Germany: Doing Business In

The legal system of the Federal Republic of Germany falls within the civil law tradition, tracing its origins to Roman law. With its important role in the codification of civil law, German legislation has influenced legislation in other jurisdictions. Main sources of law are EU Regulations, the German Constitution (for historic reasons still named Grundgesetz) and codified laws passed by the Federal Parliament (Bundestag) and/or the parliaments of the individual Federal States (Bundesländer).

There are various types of business structures, including but not limited to:

• Sole Proprietorship Businesses (Einzelkaufmännisches Unternehmen), which is an unincorporated business owned by a single natural person (entrepreneur) and operated in his or her name or under a trade name. It is not a legal entity and cannot have any rights and obligations of its own;
• Partnerships (Personengesellschaften) primarily in the forms of Civil Law Partnerships (Gesellschaft bürgerlichen Rechts or GbR), General Partnerships (Offene Handelsgesellschaft or OHG), Limited Partnerships (Kommanditgesellschaft or KG, mostly structured as a GmbH & Co. KG with a GmbH acting as sole general partner) or Silent Partnerships (Stille Gesellschaft), which hold in common that they are associations of two or more natural or legal persons without corporate organization but differ substantially in detail;
• Corporations (Kapitalgesellschaften), primarily in the forms of Limited Liability Companies (Gesellschaft mit beschränkter Haftung or GmbH) and its “little sister”, the Entrepreneur Company with limited liability (Unternehmergesellschaft mit beschränkter Haftung or UG), Stock Corporation (Aktiengesellschaft or AG), Partnership Limited by Shares (Kommanditgesellschaft auf Aktien or KGaA) and the European Stock Corporation (Societas Euopaea or SE).

As a general rule, any non-domestic company may carry on business directly in Germany but, depending on the nature of the business and the degree of physical presence in Germany, it needs to comply with several notification or registration obligations, in particular from a trade register, tax and social security perspective and may have to have a German branch registered with the German commercial register (Handelsregister).

While Germany generally follows the rule of seat and would qualify any company based on where its seat is located, that rule is largely superseded by treaty obligations/EU law and case law derived obligations to apply the rule of incorporation. As a consequence, investors are generally free to use companies incorporated in any EU member state for business purposes in Germany even if such companies exclusively do business in Germany and, therefore, have their effective seat of administration in Germany.

Yes, there are. The minimum share capital for a German GmbH is € 25,000 (unless the company is formed as an Entrepreneur Company (UG)), the minimum share capital for a German AG is € 50,000

A sole trader or Sole Proprietorship Businesses (Einzelkaufmännisches Unternehmen) would generally begin to carry on business without any formal set-up, pre-registrations or permits being required. It would be held to notify the trade register and comply with several other notification/registration obligations, depending on the size, quality and nature of the business.

A Civil Law Partnership would generally be established by means of its partners agreeing on wanting to pursue joint and common goals and the Partnership’s Articles of Association (which do not have to be recorded in writing); essentially the same holds true for a Silent Partnership. Neither the Civil Law Partnership nor the Silent Partnership would necessarily be apparent to the public.

Besides agreement on the Articles of Association, the General Partnership and the Limited Partnership require registration with the Commercial Register.

It should be noted that German law regulations applicable to Partnerships have recently been changed, by means of the Act on the Modernization of German Partnership Laws (in German: Gesetz zur Modernisierung des Personengesellschaftsrechts (PersonengesellschaftsrechtsmodernisierungsG– MoPeG), which will bring about changes to more than hundred other Acts and will enter into force on January 1, 2024. With the changes, there will be a possibility and/or obligation for Civil Law Partnerships to register with the Commercial Register, but – pursuant to the Corporate Income Tax Modernization Act (Körperschaftsteuermodernisierungsgesetz (KöMoG)) also a possibility to apply for tax treatment as if the partnership were a corporation.

The formation of corporations, whether in the form of a UG, GmbH, AG, KGaA or SE requires the execution of a formation deed, agreement on the Statutes, other formal steps as well as registration with the Commercial Register. Further details cannot be described, here.

Certain activities are subject to public permits, examples would include matters subject to financial regulation (banking and insurance business), pharmaceutical business, and many others. For certain activities, the number of eligible legal forms is limited.

The most prevalent entities would include Limited Partnerships, in particular in the form of GmbH & Co. KG’s with a GmbH acting as sole general partner (in particular in privately held, Mittelstand constellations as well as for constellations involving real estate), GmbHs (which would also largely be considered to be the best form for German subsidiaries of international groups) and AG’s. The number of SE’s has increased substantially; the number of KGaAs in Germany falls short of 350.

Operations and management as well as general corporate governance largely depend on the type/legal form of the respective entity.

KG’s are generally managed by their general partners, who can be subjected to approval by the shareholders (meeting). In cases of GmbH & Co. KG’s, it is the GmbH, represented by its Managing Directors (Geschäftsführer) who manages the KG’s business.

As a general rule, German GmbHs come with two corporate bodies, namely the Managing Directors (Geschäftsführer) on the one hand and the shareholders (meeting) (Gesellschafter, Gesellschafterversammlung) on the other hand. While the management of the GmbH is incumbent on the Managing Directors, by means of the Managing Director Service Agreement, the Articles of Association and/or the Rules of Management, etc. the Managing Directors leeway/elbow room can be reduced (substantially), so that the shareholders (meeting) can very much influence the GmbH’s management. The shareholder meeting is also entitled to issue instructions to the Managing Directors, which the Managing Directors are held to follow, unless unlawful. In some constellations, German GmbHs come with additional corporate bodies, such as earn Advisory Board (Beirat), a Shareholder Committee or a Supervisory Board (Aufsichtsrat). These corporate bodies can be installed voluntarily, by means of the Statutes. Under certain circumstances, namely where the regular number of employees exceeds a certain threshold, there can be an obligation to install a Supervisory Board. The members of such Supervisory Board will then impart be elected by the employees. Where a GmbH regularly employs more than 500 employees, pursuant to the One Third Participation Act, a Supervisory Board must be installed, one third of whose members will be elected by the employees, where a GmbH regularly employs more than 2000 employees, pursuant to the Co-Determination Act, a Supervisory Board must be installed, half of whose members will be elected by the employees.

German AGs come with three corporate bodies, namely the Management Board (Vorstand), the Supervisory Board and the General Meeting (Hauptversammlung). Division of tasks and responsibilities is more complex than it is for a GmbH. The Management Board has more far-reaching competencies then the Managing Director of a GmbH. The Management Board is not subject to instructions by the Supervisory Board or the General Meeting (while it is certainly possible to implement catalogues of reserved matters). As regards the composition of the Supervisory Board, the statements with respect to employee participation/co-determination made with respect to the GmbHs apply mutatis mutandis.

There are no general restrictions related to the persons to act as authorized representatives or shareholders, other than those deriving from general (civil) law and related to the mental capacity and legal age. Embargoes, sanctions, etc. must of course be taken into consideration.

As a general rule, an individual may become an authorized representative, if of legal age and unless disqualified from being an authorized representative (for example because of certain convictions, the nonexistence of which must be proven).

Any Partnership must have managing partners, who, in the case of commercial partnerships will also be registered with the commercial register. In cases of GmbH & Co. KG’s, it is possible to have a legal entity (the GmbH) appointed as (sole) general partner, which in turn would be represented by its Managing Directors (Geschäftsführer) so that ultimately, there will always be an individual bearing responsibility.

Corporations must always have the relevant number of authorized representatives, in most cases, the appointment of one Managing Director of a GmbH or the appointment of one Management Board Member of an AG is sufficient. Where an entity has other corporate bodies, such as a Supervisory Board, also the members to such Board must be appointed.

There are no local residency or nationality or visa requirements for individuals to act as authorized representatives. Difficulties can arise where it is (almost) impossible for the individual to actually enter Germany (for visa requirements) and/or where all Managing Directors reside outside of Germany, in which case it can be difficult to argue that the principal/main place of business is in Germany (which again can create tax issues and/or issues under the Rule of Seat doctrine followed by the German Federal Supreme Court at least for non-EU member state jurisdictions).

For some industries, persons to be appointed as authorized representatives must possess a specific skill set and education which will be verified by the competent regulators.

Other than deriving from general provisions of law, embargoes, sanctions, legal capacity, mental capacity, legal age, etc. there are no specific (residency, nationality, etc.) requirements for individuals to act as shareholder.

As a general rule, there is no maximum number of shareholders, provided that Partnerships (other than the so-called Public Partnerships or Publikums-KGs) and GmbHs are considered and have been designed to be “personalistic” companies not necessarily designed for numerous shareholders.

From a German corporate law perspective, there are no specific restrictions in expanding business operations in Germany (other than those deriving from general laws and related to prohibited goods, requirements for public permits, abidance by regulations). Therefore, unless specifically noted in the underlying constitutional documents for the respective entity or by lawful instructions of the shareholders, entities and establishments in Germany are free to work with trade/commercial agents and resellers. The EU Sales Agent Directive has been transposed into German law and is applicable, including to the extent related to the Agent’s claim for compensation in case of termination of the agency relationship. Under certain circumstances, also resellers can be eligible for the corresponding compensation.

The main regulation in that regard is the German Corporate Governance Code (Deutscher Corporate Governance Kodex, DCGK), which, however, is primarily addressed to publicly listed corporations. Content-wise, it is generally in line with comparable codes for publicly listed companies in other jurisdictions, with some claiming that the German Code comes with a comparatively greater regulatory density and stringency, a statement which is disputed by others, who claim that many topics are regulated in a more concrete and thus ultimately more restrictive manner by such comparative codes and that the German Code would have to be qualified as more general and liberal on important issues of good supervision than comparable non-German codes. German law follows a Comply or Explain regime, as set out in Section 161 of the German Stock Corporation Act. Pursuant to Preamble to the DCGK, “the recommendations and suggestions of the Code may serve as a guide for non-capital-market-oriented companies” and some say that it has a spillover effect on larger limited liability companies (GmbHs). Apart from the DCGK, there are recommendations for family held undertakings (Governance-Kodex für Familienunternehmen (www.kodex-fuer-familienunternehmen.de)) and a Public Governance Code (Public Corporate Governance Kodex des Bundes) for companies in which the Federal Republic of Germany holds participations.

German law provides for various mechanisms by which working capital can be provided. If financing is to be provided as equity financing, this can for example be done by having the shareholders make additional equity contributions for issuance or for no issuance of shares, the letter also referred to as informal additional equity contributions. Debt financing is also available, provided that loans can be obtained from/granted by the shareholders, companies affiliated with the shareholders/other group companies or third parties. Loans provided by shareholders and their affiliates are subject to a specific regime, pursuant to which they are inferior in rank in the event of insolvency and repayments that have occurred within certain time limits prior to the debtor becoming insolvent are subject to clawback. Converting shareholder loans into equity is generally possible, but more complex than it tends to be in other jurisdictions. Converting shareholder loans into equity can lead to tax issues, in particular where the fair market value of the loan receivable is lower than its face value. Any debt to equity swap must therefore be scrutinized. Mezzanine financing can also be resorted to. Apart from that, all other customary ways of financing are available as well, including factoring and fine trading.

There are various ways of returning equity or proceeds, which cannot be described in full detail, here. The options available and steps to be taken for payments by the subsidiary to its shareholders depend on the legal form of the respective subsidiary and the type of proceeds or equity that shall be paid to the shareholder.

Ordinary dividend distributions are possible. They will generally be based on yearly financial statements and resolved upon by the corresponding corporate body, i.e. generally the shareholders meeting or the General Meeting. Dividend distributions must be fed from profits, which can under certain circumstances also include amount stemming from profit or capital reserves.

In the case of GmbHs, it is generally possible to resolve on interim dividend distributions. Such interim dividend distributions must be based on the respective entity’s financial planning, which must allow the assumption that dividends at least in the amount of the interim dividend distribution will in fact be generated until the end of the financial year for which the interim dividend distribution is made. To the extent excess interim dividends have been paid to the shareholders, the shareholders are under no obligation to repay any such excess amounts.

The acquisition of own shares/treasury shares by a GmbH comes with several limitations and prerequisites and would generally not be considered a customary way of financing dividends or payments to shareholders.

Capital maintenance rules must always be factored in and it must be confirmed that the payment of the dividend, interim dividend or other repayment to the shareholder does not lead to a violation of these rules.

It should be noted that German law comes with a rather detailed and sometimes complex system of capital maintenance rules and that apart from these rules, in the case of AG’s, financial assistance rules must also be taken into consideration.

To the extent the German company disposes of capital or profit reserves which can be paid out without triggering a negative balance sheet and/or without a violation of German capital maintenance rules, the amounts of such reserves can be paid out to the shareholders. The exact mechanism to be followed depends on the circumstances of the individual case.

It is possible to reduce the nominal share capital of a GmbH and to use the proceeds generated by such nominal share capital reduction for repayments to shareholder. This requires a formal procedure to be followed, with notarial involvement, official publications, etc. and is a process that will require at least one year to be accomplished. Against this background, it can be recommendable to structure equity contributions by shareholders such that they are divided into nominal share capital and other equity (fed through share premium or informal additional equity contributions, which are generally not subject to capital maintenance rules.

The following applies to the GmbH:

In principle, a resolution is adopted by a simple majority of the votes cast. Votes are calculated on the basis of capital shares. Each EUR 1 entitles the holder to one vote. The Articles of Association may provide for deviating regulations, such as multiple voting rights or the dependence of the voting right on the payment of the contribution. Abstentions result in the votes being deemed not to have been cast.

The law requires a qualified (i.e., three-quarters) majority of the votes cast in a number of cases:

• Amendment of the Articles of Association, including ordinary increase or decrease of the share capital;
• Capital increase from company funds;
• Dissolution of the limited liability company;
• Conversion of the limited liability company into a civil law partnership, a commercial partnership or a corporation;
• merger of the GmbH with a commercial partnership or a corporation;
• splitting up of the GmbH or splitting off of a part of the business for incorporation or for new incorporation (demerger);
• transfer of all or part of the assets.

The majority requirements for the following events are at dispute, with many saying that the resolutions are subject to at least a qualified, i.e. ¾ majority:

• Exclusion resolution
• Continuation resolution and
• resolution related to the approval of an Enterprise Agreement (Unternehmensvertrag).

The Articles of Association/Statutes may provide for additional constellations in which qualified majority requirements apply, the Statutes can also provide for unanimity as the underlying concept and/or for higher percentages. It is also possible to combine provisions in a catalogue of reserved matters with specific majority requirements.

In German GmbHs, it is generally possible for the shareholders meeting to issue instructions to the Managing Directors. To the extent such instructions are lawful, the Managing Directors are held to abide by the corresponding instructions. To the extent that they believe that the corresponding instructions are not lawful, they must inform the shareholder meeting accordingly and, to the extent that the matter cannot be resolved may be facing a delicate decision to take.

There is no right, at the side of the shareholders meeting, to give instructions to the Managing Directors to the extent such instructions are not lawful or would conflict with the duties of the Managing Director or may trigger personal liability of the Managing Director vis-à-vis third parties. More in particular, the shareholders meeting cannot instruct the Managing Directors to not apply for insolvency proceedings, if and to the extent the prerequisites under German law for a corresponding obligation on the Managing Director being triggered, are fulfilled. To the extent the Managing Director abides by lawful instructions, it cannot be held liable for the corresponding action by the Company. Under certain circumstances, it can be recommendable for the Managing Director to insist on being held harmless and/or indemnified from consequences of certain actions that the Managing Director is held to take on the basis of instructions.

In a German AG, there is no possibility for the General Meeting to issue instructions to the (Members of the) Management Board.

Under German labor law, there are two kinds of dismissals: ordinary dismissals and dismissals for serious cause. These two kinds differ in reason for dismissal, notice period and dismissal protection.

An open-ended employment contract can be terminated by the employer at any time by either an ordinary dismissal or a dismissal for serious cause. Alternatively, the parties can terminate the employment contract by mutual agreement.

The fixed-term employment contract ends automatically when the agreed term expires. If the employer and employee continue to execute the employment contract beyond its expiry date, the rules provided for an open-ended employment contract apply automatically. An ordinary dismissal of a fixed-term employment contract is not permissible, unless the contract states otherwise. If a right to ordinary termination has been agreed, it applies to both parties. The right to execute a dismissal for serious cause cannot be excluded.

Ordinary dismissal

As a general rule, an ordinary dismissal is valid if the applicable notice period is observed and the dismissal does not violate public policy (e.g., if based on discriminatory grounds).

However, there are some restrictions. Employees in an operation with more than ten regular employees, and with more than six months’ seniority, enjoy comprehensive dismissal protection under the Dismissal Protection Act. Accordingly, a dismissal has to be “socially justified”, which means there has to be a specific reason for the dismissal. The Dismissal Protection Act sets out three particular categories of reasons that may socially justify a dismissal: (1) person-related reasons, (2) conduct-related reasons and (3) operational reasons.

1. A dismissal for person-related reasons can be socially justified if the employee is unable to perform his/her contractual duties under the employment contract for reasons from his personal sphere. It is irrelevant if the employee is responsible for this inability or not. In practice, the most important circumstance leading to such inability is illness – either long-term illness or frequent short-term absences. However, effectively dismissing an employee due to illness is extremely difficult in Germany. Pursuant to case law of German labor courts, there are three strict prerequisites for such dismissal: First, at the time the dismissal is declared, it must be presumed that the employee’s absence due to illness will continue in the future which is generally indicated by severe absence times in the past (usually multiple weeks per year over a couple of years). Second, the continued absence has to be a serious detriment to the employer’s business interests (e.g., loss of production or customers). Third, the employer’s interests in the termination of the employment relationship have to outweigh the employee’s interests into its continuance. As a dismissal is always only an ultima ratio, also a relocation to another job position or any other action to avoid the dismissal must be considered.
2. A conduct-related dismissal as an employer’s response to an employee’s breach of contractual duties covers various forms of employee misconduct. According to case law, such dismissal in first instance requires a significant breach of duty on the employee’s part to be lawful (e.g., unexcused absence, poor performance or inappropriate conduct towards the employer or colleagues). Second, it must be likely that the employee will breach the contractual duties again in the future. In this context, the employer is in particular obliged to issue (usually several) warnings (in writing for proof). A conduct-related dismissal without at least one prior written warning is usually invalid. Special attention should be paid to issuing effective warnings in compliance with the prerequisites set by German labor courts and in a properly documented way. Third, the employer’s interests to terminate the employment relationship have to outweigh the employee’s interests. For example, social data such as the employee’s age, seniority, and number of dependents have to be considered to the advantage of the employee. Finally, given the dismissal’s ultima ratio character, no less restrictive means may be available.
3. Dismissals for operational reasons are based on structural entrepreneurial decisions on the employer’s part. A dismissal for operational reasons requires in a first step that the employee’s job position ceases to exist due to an entrepreneurial decision of the employer, based either on external business reasons (e.g., a drop in the demand for a product) or on internal business reasons (e.g., a modification in production methods, closure of an entire business, or outsourcing of work to other companies). The mere dismissal of a particular employee may generally not be the content of such entrepreneurial decision. The underlying decision leading to the elimination of a job position is, however, subject to review by a German labor court only to the extent to which it is arbitrary. Second, the employer has to carry out a social selection which is one of the key issues in the context of dismissals for operational reasons. If the employee at risk could also perform the job of a comparable employee, the employer has to assess whether the employee at risk enjoys greater social protection than the relevant colleagues being employed in the same operation. The statutory criteria for this selection process are age, seniority, maintenance obligations, and disabilities of the affected employees. In the end, the employee with the social criteria least worthy to protect would have to be dismissed. Third, there may not be any other open and reasonable job position on an appropriate hierarchy level that could be offered to the employee in question. This search for an open job position is not limited to the same operation but must also consider job positions in other operations of the same legal entity.

The notice letter does not have to necessarily mention the reason for the dismissal in order to be valid; only in exceptional cases regulated by law is an unexplained notice of termination invalid. The law provides for such an exception for example for pregnant employees. In this case, the termination must specify the exact reason in writing.

Within the scope of application of the Dismissal Protection Act, the employer is also obliged to inform the employee, on request, of the reasons which led to the social selection made. If the employer fails to do so, he/she may be liable for damages. However, the notice letter takes effect regardless.

Dismissal for serious cause

A summary dismissal for serious cause requires a serious cause for terminating an employment relationship. Such serious cause exists if facts are present on the basis of which – taking all circumstances of the individual case into account and weighing the interests of employer and employee – the employer cannot reasonably be expected to continue the employment relationship until the notice period has elapsed or – in employment relationships for a definite period – until the agreed term has ended. Some examples include repeated tardiness, persistent refusal to work, theft of the employer’s property, or work for a competitor of the employer.

Furthermore, a dismissal for serious cause has to be notified to the employee within two calendar weeks after the employer has obtained knowledge of the facts resulting in the dismissal. Otherwise, the dismissal is invalid.

The employer must, at the employee’s request, immediately inform the employee in writing of the reasons for his or her dismissal. If the employer does not comply with this obligation, the dismissal remains effective, but the employer may be obliged to pay compensation for damages.

Collective dismissals

To ensure that the employment agencies are informed in a timely manner about an unusually high number of new unemployed persons, employers are obliged to report mass redundancies in writing. The obligation to notify depends on the size of the company and the number of redundancies planned in the same period.

A notification of collective redundancies is required if, within 30 calendar days, more than five workers are to be dismissed in an operation employing normally more than 20 and fewer than 60 workers; 10% of regularly-employed workers or more than 25 workers in establishments employing normally at least 60 and fewer than 500 workers, and at least 30 workers in establishments normally employing at least 500 workers. Managing directors, executives, apprentices, and trainees are also considered employees.

The employer must also provide the works council with information in good time and inform the council of various details in writing. In the consultation procedure, the parties must advise on how to avoid dismissals and mitigate their consequences. The notification of collective redundancy must be accompanied by the statement of the works council.

Furthermore, a mass dismissal usually qualifies as an operational change resulting in the employer’s obligation to enter into negotiations with the works council about a reconciliation of interests and a social plan. Whereas the reconciliation of interests covers the conditions based on which the envisaged measure are to be implemented and executed, the social plan provides for actions in order to soften or compensate the disadvantages to the affected employees.

Covid-19 measures
In order to terminate an employment relationship, a reason for termination based on conduct, personal or operational reasons is still required. In the case of terminations due to economic difficulties of companies as a result of Covid-19, the above-mentioned conditions still apply. There are also no deviating regulations regarding notice periods.

Costs / Risks:

1.Severance pay

There is no statutory severance entitlement in Germany. As the underlying principle of German dismissal protection law is “in or out”, a judge can only terminate court procedures by a judgment over a severance pay under special circumstances, especially when a continuation of the employment is unacceptable for the employee.

However, as wrongful dismissal procedures often last for a long time and the outcome is tricky to predict, employers usually accept a mutual settlement during the first court hearing, and therefore a termination of the employment relationship in return for payment of severance. The severance pay is usually calculated by the formula: half of the gross monthly salary per year of seniority. Depending on the justification for the dismissal and therefore the employer’s chances for winning the case, this amount decreases or – more likely – increases. In case of dismissal without objective reasons, the severance pay is usually at least one gross monthly salary per year of seniority.

2.Dismissal formalities

All dismissals – both ordinary dismissals and dismissals for serious cause – have to be done in writing to be valid (originally signed by a competent company representative). The reasons for the dismissal do not need to and should not be stated in the notice letter. Compliance with formal requirements and a provable delivery of the notice letter in due time are crucial for an effective dismissal. Particular attention should be paid to these aspects to avoid unnecessary disputes and costs on the employer’s part.

If a works council exists, it has to hear about the planned dismissal first, i.e., detailed information about the employee and the reasons for the dismissal have to be provided. Although this information can also be given verbally, written information is recommended for a stronger evidential basis in case of later disputes on the validity of the dismissal. Depending on whether the dismissal is ordinary or for serious cause, the works council has a certain number of work days to process the request. It may consent to the dismissal, object to it, or remain silent. The employer may give notice even if the works council objects. However, notice may only be given after the applicable period for the works council hearing process has elapsed. If the works council is not informed properly, the dismissal is null and void.

3.Special dismissal protection

Certain categories of employees enjoy increased protection against dismissal, including severely disabled employees, pregnant employees, employees on maternity leave and employees on parental leave. For these protected categories, dismissals are generally prohibited and only permitted in very exceptional cases and with the prior consent of competent authorities.

Works council members also enjoy special dismissal protection, considering their office within the company. A dismissal of such employees is extremely difficult.

4. Unfair dismissal 

If an employee wants to challenge the validity of a dismissal (both for ordinary dismissals as dismissals for serious cause), he/she has to file a wrongful dismissal claim at the competent labor court within three weeks from delivery of the notice letter. Otherwise, the dismissal will be effective.

The vast majority of cases is mutually settled in a first court hearing – usually against payment of severance. Where in exceptional cases no agreement is reached, a second court hearing is scheduled. In this case, the employer has to demonstrate and prove that the applicable requirements for the dismissal were fulfilled. The labor court then rules whether or not the prerequisites for a lawful dismissal were met. If this was not the case, the labor court will generally judge that the employment relationship has not been terminated effectively and that the employee has to be reinstated.

Executives are also covered by the Dismissal Protection Act. In contrast to other employees, the works council does not have to be heard. Apart from that, the general principles of termination also apply to executives.

1. Works councils

In Germany there are no basic trade union organizations in the company. Instead, the works councils are the most important point of contact for operational problems. The works councils, in turn, work closely with the union.

The works council represents the interests of employees in the company. It monitors that the applicable laws, occupational safety regulations, collective agreements and organization-level agreements are observed by the employer. The works council also advocates the equal treatment of employees and the integration of foreign employees.

The works council has certain powers and organizational options within the company which enable it to fulfil its tasks.

The works councils:

• must agree to every new hiring,
• must be heard before each dismissal,
• ensures a fair pay classification,
• determines working conditions (start and end of work, break times, overtime, on-call service, part-time, etc.),
• stands up for the rights of trainees,
• ensures occupational health and safety,
• can request measures to combat racism and xenophobia in the company.

If there is no works council in the company, its workforce can establish a works council provided that at least five employees are regularly employed in the relevant enterprise.

If you are a member of the works council, you enjoy special protection against dismissal. Dismissal by notice of works council members is completely prohibited. The protection against dismissal applies for the period from the list for election up to the end of one year after termination of membership in the works council.

The works council can conclude organization-level agreements with the employer. organization-level agreements are generally valid, meaning for all employees of the company or for certain employee groups which are based on a contract between the employer and the works council. There are many regulations in organization-level agreements that define your rights and obligations as an employee of the company. These can be, for example, general holiday principles or holiday plans for the current year, working hours, recording of working hours, break regulations or behavioral guidelines for dealing with colleagues or customers.

Many organization-level agreements are also important from a financial point of view because they define payment entitlements, e.g. commissions, wage extra payments or annual target planning.

2. Trade unions

Trade unions are supportive communities that stand up for the rights of workers. At the political level, trade unions demand fair working conditions and income as well as the protection of weaker people.

As an EU citizen in Germany you can become a member of the trade unions and exercise trade union rights just like nationals. These rights include access to the administration and management of trade unions and the right to vote and stand for election.

The union membership offers many advantages especially in terms of legal protection.
Members are guaranteed free legal advice and legal representation if they have any questions regarding:

• labor law (wages, holidays, dismissal, etc.),
• health and care insurance, unemployment insurance, pension insurance (illness, accident at work, accident on the way to work),
• other social law issues and administrative law.

3. Co-determination at the supervisory board level

Employers being incorporated as e.g. a German company with limited liability (Gesellschaft mit beschränkter Haftung, GmbH) or a German publicly listed company (Aktiengesellschaft, AG) are subject to the obligation to introduce employees’ co-determination at the supervisory board level if specific thresholds are achieved in terms of the number of regularly employed employees.

If a company regularly employs more than 500 employees, the German One Third Participation Act (Drittelbeteiligungsgesetz) requires a supervisory board to be elected by the employees/employee representatives at a level of one third.

Pursuant to the German Co-determination Act (Mitbestimmungsgesetz), the supervisory board of a company employing regularly more than 2,000 employees must be composed of 50% employee representatives.

In German criminal law, corruption is primarily dealt with by the provisions against bribery of mandate holders (Section 108e German Criminal Code, Strafgesetzbuch, StGB), bribery, accepting and granting benefits, bribery (Sections 331 et seq. StGB), violation of official or private secrets (Sections 353b, 203 StGB, professional secrecy), breach of secrecy (Section 17 UWG), bribery and corruption in the healthcare sector (Sections 299a, 299b StGB), bribery of employees (Section 299 StGB), collusive tendering (Section 298 StGB), subsidy fraud (Section 264 StGB) and embezzlement (Section 266 StGB), as well as against vote buying and selling.

According to Section 334 StGB, bribery is committed if the perpetrator offers, promises or grants a public official, a European official, a person entrusted with special public service functions or a soldier in the Federal Armed Forces a benefit for that person or a third party in return for the fact that they have performed or would in future perform an official act, and thereby breached or would breach their official duties. If the offense is committed for the lawful performance of official duties, it is merely a case of granting an advantage, which is punishable by imprisonment of up to 3 years or a fine (Section 333 StGB). Sections 331 and 332 StGB contain parallel criminal offences for the acceptance of an advantage and taking bribes.

For the criminal liability of the office bearer etc. for bribery as well as for that of the person granting the advantage for bribery, it is essential whether an official act, which is equivalent to its omission (Section336 StGB), is present (this is not the case with an off-duty activity), whether this is contrary to duty (the relevant laws and administrative provisions decide on this), and finally whether the advantage is given (on the basis of an agreement on injustice) in return for the expected official act, i.e. in connection with this, or only occasionally for official activity.

Under Section 299 StGB, anyone who bribes employees of a company in the course of business or who allows himself to be bribed as an employee is liable to prosecution. Sections 299a and 299b StGB cover bribery and bribery in the healthcare sector.

In taxation proceedings, operating expenses must not reduce profits if they relate to the granting of benefits and related expenses if the granting of benefits constitutes an unlawful act that constitutes a criminal offense or a law that allows punishment with a fine.

German law does not recognize criminal law in the proper sense for associations of persons, legal entities or business enterprises. This is due to the fact that from a German legal perspective – punishment always presupposes guilt, as from a German understanding criminal punishment involves a socio-ethical judgment and can only be imposed for culpable behavior, i.e. for a violation of law for which the perpetrator is personally responsible. Punishment can therefore de lege lata only ever be directed at individually named natural persons, not at collectives.

However, German law does contain provisions that impose adverse sanctions on associations of persons, legal entities or business enterprise for unlawful acts that occur within their sphere of responsibility. The place for this is the law of administrative offenses, the legal consequences of which, in contrast to punishment, do not express any social-ethical judgment of unworthiness. Section 30 I of the German Administrative Offences Act (OWiG) allows for the imposition of an association fine for criminal or administrative offenses committed by the executive bodies, management boards or shareholders authorized to represent a legal person or association of persons if they thereby violate the latter’s duties or if the latter has been or was to be enriched by the offense. The administrative offense in Section 130 I OWiG (breach of supervisory duty) serves as an important connecting factor. Section 29a OWiG also permits confiscation at the expense of an association under provisions that are linked to the perpetration of an administrative offense. The attribution standard of Section 9 OWiG also permits sanctioning of management personnel. The same mechanism also exists in criminal law (Section 14 StGB).

The German government’s draft bill for a law to strengthen the integrity of the economy, which was introduced in the 19th legislative period but was not implemented, provided, among other things, for the creation of an independent Association Sanctions Act (VerSanG) as a new principal law. It was intended to separate the punishment of associations whose purpose is economic business operations for offenses committed by their leaders from the Administrative Offenses Act and to reorganize it. It is currently unclear, whether the legislative efforts will be taken up anew.

The topic of money laundering has several facets in German commercial law and commercial criminal law. On the one hand, under Section 261 of the German Criminal Code (Strafgesetzbuch, StGB), those who attempt to introduce illegally acquired assets into the legal financial and economic cycle are subject to criminal prosecution.

On the other hand, the Anti-Money Laundering Act (Geldwäschegesetzt, GwG, AMLA) imposes various reporting, due diligence and documentation obligations on certain individuals and entrepreneurs in order to better prosecute those who commit money laundering offenses. The Act, which was also recently updated (again), is long and quite complex.

The German definition of money laundering is in line with European (Union) standards. The AMLA regulates the precautionary measures that must be taken to prevent money laundering and to track down criminals more effectively. Violations of the Money Laundering Act are punishable as administrative offenses and are subject to a fine of up to one million euros or up to twice the economic benefit derived from the violation.

The Act in particular obligates the following persons or companies:

• Credit institutions, financial companies and asset managers
• Lawyers, tax advisors and notaries
• Auditors and certified public accountants
• Commercial traders of goods
• Real estate agents for rental and purchase properties
• Insurers
• Organizers and brokers of games of chance
• Art brokers and art warehouses

In principle, these market participants must always pay particular attention to whether there are indications of money laundering among their customers or business partners, and in relation to all their transactions.

Lawyers and notaries are (only) subject to the obligations arising from the AMLA if they carry out so-called money laundering-relevant transactions. What these transactions are is regulated by a further list in the AMLA. These transactions include, among others:

• Purchase and sale of real estate or commercial enterprises
• Management of money, securities and other assets
• Establishment, operation, management or financing of companies, trusts or similar structures
• Assistance in tax matters

Subsequently, a differentiated system applies to these money laundering-relevant transactions, which balances the lawyer’s duty of confidentiality with the information and reporting obligations under the AMLA. It provides for the right of lawyers to refuse to disclose information that they have received in the course of a client relationship subject to the duty of confidentiality. However, the obligation to provide information remains in force if the lawyer knows that his client has used or is using the client relationship for the purpose of money laundering or terrorist financing.

A central element of the AMLA is the strengthening of the so-called risk-based approach. This includes, above all, the introduction of so-called risk management. According to this, obligated parties must have an effective risk management system that – according to the legislator in Section 4 (1) AMLA – is “appropriate in view of the type and scope of their business activities.” This includes the duty to undertake corresponding risk analyses and implement sufficient safeguards, which can for example include measures aiming at:

• the management of risk,
• the identification of the business partner
• recording and retaining data on the business partner, and
• making this data available to the relevant authorities,
• the appointment of a money laundering officer
• the screening of employees for reliability
• initial and ongoing briefing of employees on typologies and methods of money laundering and terrorist financing, and relevant regulations and obligations, including data protection.

For certain industries, the law generally provides for the obligation to appoint a money laundering officer. This applies to brokers of games of chance, casinos, credit institutions and financial companies. In addition, the competent supervisory authority may order the appointment of a money laundering officer for a company not belonging to this group if it deems this appropriate. The money laundering officer is required to ensure that the company implements the provisions of the AMLA and to monitor compliance with the measures then adopted.

In its Section 3, the AMLA regulates the due diligence obligations of the obligated parties with regard to their customers. In other words, obligations which – unlike in abstract risk management – must be fulfilled by the obligated party in concrete terms when a business relationship is established or (under certain conditions) during or even outside a business relationship. The most important of these obligations is the obligation to identify the business partner. This always applies when transactions in business relationships exceed the value of EUR 15,000 (individually or cumulatively). Anyone who operates a business may be subject to such obligations, particularly in the case of cash payments as low as EUR 2,000 or 10,000 – depending on the transaction.

For identification purposes, the following information must then be collected from a natural person:

• First name and surname,
• place and date of birth,
• nationality and
• the residential address.

In the case of a legal entity, the following information must be requested:

• company name or surname,
• the legal form,
• the registration number, if applicable
• the address of the registered office and
• the names of the members of the representative body or the legal representatives.

In the case of natural persons, identification must be made on the basis of a valid official photo ID (ID card, passport, etc.) or on the basis of another proof of identity specified in the law; in the case of legal entities, identification must be made on the basis of an extract from the relevant register, founding documents or the obligated party’s own – documented – inspection of the relevant register.

PDF templates for such money laundering forms are provided by the online portals of the federal states.

There are also extensive record-keeping and storage obligations, for example the obligation to keep the information collected for identification purposes about the contracting party and about any beneficial owners. Obligated parties must copy or optically digitize the documents submitted for identification.

However, data from audits and documents from the transactions carried out must also be archived and kept for five years, after which they must be destroyed without delay.

If suspicious circumstances arise that indicate possible money laundering, there is an obligation to report the respective company and the corresponding suspicion to the Financial Intelligence Unit (FIU).

The following circumstances may give rise to or substantiate the suspicion of money laundering:

• High number of different bank accounts
• Very large cash deposits
• Transfer of very large sums or large number of small transfers
• Transactions with partners located in so called high-risk geographic areas
• Products or transactions that could promote anonymity
• Receipt of payments for goods or services from unknown or unrelated third parties
• Customers provide no or insufficient information on the identification or beneficial owner
• A party to the acquisition transaction acts on the basis of a proxy whose basic relationship is not identifiable

Already in 2017, the electronic transparency register was introduced. The Transparency Register contains information on the beneficial owners of legal entities under private law, registered partnerships, trusts and legal arrangements similar in structure and function to trusts. Since the amendment of the Money Laundering Act 2020, it has been accessible to the public.

Legal entities under private law and registered partnerships must obtain and maintain the relevant information on beneficial owners, verify it annually, and immediately notify the register-keeping entity electronically for entry in the transparency register. Administrators of trusts domiciled or with their registered office in Germany and also trustees domiciled or with their registered office of foundations without legal capacity with a self-interested foundation purpose or of legal arrangements that correspond to such foundations in terms of their structure and function must also obtain information on the beneficial owners of the trust and transmit it electronically to the transparency register

Yes, the German Supply Chain Due Diligence Act (Lieferkettensorgfaltspflichtengesetz). The Supply Chain Act is applicable to companies, irrespective of their legal form, which have their main place of administration, statutory seat or a registered branch in Germany and regularly employ more than 3000 employees (as of January 1, 2023) or more than 1000 employees (as of January 1, 2024). The Supply Act imposes rather far-reaching obligations on companies subject to the regulations of the act, which aim at ensuring that the following overarching principles are adhered to:

• the prohibition of the employment of children under the minimum permissible age;
• the prohibition of the worst forms of child labor for children under 18 years of age (slavery, prostitution, and the like);
• the prohibition of the employment of persons in forced labor;
• the prohibition of all forms of slavery and practices similar to slavery;
• the prohibition of disregarding the obligations of labor protection applicable under the applicable national law;
• the prohibition of disregard for freedom of association;
• the prohibition of unjustified discrimination in employment;
• the prohibition of withholding a fair wage (at least equal to the minimum wage established by the applicable law);
• the prohibition of causing harmful soil changes, water pollution, air pollution, harmful noise emissions and excessive water consumption, to the extent that they are likely to interfere with some more specifically defined human rights positions;
• the prohibition of unlawful eviction and the prohibition of unlawful deprivation of land and waters (land grabbing);
• the prohibition of the use of security forces when there is a threat of disregard for the prohibition of torture or the freedom of association and union, or injury to life or limb;
• the prohibition of any action not covered by the above prohibitions which is likely to violate human rights in a particularly serious manner.

Both in terms of scope of applicability as well as in terms of content/goals pursued by the piece of legislation, the German Supply Act goes far beyond a standard set by comparable legislation of other European jurisdictions.

Noncompliance can trigger considerable sanctions.

It should be noted that there are plans, at the level of the European Union, to enact a Directive providing for even more far-reaching rules to be implemented in all EU Member states and, in February 2022, has issued a proposal for a corresponding Directive.

According to the German Commercial Code, German companies/entities (i.e. any commercial partnership and every corporation, such as GmbH or AG) are required to prepare, approve and publish their annual accounts/annual financial statements. Regarding the specific requirements or relief form certain requirements for preparation, approval and filing/publication in relation to timing and scope of documents forming part of the annual accounts/annual financial statements, pursuant to the provision of the German Commercial Code, a distinction is made between large, medium-sized, small and micro companies on the basis of certain size criteria (i.e., balance sheet total, net turnover and average number of employees during the financial year).

As a general rule, the annual accounts/annual financial statements shall – depending on the size of the Company – comprise of the balance sheet, the profit and loss statement, the notes to the accounts (Anhang) and the management report/annual report (Lagebericht). These documents shall constitute a composite whole (“Annual Accounts”) , whereby, depending on the size of the company, certain parts, such as profit and loss statement and/or the management report/annual report (Lagebericht) are exempted.

The Annual Accounts have to be drawn up within three months for medium-sized and large companies as from the end of the relevant accounting period/accounting year end (“Accounting Period”). The Annual Accounts of small companies have to be drawn up within six months as from the end of Accounting Period.

The Annual Accounts will have to be approved by the competent corporate bodies, e.g. the Shareholders’ Meeting of a GmbH or in general by the Supervisory Board of an AG. Deadlines for such approval as set by the specific laws applicable to the relevant entity type must be made. For example, the Annual Accounts of a GmbH must be approved by the Shareholders’ Meeting of a within eleven months (for small companies) and within eight months (for medium-sized and large companies) as from the end of the Accounting Period. The decision on the appropriation of annual results/distributable profits (e.g. profit distribution or profit carried forward) will be made in the annual Shareholders’ Meeting.

Annual Accounts of medium-sized and large companies have to be audited by an independent or certified public accountant auditor. Consolidated accounts and the consolidated annual report have to be audited as well. If the Annual Accounts have to be audited, the approval by the Shareholders’ Meeting may not be given prior to the completion of the audit of the Annual Accounts.

In general, the Annual Accounts will have to be submitted for publication to the German electronic Federal Gazette (Elektronischer Bundesanzeiger) irrespective of the size of the company not later than twelve months following the end of the Accounting Period. However, there are different obligations for medium-sized and large companies as well as for small companies and for micro companies regarding which documents forming part of the Annual Accounts are to be submitted to the German electronic Federal Gazette (Elektronischer Bundesanzeiger).

The annual corporate compliance requirements as provided for under German law, consist of the preparation, approval and the publication of the annual accounts as described in more detail under section C 7-22 before. Failure to meet applicable statutory deadlines can lead to considerable penalties/sentence or even potentially lead to the dissolution of a company or legal action against a company or its Managing Directors under statutory provisions or applicable laws.

Not filing/not publishing the Annual Accounts or filing the Annual Accounts too late can result in a fine/penalty for the company or its Managing directors, Member of the Management Board, in an amount of EUR 2,500 up to EUR 25,000 issued by the Federal Office of Justice (Bundesamt für Justiz). The fine/penalty can be avoided if publication of the Annual Accounts is made within six weeks after the receipt of the penalty letter of the Federal Office of Justice requesting the company to submit the Annual Accounts. No prolongation of this term is possible. If the six weeks term is not meet, the Federal Office of Justice will impose further fines until the publication has been made. If the penalty/fine has been imposed against the company, it can claim damage against its Managing Directors. The company can be held liable for fault of its Managing directors as well. The Federal Office of Justice also has the power to collect fines via compulsory enforce proceedings

For German GmbH the German Limited Liability Company Act (GmbHG) provides for the requirement of an annual/ordinary shareholders’ meeting to resolve on the approval of the Annual Accounts and the appropriation of the annual results (section 42a GmbHG.() Generally, also the decision on discharge of the Managing Directors and the appointment of the auditor will be part of such annual Shareholders’ Meeting of a GmbH. Also an AG has to held an annual General Meeting to decide on the approval of the Annual Accounts if the Management Board and the Supervisory Board have decided to leave the adoption of the Annual Accounts to the General Meeting, or if the Supervisory Board has not approved the Annual Accounts and on the allocation of the distributable profit/balance sheet profit

German reporting / notification / disclosure requirements on beneficial ownership / ultimate beneficial owners (“UBO”) are regulated under the the German Anti-Money Laundering Act (Geldwäschegesetz, GWG, “AMLA”). Beneficial ownership / ultimate beneficial owners, will have to be reported to German Transparency Register (Transparenzregister).

Legal entities under German private law were under an obligation to obtain, keep and update information on their ultimate beneficial owners (UBO) and include that information in notifications to the Transparency Register without delay (sec. 20 para. 1 sent. 1 AMLA).

If German entities do not have a real UBO within the meaning of the AMLA, based on sec. 3 para. 2 sent. 5 AMLA, the persons acting as legal representatives of these entities, i.e. their Managing Directors, are to be given as their (fictitious) UBO’s and will have to be notified to the German Transparency Register.

Any changes in the persons of the Managing Directors or the data registered for such managing directors with the German Transparency Register (e.g. place of residence or surname) must also be notified to and registered in the Transparency Register.

Corporate Taxation

Residence: A corporation is resident if it maintains its registered office (as determined by its articles of incorporation) or effective place of management in Germany.

Basis: Residents are taxed on worldwide income; nonresidents are taxed only on German-source income. Branches are taxed in the same way as subsidiaries.

Taxable income: Corporation tax is imposed on a company’s profits, which consist of business/trading income, passive income, and capital gains. Business expenses may be deducted in computing taxable income.

Rate: The corporate tax rate is 15% (15.825%, including the solidarity surcharge). The municipal trade tax typically ranges between 14% and 17%, and the minimum rate is 7%. The effective corporate tax rate (including the solidarity surcharge and trade tax) typically ranges between 30% and 33%.

Surtax: A 5.5% solidarity surcharge is levied on the corporate income tax.

Alternative minimum tax: There is no alternative minimum tax.

Taxation of dividends: Dividends received by a German resident corporation (from both resident and foreign corporations) generally are 95% tax exempt; however, the exemption is not applicable if the dividends are treated as tax-deductible expenses for the payer. Minimum shareholding requirements apply.

Capital gains: Capital gains generally are included in taxable income. Capital gains derived from the sale of a domestic or foreign corporate subsidiary generally are 95% tax-exempt.

Losses: Losses may be carried back one year and carried forward indefinitely. The maximum amount for a loss carryback is increased from EUR 1 million to EUR 10 million for losses incurred in 2020 and 2021. Losses may be offset against profits up to EUR 1 million without restriction, but only 60% of income exceeding EUR 1 million may be offset against loss carryforwards. According to the change-in-ownership rules, a direct or indirect change in ownership of more than 50% to one purchaser/related party within a five-year period results in a complete forfeiture of all tax losses (both current year losses and loss carryforwards). Loss forfeiture may be avoided in certain intragroup restructurings. In addition, losses continue to be available to the extent built-in gains in the loss company are subject to tax in Germany, or in certain cases where the historic business of the loss company is continued on an unchanged basis.

Foreign tax relief: Foreign tax paid may be credited against German tax that relates to the foreign income or deducted as a business expense. Germany typically applies the exemption system.

Participation exemption: See “Taxation of dividends” and “Capital gains”.

Holding company regime: There is no holding company regime.

Incentives: Incentive programs are available, such as investment allowances for certain start-ups and for small and medium-sized businesses. Since 1 January 2020, an R&D tax incentive of up to EUR 1 million per year, per entity/group has been introduced (reduced to EUR 500,000 for periods after 30 June 2026). In addition, attractive nonrepayable cash grants are offered, e.g., for R&D in the energy sector.

Withholding tax:

Dividends: A statutory rate of 25% (26.375%, including the solidarity surcharge) applies to dividends paid to residents; the tax typically is creditable against the corporate income tax or refundable for resident companies, and partially (40%) creditable against the individual income tax or refundable for resident individuals. A statutory rate of 25% (26.375%, including the solidarity surcharge) applies to dividends paid to nonresidents, with a possible 40% refund for nonresident corporations, giving rise to an effective rate of 15.825%, unless the rate is reduced under a tax treaty. No tax is levied on dividends qualifying under the EU parent-subsidiary directive (PSD). The distributing company may apply the exemption under the directive or a reduced withholding tax rate under a treaty only if the recipient obtains a clearance certificate from the tax authorities in advance and presents the certificate before the payment is made; otherwise, a refund may be possible.

Interest: Withholding tax generally is not levied on interest paid to residents or nonresidents, except for interest on publicly traded debt, interest received through a German payment agent (usually a bank), convertible bonds, and certain profit participating loans. The statutory rate is 25% (26.375%, including the solidarity surcharge). Where interest is paid to nonresidents, the rate may be reduced under a tax treaty or an exemption may be available if the EU interest and royalties directive (IRD) applies.

Royalties: Withholding tax is not levied on royalties paid to residents. The withholding tax on royalties paid to a nonresident corporation or an individual is 15% (15.825%, including the solidarity surcharge), unless the EU IRD applies or the rate is reduced under a tax treaty. The payer may apply the exemption under the directive or a reduced withholding tax rate under a treaty only if the recipient obtains a clearance certificate from the tax authorities in advance and presents the certificate before the payment is made; otherwise, a refund may be possible.

Fees for technical services: There is no withholding tax on fees for technical services.

Branch remittance tax: There is no branch remittance tax.

Anti-avoidance rules

Transfer pricing: Business dealings between related persons must be in accordance with transactions that would have been agreed upon by independent third parties dealing at arm’s length, under which the underlying principle is the normal degree of commercial prudence shown by a sound and conscientious business manager. Taxpayers are required to document all facts and evidence that support their positions. Specific transfer pricing rules apply to cross-border intragroup transfers of functions. An exit tax will be imposed on the “profit potential” that is deemed to be transferred, based on the discounted cash flow value of the subsidiary/branch before and alter the restructuring. Germany generally applies the authorized OECD approach. CbC reporting, in line with the OECD’s BEPS action 13, is required.

Interest deduction limitations: A taxpayer may immediately deduct (net) interest expense up to 30% of taxable earnings before net interest expense, tax, regular depreciation, and amortization (tax EBITDA). An EBITDA carryforward is generated if the taxpayer has net interest expense lower than 30% of the EBITDA for tax purposes, unless an exception to the interest expense limitation (see below) applies. The difference between 30% of the EBITDA and the net interest expense (excess EBITDA) may be carried forward and used in the following five years when the net interest expense exceeds 30% of current EBITDA. The limitation does not apply where: (i) the annual (net) interest burden is less than EUR 3 million; (ii) the taxpayer is not part of a group of companies; or (iii) the taxpayer can demonstrate that the equity ratio of the German borrower does not fall short by more than two percentage points of the worldwide group’s equity ratio. Excess interest may be carried forward indefinitely (although change-in-ownership rules apply). Disallowed interest expense will not trigger withholding tax.

Controlled foreign companies: Passive income of subsidiaries in low- or no-tax jurisdictions will be attributed to a German shareholder if such shareholder and its related parties hold, directly or indirectly, more than 50% of the subsidiary. Typical passive income is income from the rental of real estate, income from licensing, or income from the lending of capital. A jurisdiction is regarded as a low-tax jurisdiction if the income of the subsidiary is subject to an effective tax rate of less than 25%. Credits and refunds at the shareholder level are taken into account when determining whether the effective tax rate abroad falls below the 25% threshold. Credit for tax paid on attributed income can be granted upon the application of the taxpayer.

Hybrids: General anti-hybrid rules were enacted into German domestic tax law on 30 June 2021 with effect as from 2020, based on the EU anti-tax avoidance directive (ATAD 2). Additional anti-hybrid rules exist in connection with dividends received (linking rules) and certain “double-dip” structures involving German Organschaft entities (dual consolidated loss rules) and German partnerships.

Economic substance requirements: Based on the amended anti-treaty shopping rule, relief from withholding tax under a treaty or the EU PSD or IRD is not available to a foreign company if, and to the extent that:

• Its shareholders or persons that are beneficiaries under the applicable statute would not be entitled to the same relief under the same treaty or the relevant EU directive had they been direct recipients of the income (“shareholder test”); and
• There is no material link or connection between the income generating source and the economic activity of the receiving corporation, partnership, or other taxable entity; the mere realization of the income, the distribution to shareholders or persons that are beneficiaries under the applicable statue, and activities that lack adequate physical substance do not qualify as economic activity (“activity test”).

If the conditions of both tests are fulfilled, treaty abuse is presumed, and the presumption of treaty abuse can only be rebutted if and to the extent that the conditions of the “main purpose exception” or the “listed entity exception” are fulfilled. The rule applies in addition to limitation on benefits clauses and general anti-avoidance rules, and the burden of proof for meeting the conditions lies with the foreign shareholder.

Disclosure requirements: A taxpayer generally must disclose all facts relevant for taxation, especially regarding transactions with foreign related parties. Mandatory disclosure rules for certain types of restructurings were enacted at the end of 2019, based on DAC 6 and are effective as from 1 July 2020.

Exit tax: The tax law allows the taxation of unrealized capital gains when Germany’s right to tax the gains on the sale or use of assets is restricted or excluded as a result of a transaction (e.g., if a taxpayer transfers its tax residence to a foreign country or if an asset is transferred out of Germany). The exit tax is imposed on the “profit potential” that is deemed to be transferred out of Germany, usually measured by performing a hypothetical arm’s length analysis. Valuation can be based on the capitalized earnings approach or the discounted cash flow method; comprehensive valuation of the respective “business function” instead of an asset-by-asset valuation may be required.

General anti-avoidance rule: Germany has a long-standing general anti-avoidance rule (GAAR), under which taxpayers are not allowed to circumvent the tax law by abusing legal tax planning opportunities. Abuse is presumed when the taxpayer chooses an inappropriate legal structure that, in comparison with an appropriate structure, leads to a tax advantage not intended by the law. The presumption may be rebutted by demonstrating that the particular structure has been chosen for nontax reasons, provided such reasons are relevant considering all the facts and circumstances. Specific anti-avoidance rules apply for payments to recipients that are resident in a country that is on the EU “black list.”

Other: The deductibility of royalties and similar payments made to foreign related parties is restricted if such payments are subject to a non-OECD compliant preferential tax regime (i.e., an intellectual property regime not based on the “nexus approach” as described in OECD BEPS action 5) and taxed at an effective tax rate of less than 25%.

Value added tax:

Taxable transactions: VAT is levied on the sale of goods and the provision of services.

Rates: The standard rate is 19%, with a reduced rate of 7% applying to specified transactions. (The 19% rate was reduced to 16% and the 7% rate was reduced to 5% for the period from 1 July 2020 to 31 December 2020.) Certain transactions are exempt.

Registration: German entrepreneurs generally must register for VAT purposes. However, if turnover did not exceed EUR 17,500 in the previous calendar year and is estimated not to exceed EUR 50,000 in the current calendar year, German entrepreneurs can opt for the special scheme for small businesses, so that no VAT is imposed by the German tax authorities. Nonresidents that make taxable supplies of goods or services in Germany also must register.

Other taxes on corporations:

Social security contributions: Employed individuals are required to make a contribution for pension, health, nursing care, and unemployment insurance. The employer generally is required to bear 50% of the total contribution. Additional charges (e.g., statutory accident insurance, insolvency fund levy, etc.) may apply.

Payroll tax: There is no payroll tax, but the employer is required to withhold wage tax on a monthly basis from an employee’s income and remit it to the tax authorities.

Wage tax certificates must be transmitted electronically and be authenticated by the employer.

Capital duty: There is no capital duty.

Real property tax: Tax is levied by the municipality in which real estate is located, at a rate of 0.35% of the tax value of the property, multiplied by a municipal coefficient.

Municipal trade tax: This tax is an income tax levied by municipalities at a minimum rate of 7%. All entrepreneurs with commercial activities carried out through a subsidiary or a nonresident’s commercial permanent establishment in Germany are liable for trade tax. Corporations are deemed to carry on commercial enterprises (trade or business), regardless of their actual activities. (Individuals, alone or in partnerships, are not liable for trade tax on professional or other independent services unless the activities are deemed to be commercial under the income tax law.) The municipal trade tax rate varies, but averages between 14% and 17% of income. The trade tax is based on taxable income as calculated for corporate income tax purposes, with several income adjustments.

National and international subsidy programs span a diverse spectrum, in particular

• Research & Development & Innovation (R&D&I)
• Investments in environment, energy or sustainability measures
• Investments in sites or production facilities

Eligible areas include digitalization, technology, energy efficiency, site expansion and many more.

The subsidy/funding instruments, which are applied individually for each program, are as broad as the areas covered by the programs. This means that funding for projects can be provided in various ways, such as for example, but not limited to:

• Non-repayable grants
• Public grants that do not have to be repaid if used properly
• R&D tax incentives – provided certain conditions are met, companies and institutions of all types and sizes are eligible for tax incentives for their R&D projects (also see statements with respect to tax matters hereinabove)
• Loans at preferential interest rates
• Loans granted by specialized development banks (in some cases extended by commercial banks, “Hausbankprinzip”), whose loan interest rate is significantly lower than the usual market interest rate

These subsidies are complemented by public guarantees for the acquisition of bank loans and public equity capital to increase the equity ratio.

Grants and subsidies often come with specific prerequisites, terms and conditions, which can relates to the specific usage of the funds received, limitations with respect to the goods acquired, the need for maintaining a specific number of employees, limitations on dividend distributions and other return of funds to shareholder, etc.

Apart from “regular” grants and subsidies as depicted hereinabove, additional support and aid programs are made available in specific constellations (and generally after consultation with the competent European Union authorities in order to avoid a conflict with EU subsidy rules). Recent examples include specific programs initiated for companies/industries affected by the Covid-19 pandemic as well as recent dramatic increases of energy (production) cost.

As regards employees, Germany has a system of short time work allowances. The employment agency (Agentur für Arbeit) pays the short-time work allowance as partial compensation for a loss of earnings caused by a temporary cut in working hours. This relieves employers from employment costs. Companies can continue to employ their employees even in the event of a loss of orders. In other words, the short-time work allowance helps to prevent job losses. The short time work allowances are subject to certain prerequisites, that must be met, as well as terms and conditions. In times of the Pandemic and, these have been subject to repeated changes.

It must be noted that wrongful applications for grants and subsidies can trigger criminal liability, in particular criminal liability pursuant to Section 264 of the German Criminal Code (subsidy fraud). Subsidy fraud is an abstract endangerment offense, so that it is sufficient for the offense to be committed if the applicant provides incorrect or incomplete information when applying for the subsidy (e.g. the reimbursement of short-time work allowance). The occurrence of pecuniary loss is not a prerequisite for the actions to be qualified as a criminal offense. In contrast to “classic” fraud, on the subjective side it is already sufficient for criminal liability for subsidy fraud if the potential perpetrator acts recklessly, i.e., grossly negligently.

For tax matters (withholding taxes, exit taxes), please refer to the section dealing with such matters.

The law of the European Union (EU) lays down as a rule the freedom from restrictions on the movement of capital both in relations between member states and in relations with third countries. Accordingly, since 2001, the German Foreign Trade and Payments Act (AWG) no longer permits any special restrictions on capital movements for the import and export of capital. General requirements under corporate law are not considered to be a limitation of the free movement of capital.

As a special instrument of state takeover control, German foreign trade regulations (the Foreign Trade and Payments Act, Außenwirtschaftsgesetz – AWG and the Außenwirtschaftsverordnung – AWV), which were repeatedly and most recently extensively amended gives the Federal Ministry of Economics and Technology (BMWi) powers of examination and intervention in exceptional cases with regard to transactions on the basis of which non-European investors gain a decisive influence on companies domiciled in Germany. Whether the investors are sovereign wealth funds or private companies is just as irrelevant as their legal form.

Embargoes and sanctions enacted by the European Union, Germany or 3^rd countries have to be taken into consideration and made lead to limitations on inflow or outflow of capital to and from Germany.

Also see chapter dealing with foreign direct investment restrictions, controls or requirements.

Transfer tax: A real estate transfer tax (RETT) of 3.5% to 6.5% of the sales price/value of transferred German real estate applies. RETT also applies if 90% or more of the shares in a real estate-owning corporation are directly or indirectly transferred to one or more new owners within a period of 10 years or if 90% or more of the shares are combined for the first time at the level of a (new) shareholder, or if 90% or more of the interests in a real estate-owning partnership are directly or indirectly transferred to new partners within a 10-year period. The rate depends on the federal state (Bundesland) in which the real estate is located. Exceptions may apply for certain intragroup restructurings.

Stamp duty: There is no stamp duty.

Yes. The corresponding rules are set out in the German Takeover Act (Wertpapiererwerbs- und Übernahmegesetz, WpÜG). The German Takeover Act entered into force on January 1, 2002 and has repeatedly been amended ever since, in particular in view of the (implementation of the) EU Takeover Directive (in 2006). In terms of scope, the Act applies to all public bids targeted at companies in the relevant legal forms (AG, SE, KGaA) having its registered office in Germany or in another member state, provided that the shares of the Target are admitted for trading on an organized market in Germany. Content-wise, the Takeover Act does not only regulate takeover bids, but also regulates other publicly made bids by means of which the bidder seeks to acquire only part of the shares or intends to consolidate an already existing controlling position. It also applies to, by way of example, convertible bonds.

There is a merger control regime which is mandatory to the extent the prerequisites for its applicability are fulfilled. The relevant regulations are found in Sections 35 to 43 of the German Act against Restraints on Competition (Gesetz gegen Wettbewerbsbeschränkungen, GWB). The responsible authority is the German Federal Cartel Office (Bundeskartellamt). Events triggering the relevant rules set for being considered “concentrations” in the sense and meaning of Section 37 GWB include

• the acquisition of (direct or indirect) control over another undertaking or parts of it by one or several undertakings;
• the acquisition of all or substantial part of the assets of another undertaking;
• the acquisition of shares in a company’s capital or voting rights resulting in an overall shareholding reaching or exceeding 25% or 50% respectively;
• any other combination of undertakings enabling one or several undertakings to directly or indirectly exert a competitively significant influence on another undertaking.

The German concept of control is very similar to the concept of control pursuant to the EU merger control regime.

A concentration (as defined herein above) is subject to German merger control, if the prerequisites set out in either of the following alternative provisions are fulfilled:

• combined worldwide turnover of all undertakings participating in the concentration in the last completed financial year preceding the Transaction exceeds Euro 500 million + the turnover of at least one undertaking participating in the concentration exceeds Euro 50 million in Germany + the turnover of at least one other undertaking participating in the concentration exceeds Euro 17,5 million in Germany, or
• combined worldwide turnover of all undertakings participating in the concentration in the last completed financial year preceding the Transaction exceeds Euro 500 million + the turnover of at least one undertaking participating in the concentration exceeds Euro 50 million in Germany + the amount of the consideration payable for the Transaction exceeds Euro 400 million + the undertaking to be acquired is significantly active in Germany.

Further details cannot be described here.

Within perimeter of the general principle of good faith and equity (Treu und Glauben): yes.

Asset Deal:

A provision of particular importance in German law, which must be observed in case of restructuring and acquisitions, is section 613 a German Civil Code. This provision applies to transfers of businesses or parts thereof.

If such an economic unit is transferred from a company (seller) to another company (purchaser), section 613 a German Civil Code stipulates that the employment relationships of the affected employees are automatically, i. e. by operation of law, transferred to the purchaser. Any agreement, which shall obstruct this legal consequence, is ineffective.

Furthermore, it should be noted that purchaser and seller must inform the employees, who are affected by the transfer of business, about the reason of the transfer and other relevant circumstances (e.g. point of time, legal consequences etc.) in accordance with section 613 a para. 5 German Civil Code in due form prior to the transfer.

Generally, the employees can object to the transfer of their employment relationship in writing within a period of one month; this period starts upon information about the transfer. If they object, employment with the seller continues. As the employees can object also later if they are not or not properly informed about the transfer, it is important to ensure proper information in order to avoid an unpleasant surprise by objecting employees at a later date.

Share Deal:

There are no specific employee rights/protections associated with the share deal. The employment relationship between employer and employee is not affected by the transfer of the employer (share deal) and will continue unchanged.

There is a set of rules pursuant to which certain transactions involving non-EU/non-EEA jurisdictions respectively stakeholders/players from such jurisdictions must be notified to the competent authorities and require such authority’s approval. In order to avoid security risks, the Federal Ministry of Economics and Energy (BMWi) may review the acquisition of domestic companies by foreign buyers. The basis for such reviews are the Foreign Trade and Payments Act (AWG) and the Foreign Trade and Payments Ordinance (AWV). The corresponding regulations allow the competent Ministry to intervene in a restrictive manner to ensure the order or security of the Federal Republic of Germany as well as the security of other EU member states. It is sufficient if order and security are likely to be impaired. The Catalogue of sectors/transactions subject to scrutiny has been regularly extended and the voting rights threshold as of which scrutiny will be triggered has been lowered (two as little as 10% of the voting rights). Noncompliance with the corresponding rules leads to the provisional ineffectiveness of the affected legal transaction. Sanctions include monetary penalties as well as personal penalties (imprisonment). Early considerations of the underlying provisions is indispensable. Also see chapter dealing with impediments / tax charges that typically apply to the inflow or outflow of capital to and from Germany.

See chapter dealing with impediments / tax charges that typically apply to the inflow or outflow of capital to and from Germany.

In general, German law knows two basic types of liquidation, mandatory and voluntary/solvent liquidation.

A mandatory liquidation takes place in the event of – inter alia – (i) opening of insolvency proceedings, (ii) at the order of the Court or the Commercial Register and otherwise as determined by law.

A voluntary/solvent liquidation is initiated by the company or its shareholder(s) and is designed for companies that have ceased or want to cease their business activities and where the shareholder(s) believe that it makes no sense to keep an entity alive that is not doing business anymore or to keep the company as dormant or shelf company. The intention to liquidate the company can also be based on a (global) post-acquisition/merger restructuring / integration (e.g. entity reduction sale/transfer of the business followed by a company liquidation).

In the event of a voluntary liquidation, the shareholders of a company (AG, GmbH, KG etc.) resolve to close down/wind-up its operations in their own discretion. In principle, a liquidation proceeds in a similar way for all types of companies – namely in three phases: dissolution, liquidation proceedings and termination/deletion of the company. First, the dissolution/liquidation of the company has to be resolved by the shareholders. The resolution on the dissolution/liquidation a company has to be registered with the commercial register. The termination of the company is not yet complete with the dissolution. Rather, the liquidation phase follows the resolution to liquidate the company, which essentially pursues the purpose of satisfying creditors’ claims, distributing remaining assets among shareholders and deleting the company from the commercial register. Once the necessary liquidation measures have been completed, the liquidation is terminated. A final account must now be drawn up, and the termination of the liquidation can be filed for registration with the commercial register. With the deletion from the commercial register, the company ceases to exist. How exactly a liquidation is carried out depends very much on the legal form of the company. During the liquidation period, the company in the legal form of a GmbH or AG is no longer represented by managing directors/members of the board of directors but by liquidators, which are often the same individuals who acted as Managing Directors/members of the Management Board beforehand. A partnership like a KG is represented by shareholders acting as liquidators. The liquidators are obliged to close-down/wind-up the company’s business, collect all outstanding receivables and settle all claims of the company’s creditors as well as transforming all assets of the company into by selling and transferring the business as a whole or of operable parts thereof on an asset by asset basis. All transactions that serve the liquidation may be carried out. The creditors of a corporation, like a GmbH or AG have to be given public notice about the closure of the company, including a call to creditors, so as to enable them to collect their claims by respective publication of the liquidation with the German electronic Federal Gazette (Bundesanzeiger). After all creditors’ claims have been settled, any remaining assets/liquidation surplus are distributed to the shareholders. However, such distribution can take place at the earliest one year after publication of the liquidation with the German electronic Federal Gazette (restrictive year/one year waiting period). After distribution of the liquidation proceeds to the shareholders, the liquidators must file the termination of the liquidation and the deletion of the company with the commercial register. The company will be deleted from the commercial register and thus ceases to exist.

In any event, keeping in mind the one-year period mentioned above (restrictive year), the liquidation process will take at least 1 ½ years.

Under German law there is no fast-track liquidation process applicable. However, in case of a group of companies, another option would be to merge entities, i.e. merge the entity, that shall be dissolved into another group entity by means of which all assets and liabilities will be transferred to the absorbing entity way universal succession by operation of law upon registration of the merger with the commercial register. This might be attractive option since the merger of subsidiaries is the quicker and smoother way to eliminate unwanted companies compared to their liquidation.