Setting up a German market presence requires a legal structure. Expanding foreign companies can choose between these options:
- founding a subsidiary (Tochtergesellschaft)
- setting up an independent branch office (selbständige Zweigniederlassung)
- setting up a dependent branch office (Betriebsstätte or unselbständige Zweigniederlassung)
Setting up a representative office (Repräsentanz) is another option.
Decisive criteria for the choice of legal form are generally the terms of taxation, liability, initial and operational costs, the administrative burden, personal involvement, and flexibility. Contact a tax advisor, a lawyer or a consultancy organization to guide you towards the legal form that suits your company’s situation best.
Founding a subsidiary (Tochtergesellschaft)
A subsidiary is an independent company established and predominantly held by another company (parent company). It trades under its own name and prepares its own balance sheet. The rules of incorporation of the subsidiary, its business registration and entry in the Commercial Register are governed by German law, even if the parent company is domiciled abroad.
When choosing the legal form of the company, a corporation is usually the best option for larger, established companies. There are four major forms of corporations under German law: Limited Liability Company (GmbH), Limited Liability Entrepreneurial Company (UG haftungsbeschränkt), Stock Corporation (Aktiengesellschaft AG) and Partnership Limited by Shares (Kommanditgesellschaft auf Aktien KGaA).
Besides corporations there are also different forms of partnerships. There are four major forms of partnerships in Germany. Civil Law Partnership (GbR), General Commercial Partnership (oHG), Limited Partnership (KG), GmbH & Co. KG. Their main difference lies in the liability of their partners and required registration obligations.
According to Germany Trade and Invest, the economic development agency of the Federal Republic of Germany, foreign companies often choose the private limited liability company option (Gesellschaft mit beschränkter Haftung – GmbH) for local subsidiary formation. The main reason for the popularity of a subsidiary in the form of a GmbH is the separate limited liability, which this company form offers.
Get an overview on legal structures, taxes and accounting and registration with the tax and trade office on our website or at Germany Trade and Invest. In-depth information is available from the Chamber of Commerce and Industry for Munich and Upper Bavaria (IHK) on their website and upon request from their business expert office (tel. +49 89 5116 2222, email beratung@muenchen.ihk.de)
Setting up an independent branch office (Zweigniederlassung)
The independent, also known as autonomous branch office (Zweigniederlassung) fulfills tasks that exceed mere implementation and support-related tasks. It is dependent upon the head office company at the internal level but engages in business activities independently. However, the foreign head office company is liable for the business transactions concluded by the branch.
At the organizational level, autonomous branch offices are to a degree independent from the parent company. For instance, an autonomous branch office usually has its own management with executive powers, a separate bank account, and accounting as well as independent business assets.
Foreign companies can register an autonomous branch office in Germany if they are entered in a foreign commercial register (or a comparable directory). The autonomous branch office must be entered in the commercial register (Handelsregister) and registered with the local trade office (Gewerbeamt). As of August 2022, the online procedures for commercial register applications have been significantly extended. The involvement of a German notary is required. Documentation verifying the existence of the head office company as well as the power of representation for persons acting on behalf of it is needed for the registration.
Source: Germany Trade and Invest
Setting up a dependent branch office (Betriebsstätte)
A dependent branch office is a subordinate department of the head office company and does not have any autonomy from it. It focuses on maintaining contacts and initiating business in Germany. The dependent branch office is not able to independently participate in the general business transactions of the head office. It performs support and implementation-related tasks without having any individual business discretion and is entirely dependent on the head office.
Registration with the local trade office (Gewerbeamt) is required.
Source: Germany Trade and Invest
Branch office taxation
A branch office is subject to taxation in Germany if it is considered to be a permanent establishment according to the applicable double taxation agreement. An autonomous branch office is generally regarded as a permanent establishment, whereas a dependent branch office is only ever considered a permanent establishment under certain conditions.
The profit attributable to a German permanent establishment of a foreign corporation is taxed in Germany according to German taxation rules for corporations. Special rules apply for tax returns and income determination for permanent establishments.
All corporations and German permanent establishments of foreign corporations – are subject to corporate income taxation. Income taxation of corporate companies generally consists of three components: corporate income tax, solidarity surcharge, and trade tax. Due to locally set varying trade tax levels, there is no consistent nationwide tax rate for corporate income taxation. Double taxation agreements distribute taxation rights among countries.
Please see our overview on taxes for more info and get in depth-information at Germany Trade and Invest or from the Chamber of Commerce and Industry for Munich and Upper Bavaria (IHK).
Source: Germany Trade and Invest
Setting up a representative office (Repräsentanz)
Representative offices are an option at a preliminary stage to explore the German market. They serve to assess opportunities and risks associated with market entry and to establish initial contacts. However, the concept of representative offices is not recognized under German commercial and trade law. Therefore, they can only provide information and advisory services and cannot conclude business transactions in Germany. Legally effective business dealings may be conducted only by the parent company in its country of domicile.
Alternatively, the parent company could open a permanent establishment as described above. Another option includes hiring an external, independent businessperson, e.g. a commercial representative (Handelsvertreter) who has been instructed accordingly to manage the office. In this case, the company is not conducting independent commercial operations in Germany.
Compulsory membership in one of these chambers is required by law:
Please check, if you are obliged to register with other institutions and authorities such as the social insurance agencies, if you require any official licenses or permits and which rules and regulations might be important when running your business.
