Starting a business in Germany as a foreigner: the GmbH
Starting a business in Germany? Consider the popular option of Gesellschaft mit beschränkter Haftung (GmbH), which stands for Limited Liability Company. This article outlines necessary steps and a typical timeline and costs to establish a GmbH.
Options to establish a company in Germany
Various options exist to opening a business in Germany, e.g.
Sole proprietorship is a good option for freelancers and small businesses to quickly start and close a business. The business owner is fully responsible for debts and losses. Germany taxes their earnings at a personal rate of up to 45%.
Opening a branch in Germany instead of a legal entity could appear advantageous for international companies at first sight. However, the tax rates for branches and resident German companies are the same. The German branch does not deduct withholding tax on dividend distributions from profits transferred to its foreign head office.
The GmbH is a preferred option for people and foreign companies to enter the German market. It provides limited liability and compared to the sole proprietorship relatively flat income tax rates. Typical German taxes on GmbH are between 30 and 32% on its taxable income.
The GmbH? How to establish it?
Step 1: Consult a German notary or lawyer
Establishing a GmbH in Germany requires a notary. We recommend to consult a notary at an early stage because this can simplify the process and avoid suprises.
For more complicated cases, please consult a German lawyer specialized on corporate law. He can help especially on non-standard Articles of Association (next step).
Step 2: Preparation of Articles of Association
The Articles of Association reflect the character and structure of a company. The GmbH, thanks to its extensive contractual design possibilities, stands out as a highly adaptable corporate form.
These articles require important parts such as capital, shareholder info, business name, office, and company purpose.
Forming a GmbH can be easier by using standard Articles of Association for setups with up to three shareholders. Additionally, they are also suitable for setups with one director who contributes money. While these articles still require notarization, a reduced fee is applicable.
A GmbH must have a minimum share capital of EUR 25,000. You must pay a minimum of EUR 12,500 during its establishment.
The preparation of Articles of Association – especially when standard – typically take 1-2 weeks.
Step 3: Notarization of Articles of Association
The founding shareholders of the GmbH typically attend the notarization of the Articles of Association in person. Foreigners from non-EU countries need a business visa to enter Germany for this reason.
From August 2022, there are online possibilies to attend a notarization subject to certain requirements (e.g. eID, cash injection).
German embassies and consulates can also perform notarizations.
Step 4: Opening of bank account
To open a bank account of a foreign-owned GmbH is often exceedingly difficult and time-consuming. Increased anti-money-laundry (AML) regulations have further slowed down this process. To open a bank account for a foreigner can take from a few days to one year or more.
Step 5: Registration at Commercial Register (Handelsregister)
When the bank account is open and the the proof of paid-in capital has been presented to the notary, the notary registers the GmbH at the commercial register. The registration process can take 2-4 weeks depending on the local court. The commercial register excerpt shows the registration number of the GmbH, which you need for the next two steps.
Step 6: Registration at local council
The local council needs to register the newly established GmbH. You can often register online.
Step 6: Tax registration / register your business at the tax office
The Commercial Register automatically informs the tax office (tax office finanzamt) about the establishment of the GmbH. The tax office will then send a letter to the business address of the GmbH and requests to fill in a tax registration form.
Getting the tax number is crucial for the GmbH to write customer invoices. Please allow up to 6 months (!) to obtain a tax number in Germany, depending on the tax office. Start (or your tax advisor) the tax registration process early, even before the tax office sends a request letter. You need to have the GmbH’s registration number to do so.
If you need a VAT ID for inner-EU business, you should request it in the tax registration form. In this case we stll recommend you to apply for a VAT ID upon receipt of the tax number. Often the tax office does not pass the VAT ID registration request to the Central Tax Office in charge of VAT IDs.
Typical costs to set up a GmbH
The typical costs to set up a GmbH with a share capital of EUR 25,000 are currently roughly as follows:
- Notary fees: between 800-1,200 Euros
- Commercial register fees: between 150-250 Euros
- Tax registration: if you take a tax consultant it costs around 250 Euros
Tax duties of the GmbH
The GmbH has to submit tax filings to the tax office, including:
- Advance VAT returns – on a monthly or quarterly basis, latest by the 10th of the month following the accounting month
- Corporate income tax (CIT), trade tax returns and VAT – on an annual basis for the fiscal year. Various deadlines apply
- Annual financial statements – on an annual basis as part of the CIT and trade tax filing
We advise against starting a Limited Liability Entrepreneurial Company (“UG“) with only 1 Euro as the minimum share capital. The UG is in practice not highly recognized (“no money company”) by banks and business partners. In addition, a change of the UG to the GmbH is complicated and costly.
What else do you need to do?
- submit the GmbH’s financial statements to the Publication Gazette (Bundesanzeiger / Unternehmensregister) by the end of the following year. Heavy fines apply if missing this deadline.
- to register the beneficiary of the GmbH at the Transparenzregister.
How s&w can support you
s&w can assist you in establishing a GmbH in Germany and connecting you with experienced lawyers, e.g. SE Legal, and notaries for international clients. We can also support you to fullfil the day-to-day accounting and tax obligations of the GmbH as well as tax structuring, e.g. to set up a holding structure in Germany.
Sources: s&w, Germany Trade & Invest
Photos: Shridhar Gupta (Unsplash)
Disclaimer: We assume no liability for the accuracy and completeness of the information. The information provided here does not constitute recommendations for action.