Doing Business in Germany

1. Doing Businessin Germany

2. Legal Aspects B. Tax and Accounting

3. Ways of Selling into the German Market • Direct Sales from abroad • to individual customers • to retailers • Sales via distribution intermediaries in Germany • commercial agents • authorized dealers • Sales through own presence in Germany • establishment of (i) branch office (ii) subsidiary • acquisition of existing company

4. 1.a) Direct Sales to Individual Customers in Germany (i) Non-consumers • No restrictions with respect to choice of venue and applicable law. • Jurisdiction of foreign courts can be opted for. • Foreign law can be declared applicable. (ii) Consumers • German courts will have exclusive competence for most actions against consumers. • Consumers cannot be deprived from protection granted by mandatory provisions of German law.

5. 1.b) Direct Sales to Retailers in Germany • Nearly identical to legal situation of sales to non-consumer individuals.

6. 2.a) Distribution through Commercial Agent • Commercial agent: independent self-employed contractorsoliciting sales contracts for principal. • No written agreement required, although highly advisable. • German law applies, unless applicability of foreign law is agreed. • However: commercial agency law has been harmonized throughout the EU. • Commercial agent in Germany cannot be deprived of compensation claim at termination of contract. • Principal may define scope of duties of commercial agent and can give instructions, but should not impair commercial agent’s independence. • Otherwise commercial agent may be regarded as employee subject to German labor law.

7. 2.a) Distribution through Commercial Agent (continued) • Claim for commission • usually success fee for business solicited. • may also be fixed fee or combination of both. • In case of a defined exclusive territory: fee is due for every contract irrespective of commercial agent’s activity. • Compensation claim in case of termination • unless commercial agent gave reason. • complex calculation; • maximum amount: average annual commission of the 5 years preceding termination. • Post-contractual non-compete obligation • only effective, if made in writing and if it provides for reasonable compensation. • cannot be longer than 2 years after termination of contract.

8. 2.b) Distribution through Authorized Dealer • Authorized dealer: independent contractor integrated in manufacturer’s sales organization, buying manufacturer’s goods and selling them in defined territory. • No written agreement required. • German law applies, unless applicability of foreign law is agreed • No harmonization of relevant laws in the EU. • therefore: real differences • Exclusivity arrangements may be critical under EU cartel law, but are generally allowed • if the supplier’s market share in the relevant market does not exceed 30% and • if passive sales are not excluded.

9. 2.b) Distribution through Authorized Dealer (continued) • Under German law: provisions on sales agency contracts apply by way of analogy. • In particular: compensation claim upon termination • if dealer is obliged to reveal data on his customers to manufacturer. • amount: average annual profit from sales of contractual goods of the 5 years preceding termination. • Manufacturer is obliged to repurchase delivered goods still on dealer’s stock • if dealer was obliged to maintain inventory of goods.

10. 3.a)(i) Establishment of Branch Office • Must be registered in the Commercial Register. • Trade permit must be obtained from Trade Office of local municipality. • Must file corporate income and VAT tax declarations. • No liability shield: foreign company fully liable for all activities of branch office. • Employment contracts with employees working in Germany are subject to mandatory provisions of German labor law. • contributions to social security system • withholding and payment of employee’s income tax owed on salary

11. 3.a)(ii) Establishment of German Company • Basic distinction between corporations and partnerships: • Corporations (Kapitalgesellschaften) • legally separate and independent entities • no liability of shareholders • forms: • GmbH (Gesellschaft mit beschränkter Haftung) • limited liability company • AG (Aktiengesellschaft) • stock corporation • SE (Societas Europaea) • stock corporation with links to at least two EU Member States

12. 3.a)(ii) Establishment of German Company (continued) • Partnerships (Personengesellschaften) • no separate and independent legal entities • in general, full liability of partners • however, in many other respects treated as legally separate (except GbR)

13. 3.a)(ii) Establishment of German Company (continued) • forms: • GbR (Gesellschaft bürgerlichen Rechts) • Civil Code partnership • full liability of all partners for any legal purpose other than pursuit of commercial business • OHG (Offene Handelsgesellschaft) • general partnership • for trade and commercial businesses • full liability of all partners • KG (Kommanditgesellschaft) • limited partnership • only one partner must be fully liable • GmbH & Co. KG • like KG, but partner with full liability is a limited liability company

14. 3.a)(ii) Establishment of German Company (continued) • In particular: GmbH (Gesellschaft mit beschränkter Haftung) • most popular legal form • combines high flexibility with relatively few obligations. • designed for private businesses with clear and stable shareholder structure. • full liability protection of shareholders. • must have at least one shareholder. • minimum share capital: 25,000.00 EUR (intended reform: 10,000.00 EUR) • contribution in cash or in kind • 50% must be paid up when established. • formation through • notarization of deed of formation • including Articles of Association • (intended reform: only notarization of signature if standard Articles of Association are used) • and registration in the Commercial Register • costs: approx. 1,000.00 EUR (plus additional attorney’s fees)

15. 3.a)(ii) Establishment of German Company (continued) • legally represented by Managing Director • at least one • can be foreign resident • can be given instructions by shareholders • legal duties: • must ensure that the company keeps proper records. • must ensure payment of employees’ income taxes and social security contributions; • otherwise personally liable and subject to criminal charges. • must file for bankruptcy if the company is over-indebted or insolvent (not later than 3 weeks); • otherwise subject to criminal charges.

16. 3.a)(ii) Establishment of German Company (continued) • Employment • Contract does not require written form to become effective, but employer is obliged to issue a written statement on employment terms. • Applicable law may be chosen, but employee cannot be deprived from protection of mandatory German law.

17. 3.a)(ii) Establishment of German Company (continued) • Costs of employment • salary • social security contributions • Employer has to pay half of • old age pension insurance (19.9%) • long term care insurance (1.7%) • unemployment insurance (3.3%) • health insurance (approx. 15%). • obligation to withhold and to transfer employees’ income tax and social security contributions • other costs • paid holidays (minimum 24 days) • sick pay (up to 6 weeks)

18. 3.a)(ii) Establishment of German Company (continued) • Termination of employment • minimum notice period depending on length of employment: 4 weeks to 7 months • Reasoning/justification • not required when company does not have more than 10 employees. • No severance pay! • required when company has more than 10 employees. • allowed only if required due to business reasons • and if socially justified. • Severance is usually paid to make employee renounce on his employment (rule of thumb: 1/2 monthly brut salary x completed years of employment). • Special protection • while on maternity leave • for disabled employees • employees sitting on the company’s work council

19. 3.b) Acquisition of Existing Business • No special laws or regulations applying specifically to acquisition of businesses (except for merger control laws). • General provisions of German Civil Code (BGB) apply. • Contracts subject to German law are usually much shorter and less detailed than Anglo-Saxon contracts. • Unless parties agree otherwise, statutory law applies with respect to all aspects of the transaction. • Basic distinction under German law between (i) Sale and purchase agreement • Parties establish obligations to transfer title to the sold asset(s) and to pay purchase price. • Parties are free to choose the applicable law. (ii) Transfer agreement • Parties effect transfer of ownership of asset(s) sold. • Parties cannot choose the applicable law; transfer is mandatorily governed by the laws of the state where the assets being transferred are located.

20. 3.b Acquisition of Existing Business (continued) • Distinction between (i) asset deal (ii) share deal

21. 3.b Acquisition of Existing Business (continued) ad (i) Asset Deal • All assets sold and transferred must specifically be described; general description as such is not sufficient. • Transfer of accounts payable / contracts requires consent of respective creditors and contractors (differently from assignment of claims receivables). • Public licenses and permits relating to the operation of the business may be transferred, but not those licenses and permits relating to a specific person. • Usually no form requirement, unless assets include real estate (in that case notarization required).

22. 3.b Acquisition of Existing Business (continued) • Labor law: Sec. 613a BGB ! • Employment contracts are automatically transferred to new owner of the business, unless employee objects to the transfer. • Notice of objection can be given by employee within one month upon being notified on business transfer. • Purchaser is not entitled to terminate employment merely on the grounds of the business transfer.

23. 3.b Acquisition of Existing Business ad (ii) Share Deal • Assets of the company do not have to be described in detail for an effective transfer, because interests / shares are sold and transferred. • Interest in a German partnership (OHG, KG, GmbH & Co. KG) are not freely transferable; approval of all partners are required unless partnership agreement provides otherwise. • Shares in a German corporation (GmbH, AG) are freely transferable unless the company’s bylaws provides otherwise. • Form requirements: • Partnership and AG: no specific form requirement. • GmbH: notarization required.