German Law

1. Official Name and Language

Bundesrepublik Deutschland (Federal Republic of Germany); official language: German

2. Political and administrative structure

Germany is a federal republic comprised of the federation (Bund) and 16 states (Bundesländer). The states still hold some important legislative as well as most administrative powers. The state governments are also involved in the federal legislative process.

Germany is a member of the European Union as well as the European monetary union.

3. Normal business structures

German corporate and business law provides two basic options regarding the liability of businesses.

A single individual may conduct business as a sole trader (Kaufmann) or several individuals may conduct business jointly as a partnership or as a registered company with personally liable partners (Offene Handelsgesellschaft – OHG). In these cases the individuals involved will be personally liable without limitation for all debts of the business. However, there is also the possibility to limit the personal liability to only one of the partners involved, the so called Kommanditgesellschaft.

Liability can be limited by incorporating a company based on capital shares (Kapitalgesellschaft). In this case the shareholder’s liability is generally limited to the amount (if any) unpaid on shares. There are two basic models of such companies. The simpler model is the Gesellschaft mit beschränkter Haftung – GmbH (limited liability company); the minimum capital requirement is 25,000 EUR. Most capital share based companies in Germany are incorporated as GmbHs. The incorporating act takes place before a notary and the company is then registered with the local commercial court. The incorporation procedure is simple and usually prepared by a lawyer.

In order to address growing concerns over the deterrent effects of minimum capital requirements, the legislator revised the law governing GmbHs (the GmbH Gesetz or GmbHG) in 2008. It is now possible to incorporate a company which is subject to the same regulations – with few exceptions – as a GmbHwith no minimum capital requirement (the so called “1 € GmbH”). The official term for such companies isUnternehmergesellschaft (haftungsbeschränkt) or UG (haftungsbeschränkt); this term must be included in the company name. The second major modification is that 25% of an UG’s annual profit must be held back, until a share capital of 25,000 EUR has been achieved.

The more complex model is the Aktiengesellschaft – AG (literally “share company”); the minimum capital requirement is 50,000 EUR. AG shares can, but most not necessarily, be publicly traded. The AG is subject to far more formal legal requirements than the GmbH. The handling is therefore also more complex than for a GmbH.

These are the basic corporate structures; several highly specialised options exist.

Foreign companies may also open subsidiaries or representative offices in Germany in order to conduct business here.

There are no general laws prohibiting persons who are not German citizens or residents from owning an interest in a German company or from being the director of a German company.

4. Immigration and employment

European Union citizens and European Economic Area nationals benefit from the free movement of workers, the freedom of establishment and the freedom to provide services. They do not require residency or work permits. Swiss nationals enjoy similar rights as a result of the EC-Swiss Confederation Agreement on the Free Movement of Persons. There are also a number of bi-national agreements, such as the German-Turkish treaty on workers.

Other nationals generally require visas to enter Germany, residency permits to stay for an extended period of time and work permits to take up employment in Germany. The authorities enjoy a wide range of discretion concerning the grant of permits; however, there are special regimes in place, for example for large-scale investors.

The “EU Blue Card“ for Germany is a special residency permit available since 01.08.2012.

This permit is available to all academics with an officially recognised academic degree or a foreign degree comparable to the German. In addition, applicants must prove that they have an offer of employment in Germany which corresponds to their qualification. The annual gross salary must be at least 44,800 EUR.

Academics in the understaffed fields of mathematics, ICT, science and technology can receive a “Blue Card” with a minimum annual gross salary of 34,944 EUR. In the case of an annual gross salary below the 44,800 EUR benchmark, the federal employment agency must approve the application. The agency’s approval is not required, if the (potential) employee completed her or his degree in Germany, i.e. received a degree from a German University.

“Blue Card” holders are entitled to “permanent residency permits” earlier than other non-nationals. A permanent residency permit is not time-limited. The requisite language skills are level B1 according to the Common European Frame of Reference for foreign languages (CEFR). Otherwise suitable applicants who do not yet have a job offer may receive up to six months’ visas for the purposes of job searching. This is conditional upon the applicant having sufficient funds to cover her or his living expenses during that time.

Nationals of Australia, Israel, Japan, Canada, the Republic of Korea, New Zealand, and the USA may also enter Germany without a visa and apply for a residency / work permit prior to taking up employment.

A residency / work permit usually also allows for free movement within the member states of the Schengen treaty. These are:

Germany, Austria, Belgium, the Czech Republic, Denmark, Estonia, Finland, France, Greece, Hungary, Iceland, Italy, Latvia, Liechtenstein, Lithuania, Luxembourg, Malta, the Netherlands, Norway, Poland, Portugal, Slovakia, Slovenia, Spain, Sweden and Switzerland.

5. Real property

There are no general laws prohibiting individuals who are not citizens or residents of Germany from acquiring, owning or selling real property in Germany. Taxes on real estate vary across the municipalities; the average annual rate is 1.9 % of the fiscal value of the property.

6. The judicial system

The German judicial system has general courts as well as a number of specialised branches (family, administrative and chancery courts for example). Civil justice is administered mainly by the general courts. The Amtsgerichte handle smaller and the Landgerichte larger cases. The jurisdiction is determined by the sum which is in dispute.

There are appellate courts for all branches of the judicial system and every branch is presided over by a highest court on the federal level. In addition there is a federal constitutional court (Bundesverfassungsgericht) with the power to repeal parliamentary acts. The federal courts help to ensure uniformity and predictability of the courts’ jurisprudence at all levels.

7. Taxation

The German tax system is often described as overly complex and hard to grasp. However, there are a wide range of exemptions and tax benefits available, especially to businesses.

The rates of the taxes mentioned below are those for the tax year 2012 which corresponds with the calendar year.

Income Tax

Residents are liable to income tax on their worldwide income. Non-residents are generally liable to income tax on certain German-source income. An individual is a resident of Germany if the domicile or habitual place of abode is in Germany.

Resident spouses living together are, in general, assessed jointly. The income of children is not included in their parents’ taxable income but is taxed separately.

Partnerships are treated as separate persons. The profit is allocated to the partners according to their partnership interests.

Individual income tax is imposed at progressive rates. A brief summary of the tables is presented below. The 5.5 % solidarity surcharge is levied on the amount of income tax computed according to the tables.

(¹⁾ from 2013: EUR 8,130 and 16,260 respectively)

Investment income

Investment income includes dividends and interest. As of January 1, 2009 investment income also includes capital gains from the sale of shares and financial instruments. An allowance of up to EUR 801 per year (double for jointly assessed spouses) is granted. Expenses economically related to the investment income are not deductible.

This income is generally taxed separately with a final flat withholding tax at a rate of 25 % (26.375 % including solidarity surcharge). However, if the final flat withholding tax exceeds the income tax rate of the taxpayer, an option for an assessment is permitted.

Business income of individuals from an investment in shares is taxed under the partial-income system, i.e. 60 % of the dividend income is taxable. Correspondingly, 60 % of the economically related expenses are deductible.

Capital gains

Capital gains arising in the course of a business are treated as ordinary business income.

Capital gains derived from private transactions are generally not subject to tax. However, they are taxable if they arise from the disposal of real estate within ten years of the date of acquisition or regarding movable property, excluding shares and bonds, within one year of the date of acquisition. Profits from the disposal of real estate are not taxable if it has only been used privately.

Furthermore, capital gains on shares in a company are subject to tax if the shareholder owns a substantial interest, i.e. at least 1 % of the company’s share capital. The profit of such an interest is regarded as a business transaction. Capital gains on shares in such a company are treated in the same way as dividends under the partial-income system, i.e. 40 % of the capital gains are exempt from income tax.

Business Tax (sole proprietors and partnerships)

A business tax has been imposed by the municipalities. Its rate varies across municipalities. The average business tax rate amounts to 14.00 %. As of January 1, 2008 the business tax is not deductible from its own and the income tax base. Individual sole proprietors and partners of a partnership benefit from a lump-sum credit against the individual income tax to the extent that the payable income tax relates to business income. The lump-sum credit amounts to a maximum of 95 % with reference to the average business tax rate.

Church Tax

Church members subject to unlimited tax liability are required to pay church tax to the amount of 8 % or 9 % of their payable income tax, depending on the federal state in which the tax payer resides.

Solidarity Surcharge

A solidarity surcharge of 5.5 % is levied on the income and corporate income tax liability respectively.

Corporate Income Tax

The corporate income tax at a rate of 15 % (15,825 % including solidarity surcharge) is levied on the various types of entities listed in the Corporate Income Tax Law, in particular, on stock companies (AG) and limited liability companies (GmbH). Partnerships are not taxed as separate entities, the partners being taxed individually on their share of profit.

Business Tax (corporations)

Generally, every company exercising a business in Germany is subject to business tax. The effective rate of business tax depends on a federal rate of 3.5 % and a multiplier. The multiplier is imposed by the municipalities and varies across them. The average rate comes to 14 %.

Capital gains

Capital gains from the sale of shares and received dividend income are, in principal, fully exempt from corporate income and business tax. However, a lump-sum of 5 % of this revenue is considered as taxable income representing non-deductible business expenses.

Dividends

Dividends and other profit distributions paid by a corporation are subject to withholding tax at a rate of 25 % (26.375 % including solidarity surcharge). The withholding tax is creditable against the corporate income tax liability of resident corporate shareholders.

Value Added Tax (VAT)

The VAT is a tax on consumption of goods and services. The standard VAT rate charged on supplies of goods or services amounts to 19 %. A reduced rate of 7 % applies to essential goods and services, such as food and beverages (but 19 % if consumed on the spot), etc. The zero rate applies mainly to exports and intra-Community supplies.

Inheritance and Gift Tax

The rates of the inheritance and gift tax are determined based on marriage or closeness of relationship between the deceased/donor and the beneficiary and on the value of the transferred fortune. The following rates apply:

Personal allowances

The following personal allowances are granted:

Under certain conditions 85 % of the value of a transferred business property is exempt from the tax base. An option for a full exemption from inheritance and gift tax regarding business property is possible under specific requirements.

Taxes on Real Estate

An annual real estate tax as well as a transfer tax on real estate exists. The effective rate of the annual real estate tax depends on a federal rate of 0.35 % and a multiplier which is levied by the municipalities and varies across municipalities. The average rate amounts to 1.9 % on the fiscal value of the real estate. Real estate transactions of are subject to a 5.0 % transfer tax based on the purchase price.

Social Security Contributions

Germany has a social security system. The following social security contributions are payable by the employer in 2013:

• pension fund at 9.45 % on a monthly salary of up to EUR 5,800;
• health insurance at 7.3 % on a monthly salary of up to EUR 3,937.50;
• unemployment insurance at 1.5 % on a monthly salary of up to EUR 5,800;
• nursing care insurance at 1.025 % on a monthly salary of up to EUR 3,937.50

The employees, in general, have to pay the same contribution as the employer. The contributions have to be withheld from their monthly salary and paid to the social security system directly by the employer.