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Nearly 4% of global direct investment flows into Germany and few countries are as tightly connected to the world economy, but doing business can still be a challenge for those unfamiliar with its legal and tax structures, which is why having local help is essential.
Germany is the biggest economy in Europe and the fourth-largest in the world, built on research, innovation and its ability to attract foreign direct investment (FDI) from around the world. More than 45,000 foreign companies are doing business in the country, employing more than three million people, and almost one in four jobs are dependent on the export sector.
In addition to an excellent investment climate, Germany offers international businesses outstanding economic conditions. The economy is now far more competitive than it once was thanks to structural reform and changes to the corporate tax rate. First class infrastructure, a modern finance system and a huge consumer market are also investment magnets, but businesses should be aware of the many challenges to doing business in Germany, and the benefits of having local help on board to navigate legal, tax and cultural barriers.
Starting a Business
The process of starting a business underlines the complex nature of doing business in Germany. Despite its global standing and modern outlook, the World Bank and International Finance Corporation (IFC) rank Germany in 106th in the world for ease of starting a business, largely down to the several procedures companies are required to navigate. Among other steps, businesses are required to liaise with the local chamber of industry and commerce, the local commercial register, the local office of business and standards and the professional association of the relevant trade.
Dealing with Construction Permits
Obtaining a building permit and approval of static calculation are the most lengthy procedures when dealing with construction permits, although obtaining a water connection and telephone line can also take some time.
Germany boasts one of the most streamlined procedures for getting electricity to business in the world, requiring only three procedures and taking 17 days compared to the OECD average of 98.
The registration of property is another task that is laden with bureaucracy. Companies must obtain an extract from the Land Registry and notarise the transfer agreement before obtaining waiver of preemption rights with the municipality and paying transfer tax. This takes an average of 40 days to complete.
Germany is home to a modern financial sector that operates within a strict legal environment. Getting credit is therefore a relatively streamlined process, although there is no collateral registry in operation.
The World Bank and IFC rank Germany in 100th place for strength of investor protection, although steps have been taken to improve their ranking. The Strengthening Investor Protection and Improving the Functionality of the Capital Market Act, signed in 2011, gave more efficient regulation and supervision of the markets.
Germany’s fiscal system is notoriously difficult to navigate. Businesses have to contend with nine tax payments a year taking 207 hours of their time; social security contributions take 134 hours to deal with alone and corporate income tax and VAT payments can also be extremely time constraining. Altogether there are 14 different taxes which may be payable by businesses operating in Germany.
Trading Across Borders
Trading across borders is a relatively cheap endeavour, but it still requires four documents to be prepared when exporting and five when importing. It takes a week on average to both import and export goods.
Enforcing Contracts and Resolving Insolvency
Germany’s modern legal system handles contracts and insolvency with relative efficiency. It takes 394 days to enforce a contract and 438 days to resolve insolvency.
Doing Business in Germany without adequate cross-cultural awareness is a risky proposition, and businesses should ensure they carry with them an appreciation of both the business landscape and the culture. Hierarchy is valued in Germany and there is often a plethora of procedures and policies which can slow things down, so having a bit of patience is crucial to the success of business negotiations.
We have the local knowledge to help you navigate these minefields. Whether you want to set up in Germany or just want to streamline your German operations, talk to us.