investment guide to germany 2009 gtai

8/8/2019 Investment Guide to Germany 2009 GTAI

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Investment Guide to GermanyHow to access and set up businessin Europes biggest market

Busine

ssLocationGermany


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Investment Guide to GermanyHow to access and set up businessin Europes biggest market

February 2009


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I l l

e r

Ille

r

Naab

Dresden

Kiel

Potsdam

Stuttgart

Hanover

Mainz

Wiesbaden

Saarbrcken

Erfurt

Magdeburg

Schwerin

Dsseldorf

Munich

Berlin

Hamburg

Bremen

Germany Key Figures

Deogapi

Population: 82 million inhabitants, 230 inhabitants per km

Religion: Catholic (31.0%), Protestant (30.8%), Muslim (3.9%),

Other (1.8%), Undenominational (32.5%)

Govee

Form of Government: Federal Republic, 16 States

Head of State: President Prof. Dr. Horst Khler

Head of Government: Chancellor Dr. Angela Merkel Capital: Berlin

Language: German

National Holiday: October 3rd (German Unifcation Day)

Currency: 1 Euro (EUR)

Eooy

GDP: EUR 2,423 billion(2007)

GDP per capita: EUR 29,464(2007)

GDP per sector: Services 51.3%, Industry & Construction 30.1%,

Trade 17.7%, Agriculture 0.9%

Exports: EUR 969.0 billion (2007)

Imports: EUR 772.5 billion (2007)

Geogapy

Area: 357,114 km

Coastline: 2,389 km

Highest Mountain: Zugspitze (2,962 m)

Longest Rivers: Rhine 865 km, Elbe 700 km, Danube 647 km Largest Lakes: Lake Constance 536 km, Mritz 109 km,

Chiemsee 80 km

Biggest Cities:

Berlin (3.4 million), Hamburg (1.8 million), Munich (1.3 million)

Ifae

19 International Passenger Airports, 34 Seaports, 250 Inland Ports

Railways: 41,300 km

Waterways: 7,500 kmAustrIA

swItzErlAnD

FrAncE

thE nEthErlAnDs

POlAnD

czEch rEPublIc

nOrth sEA

bAltIc sEA

bAltIc sEA

ElGIum

uxEm-OurG

Mecklenburg-Vorpommern

Brandenburg

Saxony-Anhalt

Saxony

Thuringia

Bavaria

Baden-Wrttemberg

Hessen

Saarland

Rhineland-Palatinate

North Rhine-Westphalia

Lower Saxony

Schleswig-Holstein

DEnmArK

i l r r

r il

r

i l r

ir r

Major Railways

Major Autobahns

Navigable Waterways

swEDEn

DEnmArK

National Borders

State Borders

Federal States

State Capitalsd

esign:[email protected]

e


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Germany Trade & Invest www.gtai.com

Dear Reader,

I am delighted to present this years Investment Guide to Germany.This annual publication provides an inormative and easily understand-able tour o Germanys business landscape, helping make it easier than

ever to access the German market.Germany is the worlds ourth largest economy behind the USA, Japan,and China and continues to be the best-perorming in Europe. Account-ing or almost one th o EU gross domestic product, it is the enginedriving Europes economy. One o the most highly developed industrial

nations in the world, Germany has been the worlds export championor years.

A rat o ederal government reorms and unding programs have beenimplemented to create a truly business riendly environment; chie

among these are improved credit and loan provision, major publicinvestment project expansion measures, and increased investment grantunding. The current economic climate requires that we multiply oureorts through such measures in order to jump-start the economy aswe rise to meet both today and tomorrows economic challenges.

Germany Trade & Invest is the ederal oreign trade and inward invest-ment promotion agency o Germany. We assist and advise potentialinvestors interested in this vital marketplace. Foreign companieslooking to establish business operations in Germany can obtain ree

inormation and consultancy services in areas including the corporateinvestment ramework, tax regulations, and incentives. Our expertteams provide comprehensive project management and support

services rom site selection to the nal realization o the investment.

Our Investment Guide to Germany provides you with all the backgroundinormation required or setting up a business in one o Europes most

dynamic markets. I look orward to welcoming you to Germany.

Michael PeierChie Executive

Preace


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Investment Guide Germany Trade & Invest www.gtai.com

Entrepreneurs rom all over the world are welcome in Germany.The German market is open or investments in practically all businessand industry sectors. No restrictions are placed upon oreign com-panies, nor are there any business sectors exclusively monopolizedby the state.

Market Opportunities in the Center o Europe

With a population o over 82 million, Germany is the largest country

in the European Union (EU). Home to a labor orce o almost40 million including our million entrepreneurs Germany is thecontinents largest economy with a gross domestic product oaround EUR 2.4 trillion in 2007.

Germanys central position at the heart o the enlarged Europeprovides access to the EU as the largest economic area in the worldwith currently 27 member states, a population o around 500 millionand a gross domestic product o around EUR 12.9 trillion.

Moreover, it also allows Germany to enjoy the traditional advantageso Western Europes long-established and robust markets, as wellas those o the burgeoning markets o Central and Eastern Europe.Many businesses are already taking advantage of the new opportunitiesafforded by EU expansion.

Furthermore, the use o the shared euro currency in 16 memberstates (Austria, Belgium, Cyprus, Finland, France, Germany, Greece,

Ireland, Italy, Luxembourg, Malta, the Netherlands, Portugal,

Slovakia, Slovenia, and Spain) promotes trade across transnationalborders by eectively eliminating currency exchange problems.

Germany in Europe

Switzerland

Croatia

Bosnia-Herzegovina

Serbia

Albania

Macedonia

Moldova

Turkey

Ukraine

Belarus

Norway

Russia

RU

Oslo

Bern

Montenegro

Malta

Portugal

Spain

France

Italy

Austria

Slovenia

CzechRepublic

Hungary

Slovakia

Bulgaria

Greece

Romania

Poland

Lithuania

Latvia

Estonia

Finland

Sweden

Denmark

Belgium

Netherlands

Luxembourg

UK

Ireland

Cyprus

Paris

Lisbon Madrid

Brussels

London

Dublin

Frankfurt

Berlin

Copenhagen

Stockholm

Helsinki

Tallinn

Riga

Vilnius

Warsaw

Prague

Bratislava

Budapest

Vienna

Amsterdam

Ljubljana

Rome

Athens

Bucharest

Sofia

Moscow

Minsk

Kiev

Chisinau

Sarajevo

Belgrade

Skopje

Tirana

Zagreb

Podgorica

Ankara

Nicosia

Kaliningrad

Valletta

Source: Eurostat

EU 27 Countries

Welcome to Germany


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Made in Germany

Standing or high quality and innovation, the Made in Germanybrand has been a seal o quality or over a century. German compa-nies innovative orce has remained intact since that time. Compa-nies rom Germany are leaders in the development o new technolo-gies or the environmentally riendly production o electricity andpioneering nanotechnologies. Moreover, Germany continues to holdon to its world export leader crown year in, year out.

Trailblazing research is being conducted at more than 400 Germanuniversities and 600 research institutes. Close ties traditionally existbetween industry and public research organizations (particularlywith state-unded research institutes including the Max Planck So-ciety, Fraunhoer Gesellschat, Leibniz Association, and HelmholtzAssociation).

German universities train experts who transer their leading edge

scientic know-how to the commercial sector; turning sophisticatedideas into products or the global market.

The German R&D landscape is supported by excellent conditions.The government makes every eort to maintain and support innova-tion by promoting the creation o industry clusters and by osteringclose cooperation and ties between the worlds o science and industry.

This commitment to outstanding quality in scientic researchwas most recently exemplied by the Nobel Prizes awarded in 2008to Harald zur Hausen rom the German Cancer Research CentreHeidelberg and in 2007 awarded to Berlin chemist Gerhart Ertl andphysicist Peter Grnberg o the Forschungszentrum Jlich.

As well as a dynamic scientic environment, Germany is also hometo a competitive, fexible, and robust economy. By quickly implement-

ing the very latest innovations, companies are able to switly securetheir leading roles in their respective elds. Germany is ready or theuture.

Doing Business in Europes Prime

Investment Location

The German economy is traditionally strong in the areas o mechani-cal engineering, the automotive industry, aerospace, logistics, and the

pharmaceutical and chemical industries.

But there is still much more to German industry. For instance,Germany is the world leader in the sustainable industry revolutionand German companies also lead the eld in new technologies being

developed in ICT sectors, nanotechnology, optoelectronics, medicaltechnology, and biotechnology.

According to Fortune magazine, German multinationals are amousthroughout the world: Daimler, Volkswagen, Allianz, Deutsche Bank,and Siemens belonged to the worlds 50 largest companies in 2008.

As well as world-leading corporations, Germany also has an extremelyhealthy and vibrant small and medium-sized enterprise market.These are very oten highly specialized companies who have estab-lished strong ootholds in world markets. 70 percent o all employees

in Germany work in small to medium-sized enterprises.

Foreign companies and their investments play a vital role or theeconomic development o Germany. Around 45,000 oreign busi-nesses are already located in the country, with some o the worldslargest enterprises headquartered in Germany. In 2008, oreigncompanies currently employed more than 3 million people inGermany.

The Investment Guide to Germany provides all the inormationneeded to access and set up business in Europes prime investmentlocation making it easier or international companies to investin Germany.

Welcome to Germany


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5 Employees and Social Security

Finding Suitable Sta ......................................................................81Flexible Models o Employment ..................................................... 82

Terms o Employment ..................................................................... 84Termination o Employment ........................................................... 92Employee Representation ...............................................................95The German Social Security System ..............................................96

6 The Tax System

Company Taxation ..........................................................................103Taxation o Property.......................................................................108Value Added Tax .............................................................................110Options or Tax Deductions ............................................................113How Does a Tax Return Work? ......................................................114

Customs ..........................................................................................115

7 The Legal Framework

Foreign Trade and Payments .......................................................122Patents, Licensing, Trademarks ...................................................123Planning and Building ....................................................................125Legal Proceedings .........................................................................127

8 Living in Germany

Finding the Right Place to Live ......................................................132Assistance or Families .................................................................134

German Education System ............................................................136Health System ................................................................................139

Ensuring Quality o Lie .................................................................140

Annex o Addresses .......................................................................144

1 Coming to Germany

Visa or Entrepreneurs ....................................................................13Visa or Employees ..........................................................................15

Visa or Par tner and Children ........................................................17Visa Application Process .................................................................18Visa Requirements or Foreign Nationals ..................................... 20

2 Establishing a Company

The Legal Form: Corporations ....................................................... 24

The Legal Form: Partnerships ....................................................... 29The E stablishment Form: Branch O ces ......................................32Formation Procedures: Registering th e Business ....................... 34Transerring Assets .........................................................................37Business Premises ......................................................................... 39

3 Financing a Business

Equity Financing .............................................................................. 44Debt Financing ................................................................................ 48Mezzanine Financing ...................................................................... 54O-Balance Financing .....................................................................57

4 Incentives Programs

Framework Conditions o Public Funding ......................................62Cash Incentives or Investments .................................................... 66Public Loans .....................................................................................69

Labor-Related Incentives ............................................................... 72R&D Incentives .................................................................................74

Table o Contents


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10 Investment Guide

1 Coming to Germany

Photo:AndreasWiese

Visa or Entrepreneurs

Visa or Employees

Visa or Partner and Children

Visa Application Process

Visa Requirements or Foreign Nationals


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Germany Trade & Invest www.gtai.com 1

Setting Up and Running a Business:

Visa or Entrepreneurs

Depending on the intended business activities in Germany, dierenttypes o visas are relevant to entrepreneurs: visas sucient or the

setting up o a business (Schengen Visas normally apply in this case)and visas required or running the business on-site (usually nationalvisas).

Setting Up a Business

Setting up a business requires several steps, depending on purpose,

unction, and the intended legal orm o the company. (For detailedinormation on how to set up a business in Germany, please reer tochapter two, Establishing a Company.)

For most o the activities in the ormation phase o your business, a

Schengen Travel Visa (in this context oten termed a business visa)is sucient. It enables its holder to stay in Germany or up to threemonths per hal year, during which time business activities can

be perormed. In principle, a Schengen Travel Visa (business visa)is required by all nationals outside the European Union (EU),European Economic Area (EEA), and Switzerland. Exemptionsexist or certain nationals rom a number o dierent countries.Detailed inormation on Visa Requirements or Foreign Natio-nals in Germany is provided at the end o this chapter.

What is needed when applying or a Schengen Travel Visa?

Schengen Travel Visa applicants (business visa applicants) willusually be asked to present certain documentation such as:

a letter o invitation by the German business partner documentation o employment and salary certicate a letter rom the applicants employer conrming the business

purpose o the trip proo o travel health insurance

Where the entrepreneur personally applies or a Schengen Travel Visa(business visa), documents such as a copy o the oreign companysentry in the oreign commercial register, articles o association, andbank statements rom the last three months may also be required.

At some point within the process o setting up a new companyin Germany, investors usually have to come to Germany in person.The ollowing chapter outlines visa options and explains generalprocedures or investors intending to set up and run their businessin Germany.

Generally, EU nationals do not require a visa to enter, stay, and workin Germany. They only have to register at the local registration oce

(Einwohnermeldeamt), which issues a declaratory residence permiti their stay in Germany exceeds 90 days.

Most non-EU nationals require a visa prior to entering Germany.However, there are exceptions or several countries outlined inthe ollowing chapters and in the Visa Requirements or ForeignNationals in Germany table at the end o this chapter.

Generally, visas are obtained in the investors home countryat a German embassy or consulate.

Decisive or the appropriate type o visa are length and purposeo the stay in Germany. For short-term stays in Germany or transitthrough Germany, Schengen Visas such as the Schengen TransitVisa and the Schengen Travel Visa are relevant.

For long-term stays (meaning stays exceeding 90 days) national visas

are usually required. There are a number o dierent national visasavailable, depending on the purpose o your stay in Germany.Investors require a residence permit or the purpose o sel-employment or employment (Auenthaltserlaubnis r selbststndigeTtigkeit oder abhngige Beschtigung) or a settlement permit

(Niederlassungserlaubnis).

Coming to Germany


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Coming to Germany

1 Investment Guide

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I business proceedings or setting up a company exceed a periodo three months per hal year, a national visa, namely a residencepermit or the purpose o sel-employment(Auenthaltserlaubnis rselbststndige Ttigkeit) is required. This visa also allows individualsto perorm all o the steps necessary to establishing a business inGermany as well as running the business on-site.

Please be aware that setting up a business in Germany using a

Schengen Travel Visa(business visa) does not alone warrant laterissue o a residence permit. It is recommendable to apply ora residence permit or the purpose o sel-employment in your

home country beore coming to Germany.

Running the Business On-Site

A residence permit (Auenthaltserlaubnis) is required by all oreignnationals rom outside the European Union, the European EconomicArea (EEA), or Switzerland who intend to stay in Germany or morethan 90 days. The residence permit is limited in time and issuedor a specic purpose (such as taking up work).

Anyone intending to run a business on-site in Germany is consideredsel-employed and has to apply or a residence permit or the purposeo sel-employment (Auenthaltserlaubnis r selbststndige Ttigkeit).The permit includes both the right o residence in Germany and thepermit to work in a sel-employed capacity and is issued as a singledocument by the responsible visa-issuing authority (generally theGerman Embassy or German Consulate General o the respectivehome country).

Foreign entrepreneurs are considered sel-employed

i they intend to hold positions such as:

entrepreneurs (including reelance activities) managing partners or employed managing directors (Geschts-

hrer) and representatives o a companys German branch oce(depending on the individual contract)

executive board members o stock corporations (AG) authorized signatories (Prokurist) senior executives with powers o representation majority shareholders o a GmbH

A residence permit or the purpose o sel-employment will usuallybe granted i at least EUR 250,000 is invested and at least ve new

jobs are created. Where these standard requirements are not met,a residence permit or the purpose o sel-employment may neverthe-less be granted. In such cases, the responsible local oreignersregistration oce (Auslnderbehrde) together with local Cham-bers o Commerce and Industry (Industrie- und Handelskammer, IHK) will assess the underlying business idea.

A (permanent) settlement permit (Niederlassungserlaubnis) isissued i a oreigner has been in possession o a residence permit

or ve years. A settlement permit is unrestricted in time and placeand automatically includes the right to take up gainul employment.Sel-employed oreigners may be granted a settlement permit ateronly three years i the oreigner has successully realized thebusiness idea and his or her livelihood is secured.

Being Employed in Germany: Visa or Employees

Citizens o the European Union, the EEA, or Switzerland can workin Germany without any visa1.

Nationals rom all other countries have to apply or a residencepermit or the purpose o taking up employment (Auenthaltserlaub-nis r abhngige Beschtigung) which contains both: the permit tostay and the permit to work in Germany. Foreign nationals no longer

have to apply separately or a work permit at the employment oce.The residence permit or the purpose o taking up employment

contains a statement as to whether and to what extent work will bepermitted.

Generally, a residence permit or the purpose o taking up employ-ment is only awarded where a concrete job oer can be demon-strated and the Federal Employment Agency (Bundesagentur r

Arbeit) has granted approval. However, there are some exceptionsrom this general rule as explained overlea.

1 EU citizens rom the new Eastern European EU member states Czech Republic,Estonia, Hungary, Latvia, Lithuania, Poland, Slovakia, and Slovenia (until 2011at the latest); and Bulgaria and Romania (until 2014 at the latest) still requirea work permit or non-sel-employed work in Germany. However,since 2009 thelabor market has been opened up to university graduates rom the new EU states.


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Coming to Germany

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Employment o Highly Qualied Foreigners

A residence title which permits a oreigner to take up employment mayonly be granted with the approval o the Federal Employment Agency.

Highly qualied persons may however be granted a permanentsettlement permit immediately upon coming to Germany without

approval o the Federal Employment Agency.

Highly qualied persons are dened as scientists with special tech-

nical knowledge active in teaching, scientic personnel in prominentpositions, and specialists and executive personnel with extensiveproessional experience and an annual salary o at least EUR 64,800(EUR 54,600 in the new ederal states) in 2009.

Unskilled and low-skilled oreign workers rom non-EU memberstates may generally not work in Germany this is reerred to as theRecruitment Ban (Anwerbestopp).

For a number o jobs requiring at least three years o proessionaltraining, the Federal Employment Agency can however grant approvalor oreign employees. This includes, or example, IT specialists,academics, executive sta, and internal company specialists.

Temporarily Posting Employees to Germany

There are dierent regulations allowing non-EU-based companiesto temporarily send employees to Germany without having to receive

the approval o the Federal Employment Agency.

For example, the approval requirement is not needed or certain

occupational groups posted or up to a total o three months withina twelve month period (the three month period does not have to beconsecutive).

An overview o dierent types o visas or Germany

and when they are needed:

Visa or Partner and Children

Family members o oreign nationals may be granted permissionto live in Germany i the oreigner possesses a settlement permit ora residence permit and i sucient living space is available.

Spouses o oreign nationals can or instance claim a residencepermit i the oreigner possesses a settlement permit or a residencepermit or the purpose o sel-employment. Additionally, themarriage must have already existed at the time the oreigner was

granted the permit and the duration o the oreigners stay isexpected to exceed one year. I the oreigner posseses a residence

permit or the purpose o economic activity (employed or sel-employed), the spouse may take up work as well. 1

I these requirements are not met, it is still possible or a residencepermit to be granted on a discretionary basis. Children (under18 years o age) o a oreigner can claim a residence permit i both

parents hold a residence permit or settlement permit, and i thechildren relocate to Germany with their parents.

1 Likewise, these regulations apply to all partners underthe German Civil Partnership Act (Lebenspartnerschatsgesetz).

Types o Visa

Schengen Visa

National Visa

Visa Required

Schengen Travel Visa(or business personsin the orm oa business visa)

Residence permit orthe purpose o sel-employment

Residence permit orthe purpose o takingup employment

Needed or

stays in Germanyor up tothree monthsper hal year

stays in Germanyexceedingthreemonths,with the intentiono taking up gain-ul occupation

Required or

Entrepreneurssetting upbusiness

Entrepreneursrunningthe businessin Germany

Employeesworkingin Germany

Source: Germany Trade & Invest


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Coming to Germany

1 Investment Guide

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Visa Application Process

What prerequisites need to be met or a visa?

When applying or a visa, oreign nationals are obligated to provethat they have:

a passport valid or another three months ater leaving Germany documents veriying the intended purpose o the stay in Germany a health insurance policy valid or all Schengen states providing

medical coverage equivalent to the value o at least EUR 30,000

(including return transportation) sucient nancial means to cover all costs o the trip to and stay

in Germany

Where to apply or a visa?

For most oreign nationals, visas have to be obtained prior toentering Germany in their respective home country. The Germanmissions abroad (German Embassy or German Consulate General)are responsible or receiving applications and issuing the visa. They

provide visa application orms in various languages ree o charge.

To acilitate the application process, Germanys Federal Foreign Oce(Auswrtiges Amt) also provides online application orms in a numbero languages. Applications or short-term visas (Schengen visas) orup to three months may also be submitted online via the applicationservice o the Federal Foreign Oce.

www.auswaertiges-amt.de

Who will issue the visa?

Visas are issued by the German mission abroad in the country wherethe visa application has been made. Foreign nationals applying ora residence permit to take up sel-employment or employmentreceive the permission to enter Germany and to take up work romthe German mission abroad.

However, upon entering Germany, oreign nationals with a nationalvisa o this type (residence permit or the purpose o taking up sel-employment or employment) have to contact the responsible local

Foreigners Registration Oce(Auslnderbehrde) in Germanywhich issues the residence permit or gainul occupation.

Some oreign nationals may enter Germany without any visa(These exceptions are outlined in the table Visa Requirements

or Foreign Nationals in Germany at the end o this chapter).Any required visa permitting work (sel-employed or employed)can be applied or and issued by the local Foreigners RegistrationOce in Germany.

How long does it take to issue a visa?

A visa or a short-term stay (Schengen Travel or Schengen TransitVisa) will usually be issued within around two to ten working days.

For visas permitting the holder to work (sel-employed or employed)in Germany, a processing time o a ew months should be expected.Embassies and Consulates General charge a handling ee o EUR 60

or Schengen Visas, national visas, and hybrid visas (Schengen andnational visas) respectively.


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Coming to Germany

20 Investment Guide

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1 Although Switzerland is not a member o the EEA, these visa regulations also apply to citizens o Switzerland.

2 These transitional rules will cease by 2011 at the latest (Bulgaria and Romania: 2014).However, since 2009 the labor market has been opened up to university graduates rom the new EU states.

3 Here, a special regulation or entrepreneurs rom outside the EU or EEA (European Economic Area) applies.A residence permit or the purpose o sel-employment can be converted to a permanent settlement permitater three years.

4 Simplied option or highly qualied persons: special approval allows a settlement permit to be grantedimmediately, which means that they can stay and work in Germany unlimited without having to applyor any other kind o visa or residence title.

Visa Requirements or Foreign Nationals in Germany

For more inormation on entry requirements please contact theFederal Foreign Oce (Auswrtiges Amt) which provides a detailed

list o Germany entry requirements or nationals rom all countries.

www.auswaertiges-amt.de


Citizens o

Austria, Belgium, Cyprus, Denmark,Finland, France, Greece, Ireland,Italy, Luxembourg, Malta,Netherlands, Portugal, Sweden,Spain, United Kingdom

Bulgaria, Czech Republic, Estonia,Hungary, Latvia, Lithuania, Poland,Romania, Slovakia, Slovenia

Iceland, Liechtenstein, Norway, Swit-zerland1

Argentina, Australia, Brazil, Canada,Israel, Japan, Mexico, New Zealand,South Korea, United States,and 19 other states

All other states

Who stay in Germany

< 90 days

> 90 days

< 90 days

> 90 days

< 90 days

> 90 days

< 90 days

> 90 days

< 90 days

> 90 days

States

EU member states

Non-EU memberstates but mem-bers o the EEA

Non-EU memberstates

Visa requirements Who needs what?

To set up a business

No

No

No

No

No

No

No

Residence permit or the pur-pose o sel-employment

Schengen Travel Visa(business visa)

Residence permit or thepurpose o sel-employment

To run the business on-site

No

No

No

No

No

No

Residence permit orthe purpose o sel-employment3




Who will be employed in Germany

No

No

A work permit is still required.2

A work permit is still required.2

No

No

Residence permit orthe purpose o taking up work4





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22 Investment Guide

Photo:GettyImages

The Legal Form: Corporations

The Legal Form: Partnerships

The Establishment Form: Branch Oces

Formation Procedures: Registering the Business

Transerring Assets Business Premises

2 Establishing a Company


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Establishing a Company

2 Investment Guide

2


Private Limited Liability Company (GmbH)

The German private limited liability company (GmbH) is the mostwidely used legal orm or corporations. It combines high fexibilitywith relatively ew obligations. Since November 1, 2008, a reorm othe GmbH Act (acilitating the establishment and running o a GmbH)has become eective. The reorms main achievement is theestablishment o a new category o limited liability company, the

limited liability entrepreneurial company (Unternehmergesellschat,(hatungsbeschrnkt)), or Mini- GmbH.

The minimum share capital required to establish a GmbH isEUR 25,000 (this can also be made up o contributions in kind).The ormation procedure o a GmbH is airly uncomplicated, as itis established by the ounding shareholder(s) executing a deedo ormation and articles o association in the presence o a notary.

For uncomplicated standardized ormations o a GmbH, the modern-ized GmbH Act provides model articles o association (or set-ups bycash subscription with a maximum o three shareholders and onemanaging director). These articles must still be notarized, but or areduced ee. Furthermore the chambers o industry and commerce(Industrie- und Handelskammer, IHK) provide model articles.

At the time o registration, at least hal o the minimum capital(i.e. EUR 12,500) must be actually and veriably contributed on abank account.

In order to be valid, the GmbH must be entered into the commercialregister (Handelsregister). Please continue or a detailed description

on how to register with the commercial register.

All managing directors (Geschtshrer) must sign the commercial

register application in person in the presence o a notary.

Once registered in the commercial register, the GmbH becomes alegal entity. The GmbH must then be registered at the local trade oce(Gewerbeamt, please see table overlea).

Anyone can establish a business in Germany irrespective o national-

ity or place o residence. There is no specic investment legislationin Germany, nor is there a minimum percentage o German sharehold-ings required or oreign investments within Germany.1

Formation procedures are swit and ecient, with only a ew stepsneeded to establish a company in Germany.

Foreign investors can choose between several types o corporationsand partnerships or conducting business in Germany. Existing oreigncompanies can also conduct business via a German branch oce.

In the ollowing sections some o the dierent legal orms o compa-nies and ways o establishing the business in Germany are discussed.

1 There are restrictions or the deense and cryptology sectors. Further extensions arecurrently under discussion. For more inormation please reer to the section on ForeignTrade and Payments Act (Auenwirtschatsgesetz) in chapter seven (The Legal Framework).

The Legal Form: Corporations

When choosing the legal orm o the company, a corporation is

usually the best option or larger, established companies.There are three major orms o corporations under German law:

Limited Liability Company(Gesellschat mit beschrnkter Hatung, GmbH)

Limited Liability Entrepreneurial Company(Unternehmergesellschat (UG), hatungsbeschrnkt/ Mini GmbH)

Stock Corporation

(Aktiengesellschat, AG) Partnership Limited by Shares

(Kommanditgesellschat au Aktien, KGaA)

A corporation is a legal person, meaning that the holder o rights andobligations is not the individual shareholder, but the company itsel.The company itsel concludes contracts, possesses assets and mustpay taxes.

Liability is limited to the corporations business assets, includingshare capital. A minimum share capital is required, and the account-ing obligations are more extensive than those or other businesslegal orms (such as partnerships).


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2 Investment Guide

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Limited Liability Entrepreneurial Company (Mini GmbH)

As a result o the reorm o the GmbH a new category o limited liabil-ity company, the limited liability entrepreneurial company (Unternehm-ergesellschat, (hatungsbeschrnkt), UG) or colloquial Mini-GmbHwas established.

The Mini-GmbH is not a new legal orm o company, but a GmbH

which has a minimum capital o less than EUR 25,000 and wherecash subscription is required. This means that it is possible toset up a company with limited liability in Germany with capital o

only one euro.

In order to compensate the initial absence o capital the companyhas to retain a quarter o its annual prot until it has accumulatedthe minimum shareholder capital o an ordinary GmbH (EUR 25,000).

The accumulated capital can then be converted into share capitaland the Mini-GmbH changed into a standard GmbH.

Except or the above-mentioned specic provisions the Mini-GmbH,by terms o law, is generally subject to the same duties and rightsas the standard GmbH.

Stock Corporation (AG)

An AG generally enjoys a high market reputation among businesspartners. However, the ounding ormalities and costs o an AG arerelatively high, and the AG is subject to extensive organizationalobligations in day-to-day business.

In principle, an AG can be established by any individual. Generally

speaking, there are only two ounding obligations to be observed.First, an AG must have a minimum share capital o EUR 50,000(which must be ully subscribed by the ounding shareholders) andarticles o association need to be certied by a notary.

The AG comes into existence upon registration in the commercialregister. The application must be signed by the ounding share-holders, the members o the supervisory board, and the manage-

ment board beore a notary. In addition, an AG must be registeredwith the local trade oce as is also the case with GmbHs.

Steps Needed to Set Up a GmbH in Sequence

Step 1: Procurement o capital and partners

Step 2: Notarization o the Articles o Association

Step 3: Opening a bank account and payment o share capital

Step 4: Commercial register application (notary required)

Step 5: Commercial register entry

(limitation o liability comes into eect)

Step 6: Trade oce registration(i necessary application or permits etc.)

A GmbH is managed and legally represented by its managing direc-tors. There must be at least one managing director who does not haveto be a shareholder or a German resident. By issuing binding instruc-tions or directions to the managing directors, the shareholders mayexercise direct infuence on the management o the GmbH.

The estimated total costs or the ormation o a standard GmbHare approximately EUR 750 to EUR 1,000 plus ees or legal counseli a lawyer is employed to draw up the articles o association.Ideally, the time period required or the ormation o a GmbH istwo to three weeks.


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The Legal Form: Partnerships

The main eature o a partnership is the personal commitment o thepartners to their working eorts to the partnership. Any partnershiprequires at least two partners.

The liability o the partners or the partnerships debts and liabilitiesis generally unlimited and personal. No minimum share capital isrequired, and the accounting obligations and publication requirementsare less extensive than those or corporations.

There are ve dierent orms o partnerships. Their main dierenceslie in the liability o their partners and required registration obliga-tions.

Civil Law Partnership(Gesellschat brgerlichen Rechts, GbR)

General Commercial Partnership(Oene Handelsgesellschat, oHG)

Limited Partnership(Kommanditgesellschat, KG)

Corporate Partnership(GmbH & Co.KG)

Partnership Company(Partnergesellschat, PartG)1

1 This company orm has been specically designed or the joint exercising oproessional reelance activities. It is not urther explained in this publication.

The ounding shareholders appoint the rst auditor (Abschlussprer)and supervisory board (Ausichtsrat), which in turn appoints the rstmanagement board (Vorstand). The appointment o the rst auditorand supervisory board must be notarized. The ounding sharehold-ers must also prepare a ormation report with the relevant details othe establishment o the AG. This report has to be scrutinized bythe boards.

The AG is managed by its management board. Neither supervisoryboard nor shareholders can exercise direct infuence on themanagement board.

Partnership Limited by Shares (KGaA)

The partnership limited by shares (KGaA) combines the structures

o a stock corporation (AG) and a limited partnership (KG). It connectsthe entrepreneurial commitment and personal standing o the indi-vidually liable shareholders (general partners) with the unction o theAG as a public company and source o capital. The KGaA can be des-cribed as a stock corporation having individually liable shareholders(general partners) instead o a management board.

The KGaA can have an unlimited number o capital investors (limited

shareholders), whose liability is limited once they have paid theirsubscribed capital contribution. They have more or less the samelegal rights as shareholders in an AG. At least one partner, thegeneral partner, has to be liable or debts and liabilities o the KGaAwithout limitation. The KGaA must be entered into the commercialregister and registered with the local trade oce. The KGaA is not

a requently used legal orm in Germany.


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Civil Law Partnership (GbR)

A civil law partnership (GbR) is dened as an association o individualsor enterprises united in the achievement o a joint contractualpurpose. It is suitable or start-ups launching a business idea incooperation with others.

Formation o a GbR is airly uncomplicated. At least two partners must

agree on the establishment o the GbR and conclude a partnershipagreement. A written partnership agreement is recommended, but isnot compulsory. The partners are jointly liable with their private assets

or debts incurred by the company. I the GbR conducts trade in theorm o a small trade business, it has to register with the local tradeoce. It must not be entered into the commercial register.

A GbR is only allowed to conduct small trade business. As soon

as it achieves an annual turnover o over EUR 250,000 and a prot overEUR 25,000 it is deemed to be a commercial business and must beentered in the commercial register upon which it automaticallybecomes a general commercial partnership (Oene Handelsgesell-schat, oHG).

General Commercial Partnership (oHG)

The general commercial partnership (oHG) is the classic partnership

orm or small and medium-sized businesses. Its structure corre-

sponds to the civil law partnership (GbR). Every GbR that runs

a commercial enterprise (a business enterprise o a type or size

requiring business operations to be set up in a commercial manner)

automatically qualies as an oHG. Accounting regulations or an oHGare stricter than those or a GbR.

In order to establish an oHG, two or more partners must conclude a

partnership agreement. It is advisable or the partnership agreement

to be made in writing. All partners are jointly and severally liable or

the oHGs debts and liabilities.

The oHG must be entered in the commercial register and registered

with the local trade oce. The application to the commercial register

must be made by all partners and be certied and led by a notary.

The total expenses or registration vary, but generally a cost o

approximately EUR 400 can be expected.

Limited Partnership (KG)

The limited partnership (KG) is a legal orm related to the oHG,but with the option o limiting the liability o some o the partners.This legal orm is suitable or medium-sized companies seekingadditional start-up capital but wishing to limit individual responsibility.

At least one partner, the general partner (Komplementr), is

personally liable without limitation. The liability o the limitedpartners (Kommanditisten) is limited to their respective share o thepartnership capital. A KG oers greater fexibility compared to other

orms o partnerships as the capital base can be increased byincluding additional limited partners.

A KG is established when a partnership agreement between two ormore partners (including at least one limited and one unlimited

partner) is concluded. It is advisable or the partnership agreementto be made in writing. The liability o the limited partner will onlybecome limited once the registration o the KG and the subscribedpartnership contribution has been entered in the commercialregister (which is obligatory).

The application to the commercial register must be made by allpartners and be certied and led by a notary. The total costs or

registration vary, but EUR 400 can be used as a general guideline.A KG must then be registered with the local trade oce.

Corporate Partnership (GmbH & Co. KG)

The GmbH & Co.KG is a limited partnership (KG) in which the generalpartner (Komplementr) is a limited liability company (GmbH). TheGmbH is ully liable or the GmbH & Co. KGs debts and liabilities.

The liability o the limited partners (Kommanditisten) is limited totheir respective share o the partnership capital.

This hybrid orm is suitable or entrepreneurs wishing to limit theirliability while enjoying the fexibility o a non-incorporated business.Because o its fexibility, the legal orm GmbH & Co. KG is especiallyappropriate or medium-sized businesses and amily companies.


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Formation Procedures: Registering the Business

Generally speaking, your business in Germany must be registeredwith the commercial register (Handelsregister) and the local tradeoce (Gewerbeamt).

With the exception o civil law partnerships, reelance proessionals,and dependent branch oces, all other previously mentionedestablishment orms have to register with the commercial register.

Any business must then be registered with the local trade oce(Gewerbeamt) o the municipality in which the business is located.This applies to every company regardless o its company orm(except reelance proessionals).

Entry in the Commercial Register

The commercial register is administered by the local courts (Amts-gericht) and ensures legal certainty in trade by providing a recordo all current and legal business relationships. The register can beinspected ree o charge at the local court. Since 2007, the com-mercial register has been converted into electronic orm.

The commercial register provides inormation on all legally relevantacts that might be important or a business partner o a business

person or company. This includes, or example:

Company name Name o the owner and/or o the personally liable partners

o a partnership Liability o the limited partners Share capital o the GmbH

Granting and withdrawal o general powers o attorney (Prokura) Institution o bankruptcy proceedings De-registration o the company

Any application or entry into the commercial register must besubmitted by a German notary in certied and electronic orm.I a company is legally required to be registered, but takes upbusiness operations beore being entered in the commercialregister, the partners are personally liable or any losses up tothe point o registration. This also applies to both GmbH andAG company orms.

The cost or registration and publication in the commercial registeror a partnership is currently EUR 250 minimum. For a GmbH,this amount is at least EUR 400, and or an AG at least EUR 500.

Additional costs are incurred through the use o a notary.

The Federal Chamber o German Civil Law Notaries (Bundes-notarkammer) provides a register o German notaries.

www.deutsche-notarauskunt.de

In 2007 an electronic company register (Unternehmensregister) wasintroduced. Certain data rom the commercial register are compiledcentrally in this register. This inormation can be retrieved onlineat the company register website.

www.unternehmensregister.de

The electronic company register is or inormational purposes only.It does not release the companies rom their continued obligation

to le notarized registrations with the commercial register.

Entry in the Trade Register

Every company regardless o its company orm1 is obliged toregister with the local trade oce (Gewerbeamt) o the municipalityin which the business is located.

A business license or permit is not necessary or registering thebusiness in the majority o cases. For some business sectors,a permit or authorization might be required (e.g. insurance compa-nies and manuacture o medicaments).

1 Except or reelance proessionals.


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The ee or entry into the trade register or business activities notrequiring a license is between EUR 20 and EUR 40. The ee orbusinesses requiring a license depends on the sector the businessis operating in.

Some business activities might require a cratsmens card (Hand-werkskarte). The German Trade and Crats Code (Handwerksordnung)classies business activities which require a cratsmens card.

Business activities and occupations which need a cratsmens cardare, or example, bakers, carpenters, and precision engineers.

A cratsmens card is issued by the local chamber o skilled crat(Handwerkskammer).

The trade oce generally orwards the registration to the taxauthority, the regional association o proessional trading associa-

tions, and the chambers o industry and commerce (Industrie- undHandelskammer, IHK) or the chambers o skilled crats . Chambermembership is automatic and mandatory.

Tasks perormed by the chambers in Germany:

representing the interests o their member companies in dealingswith the government

taking on interim and nal examinations or employee training drawing up reports or courts and authorities regarding or

instance company names

The costs or chamber membership are based on the companysturnover.

Transerring Assets

It is advisable that anyone who runs a business in Germany also hasa bank in Germany to quickly organize day-to-day business activi-ties. Almost all large international banks have oces in Germanyand it is also easy to have oreign currency accounts.

To open a private bank account you generally must have a validpassport and written conrmation that Germany is your current placeo residence rom the local registration oce (Einwohnermeldeamt).

For a company bank account, the requirements depend on the legalorm o the company. In addition to a valid passport you will generallyneed an excerpt rom the Commercial Register and the articles oassociation o the company.

Capital

Capital can be moved in and out o Germany without any restrictions.However, amounts over EUR 12,500, or equivalent payments withvaluables, must be reported to the German Central Bank (Bundes-bank). These reports are or statistical purposes only. Forms can beobtained rom the Bundesbank.

Reporting obligations or money transers rom abroad depend on theplace o residence o the recipient/addresser: nationality is irrelevant.

A person or company with a place o residence or business inGermany must report incoming and outgoing payments rom abroador all transactions over EUR 12,500. Alternately, an investor with aplace o residence abroad does not have to register a capitaltranser to an account in Germany (even i the investor is the accountholder).

Payments or the import or export o goods and details in connectionwith the granting, taking out, or repayment o loans with an origi-

nally agreed term o less than twelve months do not have to bereported. For statistical purposes, every person living in Germanyand every company located there must also inorm the Bundesbanko the ownership o securities or deposit accounts abroad.


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Receivables or liabilities rom companies (or example, banks)or private individuals abroad must be reported to the Bundesbanki they amount to more than EUR 5 million or equivalent.

For bank account deposits o more than EUR 15,000 cash, banks arerequired to check the identity o the depositor in order to preventmoney laundering.

Goods and Machinery

Goods and machinery can circulate reely within the EU. Customs,import turnover tax (Einuhrumsatzsteuer) , and in some cases, specialexcise taxes are charged or imports to Germany rom non-EU states.The customs payable can be determined online using the TARIC(Integrated Tari o the European Communities) database. Customs

are not charged on investment goods i business operations have beentranserred in ull to Germany. For more inormation, please reer tothe section on customs in chapter six (The Tax System).

http://ec.europa.eu/taxation_customs

Household objects can also be imported into Germany reely i theowner moves place o residence rom abroad to Germany. A customsexemption o this kind must be applied or in writing beorehand.

Business Premises

Publicly owned industrial real estate or sale is administered bythe state development agencies o the German states (Wirtschats-rderungsgesellschaten der Lnder). A list o all 16 agencies isprovided in the annex o addresses.

The Federal Property Administration (Bundesanstalt r Immobilien-augaben) also administers publicly owned properties or sale.

www.bundesimmobilien.de

In addition, suitable business premises (or rental or or purchase)can be easily ound via ads in daily regional newspapers, onlinemarkets, or rom brokers.

There is oten room or negotiation when purchasing real estatein Germany. As with elsewhere in the world, decisive price actorsinclude location, equipment, building condition, nancing costs,

and any additional costs one might reasonably expect to incur.There are certain ees incurred when renting, purchasing or buildingreal estate. Please see the table overlea or an overview o addi-tional costs occurring when purchasing real estate.

When purchasing real estate, expert advice o a real estate special-ist should be sought prior to conclusion o the purchase agreement.This is because the purchasers rights regarding deects o the saleobject are typically restricted when purchasing second hand real

estate. Accordingly, the buyer can, when the purchase agreement

already has been concluded, only in exceptional cases assert a claim or example, in cases where the seller has ailed to discloseessential deects.

www.ivd.net


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Fee

Real Estate AgentsCommission Fee

Appraisal Fees(Bewertungsgebhr)

Notary Fees(Notargebhren)

Fees or Courtand Land Registry

Surveyors Oce Fees(Gebhr r Landvermessung)

Real Estate Transer Tax(Grunderwerbsteuer)

Rent/ Purchase/New Building

Renting

Buying

Buying

Purchase orNew Building


New Building


Paid by

Tenant

Varies increasingly commonor the seller to pay part o thecommission

Buyer

Buyer/Builder

Buyer/Builder

Builder

Buyer/Builder

EUR 100,000 Property (Example)

EUR 5,000 6,000

EUR 1,000 1,400

EUR 1,000

EUR 300

EUR 3,000 5,300(only i buildings have not yetbeen constructed)

EUR 3,500

Exemplary Additional Costs Overview when Purchasing Real Estate

Source: Germany Tade & Invest

Amount to be Paid

One to two months rent

5 6 percent o the purchase price(generally negotiable)

Governed by the ederal ee regulationor architects and engineers (Honorarordnungr Architekten und Ingenieure, HOAI)

One percent o the purchase price, based onnational cost regulation or notaries

0.3 percent o the property valueplus value added tax (VAT)

Depending on building costs, regulatedby the ederal ee regulation or architectsand engineers

3.5 percent o the purchase price(not reimbursed upon selling)1

1 Exempt or the cities o Berlin and Hamburg where the tax rate amounts to 4.5%.


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Photo:WojtekKryczk

aistockphoto.com

3 Financing a Business

Equity Financing

Debt Financing

Mezzanine Financing

O-Balance Financing


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Financing Instrument

Equity Financing

Debt Financing

MezzanineFinancing

O-BalanceFinancing

Real equity

Incentives

Loans

Equity orientedLoan oriented

Alternativeormso nancing

Share oTotal CapitalExpenditure

25 30%

25 30%

30 50%

5 10%

With the provision o money, shareholders usually acquire certaincompany rights which can range rom controlling and participatingrights to a share o prots.

Apart rom these equity orms, money resulting rom public undingto promote investment projects in Germany (usually in the orm ocash incentives) is also considered equity by nancial partners.

Business Angels

Business angels are wealthy individuals, oten sel-made and withconsiderable business background and industry expertise, whoallocate some o their resources to invest knowledge and seedmoney in new ventures.

During a companys seed phase, business angels are oten the onlysource o external nancing or a project. For rst-time entrepre-neurs and young companies, it is almost always easier to raise moneythrough angels than it is through traditional venture capital rms.

This start-up support provides the entrepreneur with enough capitalto und initial product development and sales so that the companycan later raise additional capital through other sources.

Business angels also oten act as mentors by tapping into anextensive, worldwide network to help nding customers and otherbusiness partners or an investment project.

Venture Capital

Venture capital (VC) is oten required or the nancing o high-tech,

high-risk projects. VC is provided by VC companies who manageunds rom private, institutional, and public investors.

Generally, VC und investors accept a higher risk o ailure than isnormally the case or other more conservative investments. This isbecause young companies rarely have signicant assets or revenuehistory. In return or taking on this risk, VC companies expect torecoup their investment as a result o increased market potential

resulting rom a perceived unique selling proposition.

There are a number o dierent models or nancing investment

projects. All include dierent instruments and sources o unding.

Most nancial partners usually require a combination o equityand debt instruments.

Equity Financing

When nancing investment projects, possible nancial partnersusually require a share o equity o at least 20 to 30 percent. In mostcases, start-ups have to rely solely on nancing through equity.

Equity can result rom a companys own business activities or is ac-

quired by nding new shareholders. Most commonly capital is thenraised through:

business angels venture capital

private equity an Initial Public Oering (IPO) which is the rst public sale o

shares on the stock exchange by a private company


An overview o nancial instruments or nancing investment projects:

Form

Own unds,private equity

Cash grants

Long-term loan,working capital acility

Silent partnership,subordinate loan

Leasing, actoring,Asset-Backed-Securities


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The German Private Equity and Venture Capital Association (Bundes-verband Deutscher Kapitalbeteiligungsgesellschaten e.V., BVK) and theGerman Equity Forum (Deutsches Eigenkapitalorum) are good startingpoints or identiying the appropriate private equity partner.

Initial Public Oering (IPO)

The IPO is the rst time a company approaches the public capitalmarket to nance its business by selling shares at the stockexchange. IPO provides the right option or companies wishing

to avoid dependency on a select ew private investors.

There are two ways to gain access to capital markets in Germany:

The Regulated Unocial Market or Open Market (Freiverkehr),oers an appropriate rst entry point or small or recently oundedcompanies.

The Regulated Market (Amtlicher Markt), governed by EU regula-tions, requires higher entry, reporting, and transparency stan-dards.

German Stock Exchanges

Germanys most established stock exchange is the Frankurt StockExchange (Frankurter Wertpapierbrse FWB), which is the thirdlargest in the world. In addition, there are regional exchanges whichconcentrate on local or sector-specic markets:

Berlin & Bremen Stock Exchange (Brse Berlin-Bremen)

Stuttgart Stock Exchange (Brse Stuttgart) Hamburg & Hanover Stock Exchange (Hamburger Brse) Munich Stock Exchange (Brse Mnchen) Dsseldor Stock Exchange (Brse Dsseldor) Commodity Exchange Hanover (Warenterminbrse Hannover) European Energy Exchange Leipzig

VC participation is limited to a specied period o time, at the end owhich the VCs cash out by selling their shares and realizing protat a margin o between twenty to thirty percent. These shares areusually sold as part o an initial public oering (IPO) the rst saleo stock by a company to the public . Where an IPO is unrealistic orholds little promise, VC companies can realize their shares through aso-called trade sale: the selling o shares to another company.

Companies can approach VCs directly to apply or VC money.In Germany, the appropriate nancial partner can be ound throughthe German Private Equity and Venture Capital Association (Bundes-

verband Deutscher Kapitalbeteiligungsgesellscha ten e.V., BVK).Special conerences and events like the German Equity Forum(Deutsches Eigenkapitalorum) provide an opportunity or youngenterprises to come into direct contact with VC companies.

www.bvk-ev.de

www.eigenkapitalorum.com

Private Equity

Private equity is privately traded capital provided by private equitycompanies nanced by institutional unds (e.g. pension unds) and

private investors. As a broader term it also comprises venture capital.

Private equity, in the literal sense, is an appropriate instrumentor established and growing companies. Private equity rms usuallyconcentrate on companies with a sales threshold in excess oEUR 20 million. For deals above EUR 50 million, the market proveshighly competitive.

Like venture capital companies, private equity companies provide

unding to a company or a xed period (usually three to sevenyears). The participation o a private equity rm is oten concludedby a trade sale (i.e. the selling o shares to another company).


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Investment Loans

The main debt nancing instrument or a project is the investmentloan. The preerred loan duration is seven years with a one yearrepayment holiday (1+6); the usual maximum period is ten years witha two year repayment holiday (2+8). Interests are charged onan annual or semi-annual basis.

Creditors, mainly banks, always require securities against a risk odeault o payment. Fixed assets will usually serve as the rst sourceo security. Inventory and receivables can be used as collateral pri-

marily or working capital acilities. As well as the above-mentionedsources o collateral, shareholder guarantees (recourse) are otenrequired as a means o reducing the banks credit risk.

Bridge Loans

Bridge loan nancing becomes necessary when a company has tobridge a deerred nancial infow, which usually results in a nancialgap. Generally, such gaps ollow rom having to pre-nance orders,or rom time-shited payments o incentives.

Interest rates or bridge loans are avorable because the company

assigns the claim to the bank.

Working Capital Loans

Working capital loans, including overdrat acilities, provide liquidity

or day-to-day business activities. They nance the stock o goodsand reserve stock, payment deadlines, and the exploitation osupplier discounts.

Working capital loans are adapted per annum. The interest ratesdepend on the level o loan utilization and the period o usage.The level o the overdrat amounts to a certain percentage o thenet working capital.

Cash Incentives

Investors can call upon a wide range o public unding in Germany.There is a large selection o programs available which are designedto support business activities at all stages o the investment pro-cess.

One o the main instruments are cash incentives usually provided inthe orm o grants. Promotion rates can account or up to 50 percent

o investment costs. They are usually regarded as equity by nancialpartners.

Other public unding instruments, such as interest reduced loans,are usually debt oriented.

For urther inormation on how to prot rom incentives in Germany,please reer to chapter our (Incentives).

Debt Financing

Debt nancing is a central nancing resource and the classic supple-ment to equity nancing in Germany. It is available or day-to-day busi-ness (working capital loans), can help bridge temporary nancial gaps(bridge loans) or nance long-term investments (investment loans).

The main dierences in comparison to equity nancing are:

Time limit

Payment o interests and amortization unlinkedto the earnings trend

No transer o shares to the creditor No liability o the creditor Preerred repayment in case o insolvency

Debt is mainly provided by banks. In Germany, universal banks oerthe whole range o nancial services. In addition, there are alsospecial banks ocusing on specic products or clientele.


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Annual nancialstatements

Exemplary rating process

or determining an investors creditworthiness:

Borrowers Credit Rating Model

Forecasts

Balance sheetpolicies

Liquidity score/annual nancial statements

Liquidity score/orecast

Quantitative rating

Liquidity issues

Management

Value added

Company environment

Annual nancial

statements rating

Liquidity rating

Qualitative rating

Source: IKB AG

Credit Rating

The availability o debt depends on the deault risk o a companyor an investment project. This is usually determined through a creditrating o the debtor. Banks conduct these ratings themselves orrequire external ratings rom private rating agencies.

The creditor grades the debtor according to a set o certain cri-

teria. The procedure results in an investment grade describing therisk associated with the company or project and determining themargin associated with that risk. Accordingly, pricing is determined

risk adequate. For companies receiving a so called non-investmentgrade credit rating, debt nancing is usually not available.

Although rating criteria are more or less the same, each bank hasits own rating process, where all nancial data (e.g. annual nancial

statements, liquidity, nancial structure) and qualitative actors(e.g. balance sheet policy, market potential, management, economicramework) are analyzed.

A company applying or debt has to be aware that this nancialinstrument deteriorates its equity ratio which may worsen the creditrating or subsequent nancing.

Premium/discount


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Financing by a Consortium

Financing by a consortium reers to the participation o severalbanks in structuring a nancing package. Usually one o the banksacts as the lead arranger and serves as the primary negotiationpartner o the company. The other banks, known as underwriters,are invited by the lead arranger to participate in nancing.

Financing by a consortium, also known as syndication, entails com-bining loans with dierent terms and conditions rom multiple banks(known as a syndicated loan). The result is structured nancing

with xed terms and conditions. The portolio can consist o:

t ypical amortizable loans loans being repaid at the end o maturity mezzanine capital

working capital acility

Financing by consortium has the advantage o stability and fexibilityover single bank nancing, but can also result in potentially highermargins, complexity, and a longer approval waiting time.

Corporate Financing vs. Project Financing

When a company applies or a loan at a bank, the bank rst o allhas to determine who is liable or paying interest, amortizationand providing securities. Based on this, the bank generally makesa distinction between corporate nancing and project nancing.

Corporate nancing requires the payment o interest and amorti-zation by the company itsel. The credit rating ocuses only on

the company, its repayment history, and its ability to earn prot.

Project nancing is based upon a more complex nancial structure.Generally, a special purpose entity is created or each project,which shields other assets owned by a project sponsor in case oailure particularly i the project company is considered to haveno assets other than the project.

The German HausbankConcept

The Hausbank (literally house bank) concept is unique in Germanyand reers to a companys primary banking institution. This termis derived rom the longstanding tradition o companies in Germanyhaving a strong nancial relationship with one particular bank.

In addition to lending and corporate nancing, the Hausbank supportsthe day-to-day business activities o a company through electronic and

international banking services, receivable management, and treasuryactivities. Special services include rating, advisory, and application

support or public unding.

Today the importance o having one specic Hausbank has begunto diminish in Germany; particularly or larger companies who otenpreer a relationship with several banks or to secure nancial sup-port through a consortium.

Nevertheless, the Hausbank still plays an important role with regardto the procurement o public unding. During the application proce-dure, authorities require a signed bank statement stipulating totalproject nancing. From this point onward, the bank is responsible oradministering incentive payments and reporting requirements.Should the company require a public guarantee, the bank acts as theapplicant.

The Hausbank does not need to be a German bank. For nancingpurposes, and or practical reasons, a subsidiary o a oreign bankin Germany is sucient. For all incentive-related tasks and servicesthe bank must be German or have at least a German subsidiary

and has to be accredited by the German government (as is generallythe case or most banks).


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Hence, project nancing is preerred i project sponsors wish tosignicantly reduce their liability or i a young company is not able toproduce a sucient repayment and prot earning history.

Risk identication and allocation is an essential element o projectnancing. The possibilities or minimizing risks and thus increasingthe chances o securing nancing are greater when:

dealing with established technologies; a large or growing or sucient market or the products or services

can be identied;

contracts with customers and suppliers exist; robust projected cash fows rom the investment can be expected,

determined through massive stress testing; an experienced management team with the relevant technological

and commercial skills is in place.

Mezzanine Financing

Mezzanine capital represents an intermediary between equity anddebt in a companys balance sheet. It is a broad nancial term thatreers to unsecured, high-yield, subordinate debt or preerredstocks. Dierent orms o mezzanine capital are classied as equityor debt according to three actors:

duration o the capital commitment

loss-sharing conditions o compensation

The table overlea illustrates several orms o mezzanine capitaland their respective categorization as either debt or equity. Varia-tions may occur due to dierent accounting rules such as Interna-tional Financial Reporting Standards (IFRS) and German AccountingRules (Handelsgesetzbuch, HGB).

Forms o mezzanine capital and their categorization as equity or debt:

Due to increased credit risk, mezzanine capital is a relatively expen-sive source o company nancing. For this reason, it is most appropri-ate or nancing growing companies with high protability.

One reason a company might preer mezzanine capital is to maintainits equity-ratio, as even loan-oriented mezzanine instruments areoten valued as commercial equity.

Mezzanine capital is mainly oered by banks, especially when it

comes to debt-related products. In return, private equity rms ocuson equity-related instruments.


Mezzanine

forms

SubordinateLoan

Silent Partner-ship (typical)

ParticipationRight(Genussschein)

ConvertibleBonds

Silent Partner-ship (atypical)

Duration

in Years

3-10

5-10

5-10

5-10

5-10

Loss Sharing

No, butsubordination



Beoreconversion:subordinationAter conver-sion: yes

Yes

Compensation

Fix

Fix and variable(dependent on proft)

Fix or variable

Fix and conversionrights

Fix and variable(dependent on proft)

Recognition on theBalance Sheet

Debt

Debt or equity, depen-ding on the contract

Generally debt, equityin case o subordina-tion and loss sharing

Equity aterconversion

Equity

Taxable Debt

Yes

Yes

Yes, i noliquidationgain sharing

Beoreconversion

No


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Investment Guide

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Example: Silent Partnership

In Germany, one o the classical orms o mezzanine nancing isthe silent partnership. The silent partner contributes a share o thecapital and obtains a share o the prot in return. The participationin losses is typically limited to the capital contribution.

There are two main types o silent partnership,

the typical silent partnership and the atypical silent partnership:

The typical silent partner does not infuence the management o

the company and expects a minimum rate o return on a regularbasis (usually yearly).

By comparison, participation in management and risk is an inherentpart o the atypical silent partnership, and or this reason, theatypical silent partner demands an extraordinary return.

The typical silent partnership is widely used in public unding. InGermany, public venture capital companies (Innovations- und Tech-nologiebeteiligungsgesellschaten) or public-private equity enter-prises (Mittelstndische Beteiligungsgesellschaten) take minorityshares in technological ventures or growing small or medium-sizedenterprises (SMEs).

Example: Subordinate Loan

The subordinate loan, also known as a junior tranche, is a debt in-strument that takes a lower repayment priority than the normal debtprovided by lenders. In the event o payment deault, the repayment

is subordinated and all other lenders are repaid in the rst instance.

Subordination also reers to the payment o amortization and theprovision o securities. With regards to securities, subordinationmeans that banks do not require collateral or these loans. However,the advantages over normal debt or the creditor are combined witha higher risk or the bank. These risk actors must be covered with ahigher margin, which means higher interest rates or the borrower.

O-Balance Financing

O-balance nancing (also reerred to as alternative nancing)comprises nancial instruments that aect only the prot and lossaccount o a company and not the balance sheet.

A company chooses o-balance nancing in order to reduce strains onliquidity and capital lockup. This enables the company to maintain theequity ratio, avoiding a degradation o its credit rating. In return, it hasto accept higher total costs in comparison to nancing on-balance.

Leasing

Leasing, especially operating lease, is the most widespread ormo o-balance nancing in Germany. Leasing is provided by generalleasing companies or companies who specialize in nancing particu-lar goods.

Various interpretations o the term leasing exist in dierent sets oaccounting rules, or example, in the International Financial Report-ing Standards (IFRS) and in the German Accounting Rules (Handels-gesetzbuch, HGB).

To qualiy as o-balance nancing, the nancing measure mustbe an operating lease. An operating lease is usually a short-term

nancing instrument in which the ownership and risk stay with thelessor. The lessee pays an expense ee comprised o interest andremuneration or depreciation. Other orms o leasing and their acti-vation in the balance sheet are shown in the ollowing illustration.


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Different Forms of Leasing Contracts

Finance Lease

Lessor provides lessee with the right o use or a certain good Usually mid-term duration Agreement risks and warranties are borne by the lessee Activation in lessors or lessees balance sheet depends on contract

details

Operating Lease

Ownership o the equipment stays with the lessor Agreement risks and warranties are borne by the lessor Usually short to mid-term duration The lessee classies the payments as an operating expense Activation in lessors balance sheet

Manuacturers Lease

Leasing o goods on behal o the manuacturer Available as nance or operating leases

Special Lease

The leased good is tailor-made or the lessees needs Thus the leased object is usually activated in the lessees

balance sheet

Sale and Leaseback

A business sells already purchased equipment to a lessor The lessor, who then takes ownership o the equipment,

leases it back to the business Activation in lessors balance sheet

www.bdl-leasing-verband.de

Factoring

Factoring is a process in which a company sells its receivables inorder to immediately obtain cash or liquidity. Special nancial insti-tutions called actors provide this advanced nancing at a discount.The actor secures the payment and oers protection against deaultby the creditor.

Over the past decade, actoring has gained importance as aninternal source o nancing in Germany. Banks in particular insistthat companies sell receivables rom goods or services as soon as

possible. Since actoring is an optimization o cash management, itcannot be used to nance larger projects.

www.actoring.de


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0 Investment Guide

4 Incentives Programs

Photo:MariaGritcai

istockphoto.com

Framework Conditions o Public Funding

Cash Incentives or Investments

Public Loans

Labor-Related Incentives

R&D Incentives


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Incentives Programs

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4


This is to be achieved by strengthening competitiveness andemployment, improving qualication, and boosting research anddevelopment activities to reduce inequalities between regions odiering economic development.

Providing Funds

The ederal government unds investment projects and supportsemployment in Germany in cooperation with the German states.A signicant part o the unding comes rom the EU which supports

regional economic development in its member states.

Germany will receive EUR 25.5 billion until 2013 rom the EUs twomain nancial instruments the European Social Fund (ESF) andthe European Regional Development Fund (ERDF) which have to

be co-nanced rom German national and ederal state budgets.

Setting Areas

The EU has dened two key target areas, which receive diverselevels o support:

Convergence Regions that require comprehensive support inorder to bridge the gap with well-developed regions in Europe.

Regional Competitiveness and Employment Regions that receiveassistance to maintain and expand their economic competitive-ness levels.

Germany comprises both target regions. Western Germany has largelybeen dened as a Regional Competitiveness and Employment

Region, whereas Eastern Germany is classied as a ConvergenceRegion. Both areas are eligible or a broad variety o public nancialsupport programs.

Germany oers numerous incentives to all investors regardlesso whether they are rom Germany or otherwise. Incentives can begrouped into two packages: (1) the investment incentives packagewith dierent measures to reimburse investment costs; and (2)the operational incentives package to subsidize expenditures aterthe investment has been settled.

Each package consists o a dierent number o programs, ranging

rom cash incentives or the reimbursement o capital expendituresto incentives or research and development (R&D).

Framework Conditions o Public Funding

The legal and nancial ramework o public unding throughoutEurope is provided by the European Union (EU) meaning that publicunding has to ollow certain criteria applicable to all EU memberstates.

The objectives o public unding are the overall advancement andmaintenance o economic growth and development in all dierent

economic regions within the EU in the long term.

Incentives

Investment Incentives Package Operational Incentives Package+

1 only available to investments in Eastern Germany

Labor-RelatedIncentives

Recruitment

Training

Wage Subsidies

Interest-Reduced Loans

KW Loans(National Level)

StateDevelopmentBank Loans

PublicGuarantees

State

CombinedState / Federal

R&DIncentives

Grants

Loans

Silent / DirectPartnership

CashIncentives

InvestmentGrant

InvestmentAllowance1

Germanys dierent incentives packages and respective programs:



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Incentives Programs

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4


Kln

Trier

Halle

Gieen

Kassel

Dessau

Berlin

Bremen

Koblenz

DresdenLeipzig

Mnster Detmold

Hamburg

FreiburgSchwabenTbingen

Saarland

Chemnitz

Arnsberg

Hannover

Lneburg

StuttgartKarlsruhe

Oberpfalz

Darmstadt

Thringen

Magdeburg

Weser-Ems

Oberbayern

Dsseldorf

Oberfranken

Niederbayern

Unterfranken

Braunschweig

Mittelfranken

Schleswig-Holstein

Rheinhessen-Pfalz

Brandenburg-Sdwest

Brandenburg-Nordost

Mecklenburg-Vorpommern

EuroGeographics Association for the administrative boundaries

gRe oi GISge oi GISR

Source: European Commission

Source: European Commission

Overview o the EUs Convergence

and Competitiveness Regions

E r r hic ci i n r h mi ni r i n ri

0 250 Km

oo

Germany: Convergence and Competitiveness Regions 2007 2013

Convergence Regions

Phasing-out Regions

Competitiveness and Employment Regions

National Border

NUTS 2 (Nomenclature o Territorial Units or Statistics)

Determining Incentives Levels

Each incentive program denes industries as well as orms oinvestments (e.g. greeneld projects or expansions) eligible orunding. Foreign investors are subject to exactly the same conditionsavailable to German investors.

Each program has a set o criteria (such as company size, planned

investment project location, etc.) which determine individualinvestment project incentive levels.

Company size is generally determined according to an EU-wide classi-cation system in which companies are categorized as being small,medium-sized or large according to their sta headcount, annualturnover or annual balance sheet total.

Criteria Determining Company Size According to EU Classication

Please note:The criterion concerning the headcount is compulsory. In addition, either o the annualturnover or the balance sheet criteria must also apply.

Most incentives programs oer the highest incentives rates to small

and medium-sized enterprises (SMEs). Some programs may evenspecically target SMEs (this is very oten the case with R&Dprograms).

Other criteria determining project eligibility may be dened subjectto individual incentives programs and ederal state regulations.

EnterpriseCatego

investment guide to germany 2009 gtai

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