Road Map for Investing in the German Market
Investing and market entry into Germany is an attractive proposition for many international firms. The country’s broad-based economy is the strongest in Europe and the fourth strongest in the world, thanks to high levels of productivity, relatively low unemployment and a wide talent pool of skilled, educated workers.
The country has made a strong recovery from the economic crisis of 2008, largely driven by exports of cars, machinery and chemical products. Its economy is free market, but is also subject to extensive rules and regulations designed to prevent corporate interests from damaging those of other groups and individuals. These rules and regulations centre on competition and employment relations.
Major industries in Germany include the automotive sector, energy, healthcare, industrial products, pharmaceuticals and medical technology, retail and consumer products, media and communications and transport. Some major German companies are still partially owned by the Government, notably including certain banks, which needed finance following the financial crisis of 2008.
The country attracts high levels of foreign direct investment (FDI), with at least 45,000 foreign companies currently operating in the German market. Between them, these companies employ more than 3 million people, and directly and indirectly account for almost one in four of all German jobs.
No major barriers to foreign investment exist in Germany, with the Government welcoming overseas firms seeking to boost the country’s economy. The Government generally encourages private individuals to invest in firms operating in Germany, having introduced a number of initiatives designed to broaden company ownership.
However, investing in the nation isn’t necessarily a quick and easy process. Entrepreneurs can face lots of bureaucracy in the process of setting up a company in Germany, and can be made to jump through lots of regulatory hoops.
The aim of these regulations is to create a commercial environment in which businesses can flourish, but within a controlled framework.
According to the IFC (International Finance Corporation), Germany’s strong standing as the 17th easiest place in the world to do business isn’t reflected by the ease of starting out in the country, which according to the same statistics, is only the 114th easiest place to do so.
This guide provides the information you need to get started:
- 2. Setting up a Company
- 3. Getting to Grips with German Culture & Etiquette
- 4. Case Study: How Not to Enter the German Market - Wal-Mart
- 5. Resources
Setting up a Company
There a number of Government bodies you need to notify before actually starting a business in Germany. The local chamber of industry and commerce acts as a representative group for firms in their area, lobbying the state and Federal Governments to act in the interests of the chamber’s members. Membership is mandatory in order to do business in Germany.
First, firms must check their company’s name with the chamber. This can be done online, although written confirmation will be provided for a fee of 25 EUR. It’s then necessary to notarise the Article of Association and Memorandum of Association. More information on this process can be found here: http://www.doingbusiness.org/data/exploreeconomies/germany/starting-a-business
A German bank account is needed for companies with limited liability, which must deposit either 25% of 50% of the start-up capital before the registration of the business.
Firms must also join the German commercial register, which contains details of all the businesses, freelancers and legal entities operating in the country. The local office of business and standards must be informed too, while the firm’s industry-specific professional body must receive notification within a week of business incorporation in Germany, ensuring the firm is covered by occupational accident insurance.
The local Labour Office must then be notified of the company’s intention to begin operating in Germany, which can be done either in writing or over the phone, and will grant the company an eight-digit operating number in order to communicate with the Social Security Office.
Any employees working for the company in Germany must be registered for health and social insurance with the Social Security Office, which requires payment for employees’ compulsory unemployment, health and annuity insurance.
Certain types of business, such as those in the hospitality or finance industries, are required to apply for a trading permit (Gewerbeerlaubnis). Those companies which don’t require a permit must merely contact the local Trade Office in order to obtain a trading licence (Gewerbeschein).
Finally, all businesses must register with the Local Tax Office by posting it the relevant documentation within 4 weeks of beginning trading, after which the Tax Office will send a questionnaire to gather data on the business. Businesses will also receive an 8-digit tax code which must be included at the top of all invoices.
Registering a Branch of a Foreign Company
Overseas firms are also permitted to operate in Germany by setting up a branch registered with the local court of the area of operation. They are not required to invest a predetermined amount of capital in this case, but do need to show that they have employed a manager in the area. For legal purposes, this is not a separate entity from the overseas company, and bears responsibility for any legal action taken against it in the first instance.
Registering Commercial Property
This step is, unfortunately, also heavily laden with red tape. The process of registering the purchase of property with the Land Registry takes an average of 40 days to complete, and involves tasking a notary with obtaining the land extract, ensuring it’s free of burdens and mortgages, and acquiring the waiver of pre-emption rights.
A priority notice, which signals the buyer’s intent to purchase the property and protects the sale against any unexpected developments, is then needed, before the sale agreement is notarised and signed. The process attracts a levy, known as the transfer tax, equating to 6% of the final purchase price, which will be highlighted in a statement delivered to the purchaser within two months of the sale.
All businesses operating in Germany pay corporation tax of 15% on their profits, before a solidarity surcharge, aimed at financing German reunification, of 5.5% is then added. Trade taxes are then added, ranging from 7% to 17% depending where the business operates - although most cities impose a rate of between 14% and 16%. This means businesses in most areas can expect to pay in the region of 28% to 33% on their profits.
Businesses with a turnover of either 17,500 EUR in the current financial year, or with a turnover likely to exceed 50,000 EUR in the next financial year, will attract VAT on the goods and services they purchase. Some goods and services, however, such as financial and insurance services and buying and selling property, are VAT-exempt.
The standard VAT rate is 19%, although this falls to 7% for businesses which provide certain services including journalism, translation and food supplies. VAT-registered firms typically have to pay the bill on the 10th of each month. Some business purchases, such as IT and office supplies, can be exempted from VAT at the point of purchase if it can be proven to be a commercial purchase.
Certain other types of transactions also attract a tax in Germany. Those of significance are insurance tax, paid by the supplier but passed on the consumer in the form of pricing, and real estate tax, which is a levy due on all sales of property, proportionate to the value of the property. Businesses preparing to invest in Germany should consider the burden added by real estate tax, which begins at 3.5% and rises to 6.5% in certain provinces.
Excise taxes are also levied on the sale of certain products, chiefly fuels, tobacco, alcohol, mineral oils, and, to some extent, electricity.
German firms are free to choose their own accounting period; it can span any two dates within twelve months, although no longer. They do, however, need to seek approval from the tax authority in order to shift the end of the accounting period from the default date of 31 December. This approval is usually sought when the accounting year end of a foreign parent company differs from the calendar year.
Companies operating in Germany can handle their tax affairs using an online system at eister.de; electronic submission for major taxes is mandatory for large firms. The deadline for filing a tax return is 31 December. A tax assessment is typically delivered from the tax office two years after incorporation, and so until this point, payments are made in advance, at a rate agreed with the tax office in anticipation of the company’s forecasted results. This can, however, mean that the firm’s taxable income is considerably higher than expected, in which case a substantial back payment will be due to the Government.
The German tax authorities conduct an audit for all businesses operating in the country every three to five months. Firms with foreign shareholders are typically audited more frequently, which involves in-depth analysis of the accounts and records over a period of several months. The final report will be subject to review by the company, which will be given the opportunity to comment on the findings and raise any matters of dispute. In the event of a dispute, the company is required to address any issues within three weeks of receiving the initial assessment.
Companies operating in Germany are, as is the case across the continent, subject to a wealth of EU laws designed to protect businesses, consumers and the environment. There are some instances, though, in which German laws go further, notably in the areas of quality assurance and product liability.
German employers are generally keen to reach a compromise in the event of a workplace dispute. Industrial action is, therefore, relatively uncommon. German labour law gives workers a wealth of protections in the workplace, covering issues including, but not limited to, redundancy, maternity and paternity leave, and termination of employment.
Most German workers are represented at least to some degree by a trade union or workers’ council. Any business with five or more employees is required by law to allow them form a council; the number of workers on the council can rise proportionately with the total number of employees.
Workers in each sector are commonly represented by one trade union, with an equivalent employers’ association in each sector, and the two organisations work together to negotiate agreements on working conditions. Agreements made in these instances have in the past been binding for all workers, with employers falling in line with the conclusion reached. Recently, however, some major German employers have taken to withdrawing from their employers’ association in order to be able to negotiate a position directly with the unions.
Employers typically pay workers a good salary by European standards; the average German takes home a gross salary of 3,449 EUR according to research conducted in 2013. Highly skilled workers and managers can, of course, earn considerably more.
In terms of benefits provided, employers generally finance a relief fund, aimed at providing a safety net if workers are rendered temporarily unable to do their job, or are retired and in financial hardship, and a pension plan, managed by an insurance company. These payments are tax deductible. Any employer contributing to an employee’s pension plan must join the state-regulated Association for the Insurance of Pensions, which protects the employee against employer bankruptcy.
Firms operating in Germany tend towards fringe benefits which make the workplace a more desirable place to be, such as free meals and childcare support.
The working week in Germany is typically somewhere between 37 and 40 hours, with any overtime payable at a higher rate than the employee’s normal salary.
Getting to Grips with German Culture & Etiquette
Many Germans are meticulous timekeepers. Forward planning is very highly valued in Germany, and so it’s typical for Germans to know precisely where they will be and what they will be doing at any given time. Foreigners may observe that Germans often devote a great deal of thought to a project, thoroughly dissecting each element, and so few German business initiatives are ill-considered.
Unexpected changes to a pre-agreed plan can be unpalatable to Germans. Making an abrupt amendment to a business transaction is not likely to be well-received, whether the outcome is agreeable for them or not. Commerce is considered to be serious and important, and it’s generally fairly rare for Germans to approach a transaction with humour. Correspondingly, business associates do not expect the manner of complimentary small talk found elsewhere, and are typically unenthusiastic about bridging the divide between professional and personal life.
Punctuality is, of course, very highly valued in Germany. Tardiness can cause annoyance among Germans, particularly in the context of a business appointment, and a delay of even a few minutes can be badly received. In these situations, calling ahead to explain, and to manage expectations, is important. Being five to ten minutes early for a business meeting is the cultural norm.
Case Study: How Not to Enter the German Market - Wal-Mart
The supermarket giant opted for a strategy of making acquisitions in the German market rather than building their presence from the ground up. In December 1997, it took control of the €1.2 million revenue Wertkauf chain, made up of 21 retail stores, for around $1.04 billion. Wal-Mart then, the following year, acquired Interspar’s 74 hypermarkets, with combined revenues of €850 million, from Spar Handels AG, the German subsidiary of France’s Intermarché group, for €560 million.
Unfortunately, Wal-Mart’s approach to entering the German market was plagued with strategic errors. These errors begin with the decision to follow up the Wertkauf deal, which was highly successful, with the purchase of market-trailing Spar. Spar had the lowest turnover of any German supermarket group, with stores located in less well-off areas, and a poor brand image to contend with.
The problems didn’t end there. Wal-Mart’s management style, widely considered to be far too hubristic, was clearly doomed to fail. The senior executives relocated to Germany by the company didn’t speak any German, and insisted upon English being spoken at management level. They also entirely ignored advice from German executives on navigating Germany’s complex legal technicalities, which led to the resignation of the top three within the first six months.
Wal-Mart also found that their pledge to deliver “everyday low prices” wasn’t as well suited to the German market as to the company’s home nation of the USA. By directly taking on long-established discount retailers such as Aldi and Lidl, the company found that they were unable to undercut the competition, and, indeed, their products were still of a lower quality. All in all, Wal-Mart’s value proposition in Germany did not stand up at all well to scrutiny.
It therefore resorted to making redundancies of surplus staff. However, once again it failed to acknowledge the cultural differences between doing business in the US and in Germany. In the US, Wal-Mart’s workforce is strictly non-unionised; only 12 of more than one million staff are known to be union members. In Germany, however, trade unions still wield a considerable amount of influence, and Wal-Mart found that laying off their staff was fraught with difficulties.
Finally, the company’s repeated noncompliance with a number of fundamentally important German commercial laws led to a barrage of bad PR and a consequent plunge in brand perceptions among consumers. The company has either been accused of, or fined for, infringing widespread regulations including those preventing firms from systematically selling products for less than they cost, requiring firms to disclose basic financial information and requiring firms to implement a deposit-fund system for certain bottles and cans.
German workers adhere to stricter cultural standards than in some countries. Addressing the task in hand, ensuring maximum productivity is the key aim of all business interactions, which is reflected in Germans’ style of communication.
German companies like to enshrine any agreements in writing, even relatively trivial procedures. Structures and regulations come first. The typical traits found in a good German worker or business executive are consistency and reliability; uncertainty is seen as something to be avoided at all times. To this end, Germans often adopt a very different professional personality at work than they might at home or with friends. Only in very close business relationship might a German behave in a way that they would with friends.
In the spirit of getting the job done, a German will usually speak directly and explicitly in the workplace. Many feel that “window dressing” detracts from the weight of a critical statement, and so an interaction that may appear rude to an outsider is not in fact intended to be so. Conversely, Germans will rarely respond to subtle verbal cues in business interactions, such as, for example, hints and facial expressions. Subtle interactions in business may, therefore, be missed by a German.
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