Germany, which boasts the largest economy in the European Union, is a home to booming sectors such as tech, banking, and healthcare. As the world’s fourth largest economy, Germany is a hub for some of the world’s top talent, with multinational firms, tech companies, and startups setting their sights on building local HQs in Berlin, Frankfurt, and other cities.
Germany is one of the most challenging countries in the EU when it comes to setting up a subsidiary or entity. Getting approved and becoming compliant with government regulations can take up to 6 months. If you handle the subsidiary process incorrectly, your business could end up paying large fines for breaking the law. In the worst case scenario, your business will be shut down and banned from operating in Germany. For this reason, many businesses choose another option for expanding in the country, such as partnering with an EOR service like Via.
This article gives foreign companies the information they need to know about the subsidiary process.
There are quite a few steps that companies must complete in order to legally register and open a German subsidiary or German branch.
The main steps in the process are as follows:
Get a local address to register the subsidiary at in Germany
Select the right legal and form structure. A private limited liability company (LLC) is the most common structure for a subsidiary. This structure frees the shareholders from any debt from the parent company. To set up an LLC, you will need 25,000 (EUR) of startup capital, with 12,500 (EUR) present at the time of registration.
Confirm the name of the company with the commercial register
Open a local German bank account
Provide and file the necessary documents for setting up a business (make sure you have all the right legal forms):
Declaration of existence
Declaration to tax authorities
Declaration to competent Statistische Landesamt
Declaration to the Labour Office, if employees are hired
Declaration to the Social Security bodies and relevant professional associations
Registration with the professional chamber to which the company belongs
Registration in the Commercial Register of the lower regional court
Register with the local tax office
After these steps have been completed, you must also apply for an employer number before you can onboard employees. All employees must be registered for health insurance.
The parent company’s key players should also write and record a resolution that explains why there was a decision to open a subsidiary. This must be submitted to the German government. Every piece of required documentation needs to be notarized before it can be filed with the German Commercial Register.
This entire process can range anywhere from 6 weeks to a few months, plus you will need support from local lawyers, accounts, and HR specialists to make sure your corporation is setting up a subsidiary or a legal entity correctly.
German laws state that subsidiaries operate as a limited liability company, separate from its parent company. This means that the subsidiary has its own share capital, accounting system, and management structure. However, you can continue to use the name of the parent company to operate.
German subsidiary laws require you to register with your local tax office online through the Federal German Fiscal Authority’s Form Management System (FMS). This allows the tax office to determine how much you owe each year, based on the amount of profit declared on registration forms. Tax returns for business are due no later than May 31st of the following calendar year.
As a parent company, you have two main options to set up a business in Germany. You can either set up a branch office or a subsidiary. While subsidiaries tend to be more strategic, setting up a branch also has its advantages.
A subsidiary can operate as a 100% local company. For branch offices, this option is not available. It is not technically a resident corporation. Subsidiaries, on the other hand, are viewed as a local German company once established. Being a local operation gives companies access to the most trade opportunities and makes it easier to attract potential employees.
Subsidiaries retain full operating independence from the parent company. This makes it easier for the business to tailor their practices to German culture. You can even take it further and change the company name to something different than the parent company.
If you choose to open a local branch, you will also face a different set of tax regulations. Branch offices are taxed according to a double-tax treaty. A subsidiary is only regulated by the same taxation rules as other resident companies in Germany.
So while setting up a subsidiary in Germany allows you to have a lot of freedom from the parent company, you will still need a lot of investment capital to move the process along. You will also need to account for travel time back and forth between Germany, as it will take months to go through the process of being legally compliant to begin operations.
Most importantly, you will need a team of legal advisors to help guide you through tax laws, subsidiary laws and employee benefits.
Beginning in April of 2017, using a global PEO service in Germany became more challenging. Third-party PEO services that hire employees on behalf of a parent company are legally required to have an AUG or temporary agency license in the country. This process is also timely and if the PEO service does not follow the process legally and correctly, you could be liable for any compliance issues. Using a global EOR service like Via eliminates many of these compliance problems.
With our easy-to-use platform, Via helps you manage local HR processes for direct employment such as benefits, payroll, background checks, and more. Our team of local labor lawyers and on-the-ground experts ensure that your company remains compliant while expanding abroad. As your employer-or-record/entity in Germany, Via assumes full responsibility for employment liability, so that you can focus on what matters: recruiting and managing your team.
With Via’s transparent pricing, you can pay full-time employees or contractors in Germany with no hidden set-up fees, no foreign exchange or transaction fees, and no minimums–start with 1 employee and scale up at your own pace.