Why do business in Germany?

As the fifth largest economy in the world, Germany has a strong exporting business sector that includes motor vehicles, machinery, household goods and chemicals.

German business culture is well-known for being strongly focussed, task-driven and efficient and the workforce tends to be professional, hard-working and very committed.

A stable legal and political environment, progressive immigration policy and large number of english speakers make Germany an attractive place for international businesses to set up shop.

Germany territory data

Local currency

EUR

Dialling code

+49

Local time

CET (GMT (+1))

Pay periods

12

World Bank Ease of Doing Business Ranking (1-190)

22

Tax rates 2020

Company tax

30-33%

Social security

20-22%

Wages tax

14-45%

VAT

19% (16% until Dec 2020)

How to set up payroll in Germany

When setting up a new business in Germany, you need to complete all necessary registrations to the country’s tax and social security authorities, including applying for an employer number, which is an eight-digit number for the name, address, and economy class of your company.

Your employer number will be necessary for hiring staff and registering them for social and health insurance. Your company will also need a dedicated tax number and register for statutory accident insurance, known as ‘Berufsgenossenschaft’.

It can take anything up to six weeks to register your business, during which time you can go ahead and set up your business bank accounts. While it isn’t necessary to pay your employees from a German bank account, it is advisable to have at least one account where government bodies can send any reimbursement payments.

To make setting up payroll easier you can use an outsourced global payroll provider such as us to determine the timing, place, and form of payments and payslips.

German employment law and HR considerations

Under German employment law, all employees have the right to join a union, work council, or collective labour agreement that can help deal with issues to do with wages, working hours and other work-related decisions.

All employers are required to pay staff at least the current minimum wage, although there are exceptions based on age, or if an employee is working as part of an apprenticeship or educational course.

Germany’s Employment Law also gives employees a legal entitlement to holiday time, which is usually 24 working days per year, and a maximum of 48 working hours per week. There are also nine national public holidays per annum, additional holidays based on the state.

Other types of leave include sick leave of up to 6 weeks covered by the employer at full salary. Maternity leave entitlement of 14 weeks at full pay. Paternity leave falls under parental leave which is 36 months after the birth divided as chosen between parents, eligible until the child is 8 years old.

It is the responsibility of the employer to calculate and deduct employee income tax based on their specific tax class and pay it to the correct authorities. Germany has tax treaties with most countries that prevent employees from being taxed by two different countries on the same income.

Social security contributions to Germany’s statutory social insurance schemes are obligatory by law. Both employers and employees must contribute to the different schemes. The typical contribution is around 40% of an employee’s gross income, but employers normally contribute half of this.

Employers must supply employees with written notice of termination and no employees can be terminated at will. The notice period and severance pay will depend on the length of employment. Employees can challenge the dismissal in court.

Mandatory employee benefits include social security contributions, accident insurance, severance pay and statutory pension.

Pictured: Berlin at night

Setting up a GmbH entity in Germany

The most common legal structure used by international businesses in Germany is a GmbH, which stands for the Gesellschaft mit beschränkter Haftung.  This is a popular structure because the liability of the members is only limited to the amount of invested capital.

You can register for a GmbH-Private Limited Liability Company with just one shareholder and one director with a minimum of 25,000 EUR share capital. The shares of a German GMBH cannot be transferred to the public nor registered at the Stock Market.

The company formation process in Germany includes preparing the necessary company documents needed for registration and entry into the German Commercial Register, such as the articles of association, specimen signatures and a set of passport copies for the company directors to confirm identities.

Part of the official documentation must be signed in front of a public notary in Germany. Your company will also need to find a registered office, have a business bank account and hire a local accountant for the company.

To form a GmbH you will need to:

  • Know who the shareholders will be
  • Write the articles of incorporation
  • Gather the share capital
  • Obtain a notarised certification
  • Submit your notarised application to the Commercial Register Court for registration

Your application will then be revised by the Register Court and if successful the GmbH will then be registered with the Commercial Registry.

Country Nuances

A US notary does not hold much weight in Germany, additional authentication steps may be needed.

Bank accounts are mandatory in Germany significant KYC checks are required to open.

VAT rules are very precise in Germany and require strict adherence. 

With the involvement of commercial courts in this process, it adds an additional layer of complexity as the incorporation process does not have as much automation as other countries.

To speed up the set-up process a trust account can be utilised, this can save several weeks.

A minimum of one director is needed to set up a German entity (the director can be non-resident).

Setting Up in Germany FAQ’s

What is the statutory notice period in Germany?

The notice period and severance payment will depend on the length of service.

What is a GmbH?

GmbH is an abbreviation of the German phrase ‘Gesellschaft mit beschränkter Haftung,’ which means ‘company with limited liability.’

What is the minimum share capital required to establish a GmbH entity in Germany?

Share capital is EUR 25,000, 50% of which must be paid up-front.

How long does it take to set up a German entity?

It takes an average of 12 weeks to set up a company.

Do you need to set up a local bank account in Germany?

While it is not necessary to have a German bank account, it can help with reimbursement payments from authorities.

Is there a residence requirement for German directors?

No. Your directors do not need to live in Germany.

What is the standard working week in Germany?

The average working week in Germany is between 36 and 40 hours. The majority of full-time jobs in Germany are seven or eight hours a day, five days a week, with an hour or 30 minutes’ break at lunchtime.

What are common supplementary employee benefits in Germany?

Supplementary benefits can include:
• Private healthcare
• Supplementary Retirement
• Supplementary death and disability
• Pension (occupational and private)
• Home/ Car/ Family Allowances

In Germany can employment contracts be terminated at will by the employer?

No. Employees cannot be terminated at will and require official written notice of termination.

What is the standard annual leave entitlement in Germany?

20 days minimum per annum. Employers often offer between 25-30. Plus 9 national public holidays per annum, additional holidays based on the state.

What is the new German R&D tax credit?

The new German R&D tax credit is available for personnel expenses and fees for subcontracting related to any activity that relies on a technical discipline to improve a product or process.

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