What’s the best approach to doing business in Germany?
That was the key question for Stefan Kirchmann, a partner and head of tax at Mazars Germany, Papaya’s in-country partner for Germany. Stefan brought his vast knowledge and expertise to Tel Aviv for an exclusive seminar for Papaya.
Using the hypothetical example of an Israeli company seeking to hire local salespeople in Germany, Stefan listed all of the primary options the company should consider, and the mechanics behind each of them.
“What happens is, the potential employee enters an employment agreement with the PEO, which enters into a service agreement with your company,” he explained.
“There is one problem with this arrangement – after 18 months, the company has to decide what to do because there is a limit to how long a company can hire through a PEO agency in Germany, which is 18 months,” he said. “After 18 months, it could automatically be changed to employment, and if you miss a deadline, there could also be penalties. So after 18 months, there needs to be a decision.”
Another option is to hire the employee with a foreign employer. German labor law would apply. Under certain circumstances, the foreign company is not obligated to withhold payroll taxes (wage tax and social security tax) in Germany.
“But in a practical sense,” he added, “we see that it makes sense to set up some sort of “shadow payroll” in order to take care of the administrative work. All the companies we know engage in a payroll company, like Mazars, to run the payroll on their behalf.”
The shadow-payroll-provider registers the company with German social security authorities, files monthly social security tax reports, and withholds and submits the taxes as a German employer.
While German social security offices may allow a foreign company to register, “German income tax authorities do usually not accept the registration of a foreign employer for German wage tax purposes,” he said.
“German sales representatives have to register themselves with their local personal tax office. The latter assesses income tax prepayments on a quarterly basis. The income tax is calculated based on the employee‘s personal income tax rate.”
A third option is setting up a legal entity in Germany. That could happen after trying out either of the previous options and seeing that the market is a good fit for the company. At that point, Stefan said, the company needs to decide what form the Germany entity will take. It can be a branch office of a foreign company or a limited liability company (known as a GMBH in Germany).
Stefan said opening a branch office is relatively uncommon, the courts are not always familiar with all of the rules, and companies still have the same accounting requirements. “The main reason not to do it is because there is no liability protection in Germany so the head office is always liable for everything. So the German branch of a foreign subsidiary is always considered a part of the foreign entity even though it’s registered in Germany.”
Far more common, he said, is for companies to set up GMBH companies. To do so requires six elements:
- Articles of Association (A0A) – This includes the corporate name, registered office, business purpose, registered share capital, shares, and managing directors of the company, notarized by a notary public. The articles serve as proof that the shareholders have the power of representation for the company.
- Bank Account – All incorporation documents have to be made available to the bank: notarized AoA and proof of existence and representation. All shareholders must be able to prove their identity and must be represented.
- Share Capital – Proof of payment of at least 50 % of share capital, i.e. EUR 12,500 must be made. The money remains with the company, but must be deposited in the German bank account. The company cannot be registered until the bank account is opened and the share capital deposit is made.
- Registration – Once proof of payment is received, the registration process can begin. It is essential to remember that until registration, all liability belongs to all shareholders. After registration, the liability sits with the managing director. The costs for a completely new company are approximately 5,200 Euro: Lawyers Fixed-Fee (including bank account support), 3,500 Euro; notary fees, 1,500, and Euro Court Fees,200 Euro.
- Managing Director – The MD assumes personal liability for the company. He does not have to be a German citizen, but should be someone who can travel to Germany without difficulty.
- Final Steps – After all the preliminary work is complete, the company must take a number of additional steps to get up and running. 1. Register your business with the Business Regulatory Authority (Gewerbeaufsichtsbehörde) 2. Notify the German tax authorities of your new business (Corporate Income Tax, Trade Tax, Wage Tax and Value Added Tax registration) 3. Register your company with the German Social Security Office (Sozialversicherungsbehörde), and 4. if necessary, transfer your German resident employees to your new entity.
With those steps, the company is ready to begin hiring workers and the payroll work begins, including providing renumerations, withholding taxes, providing benefits, and accounting for royalties, and the statutory audit of financial statements.
Papaya is deeply grateful to Stefan Kirchmann for generously sharing his vast knowledge. His talent for taking complex ideas and making them understandable to the general public is truly awe-inspiring.