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Doing business in Germany can be both challenging and rewarding, but that’s to be expected of the country with the largest economy in Europe and the fourth largest in the world. The economy is diverse, and it is underpinned by a highly skilled workforce, a sturdy legal system, excellent research and development, superb infrastructure, and a healthy social climate.
These elements continue to attract investment from around the world. However, as undoubtedly many investors and entrepreneurs have discovered, the success of those ventures depends partly on understanding the challenges of doing business here. Among those challenges are the country’s intricate legal environment, tax system, and administrative procedures.
One of the most important tips is to familiarize yourself with the country’s bureaucratic requirements. For example, you should find out about registering a new business with the local trade and tax office, the commercial register, the local chamber of commerce, and industry or professional organisations.
You should also familiarise yourself with the complex tax laws, as well as with the property registration procedure.
Guide to business in Germany for foreigners
What are the benefits of doing business in Germany?
The benefits of doing business here are many, which is to be expected from a country that is famous for the strength of its economy, legal protections, education system, and infrastructure. Beyond that, the country is undeniably influential within the Eurozone.
The country is a hub of research, development, and innovation. The government supports research institutions and start-ups, and it licenses intellectual property to assist researchers’ careers. Other benefits include access to the EU’s biggest consumer market, massive trade events, its geographic location at the centre of the EU, attractive investment incentives, and a robust start-up culture.
What are the major industries in Germany?
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 out 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 SMEs (named ‘mittelstand’) across a broad range of industries.
What are 'mittelstand' companies?
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 here. 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, the country 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 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 their corporate taxes 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.
What are the challenges for businesses in Germany?
In some areas, red tape can pose a significant challenge when doing business in here. 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.
How to open 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 in registering your business in Germany is address registration (anmeldung). After this step, 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.
Business etiquette in Germany
Correct business etiquette is taken very seriously across Germany and is something you should become familiar with when branching out into the German market.
Punctuality and delivering on agreements are naturally of the utmost importance, while if you are conversing in German then it’s necessary to know the difference between formal (Sie) and informal (du) direct speech. Although it depends greatly on the type of business or workplace you are in, a formal dress code is typically adhered to and greetings are always made with a handshake and eye contact.
How to pay a business invoice via money transfer to Germany
Whether you are transferring funds to a German supplier or sole trader, you can make ad hoc payments for overseas invoices via your online moneycorp business account. From here you can also buy currency, make payments and set up users and approval workflows for your payment needs. Read our full guide on how to pay an international invoice for more information.
How to pay your German-based staff via global payments
Our global payments solutions are designed to address the mass payment needs of our clients, automatically selecting the best available rate from our pool of 18+ liquidity providers for your payment.
No matter if it's a workforce of 10 or 1000 employees, our global payments service ensures your employees are paid on time, with access to a wide range of currencies. As well as helping you to pay German-based employees, our solutions can also be ideal to cover other operating costs of yours.