The right structure for market entry

Which structure is best suited to which market entry strategy?

An independent branch. It is not a separate legal entity but forms part of the foreign company. Consequently, the parent company is directly liable for the German operations. There is no separate minimum capital requirement. However, registration with the commercial register and the trade register, a domestic business address and an organisationally independent management team are required. Contracts and staff are legally attributed to the foreign company, whilst Germany taxes the profits of the permanent establishment.

Subsidiary GmbH. The GmbH is a separate legal entity with its own managing directors, its own contracts and its own accounting. The share capital amounts to 25,000 euros. In the case of a cash formation, registration can normally take place as soon as a total of at least 12,500 euros has been paid up, with at least one quarter paid up on each share. Obligations relating to the commercial register, trade register and transparency register also apply. Liability is generally limited to the company’s assets, and the company is taxed on its profits in Germany. Distributions to the parent company must be treated separately.

A dependent branch or purely sales-based presence may be even more streamlined, but must be precisely defined in terms of company law and tax law. A commercial agent, home office or warehouse may also trigger tax, employment or registration obligations, depending on the actual arrangements.

The choice should take into account the planned long-term vision beyond the first few months. Anyone who can foresee the need to build up staff, warehousing, local financing, licences and key contracts will often merely be postponing the effort by opting for a short-term interim structure.

Distinguishing correctly between a branch, a subsidiary and a permanent establishment

Subsidiary: A subsidiary is a separate legal entity. In the case of a GmbH (limited liability company), the foreign parent company holds the shares, but the German company itself concludes contracts, employs staff and is liable for its own debts.

Independent branch: This is an organisationally independent part of the foreign company with its own management and a certain degree of permanence. It is entered in the German commercial register but remains legally identical to the parent company.

Non-autonomous branch: This has less organisational autonomy and is not usually entered in the commercial register as a branch. Nevertheless, trade, tax, employment and other obligations may still arise.

Permanent establishment: A permanent establishment is primarily a tax term. A fixed place of business or, under certain agreements, a dependent agency may give Germany the right to tax. Whether a permanent establishment exists is determined by the actual activities carried out and the applicable double taxation agreement – not solely by the designation in the contract or the commercial register.

A company may therefore have a permanent establishment for tax purposes without having registered an independent branch. Conversely, a registered branch will generally also be relevant for tax purposes.

How is liability regulated?

In the case of a branch, the foreign company acts on its own behalf. Claims arising from German contracts, product liability, employment law or proceedings by public authorities are therefore directed against the parent company. An internal allocation of budget or assets does not limit external liability. In the case of a GmbH, liability for the company’s debts is, in principle, limited to the company’s assets. The parent company is not liable simply because it holds all the shares or has provided the company with a low, but permissible, level of capital.

Liability risks for the parent company may nevertheless arise. The parent company may become liable as a result of its own guarantees, letters of comfort or assumption of debt. Intra-group contracts, cash pooling and the parent company acting as the actual contracting party may also undermine the economic separation. In addition, the parent company’s own tortious breaches of duty, abusive withdrawal of assets, incorrect raising of capital or prohibited repayments may be taken into account. Tax and regulatory provisions may give rise to further liability independently of general company law.

This is distinct from the managing director’s personal liability. He must comply with German obligations relating to corporate governance, tax, social security, compliance and the filing for insolvency. Group directives do not relieve him of liability if they contravene mandatory obligations towards the GmbH. The liability decision should therefore not merely state ‘GmbH or branch’. Group financing, guarantees, contractual arrangements and governance must effectively implement this same separation.

How are branches and subsidiaries taxed?

A German subsidiary is, in principle, liable for corporation tax in Germany on its worldwide income if its registered office or place of management is located here. In addition, there is the solidarity surcharge and trade tax. The corporation tax rate will be 15 per cent in 2026. Under current law, a gradual reduction will begin from 2028. The total tax burden also depends on the local trade tax rate. A branch is not a separate taxpayer insofar as it forms part of a foreign company. Germany taxes the profit attributable to the domestic permanent establishment. To this end, functions, assets, risks and internal service relationships between the parent company and the permanent establishment must be delineated and documented. A simple allocation formula based on turnover or staff numbers is not always sufficient.

Significant differences arise in relation to the transfer of profits: the profits of a branch are attributed to the parent company. There is no dividend paid by the branch. In the case of a GmbH, the transfer typically takes place via a distribution to the parent company, in which case capital gains tax must generally be withheld, unless an exemption or refund applies under Section 43b of the German Income Tax Act (EStG), a double taxation agreement or other rules. Tax relief may be subject to conditions relating to net worth, shareholdings, holding periods and procedural requirements. Losses are also treated differently: losses incurred by a German subsidiary generally remain with the subsidiary, whilst losses from permanent establishments may be treated differently under home country law and double taxation agreements. In addition, there are transfer pricing issues, VAT, payroll tax and, where applicable, withholding taxes on interest or licence fees. Tax modelling must therefore take into account both the parent company and the destination country.

What are the requirements regarding incorporation, registration and notification?

Subsidiary GmbH: The incorporation of the subsidiary GmbH begins with the notarised articles of association and the appointment of the managing director. Once the required share capital has been paid up, the next steps are registration with the commercial register, opening a bank account, tax registration and business registration. The beneficial owners must then be reported to the transparency register. Depending on the nature of the business, this may be followed by licences, employer and social security registrations, as well as other sector-specific registrations. In the case of foreign shareholders, the notary often requires extracts from registers, proof of authorisation to represent the company, an apostille or legalisation, and translations. Banks carry out their own KYC checks.

Independent branch: An application for entry in the commercial register is required for an independent branch, including details of the foreign company and the German branch. In particular, proof must be provided of the parent company’s existence, articles of association, representation and registration, as well as the domestic business address and management. This is followed by trade and tax registration. Depending on the legal form and structure, there may be disclosure obligations regarding accounting documents, transparency register details and other notifications.

Dependent presence: Even without entry in the commercial register, business registration, tax registration, employer obligations, accounting for permanent establishments and licences may be required. The information in the register, tax law and actual business operations must be consistent. A nominal branch without an active operational structure does not resolve the operational issues.

Can foreign founders who are not resident in Germany set up a GmbH?

Under company law, foreign natural and legal persons may set up a German GmbH. Nor is it mandatory for a managing director to hold German nationality or be resident in Germany. In practice, however, several issues need to be resolved:

In practice, the managing director must be reliably contactable and capable of acting. If the managing director actually works in Germany, the requirements under residence and employment law must be checked. Notaries and banks require robust identification and the recognition of foreign registration and authorisation documents. In addition, the company requires a domestic business address and clear channels for service of process. The place of effective management, the opening of a bank account and proof of beneficial ownership should be planned prior to incorporation, as these factors often cause greater delays to the process than company law itself. Online notarisation can be used for certain GmbH incorporations, but requires an approved notarial online procedure and suitable electronic means of identification. Not every foreign party can readily meet these technical requirements. Alternatively, a power of attorney may be used. A foreign place of residence is therefore not a legal obstacle, but it does require early planning of documentation and governance arrangements.

Which structure is ultimately the right one?

A practical decision matrix:

A subsidiary GmbH is often the right choice if Germany is to become a permanent market or production site, if local staff, licences and contracts are to be established, and if the liability risk is to be separated from the parent company. It is also generally the better platform for local financing, external investors and a subsequent independent sale or carve-out.

A branch office is more suitable if the business remains closely integrated with the parent company, a separate German legal entity offers no operational added value, and the parent company deliberately accepts direct liability. Profits, functions and risks must be clearly attributable to the permanent establishment, and the presence should remain manageable from an organisational perspective.

A lean presence may suffice if the market is initially being tested without a fixed organisational structure, no local contracts are being concluded, no staff are employed and no permanent business premises are established, and commercial agents, service providers or distribution partners are used. Nevertheless, it is important to check whether the actual activities already trigger the creation of a permanent establishment for tax purposes or other registration obligations.

The latter scenario, in particular, must be assessed from a tax perspective. Even without a company, a permanent establishment may arise through the use of premises, staff or the authority to conclude contracts. The correct structure is determined by the planned business, not by the lowest set-up costs. Liability, tax, staff, licences, financing and exit strategies should be evaluated within a shared strategic vision.