When you think of Europe, which countries come to mind? We’re willing to bet that you either think of the UK, Germany, or France (or all three!) These are without doubt the continent’s most defining nations, and Germany especially remains a very attractive market for investors and business owners alike.
1. Benefits of doing business in Germany include an innovative environment, English proficiency, a strong start-up business culture, direct communication and excellent infrastructure
2. Challenges of doing business in Germany include complicated business establishment procedures, complex tax arrangements, bureaucratic red-tape, an unfamiliar cultural environment and extensive employment protections
3. Global Professional Employer Organizations (or ‘Global PEOs’) can help with business expansion into Germany or employing workers there.
Germany is home to Europe’s largest economy and in 2020 came fourth, behind the United States, Japan, and China, in terms of global market size. This large and diverse economy is supported by a well-developed infrastructure, a skilled and educated workforce, a positive social environment, a strong HDI, and a rich history of world-class research and innovation.
Now that Brexit is fully in force, it is likely that Germany will become even more desirable as a European business location.
All of this, while positive, comes at a cost to business owners that wish to enter the German market: Germany can afford to be choosy, and its complex bureaucratic procedures and legislative environment make it one of the most difficult countries to establish operations in for non-EU businesses.
In this article, we’re going to cover everything that you need to know before pursuing a German expansion.
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Benefits of Doing Business in Germany
If we were to list all the benefits of doing business in Germany, we would be here forever! Here are a few key ones which we think stand out:
1. A Commitment to Innovation
Germany is one of the most innovative countries worldwide, with a strong history of leveraging science and technology to benefit its economy.
This is helped in part by strong help from the government in the form of funding and incentives for research institutions and start-up companies. There’s also a strong legislative environment that rigorously protects things like corporate intellectual property.
In December 2019, the German government formed the Agency for Breakthrough Innovation. This new agency is tasked with fostering and launching innovations that are based on new and emerging technologies, such as artificial intelligence.
2. Excellent English Proficiency
The Germans are known for their excellent proficiency in both spoken and written English. This means that it’s likely that any German employees your company takes on will likely be able to speak and write in English at a near-native level, helping to eliminate the cross-cultural risk of ambiguity and misunderstanding when doing business in the country.
Although the Germans do tend to have great English skills, the benefits of doing business in the local language cannot be understated; Germans appreciate it when people make an effort with their language.
As former German Chancellor Willy Brandt once said “If I’m selling to you, I speak your language. If I’m buying, dann müssen Sie Deutsch sprechen!”
3. A Strong Start-Up Business Culture
Germany has an active and vibrant start-up scene. Although it’s no match for places like London in the United Kingdom or Silicon Valley in the United States, there is still plenty of exciting things going on, and the country ranks well overall.
In terms of the most start-up-friendly places in Germany, Berlin, Munich, and Hamburg perhaps unsurprisingly top the list. Within the last 10 years especially, Berlin has become a leading tech hub in Europe, with a diverse range of creatives and eccentrics bringing new and exciting tech innovations to market with each passing month.
4. Direct Style of Communication
German businesspeople and other professionals are very direct and straight to the point; there’s very little beating around the bush. While this can seem somewhat rude and cold to the uninitiated, it’s simply an example of German efficiency: Workers are focused, committed, and professional.
This means that when you’re doing business in Germany, you can count on dealing only with professional, highly skilled individuals who will give their work their all and do everything they can to meet their objectives, KPIs, and deadlines. This translates into benefits for your bottom line, such as higher levels of efficiency and operations that are naturally better and reduce risk exposure.
5. Excellent Infrastructure
Germany’s infrastructure is widely regarded as being second-to-none across the whole European continent, and the country ranks highly on global indexes, too. Transportation and logistics are world-class, with over 300 airports, 23 heliports, and 27,000 miles of railway in addition to 400,000 miles of perfect, pothole-free paved roadway.
Transport aside, there’s the benefit of widespread access to high-speed Internet and one of the world’s most advanced telephone systems, making it the ideal location for hiring international remote workers. Infrastructure like this helps to support doing business in Germany and provides businesses with the opportunity to get ahead of the curve when it comes to embracing the digital transformation and the inevitable future of remote working.
Challenges of Doing Business in Germany
While there are many benefits to doing business in Germany, there are a number of challenges, too.
One of the major issues of doing business in Germany is dealing with the complex bureaucratic and legislative situation; the country is very rigorous when it comes to making sure that only worthy entrants are given access to the market.
Starting a Business is Difficult
As we said, Germany exercises tight control over which businesses can enter the market. According to the World Bank, the country ranks 125 out of 190 world economies for “Starting a Business”, largely because of the bureaucratic requirements that make it difficult.
For instance, a new business must go carrying out various registrations and applications. They need to apply to various local entities, such as local trade offices, local tax offices, the local chamber of commerce, and any relevant local commercial registers or professional organizations.
It’s also expensive. The most common form of limited liability legal entity in Germany, eligible for corporate income tax rates, is the ‘GmbH’. While they are straightforward to set up, there are a few significant hurdles, such as a requirement to provide a minimum share capital of €25,000. Not every business has this type of liquid capital laying around.
Payroll & Tax Laws Are Complicated
German tax law is extremely complicated. And we mean it. While plenty of tax breaks and incentives are available to businesses, preparing taxes is a huge undertaking that requires significant time and knowledge to get right.
For an idea of how complex the situation is, businesses in Germany are required to make nine tax payments each year. In most jurisdictions, one annual payment is the norm. It doesn’t stop there, either. Businesses must also be careful to properly process social security payments, make relevant deductions, and pay mandatory Christmas bonuses and 13th-month pay packets.
Businesses that are incorporated in Germany, or have a permanent establishment there will generally be liable for corporate income taxes. The effective corporate income tax rate (including the ‘solidarity surcharge’ is around 30-33 percent.
Germany Has a Very Different Business Culture
Being successful in any foreign country requires an in-depth knowledge of cultural nuances and differences. This is especially important in a country like Germany where business etiquette is very different to many parts of the world and is something taken very seriously and mirrors the hallmarks of German culture: Punctuality, formality, and efficiency.
Germans also value attention to detail, order, and structure; nothing is done by ‘half measure’, as it is in some other countries. This huge difference in business culture can be a major sticking point for businesses that aren’t expecting it and just assume that the same relaxed approach to business is the norm.
A Significant Degree of Regulatory Oversight
We’ve already partly touched on this. Every business entity in Germany must register with the relevant local trade registry for its main place of business; there is no central registry. In addition, the business must register in any other towns or cities that it has a significant business interest there, such as a second production line or regional headquarters.
And while the central government’s recommended code of conduct for business is just that, “recommended” (not law), businesses that diverge from it must disclose any deviations when conducting business dealings.
On top of the heavy registration requirements and corporate oversight by the government, German laws governing everything from consumer protection, employee rights, and product liability are both very extensive and complex. In many cases, German laws are much more restrictive than and build on top of equivalent EU laws (for example, check out the regulations relating to German Works Councils — mandatory employee representative bodies). Unfortunately, for businesses without any local familiarity, it’s all too easy to fall foul of these laws and breach compliance requirements.
Strong Employment Protections
While we’re on the subject of regulatory oversight, Germany has some of the strongest employee protections in the world. The minimum wage is relatively high and there are strict rules when it comes to dismissing employees, holiday pay, sick leave, etcetera.
Unlike in many countries (e.g., the UK where so-called “zero-hours contracts” exist), German law requires all employees to be engaged under an employment contract, regardless of whether the position is full-time, part-time, seasonal, temporary, or permanent.
Most employment contracts are thoroughly written and include details such as holidays and benefits. For example, German employees are protected from working shifts longer than eight hours in a single day. If a worker chooses to work longer, they must be given time off in lieu as a form of compensation during each four-week period so that the average time worked per day does not exceed this eight-hour limit.
How a PEO Can Make Your Expansion Ambitions a Reality
While there are many challenges and hurdles when it comes to doing business in Germany, it’s possible for any company to enter the market if they approach it in the right way.
For businesses that are likely to find it difficult to expand into Germany on their own, pay to establish a legal entity, and remain compliant with the complex regulatory framework, there’s always the option of working with a professional employer organization (PEO).
PEOs in Germany usually operate via a form of employee leasing where the employment company holds a Arbeitnehmerüberlassung license, usually known as an ‘AUG licence‘.
What is a PEO?
A PEO is a company that offers co-employment or employer of record services to businesses that are looking to expand into international markets.
PEOs with international coverage are generally known as global PEOs, and those that cover Europe specifically are known as Europe PEOs.
PEOs leverage their local in-depth knowledge to handle all the human resources and administrative work that comes with managing employees in different countries. This makes it a lot easier for businesses to grow overseas because they don’t have to worry about things like establishing a legal entity, remaining compliant with local laws, and knowing the ins and outs of local business culture; the PEO handles all of this on their behalf.
By working on your behalf as a co-employer or employer of record (where the PEO acts as the employer of your Germany-based workforce, either in part or in full by taking on some or all responsibility and liability), a PEO can take care of things like:
You can learn more about what exactly it is a PEO does by reading our comprehensive guides:
At Horizons, we have a wealth of experience in assisting organizations of all type and size with their successful expansion into the German market. When it comes to doing business in Germany, we are the experts.
Our Germany expansion specialists and consultants offer reliable and tailored advice, consultancy, and outsourcing services designed to support you through the complex process of establishing operations in Germany.
Whether you’re interested in going all the way by registering your own GmbH or are looking to work with a PEO as a co-employer or employer of record, we can help you put together the right package of services to see your expansion through to completion.
Contact us if you would like to find out more about how we can help.