One of the most attractive business destinations in the world and Europe’s top FDI country, Germany is known for being a secure and rewarding investment location. But doing business in Germany can still be a challenge for those unfamiliar with the local requirements.
Germany is the biggest economy in Europe and the fourth-largest in the world. Built on research, innovation and its ability to attract foreign direct investment (FDI), around 80,000 foreign companies are doing business in the country, employing more than 3.7 million people. Germany boasts first class infrastructure, a modern finance system and the largest consumer market (82 million population) on the continent.
Germany offers international businesses strong economic conditions and a competitive corporate tax rate. When it comes to investments and establishing companies, the country makes no distinction between German and foreign nationals, favouring the principle of freedom of foreign trade and payment.
But it’s important to be aware of some key challenges to doing business in Germany, and understand the benefits of having local help on board to successfully navigate any legal, tax and cultural barriers.
1. Starting a business
Despite its global standing and modern outlook, the World Bank ranks Germany in 114th in the world in 2019 for ease of starting a business. This is largely down to the numerous procedures companies are required to navigate. One of the main difficulties that people face in setting up a German limited liability company (GmbH) is in opening a bank account and the relevant know-your-customer (KYC) processes. There are workaround solutions however, such as purchasing a company with an existing bank account.
Among other steps, starting a business in Germany involves checking the availability of the company name at the local chamber of industry and commerce, registering the company with the local trade register as well as registering with the professional association of the relevant trade and liaising with local labour, business standards and tax offices.
2. Dealing with construction permits and getting electricity
At 25 days on average, obtaining a building permit and approval of static calculation (21 days) are the lengthiest procedures when dealing with construction permits, although obtaining a water connection for newly-built premises can take as long as 47 days. Germany boasts one of the most streamlined procedures for getting electricity to business however in the world – ranked fifth, it requires only three procedures and takes 28 days.
3. Registering property
The registration of property is another task that is quite bureaucratic in Germany, requiring six procedures. Companies must register the ownership of a property with the Land Registry and notarise the transfer agreement. Also in many cases a waiver of pre-emption rights with the municipality needs to be obtained. The purchase of a property also triggers transfer tax. This takes an average of 52 days to complete.
4. Getting credit
Germany is home to a modern financial sector that operates within a strict legal environment. Market-determined rates of credit are available to both domestic and foreign investors, with borrowing predominantly made through banks (private commercial banks, cooperatives and public banks). Getting credit is a relatively streamlined process, however banks will expect a written presentation of your business plan or investment, complete with information about the legal structure, contracts, cost and profitability projections.
5. Sourcing local talent
Germany boasts a highly-educated workforce including among its migrant population, whose average education levels are on the rise. However there is a skilled labour shortage, particularly in the nursing and care, construction and IT industries. This makes for strong competition between companies to hire the best people.
The country’s worker shortage saw the December 2018 passing of the Fachkräftezuwanderungsgesetz – or skilled labour immigration law. The law makes it easier for employers to recruit the skilled staff they need from outside the European Union, as companies no longer need to go through the burdensome process of proving there is no one in Germany or the EU who can fill the role. The law also opens non-EU recruitment to all work sectors, whereas previously companies were restricted to hiring foreigners in specific sectors only.
Obtaining a working (employment) visa for a qualified foreigner in Germany can take as long as three months and requires a lot of paperwork. Local HR administration experts such as ourselves can assist companies with the application process to ensure it goes smoothly.
6. Paying taxes
The 2018 Financial Complexity Index ranked Germany 21st out of 94 jurisdictions globally for its high level of accounting and tax complexity. However the country has made efforts to simplify its tax legislation and extend various reporting and filing deadlines. Businesses can expect an average of nine tax payments per year, taking around 218 hours in total to deal with. The standard rate of VAT for a company in Germany is 19% while corporate income tax is 15%. A ‘solidarity surcharge’ (Solidaritätszuschlag) of 5.5% also exists, and must be paid by any individual person or legal entity that owes income tax, capital gains tax and corporate tax in Germany. Trade taxes (Gewerbesteuer) are levied on profits and the rates are set by each municipality. The average rate being around 14%.
7. Trading across borders
Germany belongs to the EU customs union and adheres to the EU’s relatively liberal policies when it comes to exports and third country import duties, restrictions and prohibitions. However there are for example specific EU health and technical goods standards that must be met.
Documents required when exporting from Germany include the following.
- A bill of lading
- Commercial invoice
- Packing list
- Customs export declaration
- SOLAS (International Convention for the Safety of Life at Sea) certificate.
Importing goods to Germany requires the following documents, among others.
- Packing list
- Commercial invoice
- CMR waybill
- Instrastat.
German businesses benefit from EU trade agreements with countries and regions around the world. The USA is the top export destination for Germany, followed by France and China. The highest level of imports to Germany come from China, the Netherlands and France.
8. Enforcing contracts
The average time and cost for resolving a commercial dispute through the courts in Germany is 499 days, and 14.4% of the total claim value.
9. Resolving insolvency
Germany’s modern legal system handles insolvency with relative efficiency. However, it still takes an average 1.2 years.
10. Culture
Doing business in Germany requires a good level of cross-cultural awareness. Their penchant for punctuality is well known, so it should come as no surprise that in the corporate world, Germans value thorough planning. Those new to the country can expect to encounter many rules and regulations and a low degree of flexibility and spontaneity. This can result in slow progress when it comes to making decisions and an aversion to sudden changes – even if they may be beneficial to the outcome. Having a bit of patience is crucial to successful business negotiations. The German communication style is quite clear and direct with no language subtleties, but rather than meaning to be impolite, Germans simply intend to be efficient and get ‘to the point’. Gift-giving among associates is not common, nor is mixing work with personal life.
Talk to us
With Accounting and Tax, HR and Payroll, Corporate Secretarial and Consultancy Solutions experts based in Munich and Frankfurt, we have the local knowledge to help you navigate your German business challenges.