The right structure for entering the German market

Which structure is suitable for which type of market entry?

Independent branch office. An independent branch is not a separate legal entity but remains part of the foreign company. The head office therefore bears direct liability for the German operations. No separate minimum capital is required, but the branch must be registered with the commercial register and trade office, have a German business address and maintain a sufficiently independent organisational management structure. Contracts and employees are legally attributed to the foreign company, while Germany taxes the profits attributable to the permanent establishment.

Subsidiary GmbH. A GmbH is an independent legal entity with its own management, contracts and accounting. Its registered share capital amounts to EUR 25,000. In the case of a cash incorporation, registration can generally proceed once at least EUR 12,500 has been paid in overall and at least one quarter of the nominal amount of each share has been contributed. Registration with the commercial, trade and transparency registers is also required. 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 considered separately.

UG (haftungsbeschränkt). The UG is also an independent limited liability company and is generally governed by the law applicable to the GmbH. It can be established with a lower amount of share capital, which must be paid in full, but it is required to build up a statutory reserve. It offers a separation of liability, although it may signal limited capitalisation to business partners. It is therefore more suitable for low-capital start-up phases than for investment-intensive or regulated projects.

A dependent establishment or a purely sales-focused presence can be even leaner, but it must be carefully distinguished for corporate and tax purposes. Depending on the actual arrangement, a commercial agent, home office or warehouse may also trigger tax, employment or registration obligations. The decision should be based on the intended long-term structure, not merely on the first few months. Where a company is likely to build up employees, warehousing, local financing, licences and material contracts, a temporary interim structure often does not save work but merely postpones it.

Distinguishing correctly between a branch, subsidiary and permanent establishment

Subsidiary: A subsidiary is a separate legal entity. In the case of a GmbH, the foreign parent holds the shares, but the German company enters into contracts, employs staff and is liable for its own obligations.

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

Dependent establishment: A dependent establishment has less organisational independence and is generally not entered in the commercial register as a branch. Trade, tax, employment and other obligations may nevertheless arise.

Permanent establishment: A permanent establishment is primarily a tax concept. A fixed place of business or, under certain tax treaties, the activities of a dependent agent may give Germany the right to tax. Whether a permanent establishment exists depends on the actual activities and the applicable double taxation treaty, not merely on the description used in a contract or in the commercial register.

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

How is liability allocated?

A branch acts through the foreign company itself. Claims arising from German contracts, product liability, employment law or administrative proceedings are therefore directed against the head office. An internal allocation of budgets or assets does not limit external liability. In the case of a GmbH, liability for company obligations is generally limited to the company’s own assets. The parent company does not become liable merely because it holds all the shares or because the subsidiary has been established with a low but legally permissible amount of capital.

The parent company may nevertheless incur liability in certain circumstances. This may result from guarantees, letters of comfort or assumptions of debt. Intra-group agreements, cash pooling and conduct suggesting that the parent is the actual contracting party may also weaken the economic separation. Further risks include the parent’s own tortious conduct, abusive withdrawal of assets, defective capital contributions or prohibited repayments. Tax and regulatory rules may impose additional responsibilities independently of general corporate law.

The managing director’s personal responsibility must be considered separately. Managing directors must comply with German corporate, tax, social security, compliance and insolvency filing obligations. Group instructions do not release them from liability where those instructions conflict with mandatory duties owed to the GmbH. The liability decision should therefore not be reduced to a simple choice between a GmbH and a branch. Group financing, guarantees, contractual presentation and governance must also reflect the intended separation in practice.

How are a branch and a subsidiary taxed?

A German subsidiary is generally subject to German corporate income tax on its worldwide income where its registered office or place of effective management is located in Germany. The solidarity surcharge and trade tax also apply. The corporate income tax rate is 15 per cent in 2026. Under current law, a gradual reduction is scheduled to begin in 2028. The total tax burden also depends on the local trade tax multiplier.

A branch is not a separate taxpayer to the extent that it forms part of a foreign company. Germany taxes the profit attributable to the domestic permanent establishment. This requires the functions, assets, risks and internal transactions between the head office and the permanent establishment to be identified and documented. A simple allocation based on revenue or headcount is not always sufficient.

Material differences arise in the transfer of profits. The profit of a branch is attributed directly to the head office. A branch does not distribute dividends. In the case of a GmbH, profits are typically transferred by way of a dividend to the parent company. German withholding tax must generally be deducted unless an exemption or refund is available under Section 43b EStG, a double taxation treaty or other provisions. Tax relief may depend on substance, shareholding, holding periods and procedural requirements. Losses are also treated differently. Losses of a German subsidiary generally remain with that company, while the treatment of permanent establishment losses may vary under the law of the parent company’s jurisdiction and the applicable tax treaty.

Transfer pricing, VAT, wage tax and possible withholding taxes on interest or royalties must also be considered. The tax model should therefore include both the German structure and the parent company’s jurisdiction.

Which incorporation, registration and reporting obligations apply?

Subsidiary GmbH: The formation of a subsidiary GmbH begins with the notarised articles of association and the appointment of the managing directors. Once the required share capital has been paid in, the next steps include registration with the commercial register, opening a bank account, tax registration and trade registration. The beneficial owners must then be reported to the transparency register.

Depending on the business activity, licences, employer and social security registrations and further sector-specific registrations may also be required. Where foreign shareholders are involved, the notary will often require commercial register extracts, evidence of authority to represent, apostilles or legalisation and translations. Banks conduct their own KYC review.

Independent branch office: An independent branch must be registered with the commercial register, including information on the foreign company and the German branch. In particular, evidence must be provided of the existence, articles of association, representation and register of the head office, as well as the German business address and management structure. Trade and tax registrations follow. Depending on the legal form and structure, disclosure obligations for accounting documents, transparency register filings and additional notifications may apply.

Dependent presence: Even without registration in the commercial register, trade registration, tax registration, employer obligations, permanent establishment accounting and licences may still be required. The legal registrations, tax position and actual business operations must be consistent. A nominal establishment without a genuine operating structure does not resolve the practical issues.

Can foreign founders establish a GmbH without residing in Germany?

Foreign individuals and legal entities may establish a German GmbH. A managing director is not required to hold German citizenship or reside in Germany.

Several practical issues must nevertheless be addressed. The management must be reliably available and capable of acting. If the managing director works in Germany, immigration and employment law requirements must be reviewed. The notary and the banks require reliable identification and recognition of foreign commercial register and representation documents. The company also needs a German business address and clear channels for service of documents. The place of effective management, the opening of the bank account and evidence of the beneficial owners should be planned before incorporation, as these matters often delay completion more than the corporate law requirements themselves.

Online notarisation may be used for certain GmbH incorporations, but it requires an approved notarial online procedure and suitable electronic identification documents. Not every foreign participant can readily meet these technical requirements. Alternatively, a properly executed power of attorney may be used. A foreign place of residence is therefore not a legal obstacle, but it requires early planning of the documents and governance arrangements.

Which structure is ultimately the right one?

A practical decision framework follows.

A subsidiary GmbH is often appropriate where Germany is intended to become a permanent market or production location, local employees, licences and contracts will be built up, and 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 future independent sale or carve-out.

A branch office is more suitable where the German activities remain closely integrated into the head office, a separate German legal entity offers no operational advantage and the parent consciously accepts direct liability. The profits, functions and risks must be clearly attributable to the permanent establishment, and the organisational structure should remain manageable.

A leaner presence may be sufficient where the market is initially tested without a fixed organisation, local authority to conclude contracts, employees or a permanent place of business, and commercial agents, service providers or distribution partners are used. It must nevertheless be reviewed whether the actual activities already create a taxable permanent establishment or other registration obligations.

The last option in particular requires tax analysis. Even without a company, premises, employees or authority to conclude contracts may create a permanent establishment. The right structure follows from the planned business model, not from the lowest incorporation cost. Liability, taxation, personnel, licences, financing and exit considerations should be assessed as part of a single target structure.