There’s never been a better time to establish a new business in Germany with its strong economy, central location in the middle of Europe, integrated transport network and highly skilled workers. Germany is also fairly stable for entrepreneurs in relation to professional ideas. There are three pieces of legislation will protect you from having your ideas stolen: copyright, patent law and trademark law are designed to safeguard what could be your most valuable asset. In this article, we talk you through what is required to set up shop in Europe’s leading destination for new businesses.
There are a small number of legal requirements you’ll need to address before you can set up your own business in Germany. You need to be at least 18 years of age. Also, you should never have been banned from practicing the profession you intend to set up a business in. Prohibitions of this nature can be imposed by courts after serious offences.
Before you start your own business, you also need to register the activity you plan to be engaged in. You can do that either with the trade office (Gewerbeamt) or the tax office (Finanzamt), depending on whether you intend to work self-employed or as a freelancer.
Working as a freelancer
In Germany, there are professions known as “liberal professions” (“Freie Berufe”). If you set up a business in one of these professions, you usually work as a Freiberufler. These jobs include:
Medical occupations, e.g. a doctor
Advisory/consultancy in law, tax or economics
Technical or scientific occupations, e.g. an engineer
Occupations concerned with the transfer of information and creative occupations, e.g. an interpreter
Pedagogical occupations, e.g. a nursery nurse.
Comprehensive information on requirements, tax aspects and legal structures for freelance businesses throughout Germany can be found here: https://www.service-bw.de
Working on a self-employed basis (Gewerbliche Tätigkeit)
If you’d like to set up your retail business, you’ll need to register it. You need to do that in the town or municipality where your business headquarters will be. For certain occupations, you’ll need to obtain certain admission requirements. These occupations are subject to prior authorisation (“erlaubnispflichtiges Gewerbe”). This applies to handicraft businesses, financial service providers and nursing services, as well as many others.
To do this, you will need:
- A valid ID document or passport
- Depending on the activity (e.g. catering), a permit or approval
- A crafts card if you are planning to set up a business in the skilled crafts sector
- A trade card for activities similar to those in the skilled crafts sector
- A residence permit that also allows you to pursue a self-employed commercial activity
- Between ten and forty euros for the registration fee
- A police clearance certificate or information from the Central Commercial Register may be required
Please note: You may find it challenging to deal with the various authorities especially if you do not speak at least a little bit of German. However, you should try and utilise their support. Make sure to prepare your meetings in advance – that way, you’re likely to get the support you need. It’s important to get the paperwork done on time and be prepared.
If you want to start a business in Germany, you’ll have to pay tax to the tax office, which is the local authority of Germany’s financial administration. Among other factors, the type of tax you need to pay depends on your company’s size, legal structure, and earnings.
Additionally, you’ll need to submit an annual tax statement for your business, which contains the details of all of your revenues and expenses. Starting out, it may make sense to consult a tax accountant to avoid making mistakes and incurring tax debt. The tax office will also advise you on tax-related questions.
Familiarise yourself with the following taxes:
VAT(umsatzsteuer) is payable when you sell goods or services. The standard rate is 19%. You’re required to bill your customers VAT and to mark this separately in your invoices. You should take note of the information that is required in your invoices. You’re then required to pay the VAT which you receive from your customers to the Tax Office as part of your VAT return (Umsatzsteuer-Voranmeldung).
You pay input tax (vorsteuer) on most company-related purchases. You should ensure that this tax is stated separately on the invoices which you pay. (Note: Invoices do not use the term “input tax” (Vorsteuer), but “VAT” (Umsatzsteuer).) You can then deduct this input tax [Vorsteuer] from the VAT (Umsatzsteuer) which you pay to the Tax Office as part of your VAT return (Umsatzsteuer-Voranmeldung).
You will be required to pay trade tax quarterly to your municipality. Once a year, you’ll be required to issue a trade tax return and to send this to the tax office.
Corporation tax (Körperschaftsteuer) is payable solely for the profit generated by corporations (Kapitalgesellschaften) (GmbH, AG). You’ll be required to pay corporation tax every quarter in advance to the Tax Office [Finanzamt] responsible for your company.
At the time you register your business, you should realistically estimate the total turnover you expect to generate. In the year of establishment, the expected total turnover for the current calendar year, including VAT, may not exceed €17,500.
Note: Anyone who does not pay turnover tax is not entitled to claim input tax. If you as an entrepreneur have high expenditure on investments and/or deliveries, you should consider waiving the tax exemption for small entrepreneurs. You should discuss this matter with your tax advisor.
1. Sole proprietorship (Einzelunternehmen)
If you open a business by yourself, either as a business person or as a freelancer, this automatically means sole proprietorship. It is easy to establish a sole proprietorship.
This is carried out when business people register their commercial activity with the trade office or freelancers apply to the tax office for a tax number (as stated earlier).
2. Limited liability company (GmbH) or a provisional company with limited liability [Unternehmergesellschaft (haftungsbeschränkt) UG]
A GmbH or UG company is established by at least one shareholder. The UG company is subject to the law that governs limited liability companies. The articles of association for both the GmbH and the UG company must be notarised. The notary forwards the articles of association to the Commercial Register. The minimum capital requirement for the GmbH is €25,000; the minimum initial contribution for the UG is €1 at the time of its establishment. The UG company is then required to appropriate 25 percent of its profits to a statutory reserve until the required minimum capital of €25,000 has been generated. The UG company can then be converted to a GmbH company.
3. Civil law partnership (GbR)
If you are joining forces with one or more partners, you will automatically form a civil law partnership [Gesellschaft bürgerlichen Rechts] (GbR or civil-code company). A civil law partnership can be established both by business people and by freelancers. There are no special formalities that apply to this kind of company. A written agreement is, however, recommended and there is no minimum capital requirement. All of the partners are liable with their private assets for all of the company’s debts (e.g. tax debts).
Your choice of legal structure has financial, fiscal and legal implications of serious importance. You should contact a consultant at the Chamber of Industry and Commerce or the Chamber of Skilled Crafts and discuss your options with your tax professional.
Trying to collect enough money to get started can be difficult, but there are many alternative options and you can get a lot of good advice from different sources. You will need to prepare a detailed cash flow statement to estimate how much money you will need in the short to medium term. It’s a disaster if within one year you’re struggling to pay your bills. Many naive startup entrepreneurs make optimistic revenue forecasts and they are forced to close their doors before the show gets going.
How much money are you willing to invest in your project? If you are setting up a small office or a small company, you may be able to finance it by yourself. However, in most cases you will need to borrow money. And this is usually not possible without a certain amount of equity. Indeed, nobody should rely entirely on third-party financing and you will not be able to find anyone who will lend you money if none of your own money is on the table. In general, start-up financing is made up of a government assistance loan, a bank loan and the founder’s equity.
Every investor will want some security in case the borrower is not able to pay back the loan. In the case of bank loans, collateral is essential. This can be cars, securities or property. Even public loans may also require that a certain percentage be secured by collateral. However, when it comes to collateral, there are some things you should keep in mind. Using the home in which you live as collateral is very risky. The same applies to life insurance policies for when you retire.
Support and subsidy programmes
The federal government, federal states and the European Union offer support programmes to assist people starting out as entrepreneurs. Public loans typically come with low interest rates, long terms and often with a redemption-free period before you begin repaying the loan.
The most important federal government support programmes for people starting out in business:
- My micro-loan [Mein Mikrokredit]
- Micro-mezzanine fund for Germany [Mikromezzaninfonds Deutschland]
- ERP start-up loan – StartMoney [ERP-Gründerkredit – StartGeld
- ERP start-up loan – Universal [ERP-Gründerkredit – Universell
- ERP capital for start-ups [ERP-Kapital für Gründung]
For more information
Federal Ministry of Economics and Energy
Tel: 03018 615-8000
Monday to Thursday from 9am to 4pm, Friday from 9am to 12 midday
- Chambers of Industry and Commerce [Industrie- und Handelskammern (IHK)]
General advice on all matters related to starting up in business (free).
The address of your nearest Chamber of Industry and Commerce can be found here
- Chambers of Skilled Crafts [Handwerkskammern (HWK)]
The address of your nearest Chamber of Skilled Crafts can be found here
Through the federal government’s financial support programmes, KfW supports people starting up in business and especially small and medium-sized enterprises. Go here
Tax consultants provide assistance on issues relating to tax law, business management, and in choosing the correct legal structure. The addresses of tax consultants can be found on the websites of the German Federal Chamber of Tax Consultants or the German Association of Tax Advisors
Lawyers and notaries provide assistance, for example, in matters related to legal structure and contract issues (legal structure, purchase contract, etc.). The addresses of lawyers and notaries can be found here:
German Association of Lawyers
Federal Chamber of Lawyers
Chamber representing the German civil law notaries [Bundesnotarkammer]
Business consultants can offer in-depth advice on business management matters (concept, marketing, organisation, controlling, etc.). Addresses can be found on the following websites:
Bundesverband Deutscher Unternehmensberater
Vereinigung Beratender Betriebs- und Volkswirte
Bundesverband der Wirtschaftsberater
Transferring money internationally
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