As one of Europe’s largest markets, Germany remains an attractive place for investors from all over the world. The country is an innovative leader across many areas of technology, having a highly qualified workforce and an outstandingly developed infrastructure. SMEs in particular benefit from the well-organized business environment and secure legal climate. Across industries from software to pharmaceuticals, the practical emphasis of effectively translating research into practical applications has been an engine for job growth, and a way to integrate German scientific research to benefit society at large.
In December 2019, the German government formed a commission and funded the Agency for Breakthrough Innovations. This new agency is charged with launching innovations with radically new technologies. New investors have a greater potential to transform markets with new products, services, and value chains. Prior to the recent pandemic, a lot of companies that have not considered Germany before. That said, Germany’s geographical diversification of corporate structures will serve as a catalyst to bring more production to Europe. Germany will benefit enormously from this transition, especially with the UK becoming significantly less attractive after Brexit.
Legal system
Germany’s legal system is based on civil law. It consists of a legislature and an independent judiciary. Legislative power resides at both the federal (Bund) and the state (Land) level. The constitution presumes that all legislative power remains at the state level unless otherwise provided. Many fundamental matters of administrative law fall within the jurisdiction of the individual federal states.
Foreign investment
Germany offers a variety of incentive programs and public funding instruments that can be applied to a range of funding purposes. Among the most common and popular programs are:
GRW cash grants. The cost to set up new facilities may be reduced through cash incentives provided through grants. Large companies may be reimbursed for up to 20% of eligible investment costs, medium companies may receive 20% and small companies can get up to 40%.
Research and development grants. Special grants are designed to help research and development projects. These programs include interest-reduction loans and other special partnership programs.
Grants for hiring. The German Federal Employment Agency and German states offer a variety of labor incentive programs created to meet the needs of companies looking to expand their workforce.
Business Vehicle
Two types of corporations are commonly used in Germany:
The stock corporation (Aktiengesellschaft, AG) is comparable to the English public limited company (plc).
The limited liability company (Gesellschaft mit beschränkter Haftung, GmbH) is comparable to the English private limited company (Ltd).
They both have the benefit of limited liability for their shareholders. The most common legal form in Germany is the GmbH, including by foreign investors. The corporate governance of a GmbH is significantly easier to handle, and the capital maintenance rules are less strict compared to an AG.
Accounting Principle
German commercial GAAP/IFRS applies. Companies must prepare annual financial statements. Tax authorities can approve transferring electronic bookkeeping abroad.
Taxation
Corporate rates
The corporate tax rate is 15% (15.825%, including the solidarity surcharge). The municipal trade tax typically ranges between 14% and 17%, and the minimum rate is 7%. The effective corporate tax rate (including the solidarity surcharge and trade tax) typically ranges between 30% and 33%.
Individual rates
Rates are progressive up to 45%. A solidarity surcharge of 5.5% (resulting in a top rate of about 47.5%) and a church tax of 9% (8% in Bavaria and Baden-Württemberg) are levied on the income tax. Private investment income, including capital gains, generally is subject to a 25% (26.375%, including the solidarity surcharge) final withholding tax. Taxpayers may opt for taxation at their individual tax rate, if lower. Individual taxpayer solidarity surcharges will be partially abolished/decreased as of 2021.
Employment
Work Permit
In principle, foreign employees require a residency permit, including a work permit. However, on 1 March 2020, the Skilled Employee Immigration Act (Fachkräfteeinwanderungsgesetz) entered into force. Consequently, foreign employees only require a residency permit to be permitted to work in Germany, provided that no law provides for a restriction or a prohibition.
Work Hour/Conditions
The maximum working hours per week in Germany is 48 hours. However, in most cases, a standard work week does not exceed 40 hours. Employers are prohibited to force employees to work for more than six consecutive hours without a break. Employees are eligible for a 30-minute break after for hours worked between 6 to 9 hours, and a 45-minute break is mandatory when employees work more than 9 hours.
Companies typically spend a significant amount of time, money, emails, and travel points to set up a subsidiary in Germany. The process can take months from start to finish and will require companies to travel back and forth between Germany and the home country. Companies will also need to possess extensive knowledge about Germany local laws, employment practices, and guaranteed benefits to avoid non-compliance. Therefore, a simple solution is to work with a global PEO. HSP Group manages everything from hiring employees on the client’s behalf to dispersing benefits and setting up payroll. As the employer of record, we take the liability from your shoulders and put it on ours, so we ensure you meet all local compliances.
Contact us today to learn more about our comprehensive solution and how we can help you expand your company in Germany.
Want a 360° understanding of local regulations and how to make your market entry efficient and cost-saving? HSP has the answer. Specialist in German and global legislation, our team offers the following integrated statutory compliance services covering accounting, corporate law, VAT, and corporate income tax. Advantages include one point of contact, multiple competencies, and a proven standardized process guaranteeing high quality and timely delivery, as well as access to key information for compliance, reporting, and planning purposes. Additional benefits are control of cost-fixed fees, flexibility, and a large and well-balanced team.
