Exclusive Q&A on Company Formations with Arne Vogel
What is the procedure for foreign investors setting up a company in your jurisdiction?
In principle, a foreign investor is free to set up a company in Germany just like a German resident. There are no specific restrictions for foreigners. There are several different types of companies in Germany. In the following I will focus on the German limited liability company (Gesellschaft mit beschraenkter Haftung – GmbH), since, according to my experience, in general the GmbH is the most common and appropriate company for foreign investors.
For setting up a German limited liability company the future shareholders (founders) need to attend a meeting at a German notary public, where they need to sign the Deed of Establishment, which will include the company’s initial Articles of Association and the appointment of the first managing director(s). The notary public will read out loud the deed of establishment and sign it together with the founders. The managing directors then need to submit the Deed of Establishment to the Commercial Register at the seat of the Company and file for registration of the company. Upon registration, the GmbH will begin to exist as a separate legal entity. The commercial register will only register the company if one quarter of the subscribed share capital is paid to the company at the free disposal of the managing directors (minimum EUR 12,500, i.e. half of the minimum share capital prescribed by law). Also other authorities need to be informed of the formation, e.g. the local chamber of commerce, local tax and social security agencies etc.
In case the founders cannot come to Germany they may authorize a representative to attend notarization on behalf of them. In that case the representative will need to prove to the notary public that he was duly authorized by submitting a respective certified power of attorney. Furthermore, the notary public and the Commercial Register will require a proof of existence of the shareholders. In case of individuals this will be a certified copy of the passport or ID card. In case of legal entities this will be a certified excerpt from the company’s commercial register or a comparable companie’s register. The German commercial register regularly requests evidence that the persons acting for a legal entity are allowed to represent the entity. In case the (foreign) companie’s register does not provide such information, some other suitable proof is required, e.g. certified copies of a respective shareholder’s resolution or of a resolution of the board of directors. All certified documents need additional certification for international use by the La Hague Apostille or by Legalization. The commercial registers in most large German cities will accept English documents. However, they are entitled to request German translations of all documents.
A GmbH needs at least one managing director. Non-German residents are generally allowed to be managing directors of a German GmbH. Since the managing directors are obliged to run and supervise the daily business and since they represent the company, it is advisable to appoint at least one person with residence in Germany as managing director.
Have there been any recent regulatory changes or interesting developments?
The last major change of the German Act on the German Limited Liability Company took place in 2008. Its goal was to facilitate establishment of limited liability companies and, at the same time, to fight abusive use of limited liability companies.
One of the most discussed innovations was the introduction of a new entry level GmbH, the so called ‘Unternehmergesellschaft (UG)’ (often translated as ‘entrepreneurial company’). The UG is a GmbH but the minimum share capital is only EUR 1. The UG cannot pay the whole profit as a dividend, but needs to retain 25 per cent of the annual profits as a statutory reserve. It is also subject to some other restrictions. A UG, for example, cannot be established by way of contribution in kind. The UG was introduced as a reaction to the demand of the market for a company providing full limited liability to its shareholders without the obligation to pay in at foundation half of the relatively high minimum share capital of EUR 25,000, (i.e. EUR 12,500) as required for a GmbH.
Another innovation was the introduction of standard forms for the establishment of GmbH with up to three shareholders, which aimed at decreasing the costs for legal advice and notarization during the start-up-process.
Furthermore, the minimum nominal value of one share was decreased from EUR 50 to EUR 1 so that a GmbH now can be established with a registered share capital of EUR 25,000, split into 25,000 shares of EUR 1 each.
Are you noticing any new or innovative formation strategies being formed?
Often GmbH are used in Germany as only partner with full liability in certain kinds of partnerships. The company resulting from this strategy is a so called GmbH & Co. KG, which combines the advantages of a partnership (which is intended to be a company where the personal contribution of the partners, usually individuals, is predominant) with the advantages of a limited liability company (which is a company that does not necessarily require a personal contribution of its members, but only a financial) and at the same time provides for full limited liability for all shareholders. The disadvantage of such GmbH & Co. KG is that, once again, the minimum share capital of the GmbH is EUR 25,000 and at least half of the share capital must be paid in. Since the introduction of the UG (with only a minimum share capital of EUR 1) a tendency becomes apparent to establish UG & Co. KG, which combine advantages of partnerships with advantages of limited liability companies but do not require a minimum paid-in share capital of EUR 12,500.
Can you detail the various funding options for early stage companies?
Early stage companies have various funding options in Germany. Typical funding will be a combination of equity and debt financing. German authorities are very keen on promoting new technology and high-tech ventures in branches such as renewable energy, information technology and services. Therefore, there are numerous state-financed early-stage funding companies and programmes. Besides state-financed funding there is also a vital private-equity and venture-capital scene, especially in the major cities in Germany like Berlin, Munich, Hamburg, Frankfurt, Stuttgart and Cologne. Within the last years also crowd-funding, in particular via crowd-funding websites, became increasingly popular.
What are the main opportunities and challenges investors need to consider before entering?
Germany provides political stability, rule of law, a very well educated and highly trained workforce, high life standard and high availability of goods and services and good access to banking and finance. The bureaucratic barriers for company formations have been decreased within the last decades. Hence, there is a reliable environment for investments in Germany. This environment provides the opportunity for investors/founders to focus on their business and obtain the resources necessary for growth, in particular people, capital and goods and services.
As already mentioned, setting up a (limited Liability) company in Germany is not very difficult and foreign investors are generally allowed to set up a company in Germany without restrictions. However, in praxis some paperwork needs to be done and the certification / legalization and sometimes translation of documents may delay the whole process significantly if it is not well prepared. This could be a challenge. Furthermore, life standard and labour costs in Germany are relatively high, so that Germany might not be the first choice for companies producing easily producible and shippable goods. Another challenge might be the language. Although people in Germany tend to speak English quite well, not being able to speak German may complicate communication with authorities and employees and seriously hamper everyday business.
Can you outline the strategic benefit from choosing a specific location for company formation?
Germany offers different regions with different disadvantages and advantages. For example, Germany has several overseas harbours. Companies that are dependent from access to overseas shipping facilities may rather chose a location close to an overseas harbour. Other regions of Germany, especially in the south, have a strong engineering and industry tradition. A company with strong demand for engineering might find it easier to find highly specialised workforce in those areas. In general, it will be easier to find highly specialised employees in the major German cities. On the other hand, life and business premises in these cities will be considerably more expensive than in smaller cities. Therefore, it may be an option to choose a smaller city, when a company does not require a highly specialised workforce.
Also differences in taxation could be a motivation for choosing a certain location. The corporate income tax for companies of 15% of the EBT is the same everywhere in Germany. In addition, the communities will raise a local trade tax within a certain range, which is roughly between 7 and 17% of the company’s profits.
Are there governmental restrictions on who can be an owner of the company?
In general, anyone can be owner of the shares of a German company, even children and certainly foreign individuals and entities. Of course ownership of shares must not violate anti-money-laundering-rules. If the investor also wants to be appointed as managing director of a limited liability company, he or she must assure the he or she has not been convicted of certain crimes like fraud or bankruptcy recently.
How can a new company ensure it has all of the necessary mechanisms in place to report and pay taxes accurately and on time?
Almost any company in Germany will have a tax advisor who will advise on tax payments and who will put up the required tax reports. Considering the complexity of German tax laws and case law it seems difficult to do business without a qualified tax advisor. Many bigger companies have their own in-house tax departments.
What role do shelf companies play in your jurisdiction?
Starting a business by way of acquiring a shelf company is permissible under German law and well accepted by the business community. Thirty years ago establishing a GmbH from scratch easily took three months. Shelf companies played a great role in those days. Nowadays, if well prepared, establishing a GmbH from scratch in Germany will only take about two weeks. The process and paperwork required for acquiring a shelf company and making it ready for business is quite similar to the process and paperwork required when establishing from scratch. A notary public needs to be involved in any case. If well prepared, acquisition of the shares can be achieved within one or two days and the changes to the company, like company name, managing director, object of the company, change of the registered seat etc. may be entered into the commercial register within one to two weeks, depending very much on the individual register. Hence, acquiring a shelf company does not provide such a big benefit compared to a formation from scratch anymore. However, in situations where it is important to have an existing legal entity within days and where no delay in the process of establishment is tolerable, it still is advisable to acquire the shares of a shelf company. In praxis, many German and non-German founders still make use of this option.
What key trends do you expect to see over the coming year and in an ideal world what would you like to see implemented or changed?
Since several years we can see a trend of reducing paperwork and streamlining the whole company formation process. We expect this trend to continue.
We also see a trend of increased risk of personal liability for managing directors of GmbH. Personal liability was not a big issue several decades ago. However, fuelled by huge company bankruptcies, spectacular cases of white collar crime, the financial crisis and, in some cases, exorbitant remuneration and bonuses for managing directors, personal liability of managing directors is now in focus of the public. Laws concerning personal liability have been sharpened and also shareholders and creditors of companies as well as the courts are more willing to hold managing directors responsible for potential misconduct.
In everyday praxis we observe that establishing a company in Germany still is a bit of a challenge without qualified advice, especially for founders with low experience. Still too many different authorities, agencies and other parties need to be involved (e.g. notary public, chamber of commerce, commercial register, tax authorities, tax advisor, social security agencies, etc.). In order to facilitate the formation of (limited liability) companies in Germany, it would be desirable to have some kind of one-stop solution company formation office, which could coordinate the formation and assist with the establishment of a new company in Germany.
Dr. Arne Vogel studied law at the University of Kiel, Germany and at Aristotle University in Thessaloniki, Greece. After graduating, he worked as scientific assistant at the business law department of Kiel University and gained a doctoral degree in law on a subject concerning the liability of directors of stock corporations. After his admission to the bar he worked for several years as a lawyer in the Corporate Law / M&A department of an internationally renowned law firm. In 2014 he joined the law firm M&P DR. Matzen & Partner mbB in Hamburg, Germany, where he now advises clients in the fields of Corporate Law, M&A and Insolvency Law.
Dr. Arne can be contacted on +49 (0) 40 / 80 80 4 80 or by email at email@example.com