Establishing a Branch Office or Permanent Establishment in Germany

Concerning the forms of organisation to be considered here, a distinction is first made between establishing a subsidiary and establishing an independent branch or a dependent permanent establishment/representative 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, only German legal provisions apply to foreign founders. In particular, this applies to the formation, business registration and entry into the commercial register.

Advantages:

• German legal form facilitates commercial activity on the German market.
• Domestic partners perceive companies as equal business partners.
• Due to legal and organisational independence, entrepreneurial decisions can be made specifically for the German market.
• It can operate under its own company name – independent of the parent company’s name.

Disadvantages:

• High bureaucratic effort: Commercial register entry and business registration are necessary.
• High economic outlay: In the case of corporations, the share capital (AG) of at least 50,000.00 euros or the share capital (GmbH) of at least 25,000.00 euros.
• Given the exclusive application of German law, there may be an increased need for legal advice.
• Generally only suitable for longer-term commitments.

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 name of the head office.

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 a trade with the competent trade office or public order office.

Advantages:

• Little bureaucratic effort: Commercial register entry not required.
• Fully subject to the law of the state of the head office.
• Suitable concerning temporary engagement in Germany.
• No capital contribution is required.

Disadvantages:

• Business registration with the competent trade office/regulatory office is required.
• No independent business activity.
• Therefore less entrepreneurial flexibility concerning opening up the German market.
• There is no possibility of a company name that differs from the head office.

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 pure 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 § 13 ff 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. However, the entry in the commercial register has only a declaratory effect.

Advantages:

• Independent business activity.
• Subject to the law of the main branch concerning legal and organisational aspects.
• Consequently, there may be less need for legal advice.
• Low economic outlay: Although the legal status as an independent branch requires its own capitalisation, no minimum capital contribution is required.

Disadvantages:

• High bureaucratic expense: Commercial register entry and business registration are necessary.
• The company name is basically the same as that of the main branch, but can be extended to include a clarifying addition (e.g. “Branch office Germany”).
• Generally only suitable for longer-term commitments.

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 (DPA) 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 Economic Area (EEA) 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.