1 Issue 2014/2015 INVESTOR S BASICS: SETTING UP BUSINESS IN GERMANY
2 SETTING UP BUSINESS IN GERMANY IMPORTANT LEGAL ISSUES FOR INTER- NATIONAL COMPANIES This publication explains how the business establishment process in Germany works. It focuses on the questions most often posed by foreign companies. These can be grouped into four key categories: entry and residence requirements, business establishment, corporate taxation, and employees and social security. You will find essential information on these matters and many useful tips on how to establish a new business in Germany both quickly and easily. ENTRY AND RESIDENCE At some point within the process of establishing a business in Germany, foreign entrepreneurs usually have to come to Germany in person. Depending on the country of origin, individuals may require a visa to enter Germany. Long-term stays require a residence permit. Different types of residence titles are available subject to the intended business activities. Our legal experts provide information helping you prepare your business trip to Germany by checking: whether a visa is needed before entering Germany or not; what type of visa or residence permit might be required for the planned business activity; granting requirements for different kinds of residence permits; how the application procedure works. BUSINESS ESTABLISHMENT German company law offers a variety of different legal structures suitable for every type of business. Formation procedures are swift and efficient, with only a few steps needed to establish a company in Germany. Our legal experts help you in preparing business establishment in Germany. We inform about: general ways to take up commercial activities in Germany. different company forms. the establishment procedure in detail. registration with the commercial register and trade office. CORPORATE TAXATION Tax implications must be taken into account when choosing a legal company form, since company taxation details mainly depend on the company form. Germany has a comprehensive regime of double taxation agreements with foreign countries which, for instance, prevent double taxation of distributed profits. Our taxation experts help you in optimizing your business. We inform about: the German tax environment. tax implications of certain company forms. how to avoid double taxation. how to register with tax authorities. EMPLOYEES AND SOCIAL SECURITY Attention should already be paid to the question of how to recruit required specialists and employees at the company formation stage. Moreover, knowledge of the different employment models and the terms and conditions of employment help successfully complete the hiring process. Our legal experts help you optimize the hiring process in advance by providing information on: flexible models of employment. different terms of employment. the social security system and payroll accounting. registering employees for the social security system.
3 SETTING UP BUSINESS IN GERMANY COMPANY FORMS FOR FOREIGN DIRECT INVESTMENTS Anyone can establish a business in Germany irrespective of nationality or place of residence. There is no specific investment legislation when setting up a branch office or a new subsidiary in Germany, nor is a minimum percentage of German shareholdings required for foreign entrepreneurs setting up business in Germany. LEGAL STRUCTURES FOR YOUR BUSINESS IN GERMANY Foreign companies have different possibilities to establish a business in Germany. In practice a separate company held by the foreign company - a subsidiary - in the form of a corporation is often established. However, it is also possible to establish a subsidiary in the form of a partnership or to set up a company held by private individuals. Existing companies can also conduct business via a German branch office. Either way, the establishment procedure is straightforward with well-defined steps. Generally, there are no restrictions placed upon foreigners who wish to establish a company in Germany. However, the local trade office registration generally requires a local representative. SUBSIDIARY A subsidiary is an autonomous company established and predominantly held by another company (parent company). For subsidiary formation, foreign companies can choose the most suitable legal company form as a corporation or partnership. There are several ways of taking up commercial activities in Germany. Subsidiary Establishment of a new legal entity Different legal forms are available (e.g. GmbH) Foreign Companies Decisive criteria for the choice of legal form are generally the intended function of the shareholders, liability and 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. CORPORATIONS The main feature of a corporation is the contribution of capital by shareholders. A corporation is a legal entity, meaning that the holder of rights and obligations is not the individual shareholder, but the company itself. The corporation itself concludes contracts, holds assets and is liable for taxation. Corporations are liable to corporate income tax, trade tax and the solidarity surcharge. Shareholders have limited personal liability. As such, a minimum share capital is required. A corporation can be established by one or more shareholders. The most important corporate forms in Germany are the private limited liability Branch Office No establishment of a new legal entity Registration of a German physical business presence German Market Presence Other Forms No direct business activity of the foreign company Activities typically via a commercial agent company (Gesellschaft mit beschränkter Haftung GmbH) and the stock corporation (Aktiengesellschaft AG). Please find further information about the GmbH in the "Business Establishment" fact sheet. PARTNERSHIPS Characteristic for a partnership is the personal commitment of the partners to their working efforts to the partnership. Partners have unlimited personal liability - a minimum share capital is not required. Any partnership requires at least two partners. There are four major forms of partnerships: Civil Law Partnership (GbR); General Commercial Partnership (ohg); Limited Partnership (KG); the hybrid form of GmbH & Co. KG.
4 SETTING UP BUSINESS IN GERMANY BRANCH OFFICE Any foreign company with a head office and registered business operations outside of Germany can establish a German branch office. A branch office is a suitable business form for a foreign company wanting to establish a presence in Germany for the purpose of initiating business and maintaining contacts with business partners. MAIN CHARACTERISTICS A branch office has no independent or separate legal personality distinct from the head office itself. In legal and organizational terms, it is part of the head office business and is therefore subject to the law governing the head office. In this context, the foreign head office company is fully liable to the extent of its own assets for any claims creditors might assert against the branch office. Any obligations or debts incurred by the branch office are also legal responsibility of the foreign company. In Germany, there are two kinds of branch establishment which primarily differ due to the degree of the independence from the head office company. Both forms require at least one representative on site in Germany. AUTONOMOUS BRANCH OFFICE The autonomous branch office (selbständige Zweigniederlassung) fulfills tasks that exceed mere implementation and support-related tasks. It has a certain degree of business discretion that is limited by the scope of the business objective of the head office. The autonomous branch usually has its own management with executive powers, a separate bank account, and accounting (on its own or via the head office company) as well as independent business assets (allocated by the head office company). DEPENDENT BRANCH OFFICE The dependent branch office (unselbständige Zweigniederlassung) focuses on maintaining contacts and initiating business in Germany. It performs support and implementation-related tasks without having any individual business discretion and is entirely dependent on the head office. Please find more information about the registration procedure of the two different branch office categories in the "Business Establishment" fact sheet. BRANCH OFFICE TAXATION A branch office is subject to taxation in Germany if it is considered as a permanent establishment according to the applicable double taxation agreement. An autonomous branch office is generally regarded as a permanent establishment, whereas a dependant branch office is only ever considered a permanent establishment under certain conditions. The profit attributable to a German permanent establishment of a foreign corporation is taxed in Germany according to German taxation rules for corporations (corporate income tax, solidarity surcharge and municipal trade tax). Please find further information in the "Corporate Taxation" fact sheet. Other Forms Offices that purely serve to observe the market and pave the way for initial customer contacts are often described as representative offices. However, this term does not exist in German commercial law. Once an office is used by a foreign company for commercial activities (thus forming part of the foreign company organization), it generally must be registered at least as a dependent branch office in Germany. This is typically the case if the foreign company has a permanent representative who conducts the commercial activities of the company in a sustained manner and, in doing so, is subject to its instruction. An office managed by a self-employed third party (e.g. a commercial agent authorized by the company) might be considered a case in which no direct business activity is conducted by the foreign company itself. In this case, registration of the foreign company with the local trade office is generally not required. Decisive here is the actual level of independence of the agent and their freedom to act without instruction from the company.
5 ENTRY AND RESIDENCE RESIDENCE TITLES Germany distinguishes between different kinds of residence titles for specific purposes subject to the length of stay and intended (business) activity in Germany. These include: Visa (Schengen visa and national visa) Residence permit Settlement permit A visa enables the holder to entry and short-term stays (up to 90 days in any 180-day period from the date of first entry) in Germany. A residence or settlement permit is required for long-term stays (more than 90 days in any 180-day period from the date of entry) or to work on a self-employed basis or as an employee in Germany. WHO NEEDS A RESIDENCE TITLE? EU citizens and citizens of the states of Iceland, Norway, Liechtenstein, and Switzerland do not require any residence title to be able to settle or work in Germany. Citizens of the new EU state of Croatia still require a work permit if they are employed in Germany. However, the labor market is open to university graduates from Croatia, as long as they are employed in Germany according to their qualification. NON-EU CITIZENS: ENTRY AND SHORT-TERM STAYS Non-EU citizens generally require a Schengen visa for entry and shortterm stays in Germany. However, individual rules apply for certain countries. For example, nationals from Argentina, Australia, Brazil, Canada, Israel, Japan, Mexico, New Zealand, South Korea, the United States, and Hong Kong can stay in Germany for up to 90 days (in any 180-day period from the date of first entry) without a visa. Residence title Visa (Schengen visa and national visa) Residence permit or settlement permit Enables the holder to... Entry into Germany followed by a shortterm stay (up to 90 days). Entry into Germany followed by a longterm stay (for which an additional residence or settlement permit is required). Long-term stays and stays with the intention to take up gainful occupation. NON-EU CITIZENS: LONG-TERM STAYS For long-term stays, non-eu citizens require a residence or settlement permit. The respective local German mission initially issues a national visa for entry into Germany. The national visa is subsequently converted into a residence permit by the competent local immigration office (Ausländerbehörde). Non-EU citizens from those countries exempt from the short-term stay visa requirements also require a national visa when entering Germany for long-term stay purposes. Exceptions apply for nationals from Australia, Canada, Israel, Japan, New Zealand, South Korea, and the United States who may enter Germany for long-term stay purposes without a national visa. These foreign nationals can directly apply for the necessary residence or settlement permit at the immigration office in Germany. Which foreign nationals require a residence title? Non-EU citizens excluding nationals from Argentina, Australia, Brazil, Canada, Israel, Japan, Mexico, New Zealand, South Korea, the United States, Hong Kong, and some other countries. Non-EU citizens excluding nationals from Australia, Canada, Israel, Japan, New Zealand, South Korea, and the United States. Non-EU citizens excluding nationals from Iceland, Norway, Liechtenstein, and Switzerland. APPLICATION PROCEDURE The residence title generally has to be applied for at the competent German embassy or consulate general prior to entering Germany. The respective visa is then issued in the applicant s home country within a period of a few weeks. The application fee is in general EUR 60. Additional fees of up to EUR 110 for a residence permit are also due. RESIDENCE TITLES FOR DIFFERING BUSINESS ACTIVITIES The relevant residence title required depends on the investor s nationality, and particularly on the specific area of business activity intended in Germany. A residence permit is not normally required for the setting up of a business. However, a residence permit is required in those cases where the foreign national intends to run the business on-site.
6 ENTRY AND RESIDENCE ESTABLISHING A COMPANY For most of the activities in the formation phase of a company, a Schengen business visa is sufficient. It enables its holder to stay in Germany for up to 90 days, during which time all fundamental establishment activities can be performed. Establishment Activities with a Schengen Business Visa Signing and notarization of articles of association Application for registration in the commercial register (submitted by a German notary) Trade office registration (provided at least one representative on-site in Germany is available) Other preparatory activities in the company set-up phase (e.g. the opening of a bank account or the conclusion of lease contracts) Negotiation and conclusion of contracts with business partners Setting up a company in Germany using a Schengen visa does not alone warrant residence permit issue at a later date. If necessary, a residence permit for self-employment or employment should be applied for in due time. A residence permit must also be applied for if the proceedings for setting up a company exceed 90 days. COMPANY MANAGEMENT ON-SITE (SELF-EMPLOYED) Entrepreneurs from non-eu countries managing a company on-site in Germany in a self-employed capacity require a residence permit for the purpose of self-employment. This permit may be granted if the planned business is expected to have a positive economic effect and has secure financing in place. An individual assessment of the intended business project is then made, taking into account, e.g.: the viability of the underlying business idea, the foreigner s entrepreneurial experience, the level of capital investment, and whether an economic interest or regional need regarding the intended business activity exists. A residence permit for the purpose of self-employment is limited in time for up to three years. A settlement permit (permanent) can be granted after three years if the investment project has been successfully realized and has stable income prospects. Who is considered self-employed (e.g.)? Entrepreneurs (including freelance professions) Partners in a partnership Majority shareholders of a GmbH who are also managing directors of the GmbH EMPLOYMENT IN GERMANY Non-EU citizens employed in Germany require a residence permit for the purpose of taking up employment. The residence permit for the purpose of taking up employment is limited for a period of up to three years. This can however be extended. A permanent settlement permit can be issued after five years. As a rule, a residence permit for the purpose of taking up employment is only issued if, amongst other things, a concrete job offer can be demonstrated. Approval from the Federal Employment Agency FEA (Bundesagentur für Arbeit) may be required subject to the foreign national s level of qualification and characteristics of the job to be performed in Germany. Certain occupational groups are, however, entirely exempt from the FEA approval requirement. Occupational Groups Exempted from FEA Approval Executives (e.g. employed managing directors, managerial employees) Specialists holding a German university degree Scientific research personnel EU Blue Card applicants (please see below) For occupational groups not exempted from FEA approval, this is granted if: (1) no suitable German or EU employees are available (so called priority check ) and (2) the foreign employee is hired at the same terms and conditions of employment as comparable German employees (especially in terms of wages and working hours). FEA approval without (1), priority check, only with regard to (2), terms and conditions of employment, is possible e.g. for internal company specialists. EU BLUE CARD - RESIDENCE PERMIT FOR HIGHLY QUALIFIED EMPLOYEES The so-called EU Blue Card allows highly qualified non-eu citizens to be fast tracked to employment in Germany. Foreigners may apply for this kind of residence permit if they hold a German university degree (or a proven comparable qualification) and demonstrate a job contract with an annual gross salary of at least EUR 47,600 (2014). The annual gross salary level is lower (EUR 37,128 in 2014) in professions with a particular skill shortage (e.g. engineers, IT specialists). This category requires FEA approval without priority check. A permanent settlement permit can be granted after 33 months - or after 21 months if the foreign citizen has attained a certain German language proficiency level.
7 BUSINESS ESTABLISHMENT EFFICIENT COMPANY FORMATION Chronological Steps Needed to Set Up a GmbH Step 1 Drafting of articles of association There are a number of different ways to enter the German market. Expanding foreign companies normally opt to establish a local subsidiary or register a local branch office. In both cases the establishment procedures are swift and efficient, requiring only a few clearly defined steps. Step 2 Step 3 Step 4 Step 5 Notarization of articles of association Payment of share capital Registration in the commercial register Trade office registration A subsidiary is an autonomous company established and predominantly held by another company (parent company). The establishment procedure starts with the formation of a company and is completed upon registration. Foreign companies often choose the private limited liability company option (Gesellschaft mit beschränkter Haftung GmbH) for local subsidiary formation. A branch office forms part of the foreign head office company s organization. A formation procedure is therefore not applicable only the registration of the branch is required. SETTING UP A GMBH The GmbH is the most widely used legal form for corporations in Germany. It combines high flexibility with relatively few obligations. At least one shareholder (private individual or legal entity) is required in order to establish a GmbH. The nationality and residence of the shareholder(s) and the managing director(s) of a GmbH are irrelevant. However, the company must have a German business address and a local representative. 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). A contribution in kind must, for example, be agreed upon in the articles of association, a valuation report is necessary, and the asset must be fully contributed. The formation procedure (with a cash contribution) can be divided into the following steps: 1: DRAFTING OF ARTICLES OF ASSOCIATION The articles of association shape the identity and constitution of the company. Thanks to the large scope for contractual design, the GmbH is a very flexible corporation. Mandatory content includes share capital, shareholders and respective shares held, business name, registered office, and company object. 2: NOTARIZATION OF ARTICLES OF ASSOCIATION The drafting and notarization of the articles of association are normally performed in one session by a German notary. The founding shareholder(s) adopt(s) its articles of association and appoint(s) one or more managing directors in a notarial deed. The articles of association must also be signed by all founding shareholders and notarized. 3: PAYMENT OF SHARE CAPITAL Once the articles of association have been notarized, a company account should be opened and the share capital deposited. A payment of EUR 12,500 in total is sufficient for registration with the commercial register of a standard EUR 25,000 GmbH. German Notaries Civil law notaries are appointed lawyers sworn to impartiality and entrusted with public functions. Depending on where in Germany the notary is appointed, he or she practices either as a single profession notary or as an attorneynotary. The number of notaries in each federal state is limited in order to ensure independence and impartiality. In Germany notarization is required, amongst other things, for establishment of corporations and applications for entry in the commercial register (Handelsregister). Notary fees are stipulated by law and subject to the value of the transaction. The notary fees for a GmbH establishment depend among other things on the share capital. The estimated total costs for a standard GmbH are approximately EUR 700 to EUR 800.
8 BUSINESS ESTABLISHMENT Before taking up commercial activities, a new business in Germany has to be registered with the public commercial register and the local trade office. 4: REGISTRATION IN THE COMMERCIAL REGISTER When the required share capital has been verifiable contributed to the GmbH, the managing director(s) apply for the registration of the GmbH in the commercial register (Handelsregister). The application is electronically filed by a notary. This must be personally signed by all managing directors of the GmbH (power of attorney not possible) and accompanied by documentation pertaining to the applying GmbH. Moreover, the commercial register requires documentation verifying the existence of any parent company as well as the power of representation for persons acting on behalf of it. 1 The commercial register checks if all formation requirements for a GmbH have been met. If so, the GmbH is registered and comes into existence as a separate legal entity. The limitation of liability becomes effective upon registration in the commercial register, too. 5: TRADE OFFICE REGISTRATION Before business operations are started, the trade office (Gewerbe-/Ordnungsamt) must be notified about the planned activity. A business license or permit is not necessary for registering the business in the majority of cases. For some business sectors, a permit or authorization may, however, be required. SETTING UP A BRANCH OFFICE Any foreign company with a head office and registered business operations abroad can establish a German branch office. There are two different categories of branch offices: the autonomous branch office (selbständige Zweigniederlassung) and the dependent branch office (unselbständige Zweigniederlassung). For more information about the different categories of branch offices please refer to the publication s folder. REGISTRATION IN THE COMMERCIAL REGISTER Registration in the commercial register is only required by the autonomous branch office. The application must include detailed information pertaining to the foreign company and the branch office. This includes, for example, documentation verifying the existence of the foreign company as well as the power of representation for persons acting on its behalf.¹ TRADE OFFICE REGISTRATION Both the autonomous and dependent branch must register in the trade office before business operations are started. As with the registration of a GmbH, a business license or permit is generally not necessary for registering the business. A permit or authorization may still be required in a few business sectors. 1 Generally the following documents are required: excerpt of the foreign commercial register or certificate of incorporation and certificate of good standing as well as articles of association of the foreign parent company. The documentation must be notarized and either legalized or issued with an apostille. It should also be accompanied by a certified translation into German language. Please notice that the documentation required can differ depending on the legal form and origin of the foreign company. It is advisable to consult a German notary at an early stage for individual advice. Commercial Register The public commercial register (Handelsregister) ensures legal certainty in the area of commercial law by providing important information about registered companies. It is administered by the local courts (Amtsgericht). Some of the company data is also available online (www.unternehmensregister.de) where commercial register excerpts can also be obtained for a fee. This means that it is fairly quick and easy to check the existence and power of representation of any given company. All corporations as well as many other enterprises requiring business operations to be set up in a commercial manner have to be registered in the commercial register. Any application for registration in the commercial register must be submitted by a German notary in certified and electronic form. Trade Office Before starting business operations, all business operators must notify the local trade office (Gewerbe-/Ordnungsamt) of the municipality in which the business is located. Business licenses may be required in a few business sectors (e.g. estate agents, brokers, security firms, property developers). Trade office registration requires at least one local representative. The trade office generally forwards the registration e.g. to the tax authority and the chambers of industry and commerce (Industrieund Handelskammer - IHK) or the chambers of crafts (Handwerkskammer). Chamber membership is automatic and mandatory.
9 CORPORATE TAXATION CORPORATE INCOME TAXATION Germany offers one of the most competitive tax systems of the big industrialized countries. There is no consistent nationwide tax rate for corporate income taxation. Instead, income taxation of corporate companies generally consists of three components: Corporate income tax Solidarity surcharge Trade tax Corporate income tax and solidarity surcharge are components with fixed rates, whereas the trade tax rate varies locally. The total amount of these three taxation components forms the overall tax burden. For that reason, the total corporate tax burden can be as low as percent in some areas. The average corporate tax burden in Germany is percent. Germany Trade & Invest can support you in identifying attractive locations in Germany. CORPORATE INCOME TAX Corporate income tax is levied as a flat nationwide tax at a rate of 15 percent of the taxable corporate income. Corporate income tax is payable by all German corporations such as the GmbH and AG, as well as by all permanent establishments of foreign corporations in Germany. SOLIDARITY SURCHARGE The solidarity surcharge (Solidaritätszuschlag) is a fixed and flat nationwide component of company taxation. It is added to the corporate income tax and set at a rate of 5.5 percent of the corporate income tax rate (and not 5.5 percent of income as such). Taken together, the corporate income tax and solidarity surcharge amount to a total taxable rate of percent. Average Corporate Tax Burden of Selected Countries 2013 Czech Rep. Poland Hungary UK Netherlands Germany Spain Italy Belgium France Japan USA (NY) Note: 1 National German average; lower overall tax rates in certain areas are possible, e.g % in certain municipalities. 2 Top corporate income taxation rate; lower starting rates or other special tax rates available. Example USA: progressive central state rate from 15% to 35%. 3 Based on standard rate of IRAP. 4 Local corporate income tax added. Source: German Federal Ministry of Finance 2014 TRADE TAX Trade tax is a municipal tax. As such, tax rates are individually determined by each municipality. The individual trade tax rate of a specific site is therefore the decisive factor for the overall tax burden. The trade tax rate must be at least seven percent. There is no statutory ceiling of the trade tax rate, but the German average trade tax rate is around 14 percent. As a rule, the trade tax rate tends to be higher in urban areas than in rural areas. The solidarity surcharge is not levied on trade tax. The individual trade tax burden depends on two factors: The tax base rate of 3.5 percent (throughout Germany). The multiplier (Hebesatz) stipulated individually by every municipality starting at 200 percent % 19.00% 20.62% % % % % % % 2 The taxable income is multiplied with the tax base rate resulting in the so-called tax base amount. This tax base amount is then multiplied by the applicable municipal multiplier. The individual percentage of the local trade tax rate is calculated by multiplying the trade tax base rate of 3.5 percent with the local municipal multiplier. Model Calculation Overall Corporate Tax Burden * COMPONENTS: 15% (Corporate Income Tax) % (Solidarity Surcharge) + 14% (Trade Tax Rate) * ~29.83%* 36.10% % 2 0% 5% 10% 15% 20% 25% 30% 35% 40% 39.62% 2, 4 * German average trade tax multiplier of 400%.
10 CORPORATE TAXATION TAXATION OF DIVIDENDS Germany provides an extensive network of double taxation agreements to ensure that double taxation in international business relations is ruled out. If a German subsidiary pays out dividends to a foreign parent corporation, generally a withholding tax (Kapitalertragssteuer) of 25 percent plus solidarity surchage is due. In the case of an existing double taxation agreement (DTA) with a foreign country, the withholding tax is usually levied at a significantly lower rate, e.g. 15, 10 or 5 percent. Value-added Tax in Selected EU Countries Hungary Poland Italy Belgium Czech Rep. Netherlands Spain UK France Germany 23% 22% 21% 21% 21% 21% 20% 20% 19% 27% Withholding tax still paid in Germany can be credited against existing foreign tax obligations or the parent company has been exempted from dividend-payable tax in the respective DTA state. The double taxation agreement with the USA for example even allows a reduction of dividend taxation to zero percent where certain requirements are fulfilled. Moreover, EU law, under certain conditions, allows tax free transfer of dividends between all EU member states. Different rules may apply for dividend payments by partnerships. VALUE-ADDED TAX (VAT) Value-added tax (VAT) is a tax on the exchange of goods and services. Companies are generally obliged to add value-added tax to the prices of their goods or services and to invoice their customers accordingly. In specific business-to-business transactions, the business client himself has to transfer the VAT to the tax authority so-called reverse charge procedure (applicable e.g. to certain Source: European Commission 2014 types of construction work carried out by subcontractors). The reverse charge procedure is also generally applicable for intra-community supplies, i.e. the sale of goods or services from an entrepreneur in one EU member state to a commercial customer in another EU member state. In general, the commercial customer has to pay VAT in his EU member state in these cases ( intracommunity acquisition ). VAT RATE The 19 percent VAT rate in Germany is below the European average. A reduced rate of seven percent applies to certain consumer goods and everyday services (such as food, newspapers, local public transport, and hotel stays). Some services (such as bank and health services or community work) are completely VAT exempt. Value-added tax which is collected has to be paid to the responsible tax office on a monthly, quarterly or annual basis. The exact time frame depends on the company s level of turnover. INPUT VAT DEDUCTION Companies themselves regularly pay VAT when they purchase goods or services. The taxes collected and paid can be balanced out in the VAT return as input VAT deduction (Vorsteuerabzug). For companies valueadded tax represents a transitory item only. Tax Office Registration Every company has to register with the local tax authority in order to be issued with a tax number required for corporate income taxation as well as national German VAT purposes. A tax assessment questionnaire must be completed before a tax number is issued. Where the company intends to deliver/import goods to or from other EU member states, it requires a specific VAT identification number issued by the Federal Central Tax Office. The VAT identification number application can be filed online or even be combined with the application for the regular tax number.
11 EMPLOYEES AND SOCIAL SECURITY LABOR MARKET HIRING A WORKFORCE Germany is internationally known for its highly qualified, motivated, and conscientious workforce. Employers are free to tailor the recruiting process to their individual needs. Only a few guidelines need to be observed; such as offering jobs in a non-discriminatory manner (meaning that employers are required to hire on an equal opportunity basis without discrimination in terms of race, ethnicity, gender, religion, conviction, disability, age, or sexual orientation). Recruitment services are offered by the Federal Employment Agency (Bundesagentur für Arbeit), which provides its services free of charge and operates job centers in all large towns and cities in Germany. There are several programs offering extensive public support for hiring employees. EMPLOYMENT MODELS REGULAR EMPLOYMENT Regular employment contracts are unrestricted and can be terminated by a written letter of termination, provided a mandatory notice period has been observed. In a regular employment contract, employer and employee usually agree upon a sixmonth probationary period during which the contract may be terminated by either party at any time with two weeks notice. Labor Cost Growth in Total Economy (annual average growth in percent) Germany France Spain Netherlands UK Czech Rep. Hungary Slovak Rep. Poland Source: Eurostat % 1.9% 0% 2% 4% 6% FIXED-TERM CONTRACTS Fixed-term contracts expire automatically on a specified date without a formal dismissal requirement. It is for the employer to decide whether to renew the contract or not. Fixedterm contracts are generally limited to a maximum of two years and may be extended up to three times provided the total duration of contract does not exceed the maximum of two years. During the first four years of a company s existence in Germany, employment contracts may be limited or extended several times up to a total duration of four years. TEMPORARY EMPLOYMENT Temporary employment means that a company leases employees from a temporary employment agency. However, it must be of a temporary character. The employee is legally employed by the temporary employment agency and receives the salary from them as no formal contractual relationship exists between the leasing company and the employee. The employment conditions are usually regulated by collective agreements. The temporary employment sector is subject to statutory hourly minimum wages. The duration and the terms of termination of the service of the employee in the hiring company are subject solely to the service contract between the hiring company and the temporary employment agency not to labor regulations. 2.4% 2.6% 3.0% 4.5% 5.0% 5.2% 5.3% WAGE LEVEL DEVELOPMENT Germany is known for very stable labor costs. Since 2004, labor costs have risen in most EU countries. While some countries - particularly those in eastern Europe - experienced a rise of five percent, Germany recorded the lowest labor cost growth within the EU at just 1.7 percent. A general minimum wage of EUR 8.50 an hour will come into effect from January 1, Transitional rules will apply in some sectors (e.g. those with universally applicable collective wage agreements) until There are also general exemptions from the national minimum wage. For instance, the following group categories are not covered by the minimum wage regulation: Young people under 18 years of age Students completing compulsory internships/internships up to three months Long-term unemployed (for the first six months in employment)
12 EMPLOYEES AND SOCIAL SECURITY SOCIAL SECURITY In contrast to some other industrialized countries, the core social security in Germany is collectively financed by means of a process of redistribution. The current costs for pensioners, sick people, those in need of nursing care, and unemployed people are paid directly from contributions by employees and employers alike. COMPONENTS OF SOCIAL SECURITY INSURANCE Social security contributions are made up of: Accident insurance contributions have to be transferred by the employer to the Employers Liability Insurance Association (Berufsgenossenschaft). The salary tax of the employee is also withheld by the employer and transferred to the tax authorities (Finanzamt). In order to facilitate the international transfer of employees, Germany has signed social insurance agreements with countries including e.g. Australia, Brazil, Canada, China, India, Israel, Japan, South Korea, Turkey, and the USA. Within the EU, the posting of employees is facilitated by EU regulations. This allows transferred employees to remain within the national social insurance system of their home country, if they are relocated to Germany for a certain time. In this case, the employer does not have to pay German social security contributions for the employees temporarily located in Germany. Health insurance * Nursing care insurance Pension insurance Unemployment insurance Accident insurance Generally speaking, social security contributions are roughly shared equally by employer and employee with the exception of accident insurance costs which are solely borne by the employer. Allocation of Social Security Contributions Employer share of social security contributions Employee share of social security contributions Income tax to be paid by employee PAYROLL ACCOUNTING Employees in Germany receive a net wage - meaning a salary from which tax and social security contributions have already been deducted. Gross salary Employee gross salary before personal income tax deduction Employee net salary All social security contributions are withheld by the employer after calculation of the gross wage. These are transferred to the employee s health insurance company. From here, all contributions are distributed to the relevant funds with the exception of accident insurance. * From a certain level of monthly gross wage salary on, employees have the possibility to join a private health insurance company instead of the statutory health insurance obligatory for all employed people. Social security contributions are more or less shared equally by employer and employee. Each corresponds to approximately 21 percent of the employee s gross salary. Only the costs for accident insurance are exclusively borne by the employer. Components of social security insurance in Germany Pension insurance Health insurance Unemployment insurance Nursing care insurance Accident insurance
13 GERMANY TRADE & INVEST SUPPORT GERMANY TRADE & INVEST HELPS YOU Germany Trade & Invest s teams of industry experts will assist you in setting up your operations in Germany. We support your project management activities from the earliest stages of your expansion strategy. We provide you with all of the industry information you need covering everything from key markets and related supply and application sectors to the R&D landscape. Foreign companies profit from our rich experience in identifying the business locations which best meet their specific investment criteria. We help turn your requirements into concrete investment site proposals; providing consulting services to ensure you make the right location decision. We coordinate site visits, meetings with potential partners, universities, and other institutes active in the industry. Our team of consultants is at hand to provide you with the relevant background information on Germany s tax and legal system, industry regulations, and the domestic labor market. Germany Trade & Invest s experts help you create the appropriate financial package for your investment and put you in contact with suitable financial partners. Incentives specialists provide you with detailed information about available incentives, support you with the application process, and arrange contacts with local economic development corporations. All of our investor-related services are treated with the utmost confidentiality and provided free of charge. STRATEGY EVALUATION DECISION & INVESTMENT PROJECT MANAGEMENT ASSISTANCE Business opportunity analysis and market research Market entry strategy support Project partner identification and contact Joint project management with regional development agency Coordination and support of negotiations with local authorities LOCATION CONSULTING /SITE EVALUATION Identification of project-specific location factors Cost factor analysis Site preselection Site visit organization Final site decision support SUPPORT SERVICES Identification of relevant tax and legal issues Project-related financing and incentives consultancy Organization of meetings with legal advisors and financial partners Administrative affairs support Accompanying incentives application and establishment formalities
14 CONTACT IMPRINT PUBLISHER Germany Trade and Invest Gesellschaft für Außenwirtschaft und Standortmarketing mbh Friedrichstraße Berlin Germany T. +49 (0) F. +49 (0) EXECUTIVE BOARD Dr. Benno Bunse, Chairman/CEO Dr. Jürgen Friedrich, CEO AUTHORS Christina Schön, Tax & Legal Services, Germany Trade & Invest, Udo Sellhast, Tax & Legal Services, Germany Trade & Invest, EDITOR William MacDougall, Germany Trade & Invest LAYOUT Germany Trade & Invest PRINT Asmuth Druck & Crossmedia GmbH & Co. KG, Köln NOTES Germany Trade & Invest, October 2014 All data provided is based on the most current information available at the time of publication. Germany Trade & Invest accepts no liability for the actuality, accuracy, or completeness of the information provided. ORDER NUMBER 15720
15 ABOUT US Germany Trade & Invest is the foreign trade and inward investment agency of the Federal Republic of Germany. The organization advises and supports foreign companies seeking to expand into the German market, and assists companies established in Germany looking to enter foreign markets. All inquiries relating to Germany as a business location are treated confidentially. All investment services and related publications are free of charge. Photo: Reicher - Fotolia.com Germany Trade & Invest Friedrichstraße Berlin Germany Supported by the Federal Ministry for Economic Affairs and Energy on the basis of a decision by the German Bundestag. T. +49 (0) F. +49 (0)
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