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Doing Business in Germany. Legal Aspects B. Tax and Accounting. Ways of Selling into the German Market. Direct Sales from abroad to individual customers to retailers Sales via distribution intermediaries in Germany commercial agents authorized dealers

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slide2
Legal Aspects

B. Tax and Accounting

ways of selling into the german market
Ways of Selling into the German Market
  • Direct Sales from abroad
      • to individual customers
      • to retailers
  • Sales via distribution intermediaries in Germany
      • commercial agents
      • authorized dealers
  • Sales through own presence in Germany
      • establishment of

(i) branch office

(ii) subsidiary

      • acquisition of existing company
1 a direct sales to individual customers in germany
1.a) Direct Sales to Individual Customers in Germany

(i) Non-consumers

  • No restrictions with respect to choice of venue and applicable law.
      • Jurisdiction of foreign courts can be opted for.
      • Foreign law can be declared applicable.

(ii) Consumers

  • German courts will have exclusive competence for most actions against consumers.
  • Consumers cannot be deprived from protection granted by mandatory provisions of German law.
1 b direct sales to retailers in germany
1.b) Direct Sales to Retailers in Germany
  • Nearly identical to legal situation of sales to non-consumer individuals.
2 a distribution through commercial agent
2.a) Distribution through Commercial Agent
  • Commercial agent: independent self-employed contractorsoliciting sales contracts for principal.
  • No written agreement required, although highly advisable.
  • German law applies, unless applicability of foreign law is agreed.
    • However: commercial agency law has been harmonized throughout the EU.
    • Commercial agent in Germany cannot be deprived of compensation claim at termination of contract.
  • Principal may define scope of duties of commercial agent and can give instructions, but should not impair commercial agent’s independence.
    • Otherwise commercial agent may be regarded as employee subject to German labor law.
2 a distribution through commercial agent continued
2.a) Distribution through Commercial Agent (continued)
  • Claim for commission
    • usually success fee for business solicited.
    • may also be fixed fee or combination of both.
    • In case of a defined exclusive territory: fee is due for every contract irrespective of commercial agent’s activity.
  • Compensation claim in case of termination
    • unless commercial agent gave reason.
    • complex calculation;
    • maximum amount: average annual commission of the 5 years preceding termination.
  • Post-contractual non-compete obligation
    • only effective, if made in writing and if it provides for reasonable compensation.
    • cannot be longer than 2 years after termination of contract.
2 b distribution through authorized dealer
2.b) Distribution through Authorized Dealer
  • Authorized dealer: independent contractor integrated in manufacturer’s sales organization, buying manufacturer’s goods and selling them in defined territory.
  • No written agreement required.
  • German law applies, unless applicability of foreign law is agreed
    • No harmonization of relevant laws in the EU.
      • therefore: real differences
    • Exclusivity arrangements may be critical under EU cartel law, but are generally allowed
      • if the supplier’s market share in the relevant market does not exceed 30% and
      • if passive sales are not excluded.
2 b distribution through authorized dealer continued
2.b) Distribution through Authorized Dealer (continued)
  • Under German law: provisions on sales agency contracts apply by way of analogy.
  • In particular: compensation claim upon termination
    • if dealer is obliged to reveal data on his customers to manufacturer.
    • amount: average annual profit from sales of contractual goods of the 5 years preceding termination.
  • Manufacturer is obliged to repurchase delivered goods still on dealer’s stock
    • if dealer was obliged to maintain inventory of goods.
3 a i establishment of branch office
3.a)(i) Establishment of Branch Office
  • Must be registered in the Commercial Register.
  • Trade permit must be obtained from Trade Office of local municipality.
  • Must file corporate income and VAT tax declarations.
  • No liability shield: foreign company fully liable for all activities of branch office.
  • Employment contracts with employees working in Germany are subject to mandatory provisions of German labor law.
    • contributions to social security system
    • withholding and payment of employee’s income tax owed on salary
3 a ii establishment of german company
3.a)(ii) Establishment of German Company
  • Basic distinction between corporations and partnerships:
    • Corporations (Kapitalgesellschaften)
      • legally separate and independent entities
      • no liability of shareholders
      • forms:
        • GmbH (Gesellschaft mit beschränkter Haftung)
          • limited liability company
        • AG (Aktiengesellschaft)
          • stock corporation
        • SE (Societas Europaea)
          • stock corporation with links to at least two EU Member States
3 a ii establishment of german company continued
3.a)(ii) Establishment of German Company (continued)
  • Partnerships (Personengesellschaften)
    • no separate and independent legal entities
    • in general, full liability of partners
    • however, in many other respects treated as legally separate (except GbR)
3 a ii establishment of german company continued13
3.a)(ii) Establishment of German Company (continued)
  • forms:
    • GbR (Gesellschaft bürgerlichen Rechts)
      • Civil Code partnership
      • full liability of all partners for any legal purpose other than pursuit of commercial business
    • OHG (Offene Handelsgesellschaft)
      • general partnership
      • for trade and commercial businesses
      • full liability of all partners
    • KG (Kommanditgesellschaft)
      • limited partnership
      • only one partner must be fully liable
    • GmbH & Co. KG
      • like KG, but partner with full liability is a limited liability company
3 a ii establishment of german company continued14
3.a)(ii) Establishment of German Company (continued)
  • In particular: GmbH (Gesellschaft mit beschränkter Haftung)
    • most popular legal form
      • combines high flexibility with relatively few obligations.
      • designed for private businesses with clear and stable shareholder structure.
      • full liability protection of shareholders.
    • must have at least one shareholder.
    • minimum share capital: 25,000.00 EUR (intended reform: 10,000.00 EUR)
      • contribution in cash or in kind
      • 50% must be paid up when established.
    • formation through
      • notarization of deed of formation
        • including Articles of Association
        • (intended reform: only notarization of signature if standard Articles of Association are used)
      • and registration in the Commercial Register
      • costs: approx. 1,000.00 EUR (plus additional attorney’s fees)
3 a ii establishment of german company continued15
3.a)(ii) Establishment of German Company (continued)
  • legally represented by Managing Director
    • at least one
    • can be foreign resident
    • can be given instructions by shareholders
    • legal duties:
      • must ensure that the company keeps proper records.
      • must ensure payment of employees’ income taxes and social security

contributions;

        • otherwise personally liable and subject to criminal charges.
      • must file for bankruptcy if the company is over-indebted or insolvent

(not later than 3 weeks);

        • otherwise subject to criminal charges.
3 a ii establishment of german company continued16
3.a)(ii) Establishment of German Company (continued)
  • Employment
    • Contract does not require written form to become effective, but employer is obliged to issue a written statement on employment terms.
    • Applicable law may be chosen, but employee cannot be deprived from protection of mandatory German law.
3 a ii establishment of german company continued17
3.a)(ii) Establishment of German Company (continued)
  • Costs of employment
    • salary
    • social security contributions
      • Employer has to pay half of
        • old age pension insurance (19.9%)
        • long term care insurance (1.7%)
        • unemployment insurance (3.3%)
        • health insurance (approx. 15%).
      • obligation to withhold and to transfer employees’ income tax and social security contributions
      • other costs
        • paid holidays (minimum 24 days)
        • sick pay (up to 6 weeks)
3 a ii establishment of german company continued18
3.a)(ii) Establishment of German Company (continued)
  • Termination of employment
    • minimum notice period depending on length of employment: 4 weeks to 7 months
    • Reasoning/justification
      • not required when company does not have more than 10 employees.
        • No severance pay!
      • required when company has more than 10 employees.
        • allowed only if required due to business reasons
        • and if socially justified.
        • Severance is usually paid to make employee renounce on his employment (rule of thumb: 1/2 monthly brut salary x completed years of employment).
    • Special protection
      • while on maternity leave
      • for disabled employees
      • employees sitting on the company’s work council
3 b acquisition of existing business
3.b) Acquisition of Existing Business
  • No special laws or regulations applying specifically to acquisition of businesses

(except for merger control laws).

  • General provisions of German Civil Code (BGB) apply.
  • Contracts subject to German law are usually much shorter and less detailed than

Anglo-Saxon contracts.

    • Unless parties agree otherwise, statutory law applies with respect to all aspects

of the transaction.

  • Basic distinction under German law between

(i) Sale and purchase agreement

      • Parties establish obligations to transfer title to the sold asset(s) and to pay

purchase price.

      • Parties are free to choose the applicable law.

(ii) Transfer agreement

      • Parties effect transfer of ownership of asset(s) sold.
      • Parties cannot choose the applicable law; transfer is mandatorily governed

by the laws of the state where the assets being transferred are located.

3 b acquisition of existing business continued
3.b Acquisition of Existing Business (continued)
  • Distinction between

(i) asset deal

(ii) share deal

3 b acquisition of existing business continued21
3.b Acquisition of Existing Business (continued)

ad (i) Asset Deal

  • All assets sold and transferred must specifically be described; general description as such is not sufficient.
  • Transfer of accounts payable / contracts requires consent of respective creditors and contractors (differently from assignment of claims receivables).
  • Public licenses and permits relating to the operation of the business may be transferred, but not those licenses and permits relating to a specific person.
  • Usually no form requirement, unless assets include real estate (in that case notarization required).
3 b acquisition of existing business continued22
3.b Acquisition of Existing Business (continued)
  • Labor law: Sec. 613a BGB !
    • Employment contracts are automatically transferred to new owner of the business, unless employee objects to the transfer.
    • Notice of objection can be given by employee within one month upon being notified on business transfer.
    • Purchaser is not entitled to terminate employment merely on the grounds of the business transfer.
3 b acquisition of existing business23
3.b Acquisition of Existing Business

ad (ii) Share Deal

  • Assets of the company do not have to be described in detail for an effective transfer, because interests / shares are sold and transferred.
  • Interest in a German partnership (OHG, KG, GmbH & Co. KG) are not freely transferable; approval of all partners are required unless partnership agreement provides otherwise.
  • Shares in a German corporation (GmbH, AG) are freely transferable unless the company’s bylaws provides otherwise.
  • Form requirements:
    • Partnership and AG: no specific form requirement.
    • GmbH: notarization required.