corporate or income tax and trade tax) and the foreign
business is subject to German accounting and record-keeping requirements. Further
there might be the obligation to register in Germany for VAT purposes.
It is also quite usual for a foreign business to establish a German sales subsidiary or
branch to regularly and systematically access the German market.
Doing business and investing in Germany 4544 Doing business and investing in Germany
Business entities
5.5 Consumer sales from foreign websites
Foreign businesses providing electronic services or downloads to private, non-
business consumers in Germany from outside the EU must register for VAT in an
EU state of their choice. Such sales are subject to German VAT if the customer
is resident in Germany. There is a common EU VAT procedure in force to enable
electronic service providers in one member state to meet their VAT obligations on
their sales to customers in other member states. Essentially, they report all such
sales to a designated authority in their state of registration – in Germany, the
Central Tax Office in Bonn – to which they pay the VAT due at the various national
rates. The authority then forwards the information and payment to its counterparts
in the countries of the customers. Participation in this scheme is the voluntary
alternative to separate VAT registration in all member states in which on-line
customers are located.
6
Doing business and investing in Germany 4746 Doing business and investing in Germany
6.1 Types of entity
Foreign businesses may establish their German operations as companies,
partnerships or branches of the parent entity. It is also possible to establish an
informal presence through a liaison or contact office or, for that matter, by merely
recruiting an individual to live and work in Germany as a direct employee of the
parent company.
6.2 Companies
Almost all German companies are AGs (Aktiengesellschaften – public limited
companies) or GmbHs (Gesellschaften mit beschränkter Haftung – private limited
companies). Originally, the AG was intended as the appropriate form for entities
owned by a large number of shareholders and under the day-to-day control of
employed managers, whilst the GmbH was designed to suit the circumstances
of an owner-managed business with its own legal personality. Historically, the
two corporate forms were widely different, but many of the differences have
since disappeared, mostly with the ascendancy of legal provisions on accounting,
auditing, transparency requirements and employee supervision of management
that apply to both types of company. The major remaining distinction is that the
shares of an AG may be publicly traded on a stock exchange, whereas those of a
GmbH may not. In consequence, the AG’s formation and shareholders’ meeting
procedures are considerably more cumbersome. Foreign investors wishing to form
a German subsidiary therefore tend to opt for the AG if any form of public offering
is contemplated now or later, whilst the GmbH will usually be chosen for simplicity
where it is intended that the German entity remain entirely in group ownership.
6.3 Capital requirements
An AG has a minimum share capital of €50,000 divided into ordinary shares
of equal nominal value of at least €1. Share certificates may not be issued until
the share capital has been fully paid up. Traditionally, most AGs issued bearer
shares, although unquoted companies may no longer hand over individual share
certificates to shareholders. Rather, they must deposit bearer share certificates with
an authorised repository (typically one of the major banks). Share transfers do not
therefore go unrecorded. The AG may also issue other shares of different classes,
such as preference shares with no voting rights but with a preferential dividend
entitlement, but there are restrictions on the issue of ordinary shares with differing
voting rights. It is not therefore possible for a minority investor to control the vote at
a general meeting through a “golden share”.
The minimum share capital of a GmbH is €25,000. On formation, each shareholder
of a GmbH receives a single share in the amount of the share capital he or she holds;
shares issued may be split later as necessary to effect a whole or partial transfer
of a holding. A GmbH does not issue share certificates and its shares are only
transferable by notarial deed. The articles of association may set other restrictions
on share transfers, such as pre-emptive or approval rights for existing shareholders.
A special rule in the GmbH Act enables registration of an “incorporated business”
(Unternehmergesellschaft) with an issued, but fully paid up, capital of less than
€25,000. Such a business must disclose its status in its firm name and must take one
quarter of its annual net profit to a legal reserve. On increase of its capital to the
legal minimum, it is free of the reserve obligation and may (but need not) change
its name to that of a GmbH.
6.4 Shareholders, directors and officers
Both the AG and the GmbH are managed by one or more executive directors.
The executive directors of an AG meet as a management board (Vorstand),
take decisions collectively and record their meetings in board minutes. The
directors of a GmbH (Geschäftsführer) meet informally and take decisions
collectively or on their sole responsibility as determined in standing procedures
established by the shareholders. Often, the executive directors of both types of
company are individually responsible for specified fields with a chairman of the
management board (Vorstandsvorsitzender oder -sprecher in the AG or Sprecher
der Geschäftsführung in the GmbH) responsible for coordinating the board and
representing the company.
Either form of company must appoint a second director as “labour director” with
special responsibility for all employment matters where the employees regularly
exceed 2,000. These companies will therefore always have at least two directors.
Shareholders’ meetings are generally called by the directors, although there are
provisions for them to be called by other bodies or persons in an emergency. The
6 Business entities
The AG (Aktiengesellschaft – public limited company) The GmbH (Gesellschaft mit Beschränkter Haftung – private
limited company)
The AG is a publicly held company comparable to the Public
Limited Company (plc) in the United Kingdom
The GmbH is a privately held company comparable to the Limited
Liability Company (Ltd) in the United Kingdom
Shares Shares may be publicly traded on a
stock exchange
Shares Shares may not be publicly traded on a
stock exchange
Capital requirements Minimum share capital of €50,000 Capital requirements Minimum share capital of €25,000
Directors • Executive Directors meet as a
management board (Vorstand) and
take decisions collectively
• If employees exceed 2,000 a
labour director has to be part of
the management board
• A supervisory board (Aufsichtsrat)
consisting solely of non-executive
directors, has to be established;
in case of employee participation
specific rules apply
Directors • Managing Directors (Geschäftsführer)
meet informally and take decisions
collectively or on their sole
responsibility
• If employees exceed 2,000 a
labour director has to be part of the
management board
• A supervisory board (Aufsichtsrat)
has to be established if number of
employees in Germany exceed 500
Shareholders • Shareholders may vote on the
resolutions tabled at shareholders’
meetings
• Under certain circumstances they may
propose resolutions of their own
Shareholders • Shareholders may resolve on all
resolutions laid before them and may
propose resolutions of their own
• There is no obligation for a formal
meeting
Doing business and investing in Germany 4948 Doing business and investing in Germany
6.5 The European Stock Cooperation
The Societas Europaea (SE or European Stock Corporation) is a European Union
based legal form which may be used in Germany as well. It basically allows the
shareholders to choose between two management structures, the traditional
German two tier system with a management and a supervisory board, and the
Anglo-American one tier system with one board of directors (Verwaltungsrat).
The SE Participation Act regulates the participation of the employees in the SE.
This includes both the workers’ council level and the co-determination level in the
supervision of management. The Act sets forth procedures for the employees to
elect a negotiating committee in order to reach agreement on these matters with
the employer. Only if negotiations fail, the model foreseen by the Act becomes
compulsory. Those involved in the negotiations are protected against unfair
pressure from the employer and are also given rights to consult trade unions and
other outside bodies – including professional consultants – as necessary.
6.6 Partnership limited by shares
German company law also provides for a partnership limited by shares
(Kommandit gesellschaft auf Aktien – KGaA). Although constituted as a partnership,
the KGaA of modern times is effectively treated as an AG for most purposes and its
shares can be traded on the stock exchange as though they were shares in an AG.
The KGaA has at least one partner with unlimited liability. The shares are issued
to, and held as investments by, the partners with limited liability who thus have a
similar status to that of shareholders in an AG. All rights to manage the KGaA fall
to the unlimited partners, who therefore have, in this regard, the same position as
the members of the executive board (Vorstand) of an AG. The division of profits and
losses among the partners is a matter for the statutes of the KGaA.
The KGaA has a long tradition on the German corporate scene, although now only
a few examples remain in existence. It is, however, favoured by family dominated
companies that want to be active in the stock markets.
There are also various other German corporate or semi-corporate legal forms, but
these are all either highly specialist in nature or are otherwise unsuitable for foreign
investors.
6.7 Partnerships
There are two German partnership forms in common use, the general partnership
(offene Handelsgesellschaft – oHG) and the limited partnership (Kommandit-
gesellschaft – KG). Legally, the KG is a variation on the oHG; thus the rules applicable
to an oHG apply equally to a KG unless an exception is expressly provided for. The
difference between the two forms is that some (but not all) of the partners of a KG
have limited liability.
shareholders of an AG may vote on the resolutions tabled at shareholders’ meetings
and may, under certain circumstances and under due periods of notice, propose
resolutions of their own. However, as shareholders, they have no direct rights of
influence, management, or information over the company.
A GmbH’s shareholders may resolve on all resolutions laid before them, and may
propose other resolutions of their own. There is no need to observe any formal
notice periods, provided the other shareholders agree. Indeed, there is no need to
hold a meeting at all, unless one of the shareholders insists on doing so. A proposed
resolution can be circulated among the shareholders, and becomes valid when the
last shareholder signs. Individually, the shareholders of a GmbH may request any
information from its directors. The directors may not refuse the request unless it is
made outside working hours or is otherwise manifestly unreasonable. The majority
of shareholders of a GmbH may also give concrete instructions to the executive
directors. The shareholders of a GmbH may also word the articles of association
of the company to specify particulartransactions or types of transaction that the
directors may only conclude with their approval.
Signing rights of directors may be sole or joint. A single director will always be able
to sign on his or her own, but most German companies require the signature of two
directors if more than one director has been appointed.
Every AG and basically all other companies with more than 500 employees in
Germany must appoint a supervisory board. The supervisory board is a separate
body made up of non-executive directors. It has responsibility for the supervision
of the management board including the approval of major transactions, monitoring
financial reporting and usually the appointment of executive directors and statutory
auditors on behalf of the shareholders. The size and composition of the board
depends on the size and legal form of the company. Employee representatives are
generally included on the supervisory board when the number of employees in
Germany exceed 500, and make up a third of their number. Companies employing
more than 2,000 people in Germany must appoint a supervisory board with an
equal number of employee and shareholder representatives, although the chairman,
appointed by the shareholders, has a second, casting vote in the event of a tie.
Composition of supervisory boards
Number of employees in Germany
< 500
(only AG) 500–2,000 > 2,000 > 10,000 > 20,000
Supervisory board
seats
3 or more 3 or more 12 16 20
Share of seats that falls
to representatives of the
employees
n/a 1/3 1/2 1/2 1/2
Doing business and investing in Germany 5150 Doing business and investing in Germany
A branch, registered or not, is not a separate legal entity from its foreign parent
company. The parent business therefore always bears ultimate legal liability for all
liabilities and obligations of the branch. However, all suits brought before German
courts against the company on the basis of obligations, commitments or liabilities
entered into by the branch must first be directed against the branch, that is, they
will be dealt with locally. In practice, recourse to the foreign business is to be had
only where either the branch has been wound up or otherwise disappeared, or
where it is unable to meet its obligations from locally available resources.
In principle, a branch’s registration is not decisive for its liability to taxation,
as formal registration is not part of the tax treaty definition of permanent
establishment. However, in practice, a registered branch will almost always rank as
a permanent establishment, simply because of the registration condition that it be
running an independently functioning business, whereas an unregistered liaison
office or other entity may or may not be a tax treaty permanent establishment,
depending on the nature and scope of the activities carried out and the
responsibilities borne.
6.10 Change of legal form
All forms of corporate reconstructions, mergers, splits, spin-offs, drop-downs,
and changes of legal form are regulated by an omnibus Reconstructions Act. In
many cases, these manoeuvres can even be done free of tax. Broadly speaking,
provided the proper formalities and procedures are observed, any corporation
may change its legal form to that of another corporation without immediate tax or
other consequences, and a corporation may change to a partnership and vice versa,
at least without having to recognise a taxable capital gain. Similarly, depreciation
policies and valuation options will be carried over into the new entity, although
there may be noticeable effects in connection with losses carried forward or
previously accumulated reserves now experiencing a change of status. Branches,
however, cannot generally be converted to corporations without triggering a
taxable gain for the previous owner (taxable as ordinary trading income) and the
downgrading of a corporation to a branch would be seen as the liquidation of the
corporation.
From a civil law point of view, the most important points to be observed are that the
reconstruction or change in legal form is based on a set of statutory accounts drawn
up not earlier than eight months before the reconstruction documents are filed
with the trade register to have the possibility to use the annual financial statements
(and no extra interim financial statement), and that the reconstruction itself entails
adhering to a number of requirements for the information and protection of the
employees. Similarly, care should be taken to ensure that there is no likelihood of a
business partner being able to use the reconstruction as an excuse for withdrawing
from a, from his point of view, unfavourable contract.
A partnership is not a legal entity, although it can acquire rights and assume
obligations in its own name, take up ownership and other rights to real estate, and
sue or be sued. It is therefore a separate business entity from an operating point
of view, although it is not legally separate from its owners (the partners) in many
respects, including taxation.
The day-to-day management of a German partnership is reserved to the general
partners, i.e. those with unlimited liability. These may, as a body, appoint an
employed manager to act on their behalf, although they still carry the responsibility
to the limited partners for the management of the business. The limited partners
have rights to meet and to be consulted on matters of overall importance including
business policy decisions; in most cases these rights are specified in detail in the
partnership agreement.
A limited partnership where all the general partners have limited liability is
referred to as a GmbH & Co. KG. These abbreviation, however, merely indicates that
there is no ultimate unlimited liability for the partnership’s debts and obligations;
they are not different legal forms.
6.8 European economic interest grouping
The European economic interest grouping (Europäische Wirtschaftsinteressen
Vereinigung – EWIV) is not a separate legal form in Germany. Rather, it is equated in
every respect to a general partnership (oHG).
6.9 Branches of foreign companies
A foreign business may carry on operations in Germany through a branch registered
for that purpose. Registration is with the local court for the area in which the
branch is located or on which the German activities are centred. There are no
formal minimum capital or other requirements (except for branches subject to
specific industry supervision), but one or more local branch managers must be
named. Registration is required if the German activity constitutes an apparently
independent business unit capable of a self-contained and self-supporting existence,
but is not possible if this is not the case, as for example with a liaison, or sales
support, office.
In point of fact, many companies effectively have a choice as to whether they
register their German operation as a branch. The specific sets of facts and
circumstances are rarely completely unambiguous when taken as a whole, so that
those wishing, or not wishing, to register a branch may see, or not see, a need to
register, depending entirely upon which aspects of the local arrangements they
place the most emphasis.
Doing business and investing in Germany 5352 Doing business and investing in Germany
6.11 Foreign legal forms
In recent years there has been a tendency to register businesses abroad, often as a
means of avoiding German bureaucracy or formal requirements. The business is
then conducted in Germany through a branch of the foreign entity (often a UK Ltd).
The rules of the country of incorporation must be adhered to as well as the local tax
and legal provisions applicable to branches. This tends to duplicate the unavoidable
formalities and also leads to difficulties in dealing with authorities, utilities and
business partners unfamiliar with the foreign legal form. Operating efficiencies are
rarely achieved.
Labour relations
and social
security 7
Doing business and investing in Germany 5554 Doing business and investing in Germany
7.1 Availability of labour
The German labour force is well-trained and well-educated, and is used to high
standards of efficiency and of organisation. It is also used to high standards of
protection and to generous fringe benefits and remuneration. In a nutshell, German
labour is of a high standard, but is also expensive.
Despite an unemployment level of 5.8%, finding skilled employees at short notice
is often difficult. Partly, this is because of a certain geographic imbalance in the
unemployment rate – it is higher in the east than in the west of the country – and
partly it is because many of the unemployed are, for one reason or another, unable
to retrain.
7.2 Employment relations
The overall climate of labour relations can only be described as good, at least in
comparison to neighbouring countries. Traditionally, there has always been a strong
desire on both sides of the negotiating table to reach a compromise, and while harsh
words are often heard, serious strikes or cases of widespread industrial unrest are
rare. Partly as a result of this history of repeated compromise, German employment
relationships are regulated by a wealth of statutory and extra-statutory instruments,
trade union and similar agreements, and by individual agreements reached on the
shop floor. Most of these regulations and provisions are highly specific and very
detailed. Broadly, German labour law applies to all employment relationships,
although there are exceptions to ease the lot of small businesses.
7.3 Workers’ councils and unions
Organised employee representation is at two levels. The first is the “workers’
council”, elected for each “shop” by its employees. Each business regularly
employing five or more persons must allow its employees to form a workers’
council from among their number. The size of the council depends on the number
of employees. For example, the workers’ council of a small business employing
between 5 and 20 individuals will consist of a single member. This rises to three
members for between 21 and 50 employees. The limit of the table is reached with
35 members where there are between 7,001 and 9,000 employees. Thereafter,
the worker’s council grows by two with each new step of 3,000 employees. There
are also provisions for individual and combined “central” workers’ councils for
diversified concerns.
The second, or external, level of employee representation is through the trade
unions. Generally, there is one union for each major sector of industry, mirrored
by a corresponding employers’ association. The two sides represent employees and
employers in the regularly recurring industry-wide negotiations on wage levels,
other benefits and on working conditions. These agreements often run for between
one and two years. In theory, they are negotiated separately for each province,
although, in practice, one province is often chosen by mutual consensus as a pilot,
and the agreement reached there is then adopted throughout the rest of the country
with only very little modification.
Traditionally, only one union was active in respect of each employer. Demarcation
disputes between two unions competing for membership were therefore avoided.
Agreements reached by the union and the employers’ association were binding in
respect of all relevant employees, regardless of union membership, whilst on the
other hand employers generally followed the agreement, even if they were not
members of the association negotiating it. However, there have been a number of
incidents recently suggesting changed attitudes in the wake of long-term structural
changes in employment relations. On the employer side, there have been instances
of employers withdrawing from their association, solely in order to negotiate their
own agreement with the relevant union. It is worth noting that the thought behind
this is more often than not a desire to be more generous towards the employees
than the association wishes, in order to avoid the unrest and ill-feeling that long
negotiations can induce. On the employee side, there is a noticeable tendency
towards specialist unions representing particular skills and appealing to those who
feel themselves to be under-represented by unions representing all employees as a
body. Perhaps the best known examples of this are the airlines and railways, where
the pilots and engine drivers formed their own unions because they felt neglected in
favour of other employees. Legislation has been passed to counter this tendency, but
is still under dispute before the Constitutional Court.
7.4 Wages and salary levels
The average monthly gross earnings of full time employees is €3,612 (2015). This
average is lower in the east, and even in the west many unskilled workers also earn
less than this. On the other hand, skilled workers can earn considerably more. On
average, a reasonably experienced secretary capable of working independently and
with a knowledge of written and spoken English can expect to earn a monthly gross
salary of around €3,200. Middle management salaries and those of professionally
qualified technicians and engineers are typically around €4,500 to €6,000. General
managers of many smaller foreign subsidiaries receive approximately €7,500 to
€9,000. These figures vary largely, depending on various factors, and should not be
treated as anything more than a very rough indication.
7.5 Fringe benefits
Pension schemes apart, fringe benefits in Germany tend to revolve round canteen
meals and similar amenities that make the work place more attractive. There is a
growing tendency for larger companies to provide child care and similar support
for young mothers returning to work. Company cars are common among more
senior employees and those who do a great deal of business travel, although the tax
rules on benefits in kind do mean that there is little or no advantage for many high
income earners in accepting a company car in lieu of salary.
7 Labour relations and social security
Doing business and investing in Germany 5756 Doing business and investing in Germany
There are two traditional ways for German companies to provide for employees’
retirement or ill health, the relief fund and the unfunded pension plan. The relief
fund was established for the help of present and retired employees in need and is
financed by regular contributions by the employer. These are tax deductible when
made, provided certain limits based on the fund assets and annual outgoings
are adhered to. Pension plans are invariably of the defined benefit variety and
are reflected in the financial statements as a provision for future and current
pensions payable. Annual allocations to the provision are tax deductible as current
expense provided the amounts are supported by an actuarial computation based
on prescribed formulae and provided the plan, itself, meets certain formalities.
Because there is no funding requirement, granting present employees future
pension rights achieves a current tax deduction without a cash outflow for the
employer and without a corresponding burden on the beneficiaries, who do not tax
the income until receipt.
Taking out insurance policies covering a company’s pension obligations is
also popular, particularly with smaller companies or to provide for individual
managerial employees. If the company is the beneficiary under the policy, the tax
deductible current expense is the premium plus the actuarially calculated annual
accrual minus the increase in the adjusted surrender value of the policy. There is
no immediate tax effect on the employee. If the employee is the beneficiary, the
premium payment is treated as an employee cash benefit.
Rather more recently, deferral schemes to commute salary increases and future
bonus or other discretionary payments to retirement benefits have gained in
popularity. These schemes are often backed by a pension fund. Provided the
prescribed formalities and limitations are observed, the annual expense is
deductible for the company, but the income is not taxable by the employee until
receipt.
Those wishing to provide for their employees can also do so through a pension
fund. Pension funds are supervised by the official supervisory authority but are
not subject to the same restrictions on investment as insurance companies. Most
pension funds are managed by insurance companies, banks and other operators as a
service. Contributions are tax deductible, but the company does not have to show a
future pension liability in its accounts if the pension fund is reinsured.
Present and former employees with both funded and unfunded pension rights are
protected against employer bankruptcy by a government supported and regulated
Association for the Assurance of Pensions. Employers making pension promises of
all descriptions other than insurance policies taken out in the name of the employee
to benefit must join the Association and pay an annual premium based on their
total commitment. An exception applies for irrevocable direct insurance policies
and pension funds. The Association sets the rates to cover its actual expenditure
in the previous year; thus effectively, it spreads the pension risk from employer
bankruptcy over all contributing employers.
There are also various government sponsored schemes run by insurance companies
for private individuals. These used to be heavily advertised by the government, but
have not lived up to initial expectations for various reasons including a surfeit of
formality and low upper limits.
Legally, employers must continue to pay employees at least their average net pay
for the first six weeks of sickness. Thereafter, the health insurance institutions will
provide sick pay to their members, although only up to a relatively low maximum
amount. Employers will sometimes make up the difference for a not inconsiderable
period thereafter, particularly to long-serving executives, although usually without
a formal obligation to do so.
7.6 Working hours and holidays
Working weeks vary by industry sector and by location, but are mostly within the
range of 37 to 40 hours.
Overtime is often payable at premium rates. There are legal restrictions on the
maximum amounts of overtime that can be worked and the trade unions often
add to this by putting pressure on management and on workers’ councils to be
reticent about requiring or approving overtime. Their hope is to force additional
employment. In any case, the current trend is towards more flexible models of
working time to allow employees to work in advance or in arrear as dictated by the
mutual interests of employer and employee but without having to worry about a
cash settlement.
The legal minimum paid holiday entitlement is 20 working days each year for
employees on a five-day working week. Trade union and other agreements usually
improve on this considerably, and most actual holiday entitlements fall within the
range of 25 to 30 days. Middle-management and more senior employees almost
invariably enjoy 30 to 32 days. Bank, or public, holidays vary by province from
9 to 13 days annually. However, the actual cost to the employer in terms of lost
working time is less than this, as a public holiday falling on a weekend will not be
compensated with an additional day off. German public holidays are invariably
celebrated on the day of the event that they commemorate; thus May Day is always
celebrated on May 1, rather than on the first working day in May.
7.7 Health and safety
All employers are subject to health and safety regulations. These are extensive and
detailed and vary by industry and type of business. The workers’ council usually has
an important say in the establishment of specific procedures. This also extends to,
in many cases compulsory, arrangements with a local doctor for accidents and for
regular medical supervision. All employers are required to take out an industrial
accident insurance for their employees with a body enjoying a monopoly in that
industry and area. This body can and does send inspectors to visit industrial and
commercial premises, especially if there has been an accident. The inspectors have
the right to demand corrective measures, should they find the safety measures to
have been deficient.
Doing business and investing in Germany 5958 Doing business and investing in Germany
7.8 Termination of employment
In principle, employers and employees can terminate contracts of employment at
any time by giving four weeks’ notice to the 15th or end of any month. However,
by law the employer must allow long-serving employees longer minimum notice
periods (two months to the end of a calendar month for at least five years’seniority
rising to seven months after 20 years of service). Certain persons, such as expectant
mothers, the disabled, data protection officers and members of the workers’ council
enjoy more or less absolute protection against redundancy. All mass redundancies
must be discussed with the workers’ council and, isolated instances apart,
agreement must be reached with them in the form of a so-called “social plan” to
alleviate hardship.
7.9 Social security
The German social security system is broken down into four main and a number of
minor elements. The main components are retirement insurance, unemployment
insurance, invalidity insurance, and health insurance. In 2017, the monthly
premiums are 18.7%, 3.0%, 2.55% and at least 14.6% of gross salary. Basically, the
cost is split equally between employer and employee, although childless employees
over 23 are required to bear an additional 0.25% premium for the invalidity
insurance. The health insurance premium is another departure from the principle of
equal split of the burden: the legal minimum is 14.6% split equally, but most health
funds require a supplement of, typically, around 1.1% to be borne by the employee
alone.
The total of these contributions amounts to a minimum of 39.95% of an employee’s
gross salary (40.2% if the employee is childless), although the contributions are only
due on salaries up to a certain level. In 2017, the monthly levels are €6,350 (€5,700
in the east) for contributions to the retirement and unemployment insurance,
and €4,350.00 (throughout Germany) for premiums to the invalidity and health
insurance. With certain specific exceptions, the first two of these insurances are
compulsory; the health and invalidity insurance are voluntary for those with annual
earnings of more than €57,600. However, those opting out must take out private
health insurance. They are also generally unable to re-join the state scheme later,
unless their regular annual earnings fall below the opt-out level while they are still
under 55.
The social security systems of the European Economic Area countries (EU, Iceland,
Liechtenstein and Norway) and Switzerland are coordinated by an EC regulation
with the broad objective of ensuring that those who move between one member
state and another do not suffer any fundamental loss of current or future rights.
Thus pension rights acquired in different member states accumulate on retirement
and visitors from another member state are entitled to the same health benefits
as the locally insured, if they fall ill. There is also provision for those living in one
European Economic Area country and working in another.
Beyond the European Economic Area countries, mutual social security
arrangements are governed by bilateral treaties. Germany has concluded social
security treaties with Albania (not yet in force) Australia, Bosnia-Herzegovina,
Brazil, Canada, Chile, China, India, Israel, Japan, Korea, Kosovo, Macedonia,
Montenegro, Morocco, Philippines (not yet in force), Serbia, Tunisia, Turkey, United
States and with Uruguay.
Generally, these treaties allow employees taking up temporary residence in the
second country to retain their membership in the social security scheme of their
home country, provided they continue in a home country employment, for a limited
period of time. They also provide for the accumulation of pension entitlements from
premiums paid in both countries and often for the provision of medical treatment
in the one country to travellers from the other. However, some treaties only cover
certain elements of the social security system. For example, the treaty with the US
only covers the retirement and health insurances. Coverage for other elements of
social security may need to be arranged privately.
7.10 Working and residence permits for foreigners
EU citizens have the right of migration to Germany. Once they have found living
accommodation, they, in common with all other local residents need to register
their address at the local registration office/town hall (Einwohnermeldeamt). Their
right to take up residence in Germany may not generally be refused and they also
have an unrestricted right to take up employment or to engage in business activities
as though they were German citizens.
Individuals of other nationalities moving to Germany require residence and work
permits. Basically, the two documents are issued under a combined procedure,
which includes a review of the local job market to ensure that there is no German
or EU job seeker available to fill the position. The prospective employer is therefore
involved from an early stage.
In most cases, the procedure starts with the application of the work permit pre-
approval by the employer to the responsible employment office in Germany. The
applicant then files for his entry visa with the original pre approval and supporting
Retirement insurance
Health insurance
Main components of social security
Unemployment insurance
Invalidity insurance
18.7%
14.6% 3.0%
2.55%
Doing business and investing in Germany 6160 Doing business and investing in Germany
documents at the responsible German mission abroad. The visa, with which the
individual can begin working immediately, is generally issued for 3 months. He/she
must convert this into a residence permit after arrival in Germany. The residence
permit can be issued for the duration of the stay or for up to 4 years depending on
the permit type.
Citizens from Andorra, Australia, Canada, Israel, Japan, Monaco, New Zealand,
San Marino and the USA are privileged in that they may enter Germany without an
entry visa and apply for a residence permit with the work permit pre-approval from
within Germany. They may not, however, start work before at least a preliminary
permit is granted.
A simplification of the process (Blue Card EU) applies to high qualified individuals
with a local contract, recognized university degree and earning a specified level
of salary. The same applies to so called scarce occupation jobs e.g. to doctors and
engineers, highly qualified IT staff and craftsmen and craftswomen in specific
trades with a lower minimum salary level. In these cases, the work permit pre-
approval is not necessary and the decision on the issuance of work and residence
permission can be made directly by the German mission abroad or the immigration
office in Germany. Essentially, applications from those appropriately qualified
will be granted without specific review of the local employment situation on the
assumption that the applicant will not be displacing an otherwise employable EU
citizen.
Audit
requirements
and accounting
practices 8
Doing business and investing in Germany 6362 Doing business and investing in Germany
8.1 Statutory requirements
The Commercial Code requires all but the smallest businesses to keep an orderly
set of books. The books must conform to a generally accepted standard of record
keeping, must provide a complete record of all transactions and must be supported
by a complete set of vouchers and other documentation. They must be written-up in
a living language. However, the annual financial statements must be drawn up in
German.
The tax law and guidelines by the tax administration also contain provisions
affecting accounting records. Among these are the “principles of orderly accounting
and retention of books, records and documents in electronic form and of data
access” (Grundsätze zur ordnungsmäßigen Führung und Aufbewahrung von Büchern,
Aufzeichnungen und Unterlagen in elektronischer Form sowie zum Datenzugriff) as
published by the Ministry of Finance; there is also a formal requirement according
to tax law that the books must be prepared and retained in Germany at all times,
unless the responsible tax office permits otherwise. There is a procedure for
applying – under certain conditions – for tax office permission to prepare and retain
electronic books and other necessary electronic records or parts thereof in another
country. If the documents are not in German, the tax authorities have the right to
demand a translation.
Furthermore, the accounts should be kept in such a manner as to allow a competent
third party to gain an overview of the business transactions and the enterprise’s
state of affairs within a reasonable period of time.
The Commercial Code also contains additional requirements for the audit and
publication of financial statements of all limited companies and of commercial
partnerships in which no natural person ultimately carries unlimited liability. Thus,
the GmbH & Co. KG (see chapter 6), in which the unlimited, general partner’s share
is held by a GmbH, is subject to an audit and publication requirement. These rules
also describe in more detail the accounting principles to be applied.
From the point of view of the audit and publication of financial statements,
companies are categorised into small, medium-sized or large. The criteria and
thresholds for determining which size category a company fits into are summarised
in the table below. Companies fall into a category if they meet any two of the three
criteria for that category. A company changes its status when it has met or fallen
below the respective criteria for the second consecutive year.
Small companies are not subject to an audit requirement, and may satisfy the
publication requirement by depositing electronically a condensed balance sheet
and notes thereto, but without a profit and loss account. Medium-sized and large
companies must have their financial statements audited, but the publication
requirements for medium-size companies are easier to fulfil, and these companies
are exempt from various otherwise required disclosures. Generally, companies must
publish the required documents within twelve months of the balance sheet date.
Large companies are subject to the full publication requirement, i.e., depositing
their full annual report with the trade register and electronic publication in the
Federal Gazette (Bundesanzeiger). There are additional publication requirements for
companies that are listed, or publically issue bonds, in Germany. In general these
companies have to publish the required documents within 120 days of the year-end.
8.2 Accounting principles
All German statutory financial statements must agree with the underlying
accounting records and must follow the historical cost convention. They must be
complete and accurate and be drawn up within three months of the company’s
year-end. This period is extended to six months for small companies, but only on the
condition that the delay can still be seen as being within the confines of an “orderly
manner of doing business”. The financial statements must follow the accrual
accounting principle. Consistency and prudence are emphasised as principles.
Financial statements must be drawn up under the assumption of going-concern,
that is, that the company will continue its business operations into the foreseeable
future, unless there are specific circumstances (legal or otherwise) to the contrary.
Appropriate depreciation of fixed and intangible assets must be recorded, liabilities
must be taken up at their anticipated repayment amounts and provision must be
made prudently for foreseeable financial risks.
8.3 Form and content of annual reports
The basic German financial statements are a balance sheet and a profit and loss
account. The notes thereto are the subject of an “appendix” (Anhang). The financial
statements are accompanied in the annual report by the auditor’s report and the
proposal or resolution for profit appropriation. Finally, the annual report includes
the directors’ report (the so-called “business report” or Lagebericht). The directors’
report should discuss the business situation of the company and also specifically
mention major risks and opportunities, a description of the internal control system,
the future outlook for the company, any important subsequent events, anticipated
development of the company’s business and any branches it maintains. The
directors’ report is subject to audit, too.
Quoted companies must also publish a cash flow statement and a declaration of
compliance with the Code of Corporate Governance (see chapter 6.5). Instances of
non-compliance are to be explained.
Overview of thresholds
Small company
Medium-sized
company Large company
Annual sales (in euro) ≤ 12,000,000 ≤ 40,000,000 > 40,000,000
Balance sheet total (in euro) ≤ 6,000,000 ≤ 20,000,000 > 20,000,000
Employees ≤ 50 ≤ 250 > 250
8 Audit requirements and accounting
practices
Doing business and investing in Germany 6564 Doing business and investing in Germany
8.4 Valuation
8.4.1 Shareholders’ equity
Shareholders’ equity consists of the issued share capital, capital and other reserves
and the net retained profits/net accumulated losses. Unpaid and uncalled amounts
on share capital are shown as a deduction from the nominal amount of issued
share capital. Amounts called up but not yet paid are presented separately under
receivables. The net retained profits/net accumulated losses are net of dividends
declared during the year.
If the shareholders’ equity is negative because of accumulated losses, the net
amount is shown on the assets side of the balance sheet as “deficit not covered by
equit y ”.
8.4.2 Fixed assets
Fixed assets consist of tangible fixed assets, intangibles and long-term financial
assets. No planned amortisation may be taken on the long-term financial assets
or on land, but all other assets must be depreciated over their useful lives. The tax
rules contain guidelines for determining the useful lives of various types of assets
and these are often followed in the statutory accounts, if only for simplicity. Under
the Commercial Code, goodwill should also be amortised over its useful life with
the amortisation period being explained in the notes. This contrasts with the tax
rules that allow a deduction for goodwill amortisation straight-line over a set
15-year period. Under certain conditions internally-generated intangible fixed
assets such as software may be capitalised as a matter of company accounting
policy. However, reserves equal to the book value of such assets (net of any deferred
tax) may not be distributed.
8.4.3 Inventories
Inventories are valued at the lower of cost or realisable value. Raw materials,
consumables and supplies may generally not be valued at more than their
replacement cost, unless it can be proved reliably that the asset (once finished) may
be sold without loss. Most generally known costing methods are acceptable for the
determination of cost. The carrying amount of similar assets of inventories usage
may be determined on an averaging method or by FIFO or LIFO.
8.4.4 Accruals and provisions
Prudent provision must be made for all foreseeable financial risks. Expenses already
incurred must be accrued. Provisions for a loss in the value of assets are deducted
from the assets themselves; provisions for claims and other expenses are shown on
the liabilities side of the balance sheet.
Long-term provisions (those not expected to be utilised during the coming
twelvemonths) are discounted over the expected period of reversal at the average
market rate of interest during the past seven years (provisions for pensions: average
market rate of interest during the past ten years). Average interest rates for this
purpose are published monthly by the Bundesbank. For pensions an average reversal
period of fifteen years may be assumed. Pension provisions have to be discounted at
the average market rate of interest during the past ten years.
8.4.5 Payables and other liabilities
Payables and other liabilities include only those amounts where the amount, the
obligation to pay and the identity of the creditor are certain. If any of these are
uncertain, the amount should be shown as a provision or accrual, rather than as an
account payable. Deferred income is shown separately from the liabilities and the
accruals.
8.4.6 Foreign currency balances
Foreign currency balances due within one year are translated into euros at the
official middle rate on balance sheet date. Long-term receivables and payables
are not to be valued at more than historical cost or less than repayment amount
respectively. Thus unrealised exchange gains on long-term foreign currency
balances are not to be taken up.
8.4.7 Taxes
Unpaid taxes actually assessed are included in other liabilities. Income taxes
currently payable but not yet assessed are shown as a separate item under the
amounts accrued.
Deferred taxes are calculated using the liability method. The calculation is to be
based on all temporary differences between the carrying value in the financial
statements and the tax base without regard to the expected period of reversal. The
effect of tax losses expected to be offset against income during the next five years is
also included. The tax rate taken is that anticipated by the company for the year of
reversal. If not known, the latest known rate should be assumed. If the net deferred
tax balance is a liability, it should be shown as the last item on the liabilities side of
the balance sheet. If it is an asset, it may be capitalised and disclosed as the final
item on the assets side of the balance sheet.
Doing business and investing in Germany 6766 Doing business and investing in Germany
8.4.8 Pensions
Pension provisions are shown as a separate item under provisions and accruals.
They are to be calculated on recognised actuarial principles under the rule for
discounting long-term provisions using the average market rate of interest during
the past ten years – see 8.4.4. Under certain circumstances, pension plan assets and
liabilities are set off against each other.
8.4.9 Leasing
The leasing attribution rules in the tax law are almost invariably followed in the
statutory financial statements. Generally leases are treated as operating leases (i.e.
capitalised by the lessor) unless the lessor does not even bear a certain portion of
the asset’s rewards. For example full pay-out leases are capitalised by the lessee
if the minimum lease period is less than 40% or more than 90% of the asset’s
anticipated useful life. A variety of other relevant factors taken from tax law also
need to be considered, for example where the ownership falls to the lessee at the
end of the lease.
8.5 Consolidated accounts
A German company with at least one subsidiary must prepare and publish a set of
audited consolidated financial statements, unless the consolidated whole fits the
definition of a small group. Broadly, a small group will employ no more than
250 employees, and have total annual sales (including intercompany items) of less
than €48m and combined gross assets of less than €24m before eliminations. The
consolidation obligation arises where two of these three criteria are consistently
exceeded.
Companies can be exempted from the consolidation requirement if they themselves
are subsidiaries of an EU or foreign parent and that parent publishes a German
translation of its own consolidated financial statements in Germany. This exemption
provision applies to all EU parent companies, and to those in other countries, such
as the United States, with internationally recognized accounting principles and
auditing standards.
The German accounting profession has established an accounting standards
committee (Accounting Standards Committee of Germany) for the debate and
promulgation of nationally acceptable accounting standards. Its pronouncements
primarily interpret the accounting principles of the Commercial Code in respect of
consolidated reporting requirements.
8.6 International Financial Reporting Standards
Following European law, all quoted companies must draw up their published
consolidated financial statements under IFRS. German law allows non-quoted
companies and other commercial entities to do this as an option. However,
companies publishing under IFRS will still need Commercial Code accounts for each
individual member of the consolidation as a measure of the maximum distributable
dividend and as a basis for the tax returns.
8.7 Enforcement
A privately organised review board (Deutsche Prüfstelle für Rechnungslegung –
German Accounting Review Board) was set up under the Financial Statements
Review Act. This board is subject to the overall control of the Federal Financial
Supervisory Authority. It conducts field reviews of the published financial
statements and other reports of quoted companies. It selects its review candidates
at random, in reaction to specific suspected irregularities, or at the explicit request
of the Supervisory Authority. Publication of its findings is the primary sanction on a
company found to have misrepresented its position unless the misrepresentation is
a breach of criminal law. Companies must cooperate with the board. Failure to do so
is reported by the board to the Authority, which may then decide to conduct its own
investigation – possibly acting through the board’s staff.
8.8 Auditing profession and auditing standards
The auditing profession is led by the Institute of Auditors (Institut der Wirtschafts-
prüfer), with a membership of just over 13,000 qualified Wirtschaftsprüfer and
accounting firms. Membership in the Institute is voluntary. Membership in the
Chamber of Wirtschaftsprüfer is compulsory for the some 17,000 Wirtschaftsprüfer
and firms. Admission is open to those holding a university degree, who have served
for three years with a qualified auditor or who can demonstrate other, equivalent
practical experience, and who have passed a rather difficult exam. Qualified
Wirtschaftsprüfer are the only people permitted to act as the auditors of companies
required to publish their statutory financial statements, although other qualified
professionals, for example tax advisors, may perform special-purpose audits and
investigations or numerous other accounting services.
The Institute of Auditors lays down detailed and extensive standards of auditing
and reporting. It also sets rules for ethical behaviour and professional conduct. In
all these respects the German profession can take its place among the world leaders.
The German auditor is required to prepare a detailed report for management and
the supervisory board on the scope and extent of the audit and its results, and must
also comment on management’s appreciation of the financial position and prospects
of the company as shown in the directors’ report. The requirement is specified in
the Commercial Code, and the Institute of Auditors has issued extensive guidance
statements indicating how its members should draw up such reports.
68 Doing business and investing in Germany
German parliament adopted the EU audit legislation on 10 March 2016. The new
requirements came into force by 17 June 2016. The German legislation mainly
effects public interest entities (PIEs). Essentially, these are financial services
companies and all other companies that have issued publicly quoted shares or
bonds. Germany has not expanded the definition of PIEs beyond the Directive
2014/65/EU.
According to the new audit legislation, audit firms will have to rotate off PIE audit
engagements after a period of ten years (maximum duration). Banks and insurance
companies are granted a maximum duration of ten years without the option to
extend the duration. For non-financial-services companies it is possible to extend
the maximum duration for a further ten years following a tender process (an
extension of 14 years is possible in the case where the incumbent auditors enter into
a joint audit). There are some transitional arrangements; thus, the timing of the
external rotation will depend mainly on how long the current auditors had been
engaged at the time the Audit Regulation (EU) No. 537/2014 entered into force.
The new law also prescribes additional restrictions on the nature and extent of
non-audit services provided by the PIE auditors or their network to the audited PIEs,
to their parent undertakings and to their controlled undertakings (black list). The
member state derogation for tax services and valuation services is fully permitted
in Germany. However, there is a specific provision under German law that prohibits
tax services that are linked to aggressive tax planning.
The audit committee responsibilities for overseeing the audit process, selecting
auditors and approving non-audit services are also prescribed in increased detail in
the audit legislation.
The Key Audit Partner rotation period is 7 years in Germany from the date of their
appointment. Thus, Germany has not made use of the derogation to rotate key audit
partners earlier that 7 years as offered in the Audit Regulation (EU) No. 537/2014.
In addition to the rotation of key audit partners a gradual rotation mechanism is
applied with regard to the most senior personnel involved in the statutory audit,
including the persons who are registered as statutory auditors.
For multinational companies the new rules in Germany have to be considered as a
whole, together with often differing requirements between other territories inside
and outside the EU. There is no legally prescribed wording for an audit opinion.
However, the opinion must be easily understandable, must draw clear attention to
major problems – especially those endangering the business as a going concern–
and must confirm that the directors’ report is not misleading. If the opinion is
unqualified, it must state that there are no adverse audit findings and that the
financial statements give a true and fair view of the net assets, financial position
and results of operations of the company.
Additionally, as a result of the implementation of the EU audit regulation in
Germany in 2016, audit opinions for PIEs will be required to describe key audit
matters as well as the tenure of the current auditors and disclosures about non-audit
services provided by them.
Tax system and
administration 9
Doing business and investing in Germany 7170 Doing business and investing in Germany
9.1 Principal taxes
Business income is subject to two taxes in Germany, trade tax and either corporate
income tax or income tax. Trade tax is levied under national rules but at rates fixed
by each local authority where the business has a permanent establishment. The
profit of an incorporated business is also subject to corporate income tax; the profit
of an unincorporated business owned by an individual forms part of his or her
income tax assessment.
The major German transaction tax is VAT, levied under the harmonised EU
system. Other significant transaction taxes are excise taxes, insurance tax, real
estate transfer tax and inheritance and gift tax. Germany has an extensive system
of withholding taxes. The most important one is the income tax deducted from
employees’ salaries (the so-called “wage tax”), followed by withholding taxes of
25% on dividends, certain interest income and capital gains from investments
in securities held via a custodian. Wage tax and other withholding taxes are
incremented by the “solidarity surcharge” of 5.5% of the tax.
Except for income from capital investments of individuals, these domestic
withholding taxes are not a final burden but prepayments on the income or
corporate income tax liability if the taxpayer files a tax return. Any resident
taxpayer may file a tax return; however, those whose only income is from a single
employment are not obliged to do so.
For non-residents the German income tax on further types of German source
income is imposed via withholding tax. Nevertheless, withholding taxes on
payments made to non-residents are often restricted or eliminated by double
tax treaty or by the provisions of the EU Parent/Subsidiary Directive. German
domestic law foresees tax withholdings of such as 30% on remuneration for
the members of a supervisory board of a corporation and 15% on royalties and
sporting or artistic income, each plus the solidarity surcharge. Only under certain
circumstances is there a possibility to deduct related expenses from the respective
income. In the hands of non-residents, the withholding tax e.g. on dividends and
royalties is generally final unless the income is part of the income of a permanent
establishment. In this case a tax return has to be filed. There is no withholding or
similar tax on the repatriation of branch profits or on most interest payments.
9.2 Sources of tax law
German taxation is based on statutes enacted by parliament. Each tax is governed
by its own statute. The General Tax Code (Abgabenordnung – AO) contains a number
of general definitions and establishes the basic rights and duties of taxpayers as well
as regulating the procedural questions of the tax administration.
The statutes are supplemented by guidelines issued by the Federal Ministry of
Finance. They are not formal statutes and do not bind the courts. These guidelines
discuss the practical application of the various provisions of the statute, often by
way of example. They also contain references to relevant case law. The statutes
are further supplemented by a collection of decrees and ordinances issued by
various levels of the tax administration, often in response to arising problems upon
application of the law.
Another source of tax law is the case law handed down from the tax courts. Cases
decided by the appeal court, the Federal Fiscal Court, carry far greater weight than
decisions by the local tax courts. In the German legal system, there is no doctrine of
binding precedent in the Anglo-Saxon sense of the term.
9.3 Returns
The tax year (assessment period) is the calendar year. If a company adopts an
accounting period that deviates from the calendar year, the tax return for this tax
year reflects the financial statements for the accounting period ending within the
calendar year. The adoption of a financial year other than the calendar year requires
the consent of the tax office.
In principle, businesses must file income tax returns (corporate or income tax return
and trade tax return) by May 31 following the tax year-end. However, an extension
to December 31 of the year following the tax year is usually automatically granted
if a professional tax advisor prepares the return. For tax periods starting after
December 31, 2017 the regular deadline will be July 31 following the tax year-end.
For tax returns prepared by a professional tax advisor the deadline will be extended
to the last day of February of the subsequent year.
In general the same deadlines apply to the annual VAT return. Preliminary VAT
returns usually have to be filed on a monthly basis (in some cases quarterly) by the
tenth day following the end of the month (or quarter). Under certain conditions the
deadline for monthly preliminary VAT returns can be extended upon application if a
special instalment is paid.
Employers have to withhold and pay wage tax on behalf of their employees. The
wage tax return usually has to be filed on a monthly basis (there are exceptions
where the total amount of wage tax is low) by the tenth day following the end of the
month.
The tax returns of businesses usually have to be filed electronically. Trading
businesses also have to file an electronic balance sheet and the profit and loss
account. Furthermore, the notes to the financial statements, the management report
and the audit report have to be filed with the income tax return or corporate income
tax return.
9 Tax system and administration
Doing business and investing in Germany 7372 Doing business and investing in Germany
9.4 Assessment notices
Once the tax office has reviewed the returns filed, it will issue notices of assessment.
If the assessment notices do not agree with the return filed, the reason for the
deviation must be stated on the assessment notice. The assessments often are
“subject to re-examination“(that is, subject to a future tax audit) or “preliminary”
with respect to a specific question.
The deadline to file an appeal is one month after the tax assessment notice is issued
to the taxpayer. If the appeal is refused by the tax office, the taxpayer can then file
an appeal with the competent regional tax court, and, if unsuccessful at the tax
court, continue litigation in front of the Federal Fiscal Court which acts as the final
instance in tax matters for the whole of Germany.
The limitation period for tax assessments is generally four years. In cases of
negligence the limitation period is extended to five years and in cases of tax
fraud up to ten years. If the taxpayer is obliged to file a tax return, the start of the
limitation period is deferred until the end of the calendar year in which it has been
filed; but no longer than to the end of the third calendar year following the tax year.
9.5 Payments
In general income taxes are paid as quarterly prepayments during the year (on
March 10, June 10, September 10, December 10 for income or corporate income
tax and February 15, May 15, August 15, November 15 for trade tax) with a
final adjusting payment or refund when the assessment is issued. The quarterly
prepayments are based on the tax for the latest tax year assessed but may be
adjusted within a certain time frame to the tax estimated for the respective year if
changes are expected.
With respect to income from an employment prepayments are assessed via
withholding. The employer is responsible for the withholding and payment of wage
tax.
9.6 Audits
Tax authorities are entitled to check specific physically or electronically filed
documents and execute mechanical analyses of the kept data to verify whether
the assessment notices assessed based on the information of the taxpayer are
correct. There are usually detailed field reviews of the books, records and of the
other relevant documents of a company. Therefore, the taxpayer is obliged to keep
the specific documents (physically or – for most documents – electronically) for
a defined period of time (ten years for the most relevant documents, e.g. books,
accounting records etc). In principle the companies are classified in different groups
based on their revenues and taxable profit. Tax audits are conducted at
three to five-year intervals for larger companies to ensure uninterrupted auditing. If
the result of the audit deviates from the tax return filed by the tax payer or if the tax
auditor does not agree with a legal view the taxpayer has taken, the tax assessment
notice of the corresponding tax year will be amended, given it has been issued
being “subject to re-examination” or the conditions for an amendment of the tax
assessment are otherwise fulfilled.
9.7 Interest on tax payments
The interest period does not start until 15 months after the end of the tax year.
Interest is levied at 0.5% for each full month on amounts additionally assessed
exceeding settled prepayments and earlier assessed amounts. In case a tax
assessment is reduced interest at 0.5% for each full month is levied on the amount
assessed and paid in excess (difference between the earlier assessed and paid tax
including settled payments and final assessment) in favor of the taxpayer.
9.8 Penalties
Late payment interest of 1% per month or part thereof is levied on amounts unpaid
after a due date for payment set by statute or payment demand. In case a tax return
is not filed or filed too late, the tax authorities may assess a late filing penalty up to
10% of the tax assessed, but a maximum of €25,000. For tax returns to be filed after
December 31, 2018 the rules for the assessment of a late filing penalty have been
amended. According to the new rules the filing of a tax return for a calendar year
later than 14 months after year-end will result in a late filing penalty of 0.25% of the
payment resulting from the assessment per month or part thereof (at least €25 per
month or part thereof).
9.9 Tax office rulings and APAs
There is a set procedure for tax office rulings on the tax consequences of a planned
transaction. The application has to be filed before any steps of the planned
transaction have been executed. It has to contain a detailed description of the
intended action, of the taxpayer’s view of the law, and of the reason why the ruling
is considered necessary – both in terms of the potential risk and of the uncertainty
involved.
A fee will be charged based on the amount of tax at risk (rarely as an exception a
fee based on an hourly rate of €50 and time actually spent by the tax office will be
applicable). The scale is that for court costs and the range is from €241 to €109,736.
No fee is charged if the subject value is less than €10,000.
Doing business and investing in Germany 7574 Doing business and investing in Germany
Advance pricing agreements (APA) are the responsibility of the Central Tax Office.
A taxpayer can request the Central Tax Office to negotiate an APA on related-
party transactions with a foreign tax authority on one’s behalf based on a mutual
agreement procedure provided for in an applicable double tax treaty. The Central
Tax Office charges a fixed fee for its negotiations. The standard amounts are
€20,000 for a new agreement, €15,000 for an extension of an existing agreement
and €10,000 for a change to reflect changed circumstances. There are special rules
for small companies.
9.10 International exchange of information
For several years, Germany has been vigorous in promoting the international
exchange of tax information and has concluded either obligations regarding the
exchange of information in double tax treaties or Tax Information Exchange
Agreements (TIEA) with countries with which it has not concluded a general double
tax treaty.
The FATCA agreement of May 31, 2013 with the United States on the automatic
exchange of bank account information of each other’s residents between national
tax authorities is in force since December 2013.
Besides Germany has signed and implemented into domestic law the Multilateral
Competent Authority Agreement on Automatic Exchange of Financial Account
Information as of October 29, 2014 which is based on the Convention on Mutual
Assistance in Tax Matters (1988/2010), also signed and implemented into domestic
law by Germany.
Automatic exchange of information has further been pushed as part of the BEPS-
Project of the OECD. The Multilateral Competent Authority Agreement on the
Automatic Exchange of Country-by-Country Reports as of January 27, 2016 was
signed by Germany and implemented into domestic law in 2016. At the level of
the EU the Mutual Assistance Directive was recently amended and extended
with respect to the exchange of information regarding Country-by-Country
reports (CbCR) as well as advance cross-border tax rulings and advance pricing
arrangements. Both amendments have been implemented by Germany into
domestic law in December 2016. The implementation of the latest extension of the
Mutual Assistance Directive to anti-money-laundering information is pending.
Taxation of
corporations 10
Doing business and investing in Germany 7776 Doing business and investing in Germany
10.1 Tax rates and total tax burden
Business profits in Germany are subject to trade tax levied by the local authorities
(municipal tax) and corporate income tax or income tax.
Corporations (GmbH or AG) having their registered seat or actual place of
management in Germany are subject to corporate income tax on their entire
worldwide income (“unlimited tax liability”). Further the income is subject to trade
tax except for income derived from a permanent establishment located outside
Germany. Actual taxation of income from abroad might be restricted due to an
applicable double tax treaty.
The statutory corporate income tax rate is 15%, plus a solidarity surcharge of 5.5%
on the corporate income tax assessed, resulting in a combined rate of 15.825%.
The trade tax rate is a combination of a uniform tax rate of 3.5% (base rate) and a
municipal tax rate (Hebesatz) depending on where the permanent establishments of
the business are located. Currently, municipalities with at least 80,000 inhabitants
levy trade tax at a rate of between 12.6% (Hebesatz of 360%) and 19.25% (Hebesatz
of 550%).
Accordingly, the overall effective tax rate for a German corporation ranges between
28.425% and 35.075%.
A non-resident corporation, whose corporate seat and place of management are
located outside Germany, is subject to corporate income tax only on income derived
from German sources. Income from German sources could include income from
operations in the country through a branch or other permanent establishment,
including a permanent representative. A non-resident corporation will be subject
to trade tax on trading income arising from a permanent establishment located in
Germany.
10.2 Taxable income – corporate income tax
10.2.1 Deviations between German GAAP
accounts and tax accounts
The taxable income is generally determined based on a tax balance sheet which
in turn is based on the statutory accounts according to German GAAP. There are
certain specific tax law and accounting adjustments to be made to the statutory
accounts and additional accounting options are available. Common tax adjustments
are, e.g. (N.B. this enumeration is non-exhaustive and business-specific):
• Intangibles,
• Provisions for expected losses,
• Pension provisions,
• Amount of annual depreciation on certain assets (such as acquired goodwill),
• Interest-free liabilities and certain accruals with a term of at least 12 months.
10.2.2 Off-balance-sheet-adjustments
To calculate the taxable income further adjustments have to be made besides the
accounting adjustments.
There are limitations on the deductibility of certain current business expenses.
Non-deductible or partially deductible business expenses are, for example, the
following items:
• Income taxes, i.e. corporate income tax and trade tax, as well as the
supplementary charges on these taxes,
• Gifts to non-employees in excess of €35 per year/per person
• 30% of entertainment costs,
• Non-deductible interest exceeding the so-called interest-capping limitation,
• Donations exceeding certain amounts.
10.2.3 Participation Exemption
Subject to certain prerequisites, dividends and hidden profit distributions (deemed
dividends) from qualified shareholdings (shareholding of at least 10%) as well as
capital gains from the sale of shares are generally 95% tax exempt for corporate
income tax purposes if the recipient of the dividend is a corporation and insofar as
the dividends or deemed dividends have not reduced the income of the distributing
corporation. For the exemption of dividends for trade tax purpose further conditions
have to be considered and different qualified holding-thresholds are applicable for
corporate income and trade tax purposes. 5% of the dividends/deemed dividends
and capital gains are treated as non-deductible business expenses and are thus
subject to corporate income tax and trade tax. At an assumed overall tax rate of
30% (including corporate income tax and trade tax), the resulting effective tax
rate is 1.5%.
Capital losses with respect to shares held by corporations are non-deductible in their
entirety, such as, e.g., capital losses from the sale of shares, write-downs on shares
or losses on certain shareholder loans (i.e. in case of a shareholding of more than
25%).
Under specific conditions the 95% tax exemption with respect to dividends from
qualified shareholdings and capital gains from the sale of shares is not applicable to
certain companies as recipients of a dividend, e.g. financial institutions.
10.2.4 Interest limitation rule
The interest limitation rule retricts the maximum allowable net interest expense of
a business entity to 30% of the relevant profit after adding back the interest expense
and the depreciation and amortization and after deducting the interest income
(creditable EBITDA).
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Doing business and investing in Germany 7978 Doing business and investing in Germany
The interest limitation rule applies both to intercompany financing and to third
party financing, even if there is no recourse.
For the purpose of the interest limitation rule each entity must be viewed separately,
although, all members of a tax group (Organschaft) are considered as one business.
The interest limitation rule does not apply if one of the following three exceptions
are relevant:
• The amount of net interest expense is less than €3 million, or
• The business does not belong, or only partially belongs, to a group (group clause),
or
• The business belongs to a group and its equity ratio (i.e. the proportion which the
shareholder’s equity bears to the balance sheet total) as of the preceding balance
sheet date is equal to, or more than, that of the group. A failure to reach the equity
ratio of the group by less than two percentage points is disregarded (equity test or
escape clause).
For corporations the group clause and the escape clause only apply if it can be
demonstrated that no detrimental shareholder debt financing as defined by law
exists.
EBITDA carry-forward
Any excess of EBITDA over the net interest expense is to be carried forward for the
following five business years (EBITDA carry-forward). This allows for an additional
interest expense deduction in future years where the net interest expense is in
excess of the creditable EBITDA of the current year.
Interest carry-forward
Non-deductible interest expense of one year may be carried forward without time
limit (interest carry-forward). It increases the interest expenditure of those business
years and is still subject to the 30% EBITDA threshold.
It should be noted, however, that the interest carry forward may (partially or
completely) be forfeited under certain conditions (e.g. change of shareholders or
restructurings etc).
The Federal Fiscal Court has held the interest capping limitation to be in breach of
the constitution and has asked the Constitutional Court to give a definitive ruling.
Only the Constitutional Court is in a position to decide whether the regulation is
unconstitutional.
It should be emphasised that the interest capping limitation is additional to, and not
instead of , the transfer pricing requirement that related-party finance must be at
arm’s length.
10.2.5 Amortisation and depreciation
Movable assets are in general depreciated on a straight line basis over the asset’s
anticipated useful life. The German Ministry of Finance publishes guidelines, the
so-called depreciation tables, listing its estimates of the useful lives of movable
fixed assets of different types as used in different industries. These tables are for
guidance only and it is open to a taxpayer to argue that his actual or intended use
of the assets concerned justifies a shorter depreciation period. Intangibles are
amortized on a straight-line basis over their estimated useful lives. Goodwill is
amortized over 15 years. Buildings are depreciated under a variety of straight-line
or reducing-rate systems designed to reach full write-down after between 25 and
50 years, depending on the age of the building, the type of use and on whether the
taxpayer is its first owner.
An exception exists for movable fixed assets with a value of up to €410 (exclusive
of VAT). These may be deducted immediately. Alternatively, if the acquisition
or production costs exceed €150 but not more than €1,000, the acquisition or
production costs can be aggregated for each period and depreciated as a pool over
five years.
Fixed and intangible assets may be written down whenever a permanent loss in
value becomes apparent. There is, however, a write-back requirement should the
value subsequently appreciate.
10.2.6 Inventories
Inventory is basically valued at acquisition cost or production cost, unless the fair
market value (replacement costs or net realisable value) is impaired permanently.
LIFO (last in, first out) is expressly permitted by the Income Tax Act, unless it would
be in conflict with German accounting principles. However, once LIFO has been
applied, the treatment must be maintained in subsequent years, unless the tax office
agrees otherwise.
10.2.7 Liabilities
Liabilities with a remaining term of 12 months or more on the balance sheet date
must be discounted at an annual rate of 5.5%, unless they are either interest-bearing
(at any rate) or result from payments in advance.
Doing business and investing in Germany 8180 Doing business and investing in Germany
10.2.8 Provisions
In general, most provisions established under German GAAP are accepted for tax
purposes. Nevertheless, some types of provisions may not be deducted for tax
purposes (e.g. provisions for anticipated losses) and for certain types of provisions
restrictions are applied, e.g. provisions for anniversary bonuses and acquired
provisions. Provisions have to be discounted by 5.5% unless the duration of the
provision is less than 12 months.
Pension provisions must be computed actuarially under specific and detailed rules
(e.g. a discount rate of 6% is applied).
10.3 Taxable income – trade tax
The taxable income for trade tax is calculated on the same lines as for corporation
tax. However, there are important differences, particularly in the area of interest
and other financing costs.
10.3.1 Add-backs for trade tax purposes
The trade tax base is the business profit determined according to the German
Income Tax Act (Einkommensteuergesetz – EStG) and German Corporate IncomeTax
Act (Körperschaftsteuergesetz – KStG), adjusted by off-balance-sheet add-backs and
deductions for trade tax purposes.
Inter alia, 25% of the following business expenses are subject to the add-back
insofar as the total amount exceeds €100,000:
• Interest and similar expenses,
• Profit share of a silent partner,
• 20% of the rent or leasing fees paid for the use of movable fixed assets,
• 50% of the rent or leasing fees paid for the use of immovable fixed assets,
• 25% of the costs for the temporary use of rights (in particular licence fees).
10.3.2 Deductions for trade tax purposes
The deductions for trade tax purposes comprise, for example:
• 1.2% of the taxable value of real estate held as a business asset not exempted from
German real estate tax,
• the portion of the total trade profit derived from permanent establishments
outside of Germany, and
• dividends from qualified shareholdings under specific conditions (the qualified
holdings-threshold is different from the one applicable for corporate income tax
purposes) minus related expenses (for dividends exempted for corporate income
and trade tax purposes the taxable 5% are also taxable for trade tax purposes).
The trade tax base is assessed centrally by the tax office responsible for the
company’s German taxation (the place of management of the entity). The tax office
then allocates this base over the various municipalities where the company has
business establishments, generally in proportion to the total wages paid to the
employees in each (there are deviating rules in certain cases).
10.4 Loss relief
10.4.1 Loss carry-forward
Tax losses are carried forward without time limitation. Unlike loss carry-backs, loss
carry-forwards are not restricted to corporate income tax but also apply to trade
tax. The set-off against income in future tax years is, however, subject to certain
restrictions. Only the first €1 million of annual taxable profits may be offset in full
against the tax loss carry-forwards. Beyond the threshold of €1 million, only 60% of
the annual taxable profits are available for loss utilisation. The remaining 40% are
subject to immediate taxation (so-called “minimum taxation”).
10.4.2 Loss carry-back
Alternatively, for the purpose of corporate income tax (however not for trade tax),
tax losses up to the amount of €1 million may be carried back to the tax year directly
preceding the tax year in which they were incurred. Insofar as tax losses were not
utilised, they will be carried forward.
Doing business and investing in Germany 8382 Doing business and investing in Germany
10.4.3 Forfeiture of tax loss carry-forwards for
corporations
Additional restrictions apply to the loss utilisation by corporations. Whenever more
than 50% of the shares or voting rights in a corporation are transferred within a
period of five years to one acquirer or a group of acquirers acting in concert, the
accrued tax loss carry-forwards as well as current losses of the ongoing financial
year accrued until the date of the harmful share transfer are forfeited. If such a
“harmful share transfer” involves more than 25% but not more than 50% of the
shares, the tax loss carry-forwards are merely reduced in proportion to the shares
transferred.
No forfeiture of tax loss carry-forwards in the case of intra-group
reorganizations
Harmful share transfers in the course of intra-group reorganizations do not trigger
the forfeiture of tax loss carry-forwards under the following conditions: (i) the
acquirer directly or indirectly holds 100% of the shares in the transferring company,
(ii) the transferor directly or indirectly holds 100% of the shares in the acquiring
company, or (iii) the same person directly or indirectly holds 100% of the shares in
both the transferring and the acquiring company.
Tax losses protected by hidden reserves
Tax loss carry-forwards are not forfeited (>50%) or proportionally forfeited (>25–
50%) insofar as they are matched or proportionally matched by hidden reserves
subject to tax in Germany respectively. For the purpose of this exception, “hidden
reserves” refers to the difference between the equity or proportional equity and the
fair market value of the corresponding shares. In the case of negative equity, the
term “hidden reserves” refers to the difference between the equity or proportional
equity and the fair market value of the business assets of the corporation.
10.4.4 Continuance-bound loss carry-forward
For harmful share transfers occurring after December 31, 2015 an application
may be made under a new provision to avoid the forfeiture of the tax loss carry-
forwards. Relief may be available, where the company has maintained exclusively
the same business during a specified observation period and during this period
no “harmful event” has occurred. In this context, harmful events include for
example, the discontinuance of the business, the commencement of an additional
business, a change in activity/business sector. Where the conditions are fulfilled
and the company has made the application, all tax loss carry-forwards available
at the end of the period of assessment, in which the harmful share transfer
occurred, will be classified as so-called “continuance-bound” loss carry-forwards
(Fortführungsgebundener Verlust), which is to be set-off against future profits subject
to a certain order and within the limits of the so-called minimum taxation rules.
The occurrence of one of the harmful events as set out in the provision will result in
the forfeiture of the continuance-bound loss carry-forwards last assessed as far as
the continuance-bound tax loss carry-forwards are not matched by hidden reserves
under the hidden reserve exception.
10.5 Group taxation and group relief
Legally, each German company is an independent legal entity and is therefore
required to file its own tax returns. There is no concept of filing a consolidated
return as such. Nevertheless, under certain conditions a parent and its subsidiary/
subsidiaries may pool profits and losses. However, they do not eliminate
intercompany profits. This type of group is referred to in Germany as an
Organschaft.
The basic concept of a tax group is that all profits and losses of the group entities are
pooled at the level of the parent. In principle only the parent has to pay corporate
tax and trade tax. Nevertheless, the subsidiary still qualifies as a tax subject. For
trade tax purposes, the subsidiary is treated as a permanent establishment of the
parent. In the case of a partnership as the Organschaft parent income is charged to
corporate income tax or income tax in the hands of each partner (charged to income
tax in the case of individuals as partners and charged to corporate income tax in
the case of corporations as partners). The Organschaft subsidiary must only pay tax
on income in the amount of 20/17 of the compensation payments made to outside
minority shareholders if applicable.
It should be noted that negative income of the parent or of the subsidiary will not
be deductible for German tax purposes, provided that such losses are deductible in
a foreign state with respect to the taxation of the parent, the subsidiary or another
person.
The conditions for a tax group for corporate income and trade tax purposes are:
• The subsidiary is financially integrated; in effect the parent must have held the
shares in the subsidiary without interruption from the beginning of its business
year sufficient to give it a majority of the voting rights in the subsidiary.
• The parent of an Organschaft must be an individual, a trading partnership or a
non-exempt corporation, association or estate.
• The investment in the subsidiary must – from a functional point of view – be
attributable to a German branch of the parent and the income of the branch be
subject to German tax and not be exempt under a double tax treaty.
• The subsidiary must be a corporation having its place of management in Germany
and its registered office in an EU/EEA member state.
• The parent and the subsidiary must have concluded a profit and loss pooling
agreement (PLPA) to run for at least five years. The PLPA must be consistently
applied throughout the term of the agreement. Under the PLPA the subsidiary
surrenders its entire income to the parent. Conversely, the parent is obliged to
compensate the losses incurred by the subsidiary throughout the term of the
agreement.
Doing business and investing in Germany 8584 Doing business and investing in Germany
10.6 Related-party transfer pricing
Germany has extensive related party transfer pricing rules. Indeed, transfer pricing
issues are often one of the most important components of tax audits of German
subsidiaries of multinational concerns. The German transfer pricing rules are
substantially in accordance with the OECD reports and recommendations on the
subject, although they are more detailed and more specific. They are based on the
premise that related parties should trade at arm’s length, i.e. as though each unit
involved were an independent entity. To demonstrate this, all important cross-
border intercompany relationships and each charge for services (anything other
than the delivery of goods, e.g. IP-related transactions) should be regulated through
a written agreement concluded in advance. Charges for specific transactions
or series of transactions may be based on transfer pricing methods, e.g. the
comparable uncontrolled price, the resale price, or the cost-plus method. The
German entity must document for itself the method used as the most appropriate
in the circumstances and must be prepared to defend its choice. However, the tax
auditors will usually accept the method chosen unless it is manifestly unreasonable,
although they are not bound by the subsidiary’s determination of an appropriate
profit margin, uplift rate or other matter of accounting estimate.
Many formalities must be observed, particularly in respect of agreements governing
continuing relationships, such as the appointment of the German subsidiary as a
commissionaire, or pooled research and development or similar activities. Under
the statute, the substance, rather than the form, of trading at arm’s length is to be
respected. However, the authorities (and also to a large extent the courts) tend to
see failure to observe forms as an indication that the substance as depicted by the
taxpayer is not necessarily the true substance to which he agreed in advance. Thus,
the rule in practice in Germany is not “substance over form”, but “substance and
form” as two distinct tests.
In terms of transfer pricing documentation, the regulations according to Sec.
90 para. 3 General Tax Code are to be applied for financial years starting after
December 31, 2002. Consequently, a taxpayer is obliged to record all cross-border
transactions with related parties. The requirements comprise the obligation to
provide information in writing on the economic and legal background, which is
relevant for the determination of transfer pricing and other business terms and
conditions vis-à-vis related parties. The obligation to prepare German transfer
pricing documentation (in the format of local file and a master file for financial
years beginning after December 31, 2016) is subject to certain volume criteria. The
taxpayer would only be obliged to prepare the local file documentation, if either
intercompany supplies of goods exceeds €5 million or services or other transactions
exceeds €500,000 per year. A master file needs to be provided if the local branches‘
sales (intercompany as well as with third parties) amounted to at least €100 million
in the previous financial year.
Specific penalty rules relating to documentation requirements became effective for
financial years starting after December 31, 2003. Failure to provide the necessary
records and documentation in a satisfactory state within 60 days upon request
(respectively 30 days for extraordinary transactions) by the tax authorities leads to
the following sanctions, in addition to any correction of taxable income:
• Refutable presumption that the relevant taxable income has been under-reported;
the tax authorities may then, for example, adjust the income to the less favourable
end of an arm’s length range.
• Penalties of 5–10% of the additional income but not less than €5,000.
• Delayed provision of records will be penalised by at least €100 per day, rising to a
maximum fine of €1 million.
Transfer pricing-specific penalties can be avoided by preparing documentation in
line with the German documentation rules. In addition, interest on tax adjustments
may become due. The interest rate on tax adjustments is set at 0.5% per month and
starts to accrue 15 months after the year-end for which taxes are levied. In case the
adjustment is linked to gross negligence or wilful misconduct, additional penalties
may be imposed.
As a third transfer pricing documentation element, the Country by Country
Reporting (CbCR) is to be prepared and filed by the ultimate parent company of the
group/partnership in the country where the parent company is registered, if the
consolidated sales of the previous financial year amount to at least €750 million.
The CbCR shall be filed for each financial year beginning after December 31, 2015
within 12 months after the financial year-end (i.e. by December 31, 2017 for the
financial year 2016). Non-provision of the CbCR could trigger a penalty of up to
€5,000.
Another relevant transfer pricing element is the so-called transfer of function
(Funktionsverlagerung). Such a transfer of function is defined as the transfer of
assets and other advantages, together with the related risks and opportunities from
Germany to a related party abroad to perform the same function. The transfer is to
be valued as a so-called transfer package valuation based on the profit expectations
of both parties at the time of transfer. There is a rebuttable presumption that – in
cases of uncertainty – independent third parties would have agreed on a price
adjustment clause, should their expectations later turn out to have been misplaced.
In all events, the taxpayer is required to identify the intangibles attaching to the
function.
10.7 Special features of branches
Traditionally, Germany has taken a legalistic position denying that transactions
between a branch and its head office can lead to a gain or loss for either unit.
Rather, such transactions have been seen as transactions within the same legal
entity and many of Germany’s double tax treaties still reflect this position. This
manifests itself in treaty provisions allowing expense or income arising in or for
a branch to be attributed to that permanent establishment regardless of where
incurred or received. Refusal to accept service fees, interest charges or royalties
within the same legal entity is the corollary.
Doing business and investing in Germany 8786 Doing business and investing in Germany
2013 saw a fundamental change in the German Foreign Transaction Tax Act,
adopting the “authorised OECD approach” (“AOA”) of treating a permanent
establishment as though it were a separate legal entity for the purposes of
determining its taxable income. Thus, a German head office or permanent
establishment is now expected to follow the transfer pricing rules – including the
documentation rules – in respect of all routine or unusual transactions with its
counterpart abroad (including notional dealings). For doing so, a twofold approach
is required: In a first step, the permanent establishment is to be defined by reference
to the functions performed by its staff (so-called “personnel functions”), the assets
they use, the risks and opportunities attaching to or derived from their activities,
and the provision of an adequate branch capital. In a second step, the identified
notional dealings need to be priced at arm’s length based on transfer pricing
principles.
The German Foreign Transaction Tax Act explicitly provides that a double tax treaty
will only take precedence over the new rules for determining branch income if the
taxpayer shows that the other state continues to apply the treaty as it stands and this
leads to actual double taxation.
10.8 Foreign Tax Credit
If foreign source income is not exempted from German taxation, a credit will be
given for the foreign tax actually paid and not otherwise recoverable. However, the
credit is limited to the corporate income tax on the net income after deducting the
related expenses (a per country limitation applies). No credit is given for underlying
income or corporate tax and any unused foreign tax credit (e.g. amounts exceeding
the maximum amount to be credited) can be neither carried forward, nor applied
against the tax on domestic-source or third-country income.
10.9 Anti-abuse provisions
10.9.1 General
Germany has a number of anti-abuse provisions designed to prevent the misuse
of legal forms, the use of tax havens, treaty-shopping or the use of proxies. Partly,
these provisions give the tax authorities the right to ignore artificial circumstances
and relationships seen as abusive. Others set up certain substance requirements
for the entitlement to a reduction of German withholding tax based on a double
tax treaty. Relationships with foreign entities subject to “low-tax regimes” are
subject to special provisions in the German Foreign Transaction Tax Act charging a
supplementary tax on the indirect German owners of income accumulated abroad.
10.9.2 Requirements of substance and anti-treaty
shopping rules
Full or partial relief from German withholding tax on dividends, interest and
royalties under a double tax treaty or applicable EU directive is only granted if
certain conditions are met (namely providing evidence of substance).
The evidence of substance must be provided by the foreign company to the extent
its own direct or indirect shareholders would not have been entitled to refund or
exemption, if they had received the income directly. Relief of withholding tax will
only be granted (pro-rata approach)
• to the extent the gross earnings in the year in question arose through the foreign
company’s own genuine business activity,
• as far as the earnings do not arise through its own genuine business activity, only
in so far as it can be shown that with respect to these earnings there are business
or other good reasons for involving the foreign company and the company did
take part in active business activity with a business establishment suitably
equipped for its business purpose.
If a company does itself not meet the income test, it can under certain conditions
be indirectly entitled to relief insofar as its shareholders would have their own
entitlement, if they were to earn the income directly (test of indirect entitlement of
the shareholders).
10.9.3 German CFC rules (Sec. 7–14 FTTA)
Pursuant to the German CFC taxation rules regulated in the Foreign Transaction
Tax Act (FTTA – Außensteuergesetz) certain income, referred to as passive income
generated by a CFC, shall be subject to German tax at the level of the German
shareholder provided the CFC is deemed to be a so-called „intermediate company“
(Zwischengesellschaft) and the German ownership criterion is fulfilled.
An „intermediate company“ within the meaning of the FTTA is defined by law as a
foreign corporation which
• has neither its place of management nor its registered office in Germany and is
not tax exempt,
• receives income from certain so-called „passive business activities“, (Passive
Income Criterion), and
• is subject to a low taxation (less than 25%) on its passive income in the foreign
country (Low Taxation Criterion).
Passive income generated by a CFC which qualifies as intermediate company will be
attributed to the German shareholder regardless of whether it is actually distributed
or not (CFC-income).
88 Doing business and investing in Germany
Taxation of
individuals
Under certain conditions an EU/EEA subsidiary will not be regarded as an
intermediate company for specific income as far as the specific income is derived
from a genuine economic activity of the foreign company and the state of residence
provides administrative assistance in the area of taxes (exchange of information).
Further, with effect from the 2017 period of assessment, certain passive income
arising to a foreign permanent establishment will be deemed to have been earned
by a domestic permanent establishment for trade tax purposes, resulting in this
income being subject to trade tax as opposed to the standard exemption of income
from a permanent establishment outside of Germany.
11
Doing business and investing in Germany 9190 Doing business and investing in Germany
11.1 Territoriality and residence
Individuals resident in Germany are subject to income tax plus solidarity surcharge.
As a further surcharge church tax is assessed for members of acknowledged
churches imposing such a tax.
Resident individuals are taxed on their worldwide income (provided that there are
no restrictions due to a double tax treaty applicable). Non-resident individuals are
taxed (often by withholding) on their German-source income only.
Domestic law defines individuals to be resident in Germany
• if they have a residence in Germany they use or that is available to them or
• if they have an habitual abode in Germany. An habitual abode is assumed in
case of an unbroken stay of not less than six months’ duration either within one
calendar year or over year-end from the beginning of such stay.
Nationality is not a criterion for residence or tax liability.
Taxable income covers income from the following seven categories:
• Agriculture and forestry,
• Trade or business,
• Independent professions,
• Employment,
• Capital investment,
• Rents and royalties,
• Other income.
Losses from one of the seven income categories can – with some exceptions, e.g.
relating losses/income from capital investment and other income as well as certain
losses from abroad – fully be offset against income from another income category.
11.2 Income determination
11.2.1 Employment Income
Income from employment includes all salary, bonuses, allowances, benefits in kind,
and all other forms of remuneration given to, or provided for, an employee. Salaries
paid under the German payroll are subject to wage withholding tax, which is
withheld by the employer and credited against the final annual income tax charge.
Salaries which are paid by a non-resident employer but recharged to the German
company may also be subject to wage withholding tax.
11.2.2 Equity compensation
Stock options are basically taxable when exercised. Taxable income is computed at
the time of exercising the option, normally as the difference between the market
price of the shares and the exercise price. Tax exemption may be granted if during
the period between grant and vesting, work was not performed in Germany
and thus the employment income was not taxable in Germany. In this case the
stock option benefit is sourced based on workdays between grant and vesting. A
favourable tax rate may apply if the period between grant and exercise exceeds
12months and if the employee is employed with the grantor company for this time.
Shares provided free of charge or at a low-price may be tax-free up to an amount of
€360 per annum. This relief is granted for shares of the employing company and of
the parent company controlling and consolidating its subsidiary.
11.2.3 Income from capital investments
Investment income, defined as dividends, interest and capital gains on the sale of
securities purchased on or after January 1, 2009 is in general taxable at a flat rate
of 25% (26.375% including the solidarity surcharge). The tax may be withheld at
source (e.g. interest payments received from a domestic bank, dividends, capital
gains from securities held via a domestic custodian bank) or is assessed (e.g. other
interest income, capital gains from certain shares not held via a domestic custodian
bank).
Nevertheless, the flat rate does not apply where the investment is held as a business
asset or for capital gains from the sale of the shares in a corporation the seller
holds or has held a significant interest within the last five years (i.e.1% or more).
Further there are certain exceptions and options for interest income and dividend
income in the case of qualifying shareholdings depending on the capital ownership
percentage. Dividends and gains from the sale of shares included in the income
taxable at the personal scale rate are partly (40%) exempt from income tax.
The amount of investment income actually charged to flat rate taxation in the hands
of an individual is reduced by a personal “saver’s allowance” of €801 (€1,602 for a
married couple) whereas related expenses cannot be deducted.
Other capital gains are taxable in Germany at individual progressive rates only if the
sale is within one year (for movable non-business assets) or ten years (real estate–
there are exemptions if used for residential purpose) after the purchase date. Such
capital gains are tax-exempt if the total profit is less than €600 in one calendar year.
11 Taxation of individuals
Doing business and investing in Germany 9392 Doing business and investing in Germany
11.2.4 Business Income
Tax on net income from professional activities or from carrying on a trade or
business is collected by assessment at the personal income tax rate. Quarterly
instalments are assessed on an estimated basis and credited against the final
income tax burden.
The income determination is generally based on the balance sheet according to
German GAAP or – if there is no obligation to produce a balance sheet according to
German GAAP – a tax balance sheet. Only small businesses have the opportunity
to determine their taxable profit by deducting the business expenses from the
revenues and other business income.
Income from trading business derived from a permanent establishment located in
Germany is further subject to trade tax. The trade tax base is the business profit
determined according to the German Income Tax Act (Einkommensteuergesetz,
“EStG”), adjusted by off-balance-sheet add-backs and deductions for trade tax
purposes. The trade tax rate is a combination of a uniform tax rate of 3.5% (base
rate) and a municipal tax rate (Hebesatz) depending on where the permanent
establishments of the business are located. Currently, municipalities with at least
80,000 inhabitants levy trade tax at a rate between 12.6% (Hebesatz of 360%) and
19.25% (Hebesatz of 550%).
11.3 Deductions
11.3.1 Income related expenses
Income related expenses if properly documented may be deducted by an individual
from the related gross earnings, unless they are – in cases of employment
relationship – reimbursed by the employer. Costs of travelling to and from work
are recognized with a lump-sum allowance based on distance. There is a blanket
employee allowance of €1,000 annually. To the extent actual employment
connected expenses exceed the lump sum of €1,000 they are deductible.
11.3.2 Personal deductions
There are some expenses that may be (partly) deducted from the taxable income
while not related to any income, such as social security contributions and certain
insurance premiums which can be deducted up to specified limits. Some of these
expenses may only be deducted by resident taxpayers or the deduction is restricted
for non-residents to expenses paid within a time period an employee receives
employment income taxable in Germany.
The basic personal allowance is a lump sum “general allowance” of €8,820 (2017)
built into the tax tables and taxed at a rate of nil. Child allowances are granted at
various levels depending on the age and schooling status of the child. The basic
amount for children under 18 or in schooling is €7,356 (2017) for a married couple
for each child.
Certain other specific allowances and reliefs favor the elderly and disabled, and
there is also a provision for tax recognition of “unusual burdens” of a financial
nature that a taxpayer is morally or otherwise obliged to accept.
11.3.3 Losses
Losses not offset in the year in which they occur may in general be carried forward
without time limitation. The set-off against income in future tax years is, however,
subject to certain restrictions. Losses from one source which may not be set-off
against income from another source in the year in which they incurred may only
be set-off against certain income. Further, only the first €1 million of annual
taxable profits may be offset in full against the tax loss carry-forwards. Beyond the
threshold of €1 million, only 60% of the annual taxable profits are available for
loss utilisation. The remaining 40% are subject to immediate taxation (so-called
“minimum taxation”). Alternatively, for the purposes of income tax (however not
for trade tax), tax losses up to the amount of €1 million may be carried back to the
tax year directly preceding the tax year in which they were incurred. Insofar as tax
losses were not utilised, they will be carried forward.
11.4 Tax credits
Full credit is granted for all withholding tax deducted from German-source
employment income. Foreign taxes not recoverable on income from abroad and not
tax exempted are usually credited against the applicable German income tax on the
specific income after deducting related expenses up to a defined maximum amount
(a per country limitation is applicable), unless the relevant tax treaty specifies
otherwise. There are special rules with respect to foreign tax credits on income
from capital investments. Employment income taxable abroad is often exempt from
German taxation in the hands of a German resident, while most treaties declare
a German resident’s foreign investment income (interest, dividends etc.) to be
taxable in Germany but allow a credit for the foreign withholding tax actually paid.
No credit is given for underlying income or corporate income tax and any unused
foreign tax credit (e.g. amounts exceeding the maximum amount to be credited) can
be neither carried forward, nor applied against the tax on domestic-source or third-
country income.
11.5 Tax returns and assessments
All resident taxpayers must file an annual income tax return, unless their only
income is employment income from a single employer. In this case the filing of an
income tax return is optional.
Doing business and investing in Germany 9594 Doing business and investing in Germany
Husbands and wives file joint returns, unless they are legally separated, or unless
one spouse requests otherwise. The income of both spouses is totalled and the total
income tax is calculated as if each spouse earned half of the total taxable income (so
called “splitting”-tax rate).
11.6 Tax rates
German income tax is levied at rates rising on a sliding scale. The exact rate to be
levied depends upon the amount of the income itself; this rate is then applied to the
entire income.
Taxation of
Partnerships
Rate scale (2017)
Taxable income in euros Tax rate
€0–8,820 (basic allowance) 0
€8,821–54,057 14% to ca. 26%
€54,058–256,303 42% less €8,475.44
€256,304 and over 45% less €16,164.53
11.7 Other taxes on income
Gift and inheritance tax in Germany is a single tax levied on the current market
value of assets transferred without consideration, that is, mainly by way of gift or
inheritance. The rates vary between 7% and 50% depending on the amount of the
transfer and on the closeness of kinship between donor and beneficiary.
Smaller gifts or inheritances are exempted from tax altogether by deducting
“general allowances” from the value of the assets transferred. These general
allowances vary by degree of kinship from €500,000 on transfers between spouses,
€400,000 on settlements on children to €20,000 on gifts to unrelated persons. As a
general rule these allowances can be made use of every ten years.
Where neither the donor nor the beneficiary is tax resident in Germany the
entitlement is restricted to a reduced allowance of €2,000, although the European
Court of Justice has held this not to be in line with EU law. A change of the relevant
provisions in the law may be expected.
In general, transfers are subject to German unlimited gift and inheritance tax where
either the donor or the beneficiary is tax-resident in Germany at the time of the
transfer. Transfers of German real estate (including loans secured by a mortgage
on German real estate), of a German business, of shares in a German company
by a holder of at least 10% of the issued capital or of German registered patents,
trademarks and similar are subject to limited gift and inheritance tax, even where
neither donor nor beneficiary are resident. Under certain conditions international
double taxation can be avoided by a crediting method either according to the
double tax treaties (France, Greece, Switzerland, Denmark, Sweden and the US) or
according to a unilateral provision within the German Gift and Inheritance Tax Act.
12
Doing business and investing in Germany 9796 Doing business and investing in Germany
12.1 General taxation of partnerships in Germany
Partnerships with trading income (trading partnerships) or partnerships whose
income is requalified as trading income (deemed trading partnerships) are subject
to German (municipal) trade tax on their total income. Income tax (in the case
of individuals) or corporate income tax (in the case of corporations or other legal
entities subject to corporate tax) is levied at the level of the partner according to
the relevant provisions, i.e. for income tax or respectively corporate income tax
purposes a partnership is treated as transparent. This applies to the taxation of
operating income as well as income from the disposal of an interest in a partnership.
12.2 Special business income and expenses of
partners at the level of the partnership
Due to the principle of tax transparency applicable to partnerships, i.e. taxation
of profits of a partnership at the level of its partners, remuneration received by
a partner from the partnership for services or loans (i.e. interest) or leasing of
assets (i.e. rental income) is treated as part of the profit of the partnership. Such
remuneration, being an expense at the level of the partnership, increases the
profit share of the partner according to German tax law. Thus, due to the resulting
increase of the profit of the partnership, overall, there is no profit reduction.
Assets held by a partner with respect to the above mentioned remuneration, but
also certain other assets owned by the partner which serve the business of the
partnership, are treated as business assets of the partnership for tax purposes (so-
called special business assets, Sonderbetriebsvermögen).
Likewise, the profit of the partnership is increased or decreased by income and
expenses which are derived from the special business assets or which are incurred
in connection with the partnership investment (so called special business income
and special business expense, Sonderbetriebseinnahmen und -ausgaben), especially
e.g. refinancing costs in connection with the partnership investment.
With effect from the 2017 period of assessment, in certain cases the deductibility
of special business expenses is restricted to the extent that the relevant expenses
reduce the tax base in another state.
Indirect taxes
12 Taxation of Partnerships
Transaction and
Excise Taxes 13
Doing business and investing in Germany 9998 Doing business and investing in Germany
13 Transaction and Excise Taxes
13.1 Value added tax (VAT)
VAT is levied in Germany under the harmonised EU system. The standard rate is
19%, and there is a reduced rate of 7% for certain basic foodstuffs, books, news-
papers, antiques, live animals, hotel accommodation and for some other items.
The VAT levied on the sales by a business is, in general, shown on the customer
invoice and is therefore passed on to each customer. The VAT borne by a business
on amounts billed to it by its suppliers (the “input tax”) is deducted from the
“output tax” charged to customers in order to arrive at the net amount payable to, or
refundable by, the tax office. This reckoning is monthly, quarterly, or, in some few
cases, annually.
Exports to customers established outside the EU are “zero-rated”, that is, the
charges to customers are not subjected to VAT, but any related input tax may still be
fully deducted from amounts payable to the tax office. Intra-EU sales are also zero-
rated. Special provisions apply to air travel. A number of specific services, including
especially banking services and insurance premiums, are exempt from VAT, whilst
disallowing an input VAT deduction. The provision of cross border supplies of
services is subject to VAT in the country the customer is established, in which case
the customer not the supplier is liable to VAT within the framework of the reverse
charge procedure
Since VAT effectively burdens domestic consumers, it is necessary to prevent them
from avoiding the burden by buying abroad. Imports into Germany from non-EU
countries are therefore subject to an “import VAT” on entry (in much the same way
as customs duties are levied) and initially VAT-free purchases by a German business
from other EU countries are subject by that business to an “acquisition tax”. Both
import VAT and acquisition tax are levied at the VAT rate relevant to the type of
goods in question, and both taxes rank as input tax of a business once paid. To
purchase goods free of VAT in any member state of the EU, the EU buyer must offer
proof of registration as a VAT-paying business in another member state (the so-
called “VAT identification number”). Since a private consumer would not have such
a number, there is no possibility of avoiding VAT altogether by purchasing goods for
private consumption in other EU countries, and private imports into Germany from
outside the EU are tightly controlled by the customs authorities on the borders.
However, there is some degree of cross-border shopping within the EU to take
advantage of a lower rate, though this is not of particular importance for Germany
with her 19% standard rate which is close to those of all neighbouring countries
except Denmark – 25%.
While VAT is not, by its nature, a direct cost for businesses, it is a tightly controlled
and strictly supervised tax. The administrative, accounting and other compliance
requirements and obligations on businesses are intense and the consequences of any
failure to adhere to all the detailed rules and regulations, including matters which
might appear to be mere formalities are often severe. Indeed, a frequent result is
that otherwise VAT-free (“zero-rated”) sales become fully taxable with no possibility
of passing the burden on to the customer, or that otherwise perfectly acceptable
input tax becomes non-deductible with no recourse to the original supplier.
Consequently, attempts to reduce the not inconsiderable VAT accounting and other
compliance costs by taking “short-cuts” frequently prove to be false economies.
13.2 Excise taxes
Germany levies a range of excise taxes on specific products, essentially with
the object of increasing their price on the domestic market. At the same time,
substantial revenue is raised for the government at only a few points of collection
and therefore cheaply. In each case, there is a single taxpayer within the supply
chain. Typically, this is the manufacturer, importer, or first domestic wholesaler.
There are specific exemptions for exports, deliveries to other EU countries, and, in
some cases, for specified consumers. Excise taxes are levied mainly on alcohol and
alcoholic drinks, tobacco and cigarettes, on all forms of mineral and fuel oils and
their derivatives, and to a lesser extent on other fuels and electric power. Insurance
premiums are also subject to a rather similar tax (insurance tax at 19%) as one of
the few German examples of an excise tax levied on a service.
Excise taxes create extensive accounting, administrative and other compliance
requirements for their few immediate taxpayers, although they do not directly
have a major effect on most other businesses. Road haulage and other transport
businesses are, perhaps, the major exception to this remark.
13.3 Real estate transfer tax
This tax can be an important factor for consideration when restructuring corporate
groups with German subsidiaries or with German intermediary holding companies.
It is levied on the sales price or other transfer value on each change of ownership
in land and buildings. There are very few exceptions other than sales between
husband and wife or transfers subject to gift and inheritance tax.
The basic rate of real estate transfer tax rate is 3.5%, although the federal states
have the power to levy the tax at a different rate on transfers of property within
their territory. Only two federal states still charge the tax at the basic rate of 3.5% –
Bavaria and Saxony.
All other provinces charge higher rates (currently: Hamburg: 4,5%; Baden-
Wuerttemberg, Bremen, Mecklenburg-Western Pomerania, Lower Saxony,
Rhineland-Palatinate, Saxony-Anhalt: 5%; Berlin, Hesse: 6 %; Brandenburg,
Schleswig-Holstein, North Rhine-Westphalia, Saarland, Thuringia: 6,5%).
Legally, as a basic rule both parties are jointly and severally liable to pay the tax,
although by tradition contracts for the sale of real estate almost invariably pass the
burden on to the buyer. Some exceptions to the aforementioned basic rule exist: in
case of transfer of at least 95% of interest in a partnership that directly or indirectly
holds German real estate the partnership itself is the tax payer. Where the buyer
unifies in total at least 95% of shares but less than 95% from a single buyer, the
taxpayer is the buyer alone.
Real estate transfer tax qualifies for the buyer of real estate as part of the costs of
acquisition. If the buyer is a business, the cost of the tax is therefore capitalised,
so that its deduction from taxable income is deferred until the site is sold.
Doing business and investing in Germany 101100 Doing business and investing in Germany
Taxation of individuals
Nevertheless, RETT paid upon acquisition of shares in a corporation or partnership
might under certain circumstances be deductible expenses at the level of the tax
payer.
From the corporate restructuring point of view, what was originally intended
as an anti-avoidance measure often has an unfortunate effect. The tax is also
levied on indirect changes in the ownership of real estate following the transfer
of 95% or more of the shares in companies (or partnerships) owning real estate.
Unfortunately, these rules apply regardless of the business background of the share
transfer, that is, they apply equally to the straight sale of the shares in a real estate
owning company at market value to an outside third party as to otherwise tax-free
dropdowns, mergers or other forms of corporate reconstruction within a closely
related group of companies, whether for consideration or not. They also apply to
the transfer of shares indirectly held, that is, to share transfers of an ultimate or
intermediary holding company outside Germany that owns the shares in another
German or foreign holding company owning in turn the shares of another company
owning the German site. Thus, a corporate reorganisation or merger agreed and
implemented at a level far above that of the German subsidiary will trigger the
liability to this German tax, even though there may well be no perception within
the corporation of the reorganisation as a German taxable event.
Some relief for group reorganisations (especially for restructurings under the
Reconstructions Act, e.g. mergers, drop-downs/transfers of a business or business
unit as well as contributions of a business or business unit in exchange for shares or
similar restructures according to the laws of a EU/EEA member state, is available if
certain conditions are met. The exemption is only granted if one controlling entity
and one or more controlled companies are involved. For that purpose, at least 95%
of the shares in the subsidiaries must be held directly or indirectly by the parent
for at least five years before and after the transfer. Additionally the controlling
entity must be business for VAT purposes during this entire time. In a decision
as of November 25, 2015 the Federal Fiscal Court (Bundesfinanzhof – BFH) has
asked the Federal Ministry of Finance (Bundesfinanzministerium – BMF) in several
pending cases for an opinion inter alia on the question whether the exemption is
in consistence with EU law or if it constitutes unlawful state aid. The cases are still
pending.
In addition, certain RETT relief might be available for transfers from or to a
partnership by the immediate partner to the extent that the partner participates
in the partnership’s property transferred. However, certain requirements must
be met: inter alia a holding period (claw back period) in the partnership of five
years before (in case of transfer from the partnership) or after (in case of transfer
to the partnership) the transaction is a prerequisite. Furthermore the relief is only
available for direct partners. Change of form of the partnership within the claw
back period can also trigger RETT retroactively.
Where the tax is levied on a share or interest transfer, or no consideration has
been agreed (e.g. in case of a merger where the property ownership is changed),
that is, where the consideration is not directly linked to the real estate, the basis of
assessment will be determined by calculating a special tax value of the underlying
property according to the valuation principles applied for inheritance tax purposes.
For this the value of the land and the value of the building are of relevance. The
calculation of the value of the building depends on the type of building. In many
cases a statutory formula (so called: gross receipts method) should be applied
taking into account the annual rent or the comparative rent (without operating
costs) and the remaining useful life of the building. In most cases the tax value of
the underlying property comes close to its market value.
The Real Estate Transfer Tax Act (Grunderwerbsteuergesetz – GrEStG) contains some
provision for the avoidance of a double levying of this tax on successive transfers
of ownership. However, this mostly addresses questions of transfers within a
partnership or transfers back to a previous owner, rather than successive transfers
between different parties that can occur in the course of reorganising a corporation.
German real estate transfer tax can therefore be a factor in the planning of such
reorganisations, as it may well be possible to reduce the overall cost by carefully
planning the order of the steps.
Mecklenburg-Western Pomerania 5%
Brandenburg 6.5%
Berlin 6%
Saxony 3.5%
Thuringia 6.5%
Saxony-Anhalt 5%
Bavaria 3.5%
Baden-Württemberg 5%
Bremen 5%
Hamburg 4.5%
Lower Saxony 5%
Schleswig-Holstein 6.5%
North Rhine-Westphalia 6.5%
Rhineland-Palatinate 5%
Saarland 6.5%
Hesse 6%
6.5% 6% 5% 4.5% 3.5%
Real estate transfer tax rates in Germany
Doing business and investing in Germany 103102 Doing business and investing in Germany
Appendix:
Withholding taxes
13.4 Land tax
Land tax is assessed annually on the owners of land and buildings as a charge on the
taxable value. The tax is levied by the local authority at rates varying considerably
throughout the country. The amount is almost always minor and the tax is, in any
case, a deductible expense for corporate income and trade taxes.
Traditionally, German leases give the owner of the property the right to charge this
tax to the tenant or lessee as a cash outlay. Consequently, the tax is not a factor in
whether to “rent or buy”.
Doing business and investing in Germany 105104 Doing business and investing in Germany
Withholding taxes – treaties
Withholding tax rates (%)
Recipient of German-source
income
Maximum WHT (%) allowed
Dividends1, 4 Interest1, 2, 3 Royalties
Albania55/15 5 5
Algeria55/15 10 10
Argentina5, 8 15 10/15 15
Armenia5, 6 15 5 0
Australia5, 8, 10 0/5/15 0/10 5
Austria55/15 0 0
Azerbaijan7, 8 5/15 0/10 5/10
Bangladesh515 10 10
Belarus75/15 0/5 3/5
Belgium5, 8 15 0/15 0
Bolivia510 15 15
Bosnia-Herzegovina5, 9 15 0 10
Bulgaria55/15 5 5
Canada7, 8 5/15 0/10 0/10
China, People’s Republic of5, 8 5/10/15 0/10 10
Costa Rica5, 8 5/15 0/5 10
Croatia55/15 0 0
Cyprus 5/15 0 0
Czech Republic11 5/15 0 5
Denmark55/15 0 0
Ecuador815 10/15 15
Egypt5, 7 15 15 15/25
Estonia5, 8 5/15 0/10 10
Finland710/15/25 0 0/5
France 5/15 0 0
Georgia50/5/10 0 0
Ghana5, 8 5/15 0/10 8
Greece 25 10 0
Hungary55/15 0 0
Iceland 5/15 0 0
India510 10 10
Indonesia5, 7 10/15 10 10/15
Iran 15/20 15 10
Ireland, Republic of55/15 0 0
Israel5, 8 5/10/15 0/5 0
Italy5, 7, 8 15 0/10 0/5
Ivory Coast515 15 10
Jamaica810/15 10/12.5 10
Japan50/5/15 0 0
1 Corporate recipients of dividend and interest income (interest on convertible and profit-sharing bonds)
can apply for refund of the tax withheld over the corporation tax rate of 15% plus solidarity surcharge,
regardless of any further relief available under a treaty.
2 Generally, only interest paid by banks to a resident is subject to a WHT. A 25% tax (plus solidarity
surcharge) is also withheld from income on certain convertible or profit-sharing bonds.
3 Interest paid to non-residents other than on certain convertible or profit-sharing bonds and over-the-
counter transactions is generally free of WHT. Tax on loans secured on German property is not imposed
by withholding, but by assessment to corporation tax at 15% (plus solidarity surcharge) of the interest
income net of attributable expenses. The tax authorities can order a WHT of 15.825% (including solidarity
surcharge) if ultimate collection of the tax due is in doubt. Both forms of tax are reduced by treaty relief.
4 Where the EC Parent/Subsidiary Directive applies, dividends paid by a German company to a qualifying
parent company resident in another EU member state are exempted from German WHT. The minimum
shareholding is 10%, to be held continuously for at least one year.
5 The EC Interest and Royalties Directive exempts payments from WHT if made to an associated company
in another EU member state. The association must be through a common shareholding of at least 25%.
Withholding tax (WHT) rates
Recipient of German-source income
WHT (%) (each plus solidarity surcharge)
Dividends1Interest1Royalties
Resident corporations and individuals 25 0/2520
Non-resident corporations and
individuals1
EU corporations4, 5 0/25 0/2530/15
Non-treaty corporations 25 0/25315
Non-treaty individuals 25 0/25315
Doing business and investing in Germany 107106 Doing business and investing in Germany
Recipient of German-source
income
Maximum WHT (%) allowed
Dividends1,4 Interest1, 2, 3 Royalties
Kazakhstan5, 8 5/15 0/10 10
Kenya 15 15 15
Korea, Republic of55/15 10 10
Kosovo5, 9 15 010
Kuwait55/15 010
Kyrgyzstan55/15 510
Latvia55/15 10 10
Liberia7, 8 10/15 10/20 10/20
Liechtenstein50/5/15 0 0
Lithuania55/15 10 10
Luxembourg55/15 0 5
Macedonia55/15 5 5
Malaysia55/15 10 7
Malta55/15 0 0
Mauritius55/15 0 10
Mexico5, 8 5/15 5/10 10
Moldova5, 6 15 5 0
Mongolia55/10 10 10
Montenegro5, 9 15 0 10
Morocco 5/15 10 10
Namibia510/15 0 10
Netherlands55/10/15 0 0
New Zealand515 10 10
Norway50/15 0 0
Pakistan5, 8 10/15 10/20 10
Philippines55/10/15 10 10
Poland5, 8 5/15 0/5 5
Portugal5, 8 15 10/15 10
Romania55/15 0/3 3
Russia55/15 0 0
Serbia5, 9 15 0 10
Singapore55/15 8 8
Slovakia11 5/15 0 5
Slovenia55/15 5 5
South Africa 7.5/15 10 0
Spain 5/15 0/15 0
Sri Lanka5, 8 15 0/10 10
Sweden50/15 0 0
Switzerland50/15 0 0
Syria55/10 0/10 12
Taiwan510 10 10
Recipient of German-source
income
Maximum WHT (%) allowed
Dividends1,4 Interest1, 2, 3 Royalties
Tajikistan55/15 0 5
Thailand7, 8 15/20 10/25 5/15
Trinidad and Tobago7, 8 10/20 10/15 0/10
Tunisia710/15 10 10/15
Turkey55/15 10 10
Turkmenistan5, 6 15 5 0
Ukraine5, 7, 8 5/10 5 0
United Arab Emirates55/10/15 010
United Kingdom55/10/15 0 0
United States5, 10 0/5/15 0 0
Uruguay55/15 10 10
Uzbekistan5, 7 5/15 5 3/5
Venezuela55/15 5 5
Vietnam55/10/15 10 10
Zambia 5/15 10 10
Zimbabwe510/20 10 7.5
1 Corporate recipients of dividend and interest income (interest on convertible and profit-sharing bonds)
can apply for refund of the tax withheld over the corporation tax rate of 15% plus solidarity surcharge,
regardless of any further relief available under a treaty.
2 Generally, only interest paid by banks to a resident is subject to a WHT. A 25% tax (plus solidarity
surcharge) is also withheld from income on convertible or profit-sharing bonds.
3 Interest paid to non-residents other than on certain convertible or profit-sharing bonds and over-the-
counter transactions is generally free of WHT. Tax on loans secured on German property is not imposed
by withholding, but by assessment to corporation tax at 15% (plus solidarity surcharge) of the interest
income net of attributable expenses. The tax authorities can order a WHT of 15.825% (including solidarity
surcharge) if ultimate collection of the tax due is in doubt. Both forms of tax are reduced by treaty relief.
4 The lower rates on dividends apply under certain conditions (minimum shareholding, specific
shareholders, in some cases minimum holding period).
5 The treaty does not limit the taxation of certain profit-based interest income which is deducted by the
debtor from his tax base; thus, the domestic rate (plus solidarity surcharge) applies.
6 The USSR treaty continues in force with Armenia, Moldova, and Turkmenistan.
7 The applicable maximum WHT rate on royalties depends on the type of royalty granted (film and
television royalties, trademarks, patents, franchises etc).
8 The lower rate on interest income applies under certain circumstances (e.g. for certain recipient such as
banks or pension funds or for interest paid in connection with certain purchases on credit).
9 The Yugoslav treaty continues in force with Bosnia-Herzegovina, Kosovo, Montenegro, and Serbia.
10 The dividend exemption applies under certain conditions to corporate shareholders with at least 80%
throughout the previous 12 months.
11 The Czechoslovak treaty continues to apply to the Czech Republic and to Slovakia. Interest on profit-
sharing bonds is taxed as a dividend.
New treaties or protocols amending existing treaties with Australia, China, Costa Rica, Israel, Japan and the
Netherlands are applicable from 1 January 2017 onwards.
Treaties or protocols amending existing treaties singed but awaiting for ratification: Armenia, Finland, Oman,
Macedonia, Turkmenistan, South Africa.
Contacts
Armin Slotta
PricewaterhouseCoopers GmbH
Wirtschaftsprüfungsgesellschaft
Friedrich-Ebert-Anlage 35–37
60327 Frankfurt am Main
Tel: +49 69 9585-1220
E-mail: armin.slotta@de.pwc.com
Dr. Holger Miß
PricewaterhouseCoopers GmbH
Wirtschaftsprüfungsgesellschaft
Friedrich-Ebert-Anlage 35–37
60327 Frankfurt am Main
Tel: +49 69 9585-1832
E-mail: holger.miss@de.pwc.com
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