Forms of Corporations and Investments in Germany
Germany has the largest economy in Europe and is also one of the largest in the world. It has the largest population in the EU and is a federal republic, consisting of 16 states, called Bundesländer each of them having their own capital and own parliament.
The economy has been stable over the years, having met the global financial crisis in 2007/2008 easily. Germany has a highly skilled labour force, but still not enough to cover all needs. That is why big legal changes are being made in June 2019, as the new Fachkräfteeinwanderungsgesetz (Law on Migration of Highly Skilled People) has been adopted by the parliament. The county has a large capital stock, is known for the low level of corruption and its innovations. When thinking of Germany many think of its industry and quality behind it, why Germany is one of the biggest exporters in the world.
Another important thing to know is that Germany has not a single economic centre as one might think of the capital Berlin. German is the official language; English is spoken widely.
Form of Corporations
There are several corporate forms, of which foreign investors can think about when placing their investments.
First in mind there are companies such as
· Gmbh (German form of Limited Liability Company, Gesellschaft mit beschränkter Haftung)
· AG (German form of a Stock Corporation, Aktiengesellschaft)
· SE (European Company, Societas Europeae)
Each of this company form has its own legal framework, in addition European regulations and constituent documents must be acknowledged.
A Gesellschaft mit beschränkter Haftung (GmbH) is the best-known form of corporations in Germany. With more than 1 Mio. companies, the formerly popular partnerships are overtaken now by this form of company (as of 2013). The GmbH in a legal entity that has its own rights and obligations. In consequence the GmbH is an independent legal personality, e.g. it can sue and be sued independently from the shareholders. The GmbH itself can be owner of movable properties. Bodies of the GmbH are the managing director (must be a natural person), the shareholders and the meeting of the shareholders. Further under certain circumstances a board of directors can be appointed. The registered share capital has to be at least EUR 25.000,00. There is no direct liability of its shareholders, unless in extraordinary cases exceptions apply and the corporate veil of a GmbH does not hold up.
A requirement like having a local director does not exist. In general, nationals of any country can become a managing director and they do not need to have a residence in Germany. Also, regarding the shareholders there do not exist any requirements regarding the legal form, location or nationality.
The managing directors have duties to the GmbH and the shareholders and can be personally responsible for actions or omissions of the company in certain circumstances (e.g. in insolvency, taxes or social security payments).
The establishment procedure is formalistic and requires the support of a notary. It is realistic to plan minimum of four weeks for such an establishment and to have the help of an attorney for drafting the articles of association for the needs of the shareholders.
The second alternative for structuring an investment can be a partnership. The forms of partnerships are
· GbR (Civil Law Partnership, Gesellschaft bürgerlichen Rechts)
· oHG (General Partnership, offene Handelsgesellschaft)
· KG (Limited Partnership, Kommanditgesellschaft)
· GmbH & Co. KG (Combination of Limited Partnership (KG) and a Limited Liability Company (GmbH))
The advantage of partnerships is that they are transparent for income tax purposes. On the other hand, it has to be thought of the fact that the partnerships have full personal liability. Furthermore, partnerships are legally required to have their effective management in Germany.
As a third form of investment a Joint Venture can be an option, too. Two or more individuals or entities can agree on working together aiming the same strategic goal. Joint Ventures can be incorporated, organised as partnerships or can be unincorporated.
Another possibility for foreign investors is the establishment of a registered branch (Zweigniederlassung) in Germany. A registration is not required when the branch is just a representative office, used for liaison purposes. Every change that is made in the foreign entity effects the registrations and the commercial register has to be kept up constantly. Also, the registered branch is tax compliant meaning that it has bookkeeping and tax obligations.
Forms of investment
Any investment shall be well planned and a due diligence investigation shall be undertaken in respect of the target company, target assets, the business, the vendors and any material assets or contracts owned or operated by the relevant company as well as regarding its tax situation and other areas which may be of importance.
The investment can be made by a company acquisition, an equity investment or a asset acquisition.
A company acquisition will involve the investor acquiring ownership of the existing shares in a company. Such an acquisition will usually be done by a share purchase agreement when a private company is acquired.
Another way to acquire shares of a company is the subscription of new shares, the so-called equity investment. By increasing the capital of the existing company and waiving the shareholders’ subscription rights the investor will be allowed to buy the new shares. On top usually a shareholder agreement is signed to govern the future relationship of the shareholders as far as the articles of partnership agreements do not contain these.
Furthermore, the investor could buy the business without buying shares by way of asset acquisition. The investor purchases only specific assets and liabilities set out in the agreement. This transaction is more complex and may require substantial dealings with third parties, a due diligence examination is a must. Especially the consideration of transferring employees is essential. According to German law employees transfer automatically to the buyer of the business unless they object.
There does not exist a specific legal framework for foreign investors regarding this issue. In fact, there are no restrictions on the ownership of business and companies by foreigners or on capital in-flow or foreign exchange control mechanisms. Transactions can be subject to merger clearance and to export controls.
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Attorney at Law Hülya Oruç, LL.M.