As uncertainty over Brexit continues, it’s no surprise to learn that British companies are looking to set up shop abroad. One popular destination is Germany.
Indeed, Christian Krumb, head of legal at international administrative support services provider TMF Group, says the firm has fielded a barrage of calls in the past year from British businesses seeking to set up a properly constituted subsidiary in Germany to ensure they have a foothold on the continent.
“There’s a big drive under way to establish real German subsidiaries, especially from companies that currently only have a branch here,” says Krumb.
“Germany remains an attractive place to operate, the fundamentals are good. But setting up a business is demanding. There are a lot of statutory regulations to comply with and to the outside world this can seem both complex and arcane.
“But company formation is highly structured. The pathway to setting up has a clearly defined process.”
TMF Group’s Global Business Complexity Index 2019 places Germany in the top ten most complex jurisdictions in which to do business. The report observes that it is often easier for local firms to incorporate than foreign-owned businesses.
Globally the main reasons for complexity can come from hard-to-navigate rules and regulations, frequently changing legislation and employment processes. In Germany the drivers of complexity stem from the tricky process of setting up a business, accounting rules and the country’s notoriously difficult tax code. But companies must also confront the rigour applied by banks when vetting new customers.
It can all add up to a challenging exercise. With the right guidance however, it can be navigated with confidence.
A slow process
The basic process does not appear intimidating: businesses must choose a company type, a company name, execute a deed of formation, deposit share capital and then register the company on the commercial register.
But all of these stages may come with quirks that newcomers to Germany may find challenging, especially if they come from jurisdictions that have moved to accelerate and automate company formation as much as possible.
Perhaps the first issue to note is that company creation may take longer in Germany than in many other countries. Indeed, establishing a new limited company from start to finish can take from four to eight weeks, a period that may leave those used to speedier time frames somewhat frustrated.
What makes it so slow? Though it may seem unlikely in the digital age, large parts of the registration process have to be undertaken physically and in hard copy. Paper forms have to be delivered to offices, and checked by real people. In the age of the internet and transactional websites, this may come as a surprise.
Firstly, establishing a GmbH (Gesellschaft mit beschränkter Haftung, or limited liability company) has to be completed in front of a notary who has to read aloud the deed of formation. This can seem quaint, but the issue of whether the deeds have been read out or not has proved the centre of legal contention in the past. Company founders must also prepare the articles of association. A representative of the founder must sign both deeds and the articles in front of a notary before company formation can move to the next stage.
New companies must be registered with the commercial register (Handelsregister). It’s worth pausing here to consider the unique nature of the commercial register. In contrast to territories where companies can be created in hours online, trained officials and lawyers check through the paperwork to ensure it has been completed correctly. And they take their time.
“The commercial register is not just somewhere you send a form electronically and then the company is registered,” warns Krumb.
“Judges and clerks review the integrity of the paperwork. It’s rather a difficult process to go through. When we are dealing with clients from the US, for example, this can come as something of a surprise. It can be difficult to explain how long the process takes.”
Perhaps the step that looms largest is the paying in of share capital. This can usually not be done without a bank account and dealing with German banks presents its own challenges.
To begin with, banks strictly enforce the Know Your Customer practices imposed by the European Anti Money Laundering Directive, updated in 2018.
But Christian Krumb says once the right information is in place, the regulation is relatively easy to manage. He says a trickier issue for companies seeking to do business in Germany is the general selectiveness local banks practice around accepting new clients. It is not unheard of for otherwise unblemished businesses and directors to struggle to be accepted as a banking customer.
“It is very important to have a business relationship with a bank,” says Krumb. “If you go to a bank and it doesn’t know you, it is almost impossible to open a bank account. We’ve seen this trend developing over recent years and it is becoming increasingly difficult for foreign investors to open an account.”
This is critical. Without a bank account it is impossible to deposit the share capital, a minimum of €25,000. And without that, impossible to register the company.
Luckily, advisers can help with building the necessary documentation and relationships that can expedite a warm welcome from a bank.
Accounting and tax
These are not the only thresholds to cross. Accounts must be completed in German GAAP and compiled on German soil. Dispensations are available for completing accounts abroad, but they are rare.
The German tax code makes its own demands. Tax law is “voluminous” says Krumb, and requires expert advice. Finding the right tax office can take time and officials require exhaustive documentation on the tax structure of the German entity and its parent company.
Tax treatments can differ too depending on the location of the company’s named director. This places a premium on having someone local. That either means finding someone early to take on some of the heavy administrative lifting, or using a service that provides a director for the purpose of formation and until a company is ready to recruit a full-time director.
“You should appoint a resident legal director in Germany in order to facilitate the registration process,” says Krumb. “If not, your file could be handed over from one tax authority to another. And that delays the process substantially.”
Setting up a business in Germany may be slow, and the banks sensitive to who they take on, but with the right advisers the process can be negotiated and the inconvenience minimised.
“Germany remains one of Europe’s leading economies,” says Krumb, “and businesses want to be here, we have seen that.
“The formation process can look intimidating but it has its own logic and can be managed successfully.”
This article has been prepared in collaboration with TMF Group, a supporter of Board Agenda.