Everything You Need to Know About Doing Business in Germany
Expanding into the German market is a smart decision. Not only does Germany have the largest economy in Europe and the fourth-largest economy worldwide, but it’s also located right at the heart of the European Union—giving your company easy access to expand throughout the continent and beyond. For business owners and entrepreneurs who would like to enter this thriving market, it’s important to know:
- Benefits of doing business in Germany
- Challenges of doing business in Germany
- How to register a new business
- How to purchase a property for your business
- Taxes and employer obligations
- Cultural considerations
Benefits to Doing Business in Germany
There are several reasons why Germany has become a hotspot for international business investment and start-up companies. For the entrepreneur who is willing to persevere, the rewards of doing business in Germany can be great.
Excellent Infrastructure
Germany is well known for its sensible, orderly, and thorough approach. This is reflected in the country’s political stability, strong legal frameworks, and top-notch transportation network. If you like to provide your customers with a reliable fulfilment experience, your German partners will do an excellent job.
Innovative Culture
While Germany isn’t the place for spontaneity (read: last-minute decision-making), it is a great place for innovation. Technology and research hubs in Berlin, Munich, and Hamburg are magnets for people wanting to start an ecommerce business in Germany. Research and development are strongly encouraged.
International Centre
Thanks to its geographical location and international trading agreements, Germany is a perfect base for companies that are looking to export. Germany is a member of the European Union and is the largest European trading partner of the United States. Furthermore, Germany hosts several international trade fairs each year, making it a strategic location for promoting your brand worldwide.
Funding and Loans
To encourage innovation and foreign investment, the German government provides a range of incentives for companies. The three most popular programs include:
- GRW cash grants help offset the cost of setup up new facilities by offering a reimbursement of up to 40%.
- Research and development grants that include interest-reduction loans and partnership programs.
- Hiring grants from the German Federal Employment Agency and the German states help companies expand their workforce.
If you are looking to secure credit, you can do this fairly easily through a private, public, or cooperative bank.
Intellectual Property Laws
German law offers strong protection for intellectual property, including copyright, patents, and trademarks. It’s important to be aware that intellectual property is protected only in the country where it’s registered, so you will need to register any patents or trademarks in each country where you plan to do business abroad.
Challenges when Doing Business in Germany
The main challenge when doing business in Germany is the bureaucracy. Registering your business, purchasing property, paying employer contributions, and even paying taxes are multi-step processes with plenty of running around that can take up significant amounts of time. If not done right, your business could incur a fine.
The other challenge is adjusting to a very different business culture than one would encounter in the United States, Ireland, Italy, or Spain. Be sure to refer to the business culture tips provided later in this article to ensure a positive relationship with Germans.
How to Establish a Business in Germany
Setting up a limited liability company (GmbH) in Germany might well be the trickiest part of doing business. It requires patience, perseverance, and local on-the-ground legal knowledge to navigate the process effectively. There’s a reason the World Bank’s Doing Business Report ranked Germany at 125 out of 190 for “starting a business” in 2020. However, those who are prepared to work their way through the bureaucracy will enjoy the rewards.
Required Steps
Before you even decide to enter the German market, you’ll need to research the market thoroughly and determine whether the products and/or services that your company offers are a good fit and which kind of business structure to use. You’ll also need to apply for a temporary residency permit (for those who are not from the EU, EEA, or Switzerland) and obtain a German address.
Depending on the kind of business structure you choose (sole proprietor, partnership or corporation), you will complete some or all of the following steps:
- Visit the local chamber of industry and commerce to check whether your company name is available.
- Submit your business name to your local commercial register.
- Go to the trade office to get a trading license (Gewerbeschein).
- Register at the Social Security and Federal Health Insurance Office.
- Liaise with the local office of business and standards.
- Register with the relevant professional association (Berufsgenossenschaft).
- Open a German business banking account.
- Apply for a merchant services account that includes a German payment gateway.
As you can see, just getting set up as a limited liability company is a multi-step process before you even start to trade. Be sure to allow time for each step and seek out local guidance to smooth the way.
Purchasing a Commercial Property
Once you’re on the commercial register, buying property and building the facilities where your company will operate is another time-consuming, multi-step process. Typically, you will need to:
- Register property rights with the Land Registry
- Notarise the transfer agreement or purchase contract
- Obtain a waiver of pre-emption rights with the municipality
- Pay the transfer tax
- Have plans drawn up in accordance with the German civil code
- Obtain a building permit and approval of static calculation
After all of that is done, you can finally start to build.
Getting Connected to the Grid
Then, before your business can start to trade, you’ll need a water connection, electrical connection, telephone connection, gas, and internet. Getting connected to the grid takes around four weeks and getting connected to water may take a little longer.
Employing Staff
Germany currently has a skills shortage due to its ageing population, so arranging work permits for foreign workers is likely to be part of getting set up.
Once you’ve got your staff on board, you can negotiate employment contracts with your local and foreign employees. These must be at least the minimum wage of €9.82 (from 1 January 2022) and €10.45 (from 1 July 2022) for employees 18 years of age and above.
Labor Law in Germany
According to German law, employers must pay health insurance, long-term nursing care insurance, and accident insurance contributions for their employees.
For employees who earn up to €64,350 per year or €5,362.50 per month, employers pay contributions towards public health insurance (Gesetzliche Krankenversicherung). For employees who earn more, the employer pays into the private fund selected by the employee.
Paying Taxes
Paying taxes is another part of life when you’re doing business in Germany. Just like the processes required to get set up, build infrastructure, and hire employees, the German fiscal system is best navigated with professional help.
Kinds of Corporate Tax Payments
Corporate residents of Germany are subject to corporate income tax payments on their German source income as well as worldwide income. However, income from countries that have a double tax treaty (DTT) usually doesn’t end up having to pay tax on income received from a foreign permanent establishment (PE).
Non-residents of Germany with income from a property or PE are only taxed on German-source income. Royalties and dividend tax is paid automatically by withholding at the source, and nothing further needs to be paid on these.
Corporation Tax
The corporate tax rate is 15% plus a 5.5% solidarity surcharge that brings the total tax rate to 15.825%.
Trade Tax
Trade tax is based on a corporation’s adjusted profit, which also includes 25% of financing costs above the amount of €200,000 (leasing, rentals, and royalties, etc.). The based uniform rate for trade tax is 3.5% plus a municipal trade tax rate (Hebesatz) between 8.75% and 20.3%, depending on where on the PE’s location.
Other Taxes and Payments Due
In addition to corporation tax and trade tax, companies will need to make VAT (value-added tax) payments and transfer tax, as applicable. In total, there are around 14 kinds of tax that businesses have to pay in nine tax payments each year.
Meeting Your Tax Obligations
Paying taxes in Germany is time-consuming. Some estimate that it takes over 200 hours to make the nine tax payments annually, including more than 100 hours on social security contributions.
If you’re serious about doing business in Germany, it’s best to hire an accountant to make sure you follow all of the applicable tax laws and make the required payments on time.
Business Culture Tips
Understanding German business culture is just as important as understanding German bureaucracy. In many ways, the two go hand in hand. Business deals are rarely instant, but patience and perseverance will pay off.
Hierarchy Is Important
When doing business in Germany, don’t expect a flat, democratic business structure like you would in places like Australia or the United States. Quite the contrary. Address German business partners and superiors with their formal title and allow them to invite less formality over time.
Get Straight to the Point
In a similar vein, avoid making too much small talk in a business exchange. While it may seem direct, blunt, or cold to an outsider, Germans prefer to get straight to the point and finish meetings and conference calls on time.
Topics for Small Talk
While a little small talk isn’t always out of place, it’s best to stick to safe topics like the weather or local history. Religion and politics are strictly off-limits when dealing in a German business exchange.
Plan far in Advance
Business etiquette in Germany is essential. To get along well with your German trading partners, plan any meetings well in advance and arrive on time (read: 15 minutes early) at the location you agreed on when scheduling the appointment.
Detailed Project Planning
Order, structure, and detail define the German psyche, and this is seen in the way that Germans do business. Be ready to spend time working out every detail of a new project thoroughly and having the entire plan laid out before the launch. Last-minute changes will not be welcomed, so allow time for “brainwaves” to come to you well in advance.
Bureaucracy is Par for the Course
Whatever the project you have in mind, allow plenty of time for lengthy procedures and policies. Germans like to have everything in order from the start. Thankfully, this can often make things smoother down the track.
Plan Carefully to Ensure Success
Doing business in Germany is somewhat complex, but not impossible. If you’re prepared to research thoroughly, plan carefully, and follow the requisite steps, the German, European, and international markets will be wide open to you.
Talking to local experts who can guide you through the bureaucracy will go a long way towards making your business operations smooth. Once you’re set up, you’ll be ready to innovate and harness the power of the German market and beyond.
