Doing business in Germany
Germany has long been Europe's economic superpower and one of the largest economies in the world, despite a declining growth rate in recent years.
With an extensive range of in-demand exports and a stable trading environment, doing business in Germany offers enormous potential for investors. However, the country also has complex bureaucratic requirements that can make incorporating significantly challenging.
Germany, officially the Federal Republic of Germany, is firmly established as Europe’s economic powerhouse, with an economy that is both the largest and most powerful on the continent.
The country consists of 16 states (known as Bundesländer), including the city-state of Berlin, which is the seat of the government and the nation’s federal capital.
Despite a decline in economic growth rate in the past few years, Germany remains the world’s fourth largest economy in terms of nominal GDP and is the third largest exporter behind the US and China, specialising in advanced technological goods in the automobile, machinery, electronics and pharmaceuticals sectors.
Germany is also the most populous country in the European Union (EU), making it one of the biggest players in the real estate market. With a GDP per capita of nearly US$50,000, it ranks among the top 10% of countries worldwide and is therefore an extremely attractive market to foreign investors.
Germany is a member of key intergovernmental organisations including the European Union (EU), the Organisation for Economic Cooperation and Development (OECD) and the World Trade Organisation (WTO).
Foreign investors seeking tips for doing business in Germany will find excellent opportunities in the German market, where the population enjoys a high standard of living with extensive purchasing power and access to a strong welfare system.
Fast Facts
- In 2023, Germany had a GDP of US$4.43 billion (Statista).
- Currency – Euro (sign:€; code: EUR).
- Language – German (official), with over 95% of the population speaking standard German or a dialect of German as their first language.
- Type of government – federal republic with a parliamentary system. The chancellor is the head of government while the president serves in a representative and constitutional capacity.
- Population – 83.26 million (Worldometer, January 2024).
- Country capital – Berlin.
- Key sectors: automotive, energy, healthcare, manufacturing, chemicals, pharmaceuticals and medical technology, retail and consumer, TMT, transportation and logistics.
- Key cities: Berlin, Frankfurt, Munich, Cologne, Hamburg, Stuttgart, Düsseldorf, Dortmund, Essen, Leipzig
Germany ranked 25th in the world for the complexity of its business environment in TMF Group’s Global Business Complexity Index 2023, moving up from 20th in 2022. This relatively high ranking is due to the complex procedural requirements set out by the country’s intricate bureaucratic system for all new entities.
Companies looking to understand how to do business in Germany must therefore ensure they have a thorough understanding of the rules and regulations and how they can vary from city to state.
Advantages of doing business in Germany
Germany is one the most stable trading economies in the world, offering foreign investors a secure and well-developed economic and political framework. The country has a strong legal system with governmental protections that allow companies to safeguard their industrial and intellectual property.
The Organisation for Economic Co-operation and Development (OECD) has classified Germany as a high-income market, making it especially attractive for companies looking to harness purchasing power in Europe. According to the OECD, Germany scores 8.9 out of 10 for job availability and earnings and 8 out of 10 for work-life balance.
Companies looking at doing business in Germany will find an extensive range of industries ripe for investment and known for their innovative approach to production and advanced use of technology. From car manufacturing and pharmaceuticals to food and beer, Germany has for decades been the leading EU exporter in both product quality and volume, providing excellent opportunities for businesses wanting to expand into Europe.
Some advantages of doing business in Germany include the country’s well-developed and reliable infrastructure with easy access to roads, electricity, water and telecommunications, as well as a state-of-the-art transport system. The COVID-19 pandemic greatly increased the flexibility of working conditions through digitalisation, striking an even better work-life balance for employees. The country’s widespread access to high-speed broadband makes it ideal for businesses wanting to expand using international remote workers.
The German government encourages foreign investment and offers a variety of incentive programmes and public funding avenues to help offset the costs of expansion. GRW cash grants allow companies to reduce the cost of setting up new facilities by up to 40% through cash incentives provided via the grants. There are grants available for certain areas of research and development, such as interest-reduction loans. The German Federal Employment Agency offers a range of labour incentive programs for companies that wish to expand their workforce in the country.
The government has also developed its national data strategy with the goal of advancing sustainable growth and facilitating economic and social innovation. This strategy spans all major economic sectors and multiple stages of the data value chain and is Germany’s contribution to Europe’s greater vision of a future data society.
Overall, the benefits of doing business in Germany are numerous and they far outweigh the drawbacks that businesses may experience while navigating the complex bureaucratic system.
Doing business in Germany: the culture
Business culture in Germany has seen a period of rapid evolution over the past 50 years. In the past, the workplace was made up mostly of German men. Today, the labour force is comprised of men and women of a variety of ethnicities and cultural backgrounds. While this progression has moved the country up the ranks to 11th on the EU Gender Equality Index (Stastista, 2022), only 17.5% of executive positions in the top 100 companies are held by women (Stastista, 2023). The current gender pay gap in Germany is 18%, further demonstrating the need for ongoing development in providing equal opportunities in the workplace.
Since 1972, the death rate in Germany has been consistently higher than the birth rate. Despite an influx of migrants since the 1960s, this natural population decline over the past five decades has impacted the workplace today, creating challenges such as an ageing population and skilled labour shortages.
German business culture is characterised by planning, organisation and perfectionism, reflecting the nation’s foundational values of order and professionalism. Business relationships tend to be quite formal, and most companies operate under a vertical hierarchy.
When negotiating business deals, it’s important that foreign investors adhere to social expectations, such as being punctual and reliable. Because transparency is a valued aspect of business culture in Germany, corruption is uncommon, and agreements are generally fair and rarely changed at the last minute.
A factor the favourably affects business culture in Germany is the strong governmental support system for employees. The mandatory social security system provides retirement, unemployment, long-term care and health insurance. Generally, employers and employees make equal contributions to the fund.
However, employees earning above a certain threshold may opt out of the health and long-term care benefits in favour of taking out coverage with a private insurance company.
Taxes and regulations in Germany
Investors looking to do business in Germany can look forward to a number of incentives. As a member of the EU, Germany has favourable cross-border regulations, with exemptions on import taxes and duties on all goods moving through the country from other EU states. Goods imported from non-EU countries which are in short supply in the EU are subject to a full exemption of duties.
While Germany offers many tax incentives, entities expanding into the country will need to navigate an arduous tax system and complex bureaucratic regulations. Companies are liable for 14 different business taxes that must be paid in nine payments per year, requiring an average of 218 hours of business time (World Bank, 2021). The process of registering a new company and obtaining the necessary permits and licenses is also lengthy and convoluted.
Companies operating in Germany are subject to two main taxes: Corporate Income Tax (CIT) and trade tax. The CIT rate currently stands at 15%, however there is also a 5.5% solidarity surcharge (Solidaritätszuschlag) on CIT that was introduced in 1991 to help carry the cost of German reunification. Trade tax is the German municipality tax and varies from city to city, averaging between 14% and 17% in major cities. The combined tax rate that businesses can expect to pay is around 30%.
Small business entrepreneurs who reside in Germany are exempt from VAT if their total turnover does not exceed €22,000 in the previous financial year and is not expected to exceed €50,000 in the current year.
As international business regulations and directives have become more widely adopted, local requirements and regulations in Germany have increased to accommodate them, which has in turn made the country’s business environment more complex to negotiate.
HR and payroll in Germany
Companies looking at doing business in Germany can be assured of clearly defined and robust employment laws that offer excellent protection for employees, but which can also create complexities when setting up payroll.
Employment is governed by several legislations, including the Civil Code - among others - for employment contracts, the Works Constitution Act, which forms the legal basis for the rights and obligations of the works council, and the Collective Agreements Act that governs collective bargaining agreements.
Companies are requested to provide the essential terms of employment in writing, sign them and give a to the employee. Employment contracts can be arranged for an indefinite or fixed term. There are strict regulations for fixed-term contracts, which can extend to a maximum of two years without an objective reason.
A central factor in Germany’s employment legislation is that of collective bargaining agreements, where employees in a particular sector can negotiate wages and working conditions as a collective rather than on an individual basis within their company. The parties to collective agreements are employers or employers' associations on the employer side and trade unions on the employee side.
Additionally, companies that employ five or more workers must allow their employees to form a workers’ council, the size of which is dependent on the total number of employees.
In 2014, Germany introduced a minimum hourly wage for the first time to prevent people from struggling to make ends meet despite working. This baseline also helps to prevent old age poverty and negates the needs for creating additional social benefits.
The current minimum wage in Germany as of 1 January 2024 is €12.41 per hour (Wage Indicator, 2024).
Foreign nationals who don’t belong to the European Economic Area (EEA) must obtain a residence permit and a work permit to live and work in Germany. The EU Blue Card is a simplified work permit process offered to qualified individuals who earn a specific level of salary and who have a recognised university degree and a local employment contract.
Starting a business in Germany
Germany has an exceptionally strong startup culture, ranking 7th out of 202 countries for the strength of its startup systems (Start Up Blink, 2023). Berlin and Munich are the best locations for starting a business in Germany, with Hamburg advancing to a close third in recent years. Berlin is the hub for fintech while in Munich the focus is on B2B and hardware enterprises.
Despite the many advantages available, foreign investors looking to start a business in Germany will need to have a thorough understanding of the procedures involved.
There are a number of hurdles that can be difficult to navigate, largely due to Germany’s complex bureaucratic requirements. World Bank’s Doing Business Report 2020 ranked the country 125th out of 190 economies for difficulty in setting up a business, awarding it high scores for low setup cost and efficiency but a significantly lower score for complicated procedures.
For companies incorporating in Germany, there is a long list of requirements that all new entities must fulfil. For example, new companies must register with the local tax and trade offices, the local chamber of commerce, the commercial register and any relevant professional or industry organisations.
TMF Group helps you to set up operations in Germany while staying compliant with the latest local regulations. Our local experts will assist with your company expansion and ongoing growth.
FAQs
1. What are the risks of doing business in Germany?
Starting a business in Germany can be challenging due to the complex bureaucratic processes involved. Companies must work through time-consuming procedures and navigate a complicated tax system that requires employees to put in a significant number of business hours in order to remain compliant.
2. What is the culture of doing business in Germany?
The German people value order, planning and professionalism. Companies setting up operations in Germany should adhere to their deeply held business values, such as always being punctual and reliable. Business meetings – especially in the initial stages – are generally formal and executives should always be addressed with their titles. Companies presenting proposals should come fully prepared and expect to have every aspect of the project examined.
3. What are the costs of doing business in Germany?
The formation of a private limited company (GmbH) costs approximately €800 and the minimum share capital required is €25,000.
4. What are the benefits of doing business in Germany?
Germany is one of the most stable trading economies in the world and offers foreign investors a well-developed infrastructure and a secure political framework. The country’s strong legal system ensures that companies are protected by the many corporate laws and have the ability to quickly enforce their rights. Germany is also the third largest exporter in the world and has a high income population with an excellent standard of living, allowing companies to harness significant purchasing power both within the country and the EU.
5. What is it like to do business in Germany?
Doing business in Germany is generally regarded as secure and relatively simple, providing you have a thorough understanding of the legislations and regulations involved. The country’s large and diverse economy is supported by highly-skilled workers, a positive social environment and a history of peerless innovation and development.
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