Business in Germany: A roadmap for entering the market

Legal form, incorporation and the commercial register

The first question to ask is what role the German presence is intended to fulfil. If the entity is to enter into its own contracts, employ staff, hold assets and act as an independent company vis-à-vis customers, a German subsidiary is often the most sensible option. A branch office may appear more streamlined, but legally remains part of the foreign company. The Unternehmergesellschaft (UG) offers a way in with a lower minimum share capital, but brings with it its own issues regarding capital formation and external representation. Liability, tax, financing, governance and exit strategies should therefore be assessed together.

For many international groups, the GmbH is the practical standard. According to Section 5 of the German Limited Liability Companies Act (GmbHG), its share capital must be at least 25,000 euros. The articles of association are notarised in accordance with Section 2 of the GmbHG. In suitable cases, this can also be done via video conferencing. Before the appointment, the company name, registered office, corporate purpose, managing director, rules on representation, financial year and shareholder structure should be agreed upon. Where there are several shareholders, governance, approval requirements and dispute resolution should also be on the agenda.

Foreign shareholders must provide proof of their identity and authority to act on behalf of the company. The specific documents required – such as register extracts, articles of association, powers of attorney, translations, apostilles or legalisations – depend on the country of origin and the individual case. These documents should not be obtained on the basis of a general list found online. A list of documents agreed in advance with the notary public handling the registration avoids duplicate certifications and last-minute requests for additional documentation.

The GmbH only comes into existence as a legal entity with full legal capacity upon entry in the commercial register. Until then, it operates as a ‘company in the process of being formed’. During this period, the special rules of Section 11 of the German Limited Liability Companies Act (GmbHG) apply to those acting on its behalf. Contracts may be entered into at this stage, but must accurately reflect the company’s status and representation. Anyone already entering into long-term tenancy, purchase or employment contracts should also clarify what happens if the registration is delayed or, in exceptional cases, fails.

In the case of a cash formation, the statutory minimum capital contributions must be made before the application for entry in the Commercial Register is submitted. A German bank account is not legally required as such in every scenario. In practice, however, the company needs a business account that reliably reflects proof of capital, payment transactions and the requirements of the notary and the bank. In the case of international ownership structures, the ‘know-your-customer’ (KYC) check is often the longest single process. The organisational chart, beneficial owners, source of funds and planned business activities should therefore be documented at an early stage.

Taxes, business registration and other registrations

Registration in the commercial register does not automatically complete the other registrations. Tax registration is initiated electronically via ELSTER. Once business activities have commenced, the questionnaire must generally be submitted within one month. The tax authorities explain the procedure on their page on setting up a business. When business activities are deemed to have commenced in a specific case, and what information is required regarding cross-border transactions, should be clarified with a tax adviser.

In addition to the German tax number, a VAT registration number may be required. The business model determines how supplies, services, intra-group settlements, permanent establishment risks and transfer pricing are treated. Invoicing processes should reflect this classification before the first invoice is issued. Subsequent corrections to VAT, the place of supply or mandatory details are avoidable administrative burdens.

Registering a business under Section 14 of the German Trade Regulation Act (GewO) and reporting beneficial owners to the transparency register under Section 20 of the German Money Laundering Act (GwG) are separate procedures. Changes to the managing director, registered office or beneficial owners may trigger further reporting obligations at a later date. Register data therefore forms part of ongoing compliance and must be maintained on an ongoing basis.

If the company intends to take on employees, it requires a company registration number before the first registration for social security purposes. The Federal Employment Agency describes the procedure on the Company Registration Number Service website. In addition, registration is required with the relevant statutory accident insurance provider, as well as for payroll, income tax and social security. In the case of international transfers, residence rights, posting notifications and social security classification must be clarified in good time. A signed employment contract alone does not make the employer’s processes fully operational.

Team, Sales and Contracts

Once the first team is in place, German employment law becomes part of day-to-day business. Group-wide templates should not simply be translated. Remuneration, bonuses, working hours, remote working, annual leave, secondary employment, confidentiality, inventions, limitation periods and termination must be tailored to the specific role and comply with the requirements of German law. Documentation and information obligations, data protection notices and internal policies should be integrated into a structured onboarding process.

When planning staffing levels, notice periods and protection against unfair dismissal must be taken into account. The Protection Against Unfair Dismissal Act applies after more than six months’ service and where the company’s threshold is exceeded. Terminations and termination agreements must be in writing in accordance with Section 623 of the German Civil Code (BGB). An electronic signature is not sufficient. Where a works council exists, employee participation rights also apply. Staffing levels should therefore not be based on the assumption that employment relationships can be terminated at short notice, as in an ‘at-will’ system.

For sales, the German entity requires contracts that reflect its actual market role. Depending on the business model, supply, service, software, licence, commercial agency or distribution contracts may be relevant. Pre-formulated terms are also subject to a review of their content under Sections 305 et seq. of the German Civil Code (BGB) in B2B transactions. Liability, warranty, prices, term, termination and place of jurisdiction should therefore not be adopted from the group’s standard terms without scrutiny.

In the case of international sales of goods, a decision must also be made as to whether the UN Convention on Contracts for the International Sale of Goods (CISG) should apply. Opting for German law does not automatically exclude the CISG. Multilingual versions require a clear rule on which version takes precedence and a translation that is consistent in content. Furthermore, the sales process must ensure that the General Terms and Conditions are effectively incorporated at the latest upon conclusion of the contract. A first reference to them on the invoice is usually too late.

Data protection cuts across all areas. Websites, recruitment, CRM, customer support, payroll and group reporting require legal bases, information for data subjects, deletion rules and appropriate authorisations. If a service provider processes personal data on behalf of the organisation, a contract in accordance with Article 28 of the GDPR must generally be reviewed. In the case of group-wide systems and support access outside the EEA, the rules on transfers to third countries also apply. A robust process for handling data subject requests and data protection incidents should be in place before the system goes live.

Timetable and Project Management

There is no fixed standard timeframe for market entry. Setting up a simple company in cash with domestic shareholders can be significantly quicker than a structure involving several foreign shareholders, complex financing and regulated business activities. Appointments with a notary, bank due diligence, registration in the commercial register, tax processing and the necessary licences also follow different timelines. Sound planning therefore takes account of dependencies and prerequisites rather than making a blanket promise of ‘within a few weeks’.

The project plan should distinguish between corporate law milestones and operational approvals. The notarisation establishes the limited liability company (GmbH) in the process of formation, whilst entry in the commercial register establishes the GmbH with full legal capacity. However, for actual business operations, elements such as a bank account, tax number, VAT registration, insurance, payroll, contracts, data protection or sector-specific notifications may still be missing. The launch of customer services, the first recruitment and the start of a lease should only be linked to deadlines where the prerequisites are verifiable.

Working on multiple tasks in parallel shortens the overall duration, provided the various strands are coordinated. Whilst the notary’s office is reviewing foreign documents, bank documents, tax master data, contract templates and data protection processes can be prepared. However, not every step can be brought forward. Capital payments, registration with the commercial register and certain other registrations require specific preliminary steps. A centralised status update, listing the person responsible, outstanding documents and matters requiring a decision, prevents multiple advisers from working on the basis of differing assumptions.

The budget also needs to allow for contingencies such as enquiries, translations and amendments. If the company structure is changed during the bank’s due diligence or the business model is only clarified in the tax questionnaire, this creates delays. A brief, binding structural document drawn up before implementation begins is often more cost-effective than subsequent amendments to the articles of association, bank accounts, registers and contracts.

Roadmap for market entry

The roadmap begins with a decision on the vision, legal form, financing and governance. The company name, corporate purpose, managing director and shareholder structure are then determined, and the foreign supporting documents are coordinated with the notary’s office. Bank onboarding and the documentation of beneficial owners commence in parallel. The notarisation is followed by the raising of capital and registration with the commercial register. Contracts entered into by the limited liability company (GmbH) in the process of being formed are concluded only with clear provisions regarding representation and risk management.

Tax registration, the VAT strategy, business registration and the transparency register are managed as separate strands. As soon as staff are planned, the company registration number, accident insurance, payroll, social security, employment contracts and onboarding must be in place. Before sales activities commence, customer contracts, the incorporation of the general terms and conditions, the invoicing process, data protection and the necessary insurance policies must be approved. A phased go-live separates internal operational capacity, initial staff recruitment and external market entry. The German entity is only truly operational once these strands have been brought together and actually finalised.