02/06/2016

Doing business in Berlin V: Incorporating in Germany

By Wilhelm Lappe Berlin, insights 0 Comments

How to manage legal issues is one of the most common questions for new companies arriving in the city, and also one of the bigger fears. But for people who have already gone through the process, it was not a barrier and they remember it as a single step in the development of their business.

I think the tip here is to find a professional to get help. Probably you’ll need two profiles: accountant (here Steuerberater) and lawyer. They are not cheap and many of them are very busy, and finding one that understands the legislation of different countries and knows how to mix them, is not easy.

And that will be your problem if you are coming from a different country. Also many times people look for someone who speaks their mother language. Probably that’s a good idea not only because of the language, but also for coming from the same legislative roots and referrals.

There are not a lot of barriers for European companies looking to do business. We have a common market and it works. In many countries you’ll need to ask for your EU-VAT number and you can start invoicing. Some VAT issues are not straightforward, for instance in ecommerce you might apply the VAT of your customer country, while in other services you would use your own and there’s an institution regulating of this, but when you learn how it works it’s not too complicated.

The main problem is with people, where and how should founders pay taxes, and how to hire people.

The main rule is that you pay taxes where you live, meaning where you spend more than 365/2+1 days. But also having a house in a place could be considered residency and in Germany when you register with the city (Anmeldung) you are in the system. Double tax agreements exist letting you divide your tax liability between countries, but that means more paperwork.

Because of the different tax and social systems and especially because of the different health systems, you could get into trouble. Having health insurance in Germany is mandatory and you have both public and private “Krankenkasse” with different services and prices. This is critical for foreigners to comply with, travel insurance doesn’t count.

For freelancers, getting a tax number is easy, but you still have to pay for health insurance. Also it’s very controlled and punished (at least theoretically) when a freelancer is not really freelance and is working full time for a company as a “false” employee. It’s not clear what happens when you mix countries and a foreign company hires a German freelancer and vice versa.

As general ideas taxes are high, the control is effective, and the protection of workers is high, making hiring quite expensive. On the other side the “wellness” system works (more or less).

For existing companies, creating a German autonomous/dependent branch is one of the most recommended options. The traditional GMBH (German LLC) requires 25,000€ share capital (at least 22,500 verifiably contributed in a bank account). A relatively new version “klein Unternehmen”, formally UG, requires only 1€ but you add 25% of yearly profits to a reserve until you accrue 25k. Some people would not consider a UG a “serious/formal” company.

It’s common that startups around Berlin are founded in UK or USA (Delaware) and that’s not a problem. It’s probably also not bad for international investors, but it could complicate getting things you would need from Germany, especially access to public support. There’s also a complicated exit tax if you or your company leaves the country, I’m not finding proper info, only some references and news.

There are grants for new companies and supporting programs giving cheap credit that are focused on creating jobs (don’t forget that Berlin has a high unemployment rate, but not in IT) and attracting talent and capital to the city. There are so many options but paperwork is necessary so my recommendation again is find someone to help you.

Try to find a good professional and consider all these topics from the very start. Bumps along the way are not going to destroy a good business but will have an impact on the profits of the company and cash flow.

From my Lean Startup perspective I recommend being focused on market and possibly investment.

Tags:berlin