Setting Up A Subsidiary In Germany

Germany is an attractive economy for entrepreneurs across the globe due to its ease of doing business, government initiatives, and large employable talent. This has made foreign entrepreneurs and several businesses expand their operations and incorporate their subsidiary businesses in Germany.

Setting up a subsidiary in Germany is a relatively complex and long-drawn process. The German subsidiary laws and other compliance requirements lengthen the time to incorporate a subsidiary in Germany, leading to shutdowns and fines if not carefully handled.

Incorporating a foreign subsidiary in Germany includes completing all registrations applicable to the German tax and social security systems. Applying for an employer number is crucial as it is an identifying factor before you can hire German employees and register them for social security and health insurance.

Setting up a subsidiary in Germany can be done in seven steps — 

1. Getting a business address in Germany to enable subsidiary company formation in Germany.

2. Selecting the right type of legal entity when setting up a subsidiary in Germany is crucial. This is because the German company law oversees and regulates all business entities depending on the type of legal entity. As discussed in the previous section, many subsidiary companies exist in Germany.

3. Confirmation of your company name with the Commercial Register is essential in setting up a subsidiary company in Germany. However, you must ensure that your company’s name is not the same as an existing registered company. You can search for already registered businesses on the online portal – Unternehmensregister.

4. Opening a bank account for your company helps in a smoother transaction experience when setting up your business.  Opening a bank account in Germany is relatively more straightforward as 

• The banks follow the standard international practice, and
• Several banks allow setting up an account online. 

However, you must provide them with proof of identity or get your lawyer’s help.

5. Provide all the required and necessary documents for subsidiary business in Germany. The required documents as a part of compliance for foreign subsidiaries in Germany include – 

• Declaration to tax authorities (Finanzamt) 
• Declaration to the Labor office (Arbeitsamt); if you are looking to hire employees 
• Registering with the Germany professional chamber, depending on the industry your business belongs to  
• Declaration to the social security and the German professional association (Berufsgenossenschaft) 
• Declaration to Competent Statistische Landesamt (Statistical Office)
• A declaration of existence to the Gewerbeamt (the Trade Office)

Certain sectors and industries, such as transportation, surveillance companies, real estate agencies, etc., require additional documentation and declarations. 

6. You must register your business with the Commercial Register with the Lower Regional Court of Germany (Amtsgericht). You must submit all the necessary documents to the Commercial Register in the form of a notary. The validated documents include —  

• The registered office
• Company name
• Legal form
• Authorized representatives
• Share capital 

When the documents are validated and accepted, your company is registered and published on the website – Handelsregister.

7. Registering your business with the German tax authorities is a must.

Setting up a subsidiary business in Germany has many benefits, especially for foreign companies. Here are some benefits:

• Due to the well-framed German subsidiary law, a subsidiary business in Germany is one of the most versatile forms of conducting business.
• Foreign companies set up a subsidiary in Germany as it can efficiently run operations and business activities and adjust to German regulations and requests.
• Managing assets and protecting rights (such as IP rights) when there is a German subsidiary.
• There are additional tax benefits to the parent company when operating through a subsidiary company.
• Business operations that include trading activities such as imports and export can be managed efficiently by setting up a subsidiary in Germany. However, the parent company must ensure that the German subsidiary obtains an EORI number.
• The German company laws permit a subsidiary business in Germany to operate from a different name from its holding company.

The required documents are expanded in step 5 of how to set up a subsidiary in Germany, including — 

• Declaration to tax authorities (Finanzamt) 
• Declaration to the Labor office (Arbeitsamt) if you are looking to hire employees 
• Documents for registering with the Germany professional chamber depending on the industry your business belongs to 
• Declaration to the social security and the German professional association (Berufsgenossenschaft) 
• Declaration to Competent Statistische Landesamt 
• A declaration of existence to the Gewerbeamt
• Documents for trade licenses (mandatory for certain industries)

Business forms recognized by the German company law if you are looking at setting up a subsidiary business in Germany include — 

• General partnership (Offene Handelsgesellschaft, OHG)
• Limited partnership (Kommanditgesellschaft, KG)
• Limited liability company (Gesellschaft mit beschränkter Haftung, GmbH)
• Entrepreneurial company at limited liability (Unternehmergesellschaft (UG) haftungsbeschränkt)
• Joint-stock company (Aktiengesellschaft, AG)
• Branch offices

As laid down by the German subsidiary laws, a subsidiary in Germany must operate as a limited liability company. The German subsidiary must-have factors that are separate from its parent company, such as its own 

• Management structure 
• Share capital
• Accounting system

However, the subsidiary can take the name of its parent company to conduct operations in Germany.

Staying up to date with the requirements relating to compliance for foreign subsidiaries in Germany is essential. Registering with your local tax office online through the Federal German Fiscal Authority’s Form Management System (FMS) is mandatory as laid down by the German subsidiary laws.

The German tax office and authority will determine corporate and other taxes your subsidiary must pay based on the profits you declare through the registration forms. You can claim your tax returns by filing on or before May 31.

An essential aspect of setting up a subsidiary in Germany is to be aware of the compliance requirements for a foreign subsidiary in Germany. All foreign and German companies failing to comply with the legal requirements when incorporating a subsidiary in Germany are liable for criminal and civil sanctions and penalties.

A few post-incorporation compliances for a foreign subsidiary in Germany include —

• Employment 
• Taxation 
• Banking 
• Fraud 
• Privacy and data protection

As a German subsidiary, you must ensure that you develop a corporate governance framework (rules, regulations, and policies) relating to all these aspects.

As laid down by the Corporate Governance Code of Germany, all businesses must have their managers organize their business to respect and comply with the German legal system and prevent offenses and crimes.

For this reason, it is common for German companies to appoint a compliance officer who ensures a set of policies and regulations are drafted.

A subsidiary business in Germany is considered any other type of company that operates in the local market. Therefore, the taxes applicable on subsidiary businesses in Germany include:

• Corporate taxes are charged at a uniform rate of 15% with an additional surcharge of 5.5% (solidarity surcharge).
• Value-added taxes are currently levied at 19%; however, VAT for certain industries, including hospitality and food and beverages, is charged at 7%.
• Trade taxes 

Tax Incentives for Businesses Setting Up a Subsidiary in Germany

The German Trade and Investment Agency provides certain tax incentives for setting up a subsidiary in Germany. Amongst the tax incentives,

• Small enterprises and startups can avail of subsidies for investments in different projects for a maximum of 40% of the project cost 
• Medium-sized companies can avail of benefits from subsidies, which amount to 30% of the project cost 
• Large-sized companies are eligible to avail of subsidies for a maximum of 20% of the project cost. However, the investments made by large companies must be in areas bordering Poland. The maximum capping for large companies is 200,000 Euros, depending on the investment area.

Other Important Considerations

Other considerations for setting up a subsidiary in Germany require you to send emails, money, time, and travel points. 

Ideally, setting up a subsidiary in Germany takes months and requires you to travel to and back from Germany for incorporation.  

Working with a global PEO platform such as Multiplier can help you expand your business operations in Germany. You can learn more about our comprehensive solution and how our team of professionals helps in compliantly expanding your business in Germany.

Expanding into a new country and setting up a subsidiary in Germany can be relatively complex. Therefore, partnering with an EOR platform such as Multiplier can help you expand. At the same time, you focus on your business operations and hire the right German talent. Multiplier offers the infrastructure to employ German talent without the need for the employer to start a subsidiary. This helps test new markets, set up teams in new countries, and attract talent at cheaper costs.

Talk to us to learn more!