If you’re planning on starting a business in Germany or opening a German office to extend your market reach, it’s worth looking into the requirements and opportunities within the German and wider European market. From rates of taxation and legal requirements to differences in business culture, a full picture will ensure that you’re well prepared to make the most of your new location.
What are the major industries in Germany?
One of the biggest industries in Germany is manufacturing. The country is well-known as an automotive manufacturer but also has a high concentration of businesses in electrical and engineering equipment, textiles and pharmaceutical companies. Innovative areas such as robotics are balanced by more traditional commodity-based industries such as steel, coal and iron, while industries such as aviation are drawn to the number of cutting-edge engineering companies and specialists.
When it comes to business opportunities in Germany for foreigners, the most interesting aspect of the commercial landscape is the high proportion of ‘mittelstand’ companies across a broad range of industries. Mittelstand companies are equivalent to UK SMEs; the classification includes any company with less than 500 employees and therefore may relate to many expats starting a business in Germany. One of the reason that these companies are high profile in Germany is because there are many global leaders due to specialisation. A sense of the scale and importance can be seen in the numbers – less than 30 of the 500 biggest companies across the globe are located in Germany, but 48% of small world market leaders in specialist markets are German in origin. If you have a unique proposition in a specialist or niche industry, Germany may be a place to foster that innovation and grow in markets across the globe.
What is the corporate tax rate in Germany?
The corporate tax rate for Germany is 15% but business tax in Germany is made up of several component parts. A solidarity surcharge of 5.5% is levied in corporate income tax and a municipal surcharge which ranges from 14% to 17% depending on the district. This brings the combined rate of tax roughly between 30% and 33%. This is levied on profits from business revenue, investments and the sale of assets. If your company is based in Germany, the tax applies to worldwide profits but if you’re opening a German branch of your business, you are only liable for taxation on activities and profits relating to activities in Germany.
It’s worth investing in a tax specialist in-country because there are specific accounting rules that apply. One of the key points is that books must be kept on an accrual basis, and profits are calculated using the net worth comparison message, meaning they are determined as the difference between net assets at the end of the previous year and net assets at the end of the current year. Capital contributions are tax-free and withdrawals must be financed out of taxable income.
In many cases, the commercial and tax balance sheets are likely to be identical but if there are any differences, companies are required to prepare both a commercial balance sheet (Handelsbilanz) and a tax balance sheet (Steuerbilanz) or an appendix added to a single balance sheet. When it comes to payments, companies must file by the deadline on 31st May for the previous year with most paying quarterly on an advanced basis on 10 March, 10 June, 10 September and 10 December.
Challenges of doing business in Germany
In some areas, red tape can pose a significant challenge when doing business in Germany. If you’re just starting out and have purchased office space, allow roughly 40 days for the registration of property. You will require an extract from the Land Registry and a notarised transfer agreement to obtain a waiver of pre-emption rights and after this, confirmation that transfer tax has been paid. Building permits and obtaining utilities can also be lengthy procedures, with the exception of gaining electricity, which takes just 17 days compared to the OECD average of 98 days.
However, the opportunities may outweigh the challenges when starting a business in Germany; the streamlined financial sector makes it easy to obtain credit, work is underway to improve protections for investors and both contract enforcement and insolvency resolution are relatively efficient. As well as legal and bureaucratic requirements for to comply with German taxation and commercial law, it’s worth considering the culture of Germany. When it comes to negotiations with German partners, hierarchy and definite procedures are highly valued so it’s worth allowing yourself the time to have a measure of patience.
Registering a business in Germany
Whether you’re starting a business in Germany or setting up an outpost of an existing company, you’ll need to register the business, which is a complex process that can take time.
The first step is address registration (anmeldung); on registration you’ll receive a certificate (anmeldebestätigung) and a tax ID (steueridentifikationsnummer) and a VAT number (umsatzsteuernummer). It’s worth checking the specific classification of your work, the German system differentiates between a freiberufler (freelancer, including engineering, architecture, teaching and professional services) or a gewerbetreibender, or tradesman. Working in a trade will require a trade license and means that you may be liable for trade tax and subject to different rules of taxation, but also includes a listing in the trade register. The certificate of registration is needed to open a bank account, which is itself a requirement for registration with the finanzamt, or tax office.
Germany has the biggest economy in Europe and despite the current downturn, has a global reputation for innovation and research as well as being an attractive proposition for foreign direct investment (FDI). A modern finance system, world-class infrastructure and access to markets across the EU make the country an attractive location for growing businesses. If you’ve decided to build on your success and start a business in Germany or open a German office, a currency specialist can help you manage the costs and revenue with great rates, expert guidance and a wealth of currency tools to support your business in Germany.