Types of companies
There are several types of companies available under German law. However, types of business entities suited best for doing business in Germany are:
- limited liability company (“GmbH” and “UG”);
- joint stock company (“AG”);
- limited partnership (“KG”).
Criteria for choice are liability, taxation, financing, personal involvement and control, and flexibility. For larger companies, GmbH or AG are typically suited best. Their shareholders’ liability is limited to the respective share capital.The minimum share capital varies between 50,000 (AG), EUR 25,000 (GmbH) and EUR 1 (for the GmbH-subtype “UG”). The transfer of shares in a GmbH or UG typically has to be approved by the other shareholders and notarized, while shares in an AG are freely transferable. However, the GmbH is a more flexible and procedurally less demanding form of entity than the AG. GmbH, UG, and AG are formed by one or more founding shareholder(s), adopting the articles of association and appointing its managing director(s) plus, in case of AG, a supervisory board (of at least three members) in a notarial deed. They exist upon registration at the commercial register. Alternatively, a supplier may purchase an existing, inactive shelf company – and, as advantage, start operating immediately. Partnerships are often preferred for tax reasons, especially the KG, which – for reasons of limiting liability – is often combined with a corporation as general partner (“GmbH & Co. KG” or “AG & Co. KG”). They require at least two partners.
- Limited Liability Companies Act (“GmbHG”) for GmbH and UG, and
- Joint Stock Company Act („AktG“) for AG.
- German Civil Code (“BGB”) and the German Commercial Code (“HGB”) for partnerships.
Foreign businesses generally operate under the same rules as domestic businesses. By way of exception, the Federal Ministry for Economy and Technology can restrict or prohibit acquisitions of or participations in domestic business entities by individuals or business entities seated outside the EU, Iceland, Liechtenstein, Norway or Switzerland (“EEA”). Preconditions:
- the foreign investor acquires 25% or more of voting rights in a German company;
- the acquisition endangers national public order or security (sec. 55–59 Foreign Trade and Payments Ordinance [“AWV”]). This may especially be the case if the domestic business entity acquired pertains to infrastructure sectors (telecommunications, power supply, trains, airports, or hospitals).Incorporation of a Limited Liability CompanyA Limited Liability Company (GmbH or UG, see above) require a minimum share capital between EUR 25,000 (GmbH) and EUR 1 (for the GmbH-subtype “UG”). GmbH and UG are formed by one or more founding shareholder(s), adopting the articles of association and appointing its managing director(s) in a notarial deed. They exist upon registration at the commercial register. Alternatively, a supplier may purchase an existing, inactive shelf company – and, as advantage, start operating immediately.
Incorporation of a Joint Stock Company
The minimum share capital required for a Joint Stock Company (AG) is EUR 50,000.
An AG is formed by one or more founding shareholder(s), adopting the articles of association and appointing its managing director(s) plus a supervisory board (of at least three members) in a notarial deed. It exists upon registration at the commercial register. Alternatively, a supplier may purchase an existing, inactive shelf company – and, as advantage, start operating immediately.
Set up of a Representative Office
A “Representative Office’s task is limited to observing the market without doing business. The Representative Office does not exist as own category under German commercial law. Instead, an office in Germany is either a branch office of the foreign company (see below), or an office of an independent contractor / service provider (but not of the foreign company). Representative Offices need not to be registered with the commercial register. Instead, a formal registration with the local trade authority suffices (“Gewerbeanzeige”).
Set up of a branch
Another way for direct distribution is to establish
- an autonomous branch office („selbständige Zweigniederlassung“) or
- a dependent branch office („unselbständige Zweigniederlassung“).
Branch offices are not separate entities, but belong to the head office of the main company and are subject to the same organizational law which governs the head office. The branch offices‘ liability therefore lies with the head office.
An autonomous branch office exercises the same business activities as the head office (not merely auxiliary activities). Besides, it has a certain personal and factual autonomy, especially through an own management with own executive powers, bank accounts, balance sheet and business assets. Such branch office has to be registered with the
- local trade authority (as above);
- German commercial register. This requires detailed information on the branch, including a notarised copy of the commercial registry in its “home country“ and the power of representation of its managing director(s), plus the memorandum and articles of association. All documents should be translated into German and the notarised copy should be authenticated (usually with an apostil).
A dependent branch office (“Unselbständige Niederlassung” or “Betriebsstätte”) does not act autonomously, but strongly depends on the head office (e.g. it issues invoices in the head office’s name).
To foreign businesses and individuals that operate in Germany, two levels of taxation apply:
- the trade tax applies to all businesses and individuals in Germany and is paid on the taxable earnings. As local tax, its rate differs from municipality to municipality;
- the income tax depends on the business entity:
- Corporations are subject to corporate income tax (15% flat rate). Their shareholders are subject to a tax on capital gain and dividends. The average overall tax burden for corporations in Germany is 30% (corporate income tax and trade tax).
- A partnership itself is not subject to income tax, but its partners are subject to either corporate (if business entities) or personal (if individuals) income tax.
- Individuals pay personal income tax. The tax rate increases with the income (to a maximum of 45% at an income of EUR 250,000), but trade tax payments can be set off against it. Special tax rates apply for dividends and capital gains.
To dividends, capital gains, interest payments and license fees, withholding tax (“Kapitalertragssteuer”) may apply. It amounts to 25% of the capital gain distributed to the owning business (plus a further “solidarity surcharge” of 5.5%, added to the tax amount). These taxes may be refunded in case of double taxation if a respective treaty with the country of origin of the owning business exists.
The Company Register
Establishing a company in Germany requires registration with the Company Register / Commercial Register (“Handelsregister”). The Register is administered by the local courts. It informs about merchants and commercial companies acting in Germany. Its objective is to create transparency and legal safety when dealing with these companies (e.g. informing about the managing directors of a company, its registered seat, its founding capital, etc.). It can also be accessed digitally on www.handelsregister.de.