Establishing a Branch Office or Permanent Establishment in Germany

When setting up a business or expanding a business in Germany, entrepreneurs have a variety of organizational forms to choose from. Concerning the forms of organisation to be considered here, a distinction is first made between establishing a subsidiary company, a dependent permanent establishment/representative office or establishing an independent branch office.

The subsidiary is a legally independent enterprise with its own legal personality in which the parent company holds a majority of the shares. It is founded per the provisions of German company law. In this respect, the subsidiary of a foreign parent company has the German legal form.

German company law generally distinguishes between partnerships, general partnerships (“OHG”) and limited partnerships (“KG”), and corporations, limited liability companies (“GmbH”) and public limited companies (“AG”). Thus, merely German legal provisions apply to foreign founders. In particular, this applies to the formation, business registration and entry into the commercial register.

Here are some crucial points on the subsidiary model under German corporate law:

• The German legal form makes commercial activity on the German market easier and is suitable for long-term commitments in Germany.
• Domestic partners perceive companies as equal business partners.
• Due to legal and organizational independence, business decisions can be made specifically for the German market
  become.
• It can operate under its own company name – independent of the parent company.
• Please note the comparatively high outlays: for corporations, the share capital (AG) is at least 50,000 euros or the share capital (GmbH) of at least 25,000 euros.

As a dependent branch or subsidiary of the overall company, the permanent establishment depends on the company headquarters abroad. It may not have a company name that differs from the head office, and invoices are issued in the head office’s name.

The permanent establishment regularly carries out auxiliary business, which serves to prepare, arrange or execute the main business of the foreign enterprise. Consequently, a permanent establishment does not participate independently in business transactions. Therefore, the head office and the permanent establishment legally form a single business operation, which is merely physically separated. Entry into the commercial register is not required. However, it is generally necessary to register with the competent trade office or public order office.

Here are some key facts about the permanent establishment in Germany:

• There is little bureaucratic effort required; entry in the commercial register, for example, is not necessary.
• All you need to do is register your business with the relevant trade office/regulatory office.
• The permanent establishment is fully subject to the law of the country of headquarters.
• Particularly suitable for a temporary engagement in Germany.
• A capital contribution is not required.
• A company name that differs from that of the headquarters is not possible.

The term “representative office”, often used in connection with establishing branches of foreign companies, has no basis in German trade and commercial law. Therefore, this is either a dependent permanent establishment or a domestic, external representative (e.g. commercial agent) is commissioned, who acts legally independently for the head office. In this respect, foreign companies have no activity in the German market.

The “branch office” is an intermediate form between a company with its own legal personality and a permanent establishment. It is dependent to a certain extent on the enterprise of the main branch, but on the other hand, the branch participates independently in business transactions.

The law on branches is standardised in Section 13 et seq. of the German Commercial Code (HGB). The legislator has deliberately refrained from defining the term ‘branch’. However, it is generally described as a branch office separate from the main branch office, which does not only conduct its own legal transactions “externally” for a temporary purpose. These are carried out within the scope of the business activities of the main branch, but with a certain organisational and factual independence. Nevertheless, the branch office does not have the status of a legal entity and, therefore, cannot itself be the bearer of rights and obligations. In this respect, it represents a part of the company dependent on the main branch without its own legal personality. Therefore, the (foreign) law applicable to the main branch applies to it.

The branch must be organised in such a way that it could continue to exist if the main branch ceases to exist. To be independent, it must have its own management with freedom of disposition and its own business assets allocated by the main branch. In the main branch’s balance sheet, the branch’s business transactions are listed separately.

For the branch to come into existence, its actual establishment is sufficient. However, it must be entered in the commercial register, whereby only German law applies to the registration procedure.

Here are some key facts about the branch under German law:

• Independent business activity is possible with a branch office.
• Regarding legal and organizational aspects, the branch is subject to the law of the main branch.
• No minimum capital contribution is required.
• The company name basically corresponds to that of the main branch but can be expanded to include a clarifying addition (e.g. “Germany branch”).

The forms of the organisation explained in more detail above may also differ in individual cases regarding tax law aspects. In principle, however, the profit generated in Germany by a company or its permanent establishment or branch is also taxable in Germany. The substantial tax burden then depends on the respective German legal form of the company or on the legal form with which the foreign main branch most closely corresponds in its organisational structure.In particular, income tax or corporation tax, wage tax, trade tax and turnover tax may be due.

The extent to which the amount taxable in Germany is either exempt from taxation in the country of the main branch/head office or is again subject to tax there is determined in each individual case by the agreements on the avoidance of double taxation – which the Federal Republic of Germany has concluded with other countries.

In Germany, commercial activities of subsidiaries, branches or permanent establishments must be registered with the competent trade office or public order office. In addition, a separate permit/concession may have to be applied for in some areas of business activity. This applies in particular to the following areas of business: financial services, insurance, restaurants, travel, transport, crafts, and real estate.

In addition, foreign natural persons from third countries (states that do not belong to the European Union, except for Switzerland) may have questions regarding immigration law and, in particular, residence law when managing a branch office. It is, therefore, mandatory to observe the German immigration law provisions on entry and residence. Consult our experts in immigration law for more information.