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- 1. Doing Business in Germany A short introduction on how to start business activities in Germany Sven Ole Raap January 13, 2012 © 2011 Sven Ole Raap. All rights reserved.
- 2. Overview • Germany – a profile • Geography, population and language • Economy and investment environment • Banking and finance • Foreign investment in Germany • How to invest in Germany • Direct transactions and investments • Investments through a permanent establishment • Investments through a company • Exporting to Germany • Import restricitons • Import duties • Consumer sales from foreign websites
- 3. Overview • Business structures • Limited liability companies and stock corporations • Other forms of corporations • Other business associations • Branches of foreign companies • Companies organized under the law of a foreign jurisdiction • Accounting and audit requirements • Statutory requirements • German accounting principles • International Financial Reporting Standards (IFRS) • Form and content of annual reports • Auditing profession and auditing standards
- 4. Overview • Business taxation • Tax system and administration • Taxation of corporations • Taxation of partnerships • Labor law and labor costs • Employment contract and terms of employment • Collective agreements, co-determination and works council • Wages and contributions to social security systems • Grants and incentives • German incentive programs • US incentive programs • Business culture and differences
- 5. Germany – a profile Basic Data • Geography Area: 138,000 sq.mi • Located in the center of Europe Coastline: 1,485 mi • Borders to nine countries and the North and Baltic Seas Population: 82 mill. • Germany enjoys a temperate climate with no great extremes Working of heat or cold Population: 40.8 mill. Largest cities: • Population Berlin (3.4 mill.) Hamburg (1.8 mill.) • Estimated population is 82 million (last census 1987/81) Munich (1.3 mill.) • Population has risen in the last decade due to immigration • Language • Official language is German • English is by far the best known foreign language
- 6. Germany – a profile Basic Data • Political System Head of State: Federal President • Under the German constitution, the Federal Republic of Christian Wulff Germany is a parliamentary democracy with 16 states Head of • The Capital of Germany is Berlin Government: Federal Chancellor Dr. Angela Merkel • Legal System • Origin of Germany’s civil law is Roman law • Important legislation is mainly federal law and is embodied in general codes - ultimate source of all law is the constitution or Basic Law (Grundgesetz) • The judicial system is generally three-tiered (federal, regional and local courts • The Federal Constitutional Court is the court of last resort if constitutional issues are involved
- 7. Germany – a profile Exchange rate • Currency of the Euro • The official currency in Germany is the Euro, which was USA: USD 1.2793 adopted on January 1, 1999 United Kingdom: • The Euro is freely convertible into other currencies, and the GBP 0.8254 import and export of capital is free Japan: • The Euro is managed by the European Central Bank in JPY 98.745 Switzerland: CHF Frankfurt / Germany 1.2184 January 5,2012
- 8. Germany – a profile Basic Data • Economy GDP: EUR 2.5 trillion • Germany is a social market economy GDP per Capita: • Germany’s economic position enhances a broad and EUR 30,569 competitive environment with a strong focus on innovative GDP Growth: 3.6% future technologies Exports of Goods: • The typical business in Germany is a small or medium family- EUR 952 billion owned unit. Imports of Goods: EUR 798 billion • German “Middle Market” (Mittelstand) is regarded as the Data for 2010 backbone of the German economy with 99.6% (2010) of all companies being SMEs • The labor force numbers some 41 million and the unemployment rate is 6.6% (12/2011)
- 9. Germany – a profile • Banking system • Germany has a system of “universal” banks which are engaged in the full range of banking activites • Most banks conduct both corporate and private customer business • Besides banks many non-banking firms have become financial service providers in the past • Banks, financial services institutions, and insurers in Germany are governed by a state regulator, the Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht – BaFin)
- 10. Germany – a profile Basic Data • Foreign investment in Germany Inward FDI (2010): EUR 509 billion • Foreign investment is welcome in Germany Inward FDI growth • Foreign investors are subject to the same conditions as 205-2010: 33% German investors when obtaining licenses or building inward FDI permits, or applying for and receiving investment incentives Origin (2009): EU-27 77% • The foreign Trade and Payment Act (Außenwirtschaftsgesetz) Europe non-EU 9% is the legal framework for foreign direct investments in US 8% Germany Asia 5% • Current trends towards tax reforms have improved opportunities for foreign investors • International organizations and decision makers ranked Germany first within Europe, and fifth worldwide in the “most attractive business location” category
- 11. How to invest in Germany • Direct transactions and investments • Direct transactions are the easiest option to conduct business in Germany • For investors who only intend to sell their products in Germany and thus develop a new market • German-source income is not subject to income taxation in Germany • Could be effected by Value Added Tax Law and Customs Law • German-source income from direct investments (e.g. ín real estate) by foreign investors is typically subject to non-resident (limited) tax liability in Germany.
- 12. How to invest in Germany • Investments through a permanent establishment • Alternative, if a stronger presence will be required or after a while of business activities to meet market and increasing administrative requirements • There are no conditions under company law that permanent establishments would have to meet • Only condition to be met is to inform the municipality in which the permanent establishment will be opened, which will share this information with the local tax office • Any German-source income derived from a permanent establishment is qualified as commercial income and subject to non-resident tax liability in Germany • The economic risk will be assumed solely by the foreign head office because a permanent establishment has no legal personality
- 13. How to invest in Germany • Investments through a company • If foreign investors plan to conduct business on an ongoing basis in Germany it might make sense to set up a company in Germany with a view to intended business • Foreign investors can choose between different legal forms which are typically divided into corporations (Kapital- gesellschaften) and partnerships (Personengesellschaften) • Liability and allocation of profit are vital parameters influencing investors’ decisions
- 14. Exporting to Germany • Import restrictions • The only import restrictions of general application are those in accordance with UN sanctions. • There is a special licensing procedure for certain specific types of goods, mostly for military equipment and drugs. • Some import quotas are imposed by the EU, and these are also applied by Germany, which issues licenses freely until the quota is filled • Since the EU members constitute a single European market, deliveries between Germany and other EU countries do not qualify as imports and exports
- 15. Exporting to Germany • Import duties • Clearance for free circulation generally triggers import duties. These duties include in particular customs duties, import value added tax and, where applicable, excise duties • Custom duties are the main duties effectively increasing the price of foreign goods over that of domestic or EU products • German customs duties are all based on value and are levied at rates dependent on the type of good and on the country of origin • The rate of duty on imports of manufactured products from other countries is often zero and rarely rises above 10% • The basis for assessing duties is usually the supplier’s invoice unless it is obviously incorrect
- 16. Exporting to Germany • Consumer sales from foreign websites • Foreign business 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 • VAT is to charged as though the service had been performed from the state and must be accounted for accordingly
- 17. Business structures • Corporations Four Different Forms of Corporations Legal Form Minimum Number of Minimum Legal Liability Partners share Capital GmbH – Limited One Partner EUR 25,000 Liability limited to Liability Company share capital UG ‚Mini GmbH‘ One Partner EUR 1.00 Liability limited to – Limited Liability share capital Entrepreneurial Company AG – Stock One Partner EUR 50,000 Liability limited to Corporation stock capital KGaA – Two Partners: EUR 50,000 General Partner: Partnership general Partner and unlimited liability Limited by Share limited shareholder Limited shareholder: Limited share liability
- 18. Business structures • Other forms of corporations • Societas Europaea (SE) • European stock corporation • Once incorporated, the SE can change its place of management to another Member State without giving up its legal status • The SE can be governed by either a supervisory body and management body (two-tier-system) or by a single administrative body (single-tier-system) • Societas Privata Europaea (SPE) • European private company with limited liability • Not yet available (European Commission proposal)
- 19. Business structures • Partnerships Four Different Forms of Partnerships Legal Form Minimum Number Minimum Legal Liability of Partners share Capital GbR – Civil Two partners Not required Personal unlimited Partnership liability oHG – General Two partners Not required Personal unlimited Commercial liability Partnership KG – Limited Two partners: Not required General Partner: Partnership general partner unlimited liability and limited partner Limited shareholder: Limited share liability GmbH & Co. Two partners: Not required General Partner (GmbH): KG general partner unlimited liability (GmbH) and Limited shareholder: limited partner Limited share liability
- 20. Business structures • Branches of foreign companies • Autonomous Branch Office • The autonomous branch office is dependent upon the head office company at the internal level but engages in business activities independently • At the organizational level, autonomous branch offices are to a certain extent independent from the parent company • Dependent Branch Office • A dependent branch office is a subordinate department of the head office and does not have any autonomy form the head office • Invoices have to made out in the name of the head office company
- 21. Business structures • Companies organized under the law of a foreign jurisdiction • It is possible for companies organized under the law of another European jurisdiction to move their place of management to Germany if their foreign jurisdiction permits such move • A substantial presence in their home jurisdiction is not required • The formation of a foreign corporation might involve fewer formalities and entail less expenses, however, the operating costs often exceed the costs of their German counterparts
- 22. Accounting and audit requirements • Statutory requirements • The Commercial Code (Handelsgesetzbuch – HGB) requires: • to keep an orderly set of books • the books must be conform to a generally accepted standard of bookkeeping • a complete record of all transactions and • must be supported by a complete set of vouchers and other supporting documentation • that they must be kept in Euro and must written up in a living language
- 23. Accounting and audit requirements • Statutory requirements • Principles of orderly computerized accounting systems (requirements by the tax act): • books must be prepared and retained in Germany at all times, unless the responsible tax office grants a specific exemption • in principle, approval will be granted where the tax office is satisfied that its right to audit will not be compromised • Additional requirements • The Commercial Code contains additional requirements for the audit and publication of financial statements of all limited companies and of partnerships in which no natural person ultimately carries unlimited liability
- 24. Accounting and audit requirements • Statutory requirements • Categorization as small, medium-sized and large companies • a small company is one not exceeding any two of the three following criteria: balance sheet Size annual sales employees total small < EUR 9,680,000 < EUR 4,840,000 < 50 medium-sized < EUR 38,500,00 < EUR 19,250,000 < 250 Large ≥ EUR 38,500,00 ≥ EUR 19,250,00 ≥ 250 • a company changes its status with effect for the third year where it has met or fallen below the respective criteria for the second consecutive year
- 25. Accounting and audit requirements • Statutory requirements • Audit and publication requirements • Small companies are not subject to an audit requirement and may satisfy the publication requirements by depositing 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 • The publication requirements for medium-sized companies are easier to fulfill, and these companies are exempt form various otherwise required disclosures.
- 26. Accounting and audit requirements • German accounting principles • The commercial financial statements form an authoritative basis for tax accounting purposes (so-called principle of linkage – Maßgeblichkeit) • All German statutory financial statements must agree with the underlying accounting records and must follow the historical cost convention • They must be drawn up within three months of the company’s year-end (six months for small companies) • Consistency and prudence are emphasized as principles • Financial statements must be drawn up under the assumption of going concern
- 27. Accounting and audit requirements • International Financial Reporting Standards (IFRS) • Following European law, all quoted companies must draw up their published consolidated financial statements according to IAS/IFRS for business years starting on or after January 1st, 2005 • From the date, German law allows all companies and other commercial entities to publish their individual and group financial statements under IAS/IFRS, rather than under the accounting principles of the Commercial Code
- 28. Accounting and audit requirements • Form and content of annual reports • The German financial statements consists of: • Balance sheet • Profit and loss account • “appendix” (notes to balance sheet and profit and loss account – only corporations) • Directors’ report (medium-sized and large corporations) • Auditor’s report (medium-sized and large corporations) • Resolution for profit appropriation • Cash flow statement (quoted companies) • Statement of changes in equity (quoted companies) • Declaration of compliance with the Code of Corporate Governance (quoted companies)
- 29. Accounting and audit requirements • Auditing profession and auditing standards • The audit profession is led by the: • Wirtschaftsprüferkammer (Chamber of Public Auditors – Membership is compulsory) • Institut der Wirtschaftsprüfer (Institute of Public Auditors in Germany • Qualification for admission • University degree • Served for at least three years with a qualified auditor • Rather difficult exam • The Institut der Wirtschaftsprüfer lays down detailed and extensive standards of auditing and reporting (largely equals International Standard of Auditing) • It also sets rules for ethical behavior and professional conduct
- 30. Business taxation • Tax system and administration • Principal taxes • Most German taxes are levied on income or transactions • Business income is subject to two taxes: trade tax and then either corporation or income tax • The major German transaction tax is VAT, levied under the harmonized EU system • Sources of tax law • German taxation is based on acts of parliament. Each tax is governed by its own act • These acts are linked by the tax management act that regulates reporting, filling assessment and appeal procedures common to all, or nearly all, taxes. • major tax acts are supplemented by official guidelines
- 31. Business taxation • Tax system and administration • Returns • The tax year is the calendar year • Taxes on business income based on financial statements supported by a proper accounting system will be levied on the net profit for the business year • In principle, business must file tax returns by May 31st following the year-end • Audits • Tax audits are conducted at three- to five-year intervalls • Tax audits are usually detailed field reviews of the books, records and other relevant documents of the company and often take several month to complete
- 32. Business taxation • Taxation of corporations • Tax rates and total tax burden • Germany offers a competitive system of company taxation. The average tax burden on companies is less than 30%. In some regions of Germany, due to a locally variable rate of trade tax, it is under 23% • Trade tax rates of lager towns and cities generally fall within the range of 14% to 17%. Those of smaller towns and country districts are usually between 12% and 16% • All corporations are liable to pay corporate tax. The rate of tax is 15% on the taxable profits of the company • The so-called solidarity surcharge (Solidaritätszuschlag) is added to the corporate tax. This totals 5.5% of the 15% rate of corporate tax, or 0.825%
- 33. Business taxation • Taxation of corporations • Tax rates and total tax burden • If a German subsidiary company distributes profits to its foreign parent company (a dividend payment) then a 25% rate of withholding tax (Kapitalertragssteuer) is payable • Almost all the German tax treaties reduce this to 5%, 10% or 15% on dividends paid to foreign corporate shareholders with at least a 25% holding in the German company • For holdings of at least 80% the US treaties waive it altogether (below 80% it will be reduced to 5%, below 10% it will be reduced to 15%)
- 34. Business taxation • Taxation of individuals • Territoriality and residence • All resident individuals (natural persons) are taxed on their worldwide income. • Domestic law deems a person to be resident if the has a home or his habitual abode in Germany. • Generally, individuals are deemed to have their habitual abode in Germany if they are physically present for more than six month
- 35. Business taxation • Taxation of individuals • Tax rate • German income tax is levied at rates rising on a sliding scale. The exact rate to be levied depends upon the amount of income itself (applied to the entire income in excess of the tax-free basic allowance 2011/2012 rate scale Taxable income in euros Tax rate EUR 01-8,004 (basic allowance) 0 EUR 8,005 – 13,469 14% EUR 13,470 – 52,881 Sliding scale up to 42% EUR 52,882 – 250,730 42% less EUR 8,172 EUR 250,731 and over 45% less EUR 15,694
- 36. Labor law and labor costs • Employment contract and terms of employment • Employment contract • Employment contracts should be entered into, or confirmed by the employer, in writing. However, a lack of written form does not render the contract void or unenforceable. • An employment contract can be concluded for an indefinite period or a limited period (fixed-term contracts) • Termination of employment • Employment contracts can be terminated by either party by giving notice of termination to the other contracting party (in writing) • The right of the employer to terminate employment contracts without cause is severely restricted
- 37. Labor law and labor costs • Employment contract and terms of employment • Terms of employment • The employer and the employee are generally free to agree on the terms of the employment contract. • However, this right is limited by mandatory provisions of the law and by collective bargaining agreements (Tarif-vertrag) and works agreements (Betriebsvereinbarung) • Mandatory provisions • Working hours • Paid vacation • Continued payment of salary in the event of illness • Anti-Discrimination • Request to work part-time • Maternity and parental leave
- 38. Labor law and labor costs • Collective agreements, co-determination and works council • The detailed terms and conditions (e.g. the amount of wages and salaries, working hours etc.) are generally agreed in the course of collective negotiations between the labor unions and the employers’ associations • Employee participation, i.e. the ability and right of employees to influence company decision-making process, takes place in Germany mainly through the works council (Betriebsrat) (at the operational level) and the supervisory board (Aufsichtsrat) (at company level)
- 39. Labor law and labor costs • Wages and contributions to social security systems • The level of the salary or wage in Germany can be negotiated freely between the employer and employee. There is no general minimum wage (specified for a few sectors only) • Bonuses only have to be granted if they have been agreed to in the individual employment contracts or in collective agreements • German social security insurance system consists of: • Health insurance • Pension insurance • Unemployment insurance • Nursing care insurance
- 40. Labor law and labor costs • Wages and contributions to social security systems • Current contributions 2012: Social security Contribution Employee’s Employer’s rate contribution contribution total Health insurance General: 15.5% General: 8.2% General: 7.3% Reduced: 14.9% Reduced: 7.9% Reduced: 7.0% Pension insurance 19.6% 9.8% 9.8% Unemployment 3.0% 1.5% 1.5% insurance Nursing care 1.95% 0.975% 0.975% insurance (without children) (2.2%) (1.225%) (0.975%) • Contribution ceiling (west) • for health and nursing care insurance: EUR 45.900 • for pension and unemployment insurance: EUR 67.200
- 41. Grants and incentives • German investment incentives packages • Cash incentives • Investment grants • Investment allowance (only in eastern Germany) • Interest-reduced loans • KfW Loans (national level) • State development bank loans • Public guarantees • State • Combined State / Federal
- 42. Grants and incentives • German operational incentives packages • Labor-related incentives • Recruitment support • Training support • Wage subsidies • R&D Incentives • Grants • Loans • Silent / Direct partnerships
- 43. Business culture and differences • Major German Cultural Themes • “ Ordnung muss sein” (there must be order) • Insiders and Outsiders • Clarity and Compartmentalization • Private and Public Spheres • Friends and Acquaintances • “ Pflichtbewußtsein” (one’s sense of duty and obligation)
- 44. Business culture and differences • German Communication Patterns • Communication style • “ Du” and “Sie” • Private and Public • Directness and “Klarheit” (clarity) • Discussions • “ Unterhaltung” and “Gemütlichkeit” (conversation and coziness) • “ Vertiefen” (going into detail) • “ Verbindlichkeit” (binding nature) • “ Sachlichkeit” (objectiveness) • The fine art of complaining
- 45. Business culture and differences • The German Social Market Economy • German View of Business • Large Companies and Mittelstand • Importance of job security • Managerial Approaches • Risk aversion • Long-term relationship and secrecy • Long-term planning
- 46. 10 Reasons to Choose Germany 01 Leading Economy 02 Global Player 03 High Productivity 04 Excellent Workforce 05 Innovative Power 06 First-Class Infrastructure 07 Inviting Incentives 08 Competitve Tax Conditions 09 Secure Investment Framework 10 Quality of Life
- 47. 10 Reasons to Choose Germany 01 Leading Economy 02 Global Player 01 Leading Economy 03 High Productivity • Germany is the world‘s fourth largest economy and 04 Excellent Workforce Europe’s economic engine • 05 Innovative Large domestic market Power • Easy access to markets in the European Union 06 First-Class Infrastructure • Easy access to the growing markets in 07 Inviting Incentives Eastern Europe 08 Competitve Tax Conditions 09 Secure Investment Framework 10 Quality of Life
- 48. 10 Reasons to Choose Germany 01 Leading Economy 02 Global Player 02 Global Player 03 High Productivity • Germany was the world’s number one exporter for six 04 Excellent Workforce years and is now the number two after China • With 05 479 billion inward investments Germany is EUR Innovative Power one of the top regions for foreign investments 06 First-Class Infrastructure 07 Inviting Incentives 08 Competitve Tax Conditions 09 Secure Investment Framework 10 Quality of Life
- 49. 10 Reasons to Choose Germany 01 Leading Economy 02 Global Player 03 High Productivity 03 High Productivity • One of the highest productivity rates in the world 04 Excellent Workforce • One of Europe’s most cost-effective productions locations Innovative Power 05 • Competitiveness through German quality and steadily 06 First-Class Infrastructure decreasing unit labor costs 07 Inviting Incentives 08 Competitve Tax Conditions 09 Secure Investment Framework 10 Quality of Life
- 50. 10 Reasons to Choose Germany 01 Leading Economy 02 Global Player 04 Excellent Workforce 03 High Productivity • 81% of the German population have been trained to 04 Excellent Workforce university entrance level or posses a recognized vocational qualification Power 05 Innovative • Investor friendly social-market economy promotes 06 First-Class Infrastructure stable labor relations 07 Inviting Incentives 08 Competitve Tax Conditions 09 Secure Investment Framework 10 Quality of Life
- 51. 10 Reasons to Choose Germany 01 Leading Economy 02 Global Player 05 Innovative Power 03 High Productivity • With R&D expenditures of EUR 66.7 billion (2009) 04 Excellent Workforce Germany is Europe’s No 1 location for research • With 05 Innovative Power European Patent 12,000 patents granted at the Office in 2010, Germany is Europe’s leading patent applicant First-Class Infrastructure 06 • R&D 07 Inviting Incentives in annual federal is backed by billions of euros funds 08 Competitve Tax Conditions 09 Secure Investment Framework 10 Quality of Life
- 52. 10 Reasons to Choose Germany 01 Leading Economy 02 Global Player 06 First-Class Infrastructure 03 High Productivity • Located in the center of Europe Germany is Europe’s 04 Excellent Workforce Global Logistics Hub • 05 Innovative Power World Class Transport and Network Infrastructure • German logistic companies are among the global 06 First-Class Infrastructure logistic leaders 07 Inviting Incentives 08 Competitve Tax Conditions 09 Secure Investment Framework 10 Quality of Life
- 53. 10 Reasons to Choose Germany 01 Leading Economy 02 Global Player 07 Inviting Incentives 03 High Productivity • Attractive incentives to all investors to meet immediate 04 Excellent Workforce capital needs • Comprehensive range ofPower at all stages of the 05 Innovative programs investment process • 06 First-Class Infrastructure Support ranges from cash grants to incentives for labor and R&D Inviting Incentives 07 08 Competitve Tax Conditions 09 Secure Investment Framework 10 Quality of Life
- 54. 10 Reasons to Choose Germany 01 Leading Economy 02 Global Player 08 Competitive Tax Conditions 03 High Productivity • The average overall tax burden for corporate 04 Excellent Workforce companies amounts to 29.83 percent • 05 Innovative Power Significantly lower tax rates are available in certain German municipalities – up to 7 percent less • 06 First-Class Infrastructure Germany provides an extensive network of double taxation agreements Incentives 07 Inviting (DTA) ensuring that double taxation is ruled out 08 Competitve Tax Conditions 09 Secure Investment Framework 10 Quality of Life
- 55. 10 Reasons to Choose Germany 01 Leading Economy 02 Global Player 09 Secure Investment Framework 03 High Productivity • Highly developed economic and political framework 04 Excellent Workforce ensures security for investments • 05 Innovative Efficient judicial system Power • Intellectual property is well protected by patent laws 06 First-Class Infrastructure • Reliable laws enable companies to plan their 07 Inviting Incentives investments effectively 08 Competitve Tax Conditions 09 Secure Investment Framework 10 Quality of Life
- 56. 10 Reasons to Choose Germany 01 Leading Economy 02 Global Player 10 Quality of Life 03 High Productivity • Modern, tolerant and cosmopolitan society • 04 Excellent Workforce Superior health and education system • 05 Innovative Power Endless opportunities for sports and recreation • Vibrant cultural scene 06 First-Class Infrastructure 07 Inviting Incentives 08 Competitve Tax Conditions 09 Secure Investment Framework 10 Quality of Life
- 57. For more information on NPP, please visit us at www.npp.de Sven Ole Raap German Certified Public Auditor (Wirtschaftsprüfer) German Certified Tax Advisor (Steuerberater) NPP Niethammer, Posewang & Partner GmbH Wirtschaftsprüfungsgesellschaft Steuerberatungsgesellschaft Johannes-Brahms-Platz 1 20355 Hamburg – Germany Tel.: +49.(0)40.33 44 6 - 0 Fax: +49.(0)40.33 44 6 - 222 o.raap@npp.de
Notes de l'éditeur
- Geography Center of Europe : You can reach nearly everypart of Europe within 3 hours by air and 24 hours by road Measuring 550 miles from north to south and 370 miles from east to west North: Denmark + North and Baltic Seas East: Poland, Czech Republic South: Austria and Switzerland West: France, Luxembourg, Belgium and Netherlands Southern border passes through the Alps, giving Germany its own area for skiing and winter sports Population Last full census in 1987 (western part) and 1981 (eastern part) Population makes Germany the largest consumer market within the European Union Long term assumption is that the population will decline to about 65-70 million by 2060 No significant tendency to emigrate, but still a certain amount of migration within Germany (from east to west) There is no tradition of mobility within the country – movement is hampered by Cultural differences Decentralized education system Foreign population of 7.1 million (8,7%), most Turkish citizen (1.7 million – partly second- or third-generation residents), but also Italians and Poles Language English is usually the first foreign language thought at school Today children start to learn English in elementary / grade school starting from first grade Partly English is already thought at Kindergarten
- Political System At Federal level, the executive branch consists of the Federal President ( Bundespräsident ) and the Federal Government (headed by the Federal Chancellor and the Cabinet) The bicameral legislature consists of the Federal Parliament ( Bundestag ) and the Federal Council of States ( Bundesrat ), consisting of representatives from the governments of the States ( Länder ) Legal System No case-law intead statutory law Exception to three-tiered: Tax Courts, which are two-tiered The German court system is decentralized Judgment of the Federal Constitutional Court are binding on all other courts. The judgment of all other courts (incl. supreme court) do not set binding precedents for other cases of a like nature. They may, however, give guidance to other courts The European Court of Justice (ECJ) is the supreme decision-making body for issues relating to the fundamental freedoms guaranteed by the EC treaty and to other questions of EU law
- Currency Import / Export is only subject to reporting requirements 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 an option not to join Members: Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia and Spain Blank
- Economy Social market economy = meaning that the country 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 (incl. antitrust provisions) Protection of enviroment Protcting employees Germans are willing to limit their personal freedom for the public / collective good Strong industries are: Mechanical engineering Automotive industry Aerospace Logistics pharmaceutical and chemical industries EU definition Micro business: below 9 employees , below EUR 2.0 mill turnover Small business: below 49 employees , below EUR 10.0 mill turnover Medium business: below 249 employees , below EUR 50.0 mill turnover Big business: above 249 employees , above EUR 50.0 mill turnover Mittelstand : 99 % of all companies are SMEs generating approximately 47% (2007) of the net value added Employing 79.5% of all employees Many of these SMEs are world market leaders in their respective niche segments ( hidden champions ) Even within publicly held corporations the original family owners retain a significant influence issuing different class of shares to the public (quite frequently non-voting preferred stock) Blank
- Banking system In addition there are some banks which specialize in particular services (e.g. mortage banks and home loan banks). There is a trend towards big corporations increasingly being handled by major banks, while small and medium-sized enterprises are handled by smaller, regionally based banks (e.g. savings and loan banks) Regional banks (as savings banks) can play a major role (-> Haspa) Such as Insurers Department stores Mailodrer firms Car manufacturers BaFin functions under the auspices of the Federal German Ministry of Finance (Bundesministerium für Finanzen – BMF) Speech The European currency (EUR) is managed by the European Central Bank in Frankfurt. Bank in Germany usually offer universal services for businesses and individuals comprising both the lending side with the full service of corporate finance and the saving side also including investment banking. Anyone running a company in Germany should have a bank account in Germany. To open a bank account, you usually need only a valid passport and a confirmation from the resident’s registration office that your place of residence is in Germany. In many banks, it is possible to have accounts in foreign currencies. Practically all large international banks are represented in Germany. If amounts of more than EUR 15,000 are paid into an account in cash, the banks check the identity of the depositor, in order to prevent money laundering. Checks are not very common in Germany anymore, Credit cards are not that common as in the US Most people use cash cards issued by their banks
- Foreign investment in Germany Generally, it favors the principle of freedom of foreign trade and payments transactions, but it also allows the imposition of restrictions on inward and outward FDI for reasons of foreign exchange, foreign policy, or national security Ernst & Young’s “European Attractiveness Survey 2011” confirms Germany’s reputation as one of the world most attractive business locations in the world. A recent study conducted by the American Chamber of Commerce highlights the positive regard in which the German business environment is held by the US companies 60 % named Germany their main medium-term investment focus within the EU Followed by Eastern Europe 28% UK 18% AmCham Business Barometer 2011 American business executives highlighted the following factors as the top location advantages that distinguish Germany from its competitors Economic strength : diversified mixture of business Infrastructure : excellent nationwide infrastructure Framework conditions : governmental promotion of forward-thinking industries (e.g. solar and biotech) Human capital : highly qualified workforce, skilled talent pool Blank
- Investment options There are different types of investment options which need to be assessed with a view to the intend business activity and the objectives of the potential investor. Investors can opt for So called direct transactions or direct investments Make investments through a permanent establishment or the engagement of a permanent representative Take up business activities as a sole proprietor in Germany Or can set up a company When choosing one of the options investors should consider the type and duration of their intended activities The business risk associated with such activities And the tax consequences Direct transactions In direct transactions in the classical meaning, the foreign business supplies goods or renders services to a domestic recipient without giving rise to taxation in Germany (e.g. a foreign business supplies merchandise from abroad to a German Customer) Direct investments Real property that is situated in Germany and which a foreign investor acquires for the purpose of letting said property is deemed a direct investment. Direct transactions / investments Pro’s Typically causes the lowest administrative burden Requiring no or only a very short lead time, And allows for the greatest flexibility This type of investment is thus particularly appropriate for Initial phase of business activities to be conducted in Germany If business activities in Germany are not intended to be conducted on a permanent basis Or only on a small scale
- Permanent establishment Defined as a fixed place of business or facility that serves the business of an enterprise and over which the entrepreneur (here the foreign investor) exercises control. Does not require human intervention, so that the presence of an internet server on German territory may constitute a permanent establishment Current taxation The profits generated by a non-resident corporation’s permanent establishment are subject to a corporate income tax rate of 15% plus trade tax ( Gewerbesteuer ) and solidarity surcharge It is possible o offset losses arising from permanent establishments against other positive domestic income. Losses that are not offset my generally be carried back (up to an amount of EUR 511,500) of one year and forward for an unlimited time. However, the offset of losses carried forward is restricted by the so called minimum taxation Double taxation can be prevented or its effects reduced by double tax treaties which contain permanent establishment rules (cf. Art. 7 OECD-MTC), or by taking unilateral measures in the foreign country. Exit taxation The transfer of any of the permanent establishment’s assets to a foreign head office or a foreign permanent establishment of the same taxpayer generally results in the immediate taxation of such asset’s hidden reserves. Gains on the sale of a permanent establishment are deemed to be current profit and are thus subject to non-resident tax liability. Germany’s tax treaties generally permit the taxation of gains on the sale of a permanent establishment
- Investments through a company Establishing a corporation gives investors the opportunity to limit liability to the so-called liable equity capital (registered share capital – Grund-/Stammkapital ) in order to limit their business risk
- Import restrictions Within the EU there are no longer any border controls (Schengener Treaty) of any description or any customs duties or other restrictions on intra-union traffic apart form certain minor formalities for travellers The terms “export” and “import” therefore now only refer to trade between Germany and non-EU countries blank blank
- Import duties Import value added tax: The import of goods into Germany from non-EU countries is subject to German import value added ax ( Einfuhrumsatzsteuer ), which is part of the German VAT tax system The standard tax rate of 19% is subject to reduction for privileged goods (e.g. food and books). Importers who are taxable persons for VAT purposes may recover the import VAT from the tax authorities Goods are classified for customs duty purposes under the Harmonized System and the TARIC (integrated tariff of the European Communities) nomenclature, and the valuation principles follow the internationally recognized customs code Upon application by an importer, the appropriate customs authorities must issue binding tariff information (BTI). Any BTI issued by a Member State binds the customs authorities of all Member States if the holder requests its application and the imported goods are identical in every respect with those described in the BTI Customs duties are calculated as a percentage of he value of the product There are different methods of determining the value of imported goods. Normally, customs value will be the “transaction value”, in general the actual price paid or payable for the goods when sold for export to the EU if this price is not subject to certain restrictions in use Additionally, costs or value incidental to the production and the sale of goods or associated with the transportation of goods must be added if not included in the price already This applies to Commissions and brokerage (except buying commissions), Costs of containers and packing, Royalties and license fees, Resale proceeds, Cost of transportation Customs duty auditors regularly inspect the books of German importers Customs regimes to avoid, reduce, or defer duty payments Customs warehousing: under the customs warehousing procedure, imported goods can be stored indefinitely in a customs warehouse, without as yet being subject to payment of import duties, import VAT, or excise duties, or to the application of commercial policy measures Inward processing: this customs procedure applies to goods imported temporarily into Germany form non-EU countries for processing and subsequent re-export in the form of compensating products. Temporary use: this customs procedure allows goods to be imported into Germany for a short period without triggering duties and taxes, and subsequently re-exported, e.g. goods temporarily imported in conjunction with a fair or exhibition or for testing and educational purposes. End-use relief: The customs tariff provides a customs duty exemption for certain goods if the goods are used in Germany for a specifically described purpose. Transit procedure: under the transit procedure, goods can be moved form one point to another within the EU without incurring liability customs duties, import VAT or excise duty, and without being subject to commercial policy measures Tariff suspensions: if goods are not available in the EU (either at all or in the same or a similar form) in sufficient quantity or quality, the shortfall can be offset by imports form non EUR-countries. In this case, the suspension of tariff serves as an incentive to import such products Non-tariff customs duty exemptions: these exemptions are generally linked to the use to which the goods are put or the purpose for which the goods are used. This includes personal and household items imported in connection with the relocation of residence to the EU, as well as materials used in teaching, education, and research. blank
- Consumer sales from foreign websites Cyprus and Luxembourg currently have the lowest standard rate of VAT at 15% German rate of 19% will probably make it unattractive to foreign business to register in Germany If they do, they will have to abide by the German requirement to keep records in support of the VA returns filed These include obligations to submit the records in soft copy to the Central Tax Office on demand and to retain them in hard and soft copy for ten years blank blank
- General Decisive criteria for the choice of legal form are generally The intended function of the shareholders Liability Terms of taxation The basic structure of all company forms is stipulated by law which provides for predictability and legal certainty The same legal conditions apply for foreign and local entrepreneurs Establishment of a Corporation A corporation can be established by any number of different partners Compensating the limited personal liability of the Shareholder(s), the GmbH requires a minimum share capital of EUR 25,000. It can be contributed in cash or in kind (e.g. real estate or patents) The establishment must be specified in the articles of associations and certified by a notary Steps for the establishment of a Corporation are: Drafting of articles of association Notarization of articles of association Payment of share capital Registration in the commercial register ( Handelsregister ) Trade office registration The establishment procedure ends with registration in the commercial register. Only at this point in time does the corporation’s limitation of become effective blank blank
- Societas Europaea SE The registered office and place of management must always be identical for the SE The SE can move freely within the EUR and the EEA (Norway, Iceland and Lichtenstein) Member States SE can be set up by two or more stock corporations from at least two different EU Member States Operating throughout the EU on the basis of a single set of core regulations Designed as a publicly held corporation Registered share capital of at least EUR 120,000 Societas Privata Europaea SPE An European Commission proposal published on 25 June 2008 envisages the introduction of the statute of a European private company with limited liability Supranational legal form for corporations Discussions are still underway Unlike the SE, the SPE statute includes only very few references to national law Required minimum registered share capital EUR 1.00 (discussion) After formation, the place of management and the statutory seat can be chosen at liberty within EU Can be governed by two-tier-system or one-tier-system Advantage: one legal form for all European subsidiaries blank
- Partnerships Establishing a partnership is easy and can be completed in just a few steps. At least two partners are required to establish a partnership A minimum share capital does not have to be raises The management of the company can only be carried out by partners Depending on the type of partnership entry in the commercial register is required The application is signed by all partners and must be filed by a German notary in certified and electronic form with the commercial register. If a business is carried out by the partnership, the trade office must accordingly be notified blank blank
- Branches of foreign companies In Germany there are two kinds of branch offices which primarily differ due to the degree of independence from the head office company Autonomous branch office The relationship with the customers are generally subject to German law However, the foreign head office company is liable for the business transactions concluded by the branch They usually have the following attributes: Management with the freedom to act according to their own judgement (i.e. with full power of attorney and power of contract) Own capital resources and bank account Separate accounting The branch office must be entered in the commercial register The branch office can use its own name affix but the company name of the head office must also appear including its legal designation (e.g.: XY Ltd., branch office, Hamburg) Depending branch office An individual company name cannot be used Accordingly, the dependent branch establishment does not have to be entered in the commercial register
- Companies organized under the law of a foreign jurisdiction Even if the foreign company lacks any material connection with the country in which it was formed and only has a token presence in its nominal home jurisdiction, Germany may not refuse to recognize the foreign company Main reason used to be: lower minimum registered share capital (now there is the UG or ‘Mini-GmbH’), but also cause for poor reputation In addition, there are legal uncertainties and implications concerning the taxation of such entities which often render corporations organized under the law of a foreign jurisdiction less attractive blank blank
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- Additional requirements Thus the GmbH & Co. KG in which the unlimited general partner’s share is held by a GmbH is subject to an audit and publication requirements blank blank
- Additional requirements Thus the GmbH & Co. KG in which the unlimited general partner’s share is held by a GmbH is subject to an audit and publication requirements blank blank
- Audit and publication requirements The financial accounts have to be published electronically with the trade register Documents must be filed in electronic form with German Federal Gazette ( Bundesanzeiger ) for publication on its homepage blank blank
- German accounting principles Principle of linkage: however, there are also certain specific tax accounting rules e.g. valuation of accruals for pensions funds e.g. provisions for anticipated losses on transactions in the course of completion (pending transactions). Such provisions are mandatory under commercial law, but generally not permitted in the tax accounts Historical cost convention / principle: if the value of an asset at a later date exceeds its historical cost, the increase may not be recognized in the balance sheet until a realization event occurs (e.g. the sale of the asset) The principle of the lower of costs or market value applies in a different form for fixed and current assets Preparation period: There are no real sanctions (pressure results from banks and tax authorities) Principle of prudence: May be one of the reasons, why Germany was not effected by the crisis as much as other countries. Many German companies tend to be very prudence, especially because of the “principle of linkage” blank blank
- International Financial Reporting Standards (IFRS) However, companies taking advantage of this option will need Commercial Code accounts as a measure of the maximum distributable dividend and as a basis for their tax returns The IFRS are developed by the International Accounting Standards Board (IASB), which is a private sector organization and as such lacks democratic legitimacy. To retain legislative competence, the EU Commission reserves the right to review the IFRS for compliance prior to their transformation into Community law blank blank
- Form and content of annual reports Directors report: Called business report ( Lagebericht ) The directors’ report discusses the business situation of the company and also specifically mentions any important subsequent events, anticipated development of the company’s business, R&D activites and braches it maintains blank blank
- Auditing profession and auditing standards WPK: some 13,900 CPAs IDW: some 12,000 CPAs Qualification: no facilitation for German certified public Auditors taking the US CPA Exam (puts us behind Mexico) ISA: IDW transferred more-or-less the ISA into German Standards adding German specialties (directors’ report) ISA will officially be adopted in Europe (waiting to be accepted be the EU) blank blank
- Principal taxes Trade tax is levied under national rules but at rates fixed by the local authorities where the business has establishments Profit of an incorporated business is also subject to corporation tax, That of an unincorporated business owned by a natural person forms part of his or her income tax assessment Partnerships are transparent vehicles once the trade tax has been paid VAT rate is 19% (reduced for special goods to 7%) Luxembourg, Cyprus: 15%?, Spain: 16%, UK: 17.5%, Netherlands 19%, France 19.6%, Italy 20%, Sweden 25% Sources of tax law Tax acts: Corporation Tax act Trade Tax act Income tax act VAT act These acts are supplemented by a number of specific acts to regulate the tax consequences of a given type of transaction or set of circumstances These guidelines discuss the practical application of the various provisions of the act, often by way of example. blank
- Returns The deadline is automatically extended – to December 31 st in 2011– if the returns are prepared with the help of a professional tax consultant Further extensions may be granted up to the end of the following February, but only for a specific reason Monthly advanced VAT return must be submitted electronically Audits Larger companies with foreign shareholders are almost always reviewed regularly, although not every year is necessarily reviewed with equal intensity The tax auditors have the right of direct access to the computer of any taxpaying company that keeps its books electronically. They may interrogate the data on site using the hardware and software of the taxpayer, or search or analyze copies of it off site using their own audit software blank
- blank Legal minimum tax rate is 7% The taxable income of the company is multiplied with the tax base rate (3.5%) which results in the so-called tax base amount This tax base amount is then multiplied with the corresponding municipal multiplier Average between 350% and 400% (minimum 200% - maximum 490%) blank blank
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- Employment contract Termination of employment Restricted by the Protection Against Unfair Dismissal Act In general it applies to all employees who have worked for the employer for more than six month, provided the employer has more than 5 employees (hired after 31 December 2003: more than 10 employees) blank
- Mandatory provisions Working hours Generally between 35 and 40 hours (maximum allowed by law is 48 hours) Generally any time worked in excess of the contractually agreed working time (overtime) has to be compensated Paid vacation Statutory minimum vacation entitlement is 20 days per calendar year, based on a normal five day working week (at least for weeks) In addition employees receive their salary on statutory holiday (between 9 and 13 days depending on the place of work) Continued payment of salary in the event of illness Law requires employers to continue to pay employees during the first 6 weeks of absence from work due to illness After six weeks the employee is entitled to receive a sickness allowance paid by the health insurance Anti-Discrimination The bill prohibits discrimination based on race or ethnic origin, gender, religion, conviction, disability, age, or sexual identity Request to work part-time Any full time employee who has been employed for more than six month by the same employer may request that she or he be employed on a part-time basis instead, provided the employer employs more than 15 persons The employer must grant this request unless it is unfeasible for operational reasons Maternity and parental leave During the last six weeks of pregnancy and the first eight weeks after giving birth, mothers are not permitted to work (maternity leave) The law requires employers to continue to pay mothers during their maternity leave Furthermore, the mother or father may choose to take up to 3 years’ special postnatal leave to care for the new born child (Elternzeit) The contractual relationship between the employer and the employee is suspended during parental leave blank blank
- Collective agreements Each collective agreements consists of two parts The first part deals with the rights and duties of the contractual partners (the parties’ two main obligations are to maintain the industrial peace and to use all available means to ensure that their member abide by the agreement) The second part set forth rules related to labor contracts, to operational questions, and to the works constitution within the meaning of the Works Constitution Act Only members of the labor union and members of the employer association are actually bound by the agreements If an employer does not join the employers’ association, the unions may negotiate a collective bargain with the employer individually Not for executive staff Co-determination and works council Works council Elected by its employees Each business 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 Co-Determination Stock corporations, limited partnerships with share capital and limited liability companies with more than 2,000 employees must have equal representation for the employees and the owners in the supervisory board In stalemate situations, the chairman of the supervisory board (generally represents the interests of the owners), has a double vote. blank
- Wages and contributions to social security systems Germany recorded the lowest labor cost growth between 2001 and 2010 within the EU with just 1.6% (UK=4.1%, Netherlands=3.4%, France=2.1%) Social security insurance In general, social security coverage is mandatory for all employees working in Germany, regardless of citizenship or residence of their employer blank
- Wages and contributions to social security systems Social security insurance In general, social security coverage is mandatory for all employees working in Germany, regardless of citizenship or residence of their employer blank
- Grants and incentives For Exports = Interest Charge - Domestic International Sales Corporation (IC-DISC) Investment incentives and operational incentives can be combined Investment phase (high capital needs) Cash incentive programs reimburse direct investment costs by providing non-repayable cash grants Public loans and guarantees round off investment project financing Once operations have started Labor related incentives programs support companies during all stages of building up a workforce Particular emphasis is placed on R&D projects General Each incentives program defines industries as well as forms of investments (e.g. greenfield projects) Each program has a set of criteria (such as company size or planned investment project location Most incentives programs offer the highest level incentives rates to small and medium sized enterprises blank
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- R&D expenditure of some Federal states are higher as in some other European states Bavaria = Russia Baden-Württemberg = Spain + Portugal North Rhine-Westphalia = Netherlands Germany‘s share of patents is almost twice that of France and UK combined To foster the advancement of new technologies the German government has launched an unprecedented campaign. Approximately EUR 4 billions annualy have been set aside to develop cuttting edge technologies.
- Almost all of Europe is reachable within three hours by air of 24 hours by road Germany has a sophisticated energy and communications infrastructure and a first-class transportation network Europe’s second largest port measured in container port traffic (Hamburg) Europe’s largest port container terminal (Bremerhaven) 250 inland ports Dense network of airport (22 are international airports) Seventh (cargo) and ninth (passanger) airport worldwide (Frankfurt) Highest highway density level in Europe 37,900 km (23,700 mi) of railroads Germany’s high-speed railway network, with speeds of up to 300 km/h (190 mi/h), is the fourh largest in the world German logistic companies Deutsche Post DHL =world’s largest logistics services provider Deusche Bahn = operates Europe’s largest rail network Lufthansa Cargo = is one of the world’s leading global air freight companies
- The DTA between Germany and the US, for example, reduces taxes on dividends paid by a German subsidiary to its US parent company to only five percent if the US parent company holds at least ten percent of the German subsidiary. This five percent withholding tax paid in Germany can then be offset against taxes to be paid in the US. The tax on dividends can even be reduced to zero percent if the US parent company holds at least 80 percent of the shares of the German subsidiary company for a period of at least twelve months and certain other criteria are fulfilled (e.g., the US company is a stock corporation listed on a US stock exchange).