Situated in central Europe, Germany is a member state in the European Union, and is bordered by nine countries: namely Denmark, Netherlands, Belgium, Luxembourg, France, Switzerland, Austria, Czech Republic and Poland. Germany is the seventh largest country in Europe. With a gross domestic product (GDP) of 3.73 trillion USD, the German economy is the fifth largest economy in the world and Europe’s largest economy. The country is a leading exporter of products such as; machinery, vehicles, chemicals, and household equipment and benefits from a highly skilled labor force. The countries impressive economy, consumer market, and workforce combined with its strategic position in the European Union (EU) make it a smart choice for companies looking to expand their business in Europe and across the globe. Germany is one of the world’s largest car producers in the world.
Germany’s stable political and economic climate for expansion is most favorable for investors. Its strong legal protections enable foreign investors to quickly enforce their rights and protect their industrial and intellectual property. Following are the advantages to establish a business entity in Germany:
A strategic location
As a more favorable business location, Germany offers the benefits of significant spending power, an innovative climate, dense transport network in the center of Europe and highly skilled workers. The country’s infrastructure makes it easy for foreign investors to set up their own business.
Germany economy is stable, thriving and globally famous for manufacturing world famous vehicles like: Volkswagen, BMW, and Daimler, etc. Germany has a mixed economy, and also known as a social market economy which means, a free market economy that operates within a framework of government oversight and social welfare programs.
Large consumer market
Both in terms of the number of people and purchasing power, Germany is the largest consumer market in Europe. Expansion of business in Germany can give a direct access to massive consumer base, helping to grow the business.
Strategic position in Europe
Any foreign company entering the European market may consider Germany for its strategic geographic location. However, the country is also a popular and favorite location for trade shows and other industry wide events. Its trade fairs welcome approximately 10 million visitors each year.
Due to its robust vocational education and training (VET) system 44% of upper secondary graduates in Germany hold a vocational qualification. Germany’s reputation for productivity and innovation is owed largely to the country’s highly skilled workforce.
Simple Tax Regime
Individual income taxes
In Germany, all resident individuals are taxed on their worldwide income, whereas non resident individuals are taxed on German sourced income only. The individual income tax, based geometrically progressive rates, starts at 14% and rises to 42%. Further, the taxable income covers income from the following categories:
- Agriculture and forestry;
- Trade or business;
- Independent professions;
- Capital investment;
- Rents and royalties;
- Other income, as defined by tax law.
Personal income tax Rate
- Income for single taxpayers from 0 to 10,347 EUR and for married taxpayers from 0 to 20,694
EUR is liable to tax at a rate of 0%;
- Income for single from 10,347 to 58,596 EUR and for married from 20,694 to 117,192 EUR is
liable to tax at a rate from 14 to 42%;
- Income for single from 58,596 to 277,825 EUR and for married from 117,192 to 555,650 EUR is
liable to tax at a rate of 42%;
- Income for single from 277,825 EUR and above and for married from 555,650 EUR and above is
liable to tax at a rate of 45%.
Corporate income taxes (CIT)
In Germany, the corporate residents are taxed on their worldwide income wherein, due to double taxation treaties (DTTs) signed by Germany, exempts income attributable to a foreign permanent establishment(PE). Non residents with PE or property income are taxed by assessment on German source income, whereas royalties and dividends are taxed by withholding at source. German business profits are subject to following two taxes:
Companies are liable to pay corporation tax at a uniform rate of 15% and liable to surcharge of 5.5%.
The trade tax rate is a combination of a uniform tax rate of 3.5% base rate and a municipal tax rate depending on where the PEs of the business is located.
Incorporating a company is a wise decision to start a business in Germany, Unless the business is trivial, it can protect from a lot of inconveniences and trouble with the authorities. Germany is one of the world’s largest and most stable trading economies, offering a secure, highly developed political and economic framework. Its strong legal protections enable investors to quickly enforce their rights and protect their industrial and intellectual property.Following are some of the most widespread forms of business entities of Germany.
Company with limited liability
This type of company is the most widespread company form in Germany. In this form of entity, the shareholders are not personally responsible for the company’s debts. To form a company with limited liability and to be its shareholder, one person is sufficient. However, the share capital must be at least EUR 25,000.
Joint stock company
To form a joint stock company at least one person who may be the only shareholder of the company, and a share capital of EUR 50,000 is required. In order to incorporate a German joint stock company, the investor will need to sign the articles of association, however, the company will become active only after the registration is completed at the Register of Companies.
The limited partnership
To form a limited partnership you need a capital of 50,000 euros. This capital has to split into shares. The Partnership has to be registered with the Trade Register and the articles of associations of the entity have to be notarized. The limited partnership is more suitable for small and medium sized enterprises (SMEs).
The general partnership
In Germany, to start a general partnership there is no need of capital, as each partner has unlimited liability. This type of entities has to be registered with the Trade Register and has to bear the OHG abbreviation at the end of the name for clarification or liability. The general partnership needs a board of directors and a supervisory body.
Civil law partnership
In order to form a civil law partnership two partners with unlimited liability is required. In case of small trade business, the entity has to be registered with the trade office, whereas if the annual profit exceeds 25,000 euros, it will become a commercial business and it will be considered a general commercial partnership (OHG) and will have to register with the Commercial Register.
Branches and subsidiaries
Foreign companies can open subsidiaries or branch office in Germany. The main difference between these two business entities lies in the liability of the parent company abroad. For the branch, the foreign company bears full liability while the subsidiary is incorporated as a GmbH, and will be treated as a locally registered German company.
Sole trader is the simplest form of business entity in Germany, which can be incorporated and is formed by a single individual who wishes to open his business. This type of entity is fully managed by the founder who is also fully liable for the debts and obligations of the business.
The country’s impressive economy, consumer market and workforce combined with its strategic position in the European Union (EU) make it a smart choice for companies looking to expand their business in Europe and across the globe. Germany is one of the world’s largest car producers in the world.
Author: Chandrawat & Partners
Topic: Doing Business in Germany
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