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Germany – Avoiding obstacles for inbound UK investors and businesses

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Germany – Avoiding obstacles for inbound UK investors and businesses

As one of the strongest economies in the world, situated in a unique location in the heart of Europe, Germany is a great place to do business. A highly skilled available workforce, a political stable environment along with the availability of both, large multinational corporations as well as small and medium sized businesses are further reasons to conduct business in Germany.

This has been true also for UK investors and businesses who have historically held strong business relations to Germany and vice versa. BREXIT has however had a significant initial impact on this strong relation between both countries. While the export volumes from Germany to Great Britain have declined by almost 27 % between 2015 and 2021, the import volumes from Great Britain into Germany also show a decrease of 16 % of the last two years, which is in complete contrast to the overall German foreign trade during the same period.

Despite this impact, the interest in cross-border investment and the expansion of business relations is unwavering and has increased since the Ukraine crisis.

UK investors seeking direct investments in Germany are challenged on various levels and hereby face obstacles, which – if not anticipated correctly – can have a significant impact on the overall success of the investment. In addition to certain cultural and language barriers, Germany is characterized by a very complex system of regulations and tax rules. In addition to the domestic German tax law, the provisions of the Double Tax Treaty with the UK is central in the structuring of cross-border activities.

The German tax system is a federal tax system with very minor deviations between the 16 federal states. Germany´s VAT system is levied under the harmonized EU system. The German tax year is the calendar year, which can be amended to match the UK tax year, if required.

When deciding to invest in Germany, U.K based businesses or investors can either engage in the German market via direct sales from abroad, set up a local German entity in the legal form of a corporation or a partnership or constitute a permanent establishment.

While setting up a legal entity is a formal act that is deliberately enacted, regularly requiring notarization by a German public notary, and can take a significant time to conclude, the risk of unintendedly constituting a permanent establishment cannot be understated. Constituting a PE can have significant consequences. Failing to register a PE und fulfill the associated filing obligations can result in significant fines. The permanent establishment is the nexus for taxation in Germany. UK based entities with employees in Germany or who hold a physical presence in Germany should address the PE-risk actively to avoid unwanted consequences.

The most common legal form of establishing a German corporation is the GmbH (Gesellschaft mit beschränkter Haftung – private limited corporation) which is subject to German Corporate Income Tax at a flat rate of 15 % and German Trade Tax at a rate - which slightly varies between municipalities – at a rate of approx. 15 %, resulting in a combined income tax rate of 30 %. With a minimum share capital of 25.000 EUR, the entity is subject to German publicity law, requiring entities to file their annual financial statements with the German Gazette.

Germany has extensive related party TP rules, which are very similar to those endorsed by the OECD Transfer Pricing Guidelines. They are based on the premise that related parties should trade at arm´s length. The obligation to prepare a TP documentation is subject to size criteria of the entity. The compliance with the TP provisions has become a key focus of tax audits and should be a focus in cross-border compliance measures.

In regard to real estate investments into the German market from U.K. based corporations, certain structures can offer a favorable taxation, thereby avoiding the Trade Tax burden, reducing the overall taxation from 30% t0 15 % if structures properly. Germany levies a RETT on real estate transactions, with rates varying in the 16 states between 3,5 % and 6,5 % of the purchase price. As the RETT is also triggered due to acquisitions as well as in reorganizations, any change in the shareholding of foreign based parent entities of German subsidiaries with German real estate should in advance be screened for potential RETT implications. With the current real estate prices, failure to anticipate such tax relevant event can have disastrous implications.

Useful Links:

German Chamber of Commerce in the United Kingdom (ahk.de)

BCCG British Chamber of Commerce in Germany


Dr. Benjamin Cortez

Dr. Benjamin Cortez

MBA (International Taxation), APCIT (IBFD)
Master of Laws in Corporate Restructuring

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