Opening a Branch vs. a Subsidiary in Germany

The branch and the subsidiary are two means by which a foreign company can establish its presence in Germany. While these two both offer the advantage of being able to do business in Germany, one of the major markets in the European Union, they have fundamental differences in terms of independence towards the foreign company.

There are different types of companies in Germany and an entrepreneur can decide which one suits him better. A foreign company can open a subsidiary or a branch office in Germany considering factors like the German taxation system, the purpose of the establishment, and the costs of starting a business in Germany.

In Germany, all types of company structures are requested to register with the local Trade Office (Gewerbeamt).
Below you can read the main characteristics of branches and subsidiaries in Germany. For more details or assistance for opening one of these business forms, please get in touch with our lawyers in Germany. 

What are the characteristics of the branch in Germany?

The German branch office is an establishment that will be connected to the parent company and it does not have assets or an accounting system of its own. A branch office in Germany is allowed to conduct the same type of activities as its head office and it cannot engage in other, different activities.

There are two types of branches available in Germany, a rather unique system for branches, compared to that in other jurisdictions. The autonomous branch is dependent on the parent company at an internal level, however, it is independent in engaging in its business activities in the German city in which it is set up. It has its own capital and its own bank account in Germany. Also, it will have separate accounting records. The foreign head office remains liable for the debts and obligations despite the level of self-sufficiency this type of branch has.

The dependent branch office is one that does not have any autonomy from the head office and it is only used to maintain contacts and not to engage in the business in which the foreign company is involved. The types of activities it performs are support and implementation. 

One of our attorneys in Germany can provide more details about these two types of branches. None of the two require minimum capital and only one individual is required to form the branch. 

In Germany, the branch office is not required to register with the Register of Companies but has to register with the local trade office. In regards to taxation, the German branch office is considered part of the foreign company and will be subject to the German taxation system applicable to them.

What are the characteristics of the subsidiary in Germany?

A German subsidiary is usually considered a limited liability company (GmbH) and it must have its own share capital, management, and accounting system. The subsidiary is allowed to conduct business operations in name of the parent company.

A subsidiary in Germany is required to register with the local commercial register and the trade office. Subsidiaries are subject to the German taxation system as any other local business.

When opening a subsidiary, investors will usually open the German equivalent of the private limited liability company. The setup process for this business form has moderate establishment formalities and, in practice, it can last longer compared to those for the branch. However, many investors will prefer the slightly longer incorporation process when they look at some of the advantages (especially the fact that the parent company is no longer fully liable).

How does the branch compare to the subsidiary in Germany?

The table below highlights the main characteristics of a legal entity in Germany and how they each apply and differ in the case of the branch and the subsidiary. Foreign investors can use the information provided by our experts to make an initial decision regarding the business form that is most suitable to their business needs.

Unlike subsidiaries, branch offices may find it more difficult to obtain a bank account in Germany and clients may be reluctant in going into business with a branch office.

In certain cases, both a subsidiary and a branch office may need special certificates or licenses in order to conduct business operations in Germany. In the case of a branch office, the headquarters will be held accountable for the liabilities and the branch office will also be affected by any change in the parent company.

The subsidiary will have limited liability and if any changes occur in the parent company they will not affect the subsidiary’s activities. However, the fastest, easiest, and cheapest way to start a business in Germany is through a branch office.

Investors should remember that this description covers only the main traits of the branch and the subsidiary. Foreign companies will make the appropriate choice based on the business field in which they activate. For example, there are many foreign bank branches in Germany as this type of financial services provider prefers the branch model; the same can apply in the case of insurance companies. Other companies may benefit more from opening a subsidiary, as they will need their German counterpart to function on its own, independently. 

The taxation of the branch and the subsidiary in Germany

The corporate taxation principles in Germany stipulate that a company is taxed according to its residency. This means that a company that has its registered office or other main places of management in Germany, it is considered a resident for tax purposes. resident companies in Germany are taxed on their worldwide income, however, branches are subject to the same taxation regime as subsidiaries and there is no special branch tax.

The corporate income tax is levied on the profits made by the company (business and trading income, passive income as well as capital gains). The standard corporate tax in Germany is 15%, however, several other taxes apply to it (the solidarity surcharge and the municipal trade tax), making the effective tax rate grow to a 30-33% rate.

Other taxes for companies include the withholding tax on dividends and royalties, the real property tax, the social security tax (according to wage), and transfer tax. Subsidiaries are liable for trade tax.

The value-added tax is an indirect tax applicable to companies in Germany and has a rate of 19% as well as a reduced one of 7%. A special scheme for small businesses applies in those years in which the company estimates that its profits will not exceed 50,000 EUR (and if in the previous calendar year the turnover was below 17,500 EUR). One of our lawyers in Germany can give you more information about how this reduction can apply.

One of our tax lawyers in Germany can provide investors with complete information about the taxes applicable to companies as well as the regulations set forth the by Ministry of Finance, the Federal Central Tax Office, and other authorities. Germany has a broad tax treaty network that includes more than 95 double tax treaties signed with countries worldwide. These treaties do have implications in terms of taxation for corporations that derive income both from Germany (through a permanent establishment) and from their country of origin. Our tax attorneys can also provide detailed information about the provisions included in these treaties regarding the tax treatment of branches and subsidiaries. 

The tax year in Germany is the same as the calendar year and it cannot exceed 12 months in any case. Taxpayers are expected to file a quarterly preliminary VAT return (electronically) and companies must file the annual tax returns by the end of May (the 31st ) the following year via an electronic filing system. When the company uses a tax advisor, the filing period can be extended in some cases. Penalties of 10% can apply for late filing (and a maximum of 25,000 EUR).

Foreign investments in Germany

Germany offers a number of advantages to expanding companies, starting with the business confidence level, the economic and political situation, and the funding options available to companies in selected business fields. Cities like Berlin are rapidly becoming innovative cities for startups and entrepreneurs will also find that Germany offers options for hiring skilled. Opening a subsidiary or a branch will offer a wide range of possibilities.

Germany supports foreign trade and investment through the Federal Ministry of Economic Affairs and Energy. The Ministry oversees the foreign trade policy and the promotion of investment as well as other areas, including the treatment of small and medium-sized companies (SME). According to the German Federal Statistical Office, the following data is available as per the number of companies in the country:

• 36,187 foreign-controlled companies in 2017;

• these companies employed approximately 3.6 million individuals in 2017.

• 2.5 million small and medium-sized companies were activating in Germany in 2017;

• these companies employed 61% of the total number of employees in the country;

• in 2017, the total number of companies in Germany was 3,481,860.

Foreign investors can enter the market either as part of a foreign-controlled company or by opening a new, independent business establishment. Germany has a number of areas of interest for investments, including the ICT sector, consumer services, health, biotechnologies, and others. Our team of attorneys in Germany can provide foreign entrepreneurs with complete information about the manner in which they can enter the market as well as offer complete details about the special permits and licenses that are required in selected business fields.

The choice between a branch and a subsidiary is an important one and will be based on the types of operations the foreign company will engage in Germany as well as the company’s overall expansion strategy. 

You can contact our law firm in Germany for more details about opening a branch office or a subsidiary here. Our team of attorneys can also help you register a trademark in Germany.