Branch of a Foreign Company in Germany
Many people mix up branch with a subsidiary and / or representation. A branch is just another registered "footprint" without incorporating in Germany. When you incorporate, you will establish a different legal entity – another (juristic) person having its own rights and duties. Well, a branch is not a legal form of a company but only like a registered domestic agent. A branch has no own legal personality. We differentiate between "independent" and "dependent" branches. The red tape to open either of them will be described below. A representation is synonymous with a dependant branch.
What is needed to set up a branch?
It depends exactly on what kind of branch you will be setting up. We differentiate between dependant and independent branches. While the dependant branch has the least red tape to work around, the independent one will require some registering.
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Is it not better to incorporate?
The answer depends on how strong your "footprint" in Germany is to be, if you only want to test the market or are fully committed to do long-term business in Germany. Keep on reading.
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What are the advantages of opening a branch in Germany?
There are many advantages of opening a branch in Germany. We listed the most important advantages below.
- Simplified Setup and Lower Costs:
Establishing a branch is less formalized and involves fewer administrative requirements compared to forming a subsidiary. It does not require capital contributions, making it cost-effective. - Direct Control:
Headquarters retain full control over the branch’s operations, ensuring consistency in corporate policies and decision-making. - Tax Transparency:
The branch’s profits and losses are directly included in the parent company’s tax return, simplifying tax overhead. This will be true for a dependent branch.
Yet, the independent branch will be considered as a tax subject in Germany. It is imaginable that the independent branch might trigger taxation also at home. However, double taxation conventions exist that want to exactly prevent any double taxation.
§§§ - Access to Germany’s Robust Economy:
Germany boasts a stable economy, robuste infrastructure, and access to one of Europe’s largest consumer markets, including e-commerce.
§ - Government Subsidies:
Foreign companies may benefit from subsidy programs that support expansion into Germany.
§§ - No Separate Legal Entity:
A branch does not require independent registration as a legal entity, reducing administrative overhead.
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This sounds exiting. Are they any disadvantages?
There are just as many disadvantages of opening a branch in Germany, we listed the most relevant disadvantages below.
- Unlimited Liability:
The parent company is fully liable for the branch’s obligations, increasing financial risk.
§ - Lower Market Perception:
A branch may be perceived as less reliable or graspable in the German market compared to a subsidiary, potentially affecting customer trust and business relationships.
§ - Reduced Flexibility:
A branch is typically closely tied to the parent company’s directives, which may limit its ability to adapt to local market conditions.
§ - Complex Accounting Requirements:
Despite integration with the parent company’s accounting system, branches must comply with German accounting regulations, adding complexity.
§§§ - Taxation Obligations:
Profits generated by the branch might be subject to German taxation rules, which may differ from those in your country. It might lead to filing two annual closings: 1) at home and 2) in Germany – just like a subsidiary.
§§§ - Challenges in Managing Operations:
Operating a branch from abroad can present logistical difficulties and requires appointing a local manager who resides within Germany or the EU/EEA.
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Dependant Branch aka Representation
What determines a dependant branch?
A dependent branch will be just a local address for local communication while business is still made at home. It's roughly comparable to a domestic agent with the company's sign on his offices's door.
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Where does this branch need to be registered?
It will only have to be registered with the local trade office
How is the tax rate for a dependent branch?
Zero. Nic. Nothing. Nada. Since business is made at home, there is generally nothing to be taxed in Germany. Its sole function is to represent the parent company. Business is transacted and invoices are written at headquarters. It's comparable to a phone in another room. The main exception will be for real estate.
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Independent Branch
What characterizes an independent branch?
An independent branch will be considered as a second office physically separate from the main office and managed by a local. It should be created as an additional, permanent center of operations from which not necessarily all the business of headquarters is conducted but pretty much all lines of the business. It might be that only regionally interesting parts of the business is done via the branch. It has its own management with a certain freedom of disposition, separate accounting for business transactions and its own business capital. Case law has summarized these requirements several times to the effect that the branch office must be organized in such a way that it could continue to exist as a separate trading entity if the main branch were to cease to exist.
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You mention a local must manage the branch? Who can this be?
The person's nationality is actually regardless for corporate purposes. Foreigners will need a residence permit to work for this branch. In any case, the branch's manager must have an address in Germany.
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What kind of visa is good enough for this position?
This depends on the person's current setup and what kind of work permit the candidate has. Usually, this is a straightforward question that the local person can ask us on our service number 09008 529 366 00 for € 2.99 / minute.
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Heck, we have a really strong presence in Germany with a lot of traffic. We write the company's invoices with the home address. Aren't we now an independent branch?
You are showing less then what is needed; you clearly describe a dependant branch.
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