Authors: Udo Sellhast and Christina Schön / Germany Trade & Invest (GTAI)
Indian companies seeking to set up a business in Germany can choose between different establishment forms. A separate corporation held by the foreign company – a subsidiary – in the form of a corporation is in practice often established for this purpose. Existing companies can also conduct business via a German branch office. This chapter provides an overview on different possibilities of establishing a market presence of an Indian company in Germany as well as on the necessary steps when it comes to the process of incorporation.
Forms and Types of Business Entities
German company law offers a variety of different legal structures suitable for every type of business. Decisive criteria for the choice of legal form are generally the intended function of the shareholders, liability, and terms of taxation. The basic structure of all company forms is stipulated by law which provides for predictability and legal certainty. The same legal conditions generally apply for Indian and German entrepreneurs.
The main feature of a corporation is the contribution of capital by shareholders. A corporation is a legal entity, meaning that the holder of rights and obligations is not the individual shareholder, but the company itself. The corporation itself concludes contracts, holds assets and is liable for taxation. Shareholders have limited personal liability. As such, a minimum share capital is required. There are four major forms of corporations under German law:
– Limited Liability Company (GmbH)
– Limited Liability Entrepreneurial Company (“Mini GmbH”)
– Stock Corporation (AG)
– Partnership Limited by Shares (KGaA)
In contrast, characteristic for a partnership is the personal commitment of the partners to their working efforts in the partnership. In partnerships, the individual partners responsible for the liabilities of the company (including private assets) act for the company. Limitations of liability for individual partners are only possible to a limited extent. The different kinds of partnerships differ primarily in terms of the contingent liabilities of the partners and the necessary registration obligations. Major forms of partnerships in Germany include
– Civil Law Partnership (GbR)
– General Commercial Partnership (oHG)
– Limited Partnership (KG)
Even mixed forms are possible, for instance the GmbH & Co. KG. The GmbH & Co.KG is a limited partnership (KG) in which the general partner (Komplementär) is a limited liability company (GmbH). The GmbH is fully liable for the GmbH & Co. KG’s debts and liabilities. The liability of the limited partners (Kommanditisten) is limited to their respective share of the partnership capital.
For detailed information on these different company types, please refer to the “Investment Guide” of Germany Trade & Invest (GTAI) online.
As the GmbH is the most widely used form for corporations in Germany, this Guide will focus on the establishment of a GmbH as a subsidiary of an Indian corporation.
Difference between subsidiaries and branch offices
Instead of setting up a new legal company according to German law, an Indian corporation may also merely register a branch office in Germany. A branch office has no independent or separate legal personality distinct from the Indian head office company itself. In legal and organizational terms, it is part of the Indian head office business. In this context, the Indian head office company is fully liable to the extent of its own assets for any claims creditors might assert against the branch office. This often is seen as one of the disadvantages of a branch office compared to e.g. a subsidiary in the form of a GmbH.
In Germany, there are two kinds of branch offices which primarily differ due to the degree of independence from the head office company.
The autonomous branch office (selbständige Zweigniederlassung) is dependent upon the head office company at the internal level but engages in business activities independently. However, the Indian head office company is still liable for the business transactions concluded by the branch office.
At the organizational level, autonomous branch offices are to a certain extent independent from the head office company and usually have the following attributes:
– Management with the freedom to act according to their own judgment (i.e. with full power of attorney and the power to contract)
– Own capital resources (allocated by the head office) and bank account
– Separate accounting (on its own or via the head office company)
The dependent branch office (unselbständige Zweigniederlassung) focuses on maintaining contacts and initiating business in Germany. It performs support and implementation- related tasks without having any individual business discretion and is entirely dependent on the head office.
Offices that purely serve to observe the market and pave the way for initial customercontacts are often described as “representative offices.” However, this is a term which doesnot exist in German commercial law. Once an office is used by a foreign company for commercial activities (thus forming part of the foreign company organization), it generally must be registered at least as a dependent branch office in Germany.
Founding and Registration of a Business Entity
a) GmbH as Subsidiary of an Indian Corporation
The German limited liability company (Gesellschaft mit beschränkter Haftung – GmbH) is the most widely used legal form for corporations in Germany. The main reason for its popularity (also as a subsidiary of a foreign company) is the combination of high flexibility and relatively few obligations. At least one shareholder (e.g. an Indian national or an Indian corporation) is required in order to establish a GmbH.
The GmbH has two mandatory corporate bodies. The main body is comprised of the shareholder(s) collectively in the shareholder meeting and the executive body of the managing director(s). An Indian national residing in India can generally also be the managing director of a GmbH if the company has a physical German business address and at least a representative on-site in Germany.
The GmbH requires a minimum share capital of EUR 25,000. It can be contributed in cash or in kind (e.g. real estate or patents). Liability is limited to the corporation‘s business assetsincluding share capital.
The incorporation of a GmbH requires notarization by a German notary. For instance the notary has to verify the existence and power of representation of the parent company. Typically this is demonstrated by specific public documents. Foreign public documents as a rule require authentication for use in Germany. Since Germany no longer legalizes Indian documents, a formal verification process, initiated by the Embassy or Consulate generally is required. The German Missions in India provide further information on this verification procedure online. This extra step should be considered in the overall time planning for the incorporation.
The main steps for setting up a GmbH by cash contribution are straightforward and can be described as follows:
– Drafting of Articles of Association: The articles of association shape the identity and constitution of the company. Thanks to the large scope for contractual design, the GmbH is a very flexible corporation. Mandatory content includes share capital, shareholders and respective shares held, business name, registered office, and company object.
– Notarization of Articles of Association: The drafting and notarization of the articles of association are normally performed in one session by a German notary. The founding shareholder(s) adopt(s) the articles of association and appoint(s) one or more managing directors in a notarial deed. German notaries can be found online in the directory of the Federal Chamber of Notaries. The notary should also be contacted at an early stage in order to get certainty on the documents of the Indian parent company (if applicable) and the necessary form.
– Payment of Share Capital (Cash Contribution): Once the articles of association have been notarized, a company account should be opened and the share capital deposited. A payment of EUR 12,500 in total is sufficient for standard EUR 25,000 GmbH registration in the commercial register.
– Registration in the Commercial Register: When the required share capital has been verifiable contributed to the GmbH, the managing director(s) apply for the registration of the GmbH in the commercial register (Handelsregister). The application is electronically filed by a notary. The GmbH comes into existence as a legal entity and its limitation of liability becomes effective upon registration in the commercial register. For more information on the Commercial Register, please refer to the “Investment Guide” of Germany Trade & Invest (GTAI) online.
– Trade Office Registration: Before business operations are started, the trade office (Gewerbe-/Ordnungsamt) must be notified about the business activity in question. Required permits and verification of representatives must also be submitted.
For other company forms, the establishment procedure may differ. Please see GTAI’s Investment Guide online for further information.
b) Registration of a Branch Office
An autonomous branch office of an Indian corporation must be registered with the commercial register via a German notary. Like for the establishment of a subsidiary, the notary should be contacted at an early stage in order to get certainty on the documents of the Indian head office company and the necessary form.
Autonomous branch offices and dependent branch offices of Indian companies generally have to notify the responsible trade office (Gewerbe-/Ordnungsamt) about any performed business activity. Required permits and verifications of representatives must also be submitted.
Licenses and Permits
Only in certain cases, a business license or further registrations are necessary in addition to the registration with the commercial register and to the trade office notification.
For instance, in the financial services and fintech sector, an authorization by the German Federal Financial Supervisory Authority (BaFin) may be necessary among other things. As the business models may be very diverse, BaFin has compiled initial information online on e.g. alternative payment methods, blockchain technology, crowdfunding or virtual currencies and also offers a specific contact form for start-ups and fintechs. For more detailed information, please see the website of BaFin.
For brokers, real-estate or insurance intermediaries and advisors or similar professions, specific licensing and registration requirements exist, too.
For the independent, non-industrial operation of certain trades (e.g. bakers, carpenters or hearing aid acousticians) entry in the Register of Craftsmen (Handwerksrolle) is required. The trades that are affected are listed in the Crafts and Trades Regulation Code (Handwerksordnung) where they can be consulted.
It is not possible to list all cases of potential licensing or permit requirements. A (non- exhaustive) list of professions requiring a permit please refer to a website of the Chamber of Commerce and Industry of Frankfurt/Main.
Membership of the Chamber of Commerce and Industry
In Germany, the Chambers of Industry and Commerce (Industrie- und Handelskammer – IHK) and the Chambers of Crafts (Handwerkskammer) function as the local interest groups of business operators in a specific region. The chambers realize more than just the general functions of professional associations for their members. They also:
– carry out active lobbying work by representing the interests of the company towards municipalities, state, and federal government;
– organize vocational training by defining the framework requirements and approving interim and final examinations;
– draw up certificates concerning, for example, admissible company names
In addition to this, the IHKs also provide information about the local economic framework conditions in a specific region and provide foreign companies with business contacts to possible regional partners. All IHK members are also able to draw on the comprehensive advice and services of the responsible chamber. The chambers are generally the first point of contact in the event of day-to-day business problems.
Membership of the IHK occurs automatically upon registration in the trade office without requiring special registration. The costs of membership of the chamber depend on the turnover of the applicant company.
Certain trades considered as crafts professions have to register with the Chamber of Crafts prior to the trade office notification. Membership costs depend on turnover, too.
The umbrella association of the Chambers of Industry and Commerce, the DIHK, and the umbrella association of the Chambers of Crafts, the ZDH, offer an overview of all of the regionally responsible chambers.