Establishing a company and operating facilities in Germany
If a foreign company wants to set up a sustainable representative office in Germany, the first step is to find the right form. As a rule, the choice is a subsidiary of a permanent establishment. The decision regarding optimal organizational structure has different legal and tax consequences in both countries. It is important to think through this carefully, in advance, when deciding on the appropriate form of activity in Germany. There is no one-size-fits-all solution that can be recommended for all companies as to the ideal form in which the foreign engagement in Germany should be structured. Rather, we at PBS analyze many legal, tax and economic factors in order to find a result tailored for your business activities in Germany.
A subsidiary is a legally independent company, which is generally established by the existing domestic company. The formation of a subsidiary (provisions governing the incorporation, registration of the business, entry in the commercial register) is subject to the law of the country in which the subsidiary was incorporated. Due to the legal entity of the German company being independent from your foreign company, a corresponding limitation of liability can be established for the foreign company. The German company independently operates and draws up the balance sheet, thereby determining its taxable profit, which is subject to national regulations in Germany.
The most common legal form of corporations in Germany is the GmbH, which can be legally founded as a limited liability entity (corporation), similar to a foreign limited company. Besides, stock corporations (AG), limited partnerships based on shares, the special form of the European company (SE) can be founded. The establishment of the company necessarily takes place via a German Notary and it must be entered in the regional commercial register (register of companies). In the case of a GmbH, the minimum share capital is EUR 25,000, although only half (EUR 12,500) has to be paid in when establishing the company under certain conditions.
As a special form, there is the entrepreneurial company (UG), a kind of mini-GmbH, which can be incorporated with a share capital starting from EUR 1.00. However, each UG has to appropriate 25% of its net annual income minus the loss carryforward from the previous year as retained income until the minimum share capital of EUR 25,000 is reached.
Alternatively, a partnership with or without limitation of liability limited partnership (KG) or general partnership (OHG) can be opted. In Germany, the limitation of liability for partnerships for partners is only possible if at least one partner has unlimited liability.
Besides, there is a hybrid form in Germany, the so-called GmbH & Co. KG, in which the liable partner of the partnership (KG) is a GmbH as a capital company that must not participate in the assets and profit distribution of the partnership.
The establishment of a company and the procedure for this are legally stipulated in Germany. In order to carry out all steps before the start of entrepreneurial activity in Germany, there must be 8 weeks of forward planning.
Overview of the process of setting up a company in Germany:
Founding meeting and resolution of the Articles of Association, Registration of the company in the commercial register (Register of Companies). Payment in equity by shareholders. Registration of the company in the commercial register (Register of Companies). Business registration with the local municipal administration. Tax registrations at the competent tax office
A German permanent establishment, on the contrary, is a legally more dependent part of the foreign company and is defined in the double taxation agreement as a fixed place of business according to individually defined criteria by which the foreign company's business is carried out in Germany. A permanent establishment for tax purposes does not always require a formal act of foundation or a conscious decision by the entrepreneur. Such a permanent establishment is created as soon as the legal prerequisites are fulfilled, whether this is intended or not. Permanent establishments are therefore often only discovered through German statutory audits. For this reason, tax advice should be sought at the beginning of any overseas activity, also in order to avoid the establishment of permanent establishments unwittingly. A permanent establishment in Germany can also be consciously opted by entering a branch of the foreign company in the German commercial register.
For a permanent establishment, the approach that applies is that it has to pay tax on its profits in the country of residence. This is consistently the regulatory content of the relevant double taxation agreements that Germany has concluded with other countries. Due to the legal dependence, however, allocation and apportionment of profits between the foreign parent company and the German permanent establishment must take place for tax purposes.
The avoidance of double taxation must then be carried out by the parent company - usually by exempting the permanent establishment abroad. The difficulty or accounting challenge lies in the fact that the apportionment of profits between the parent company and the permanent establishment is a purely tax consideration. In the annual financial statements under commercial law, the earnings of the permanent establishment are part of the company's profit or loss. In addition, the apportionment of profits must bear scrutiny of the tax offices of both the countries
In connection with a foreign engagement, a so-called representative office (Rep-office) is sometimes mentioned, which is not taxed in Germany. The German tax or commercial law does not recognize the term "representative office". This unit also plays no role in double taxation agreements. Either the requirements for a tax-relevant permanent establishment are fulfilled or not. The representative office could therefore be defined negatively to the effect that this is a place of business in Germany that does not yet meet the requirements of a permanent establishment in terms of capital value, such as a showroom or contact point for customers without any power (or authority) to enter into a contract. The decisive factor here is not the formal designation, but the actual fact, so that, from our practical experience, a representative office that is not clearly organized can swiftly result in a (hidden) establishment.
If the decision on the appropriate legal form has been made, the steps required in Germany are implemented. The creation of a realistic schedule presents you with planning security so that all registrations and approvals required in Germany are available on time and all tax obligations can be fulfilled ab initio. All registrations and formalities, provisions for company name and information on business letters are of course subject to German regulations and, as a rule, by the stipulated language of German as the official language.
Apart from the formal steps of the establishment, partly via German notaries and the commercial register, in Germany a business registration with the local municipality and a tax registration with the locally competent tax office must be carried out. Information on the prospective tax obligations, such as profit, wage and VAT registration applications, must be provided.
In any case, it is important to set up appropriate accounting or at least shadow accounting for the subsidiary or permanent establishment at the beginning of the activity, also in order to be able to fulfil the tax requirements in Germany. This concerns the timely filing of current sales tax returns, reporting of wage and social security contributions and company tax returns. Further, coordination and measures must also be taken in the foreign accounting department in order to be able to draw applicable commercial and tax accounting consequences in the case of permanent establishments or subsidiaries (transfer prices, allocation of assets, acquisition costs).