Doing Business In.. 2020

Last Updated July 15, 2020


Law and Practice


McDermott Will & Emery partners with leaders around the world to fuel missions, knock down barriers and shape markets. With 20-plus locations in six countries, the team works seamlessly across practices, industries and geographies to deliver highly effective – and often unexpected – solutions that propel success. More than 1,100 lawyers strong, the firm brings its personal passion and legal prowess to bear in every matter for its clients and the people they serve. In Germany, McDermott Will & Emery has three offices in Düsseldorf, Frankfurt a.M. and Munich with more than 120 lawyers. Clients are regularly advised on the full spectrum of corporate and commercial matters, including cross-border M&A, joint ventures, the establishment of subsidiaries (and related personnel and visa matters), cross-border financings and securities issues. The firm’s lawyers are well-respected experts in the areas of antitrust and competition; capital markets; corporate law; health services and life sciences; IP; labour and employment; private equity and venture capital; restructuring and insolvency; real estate; taxation; and telecommunications, media and IT. In February 2020, McDermott Will & Emery launched a global and multidisciplinary COVID-19 Task Force that helps its clients to navigate through the pandemic.

Germany is a federal, parliamentary, representative democratic republic with a multiparty system. The legislative power is exercised in the federal parliament and the federal council. The 16 federal states have their own legislative bodies with responsibility for certain areas set out in the German constitution (Grundgesetz, GG), which is the ultimate source of German law.

The legal system in Germany is a civil law system. Legislation is the primary source of German law. It can be issued at federal and state level in the form of statutes, ordinance, decrees, guidelines and other forms of legal code. The court judgments in Germany are based on legal codes, which are formulated in abstract terms and applied to the individual case. In principle, the lower courts are not bound by previous decisions of the higher courts (case law). In practice, however, the lower courts consider the case law developed by the supreme and the higher courts. This ensures uniform interpretation and application of the law in Germany.

The judiciary is independent from the legislative and the executive power, decentralised and divided into five jurisdictions: ordinary (ie, civil and criminal), labour, administrative, social and fiscal. The German Federal Constitutional Court is the highest court in Germany to which final appeals can be made but only on the grounds of conflict with the constitution. Each jurisdiction has its own federal supreme court to which appeals can be made. The ordinary courts are organised in a four-tier system: the local courts, the regional courts, the higher regional courts and the Federal Court of Justice. Cases are held locally and appeals are made to a higher court responsible for a wider geographical area. In a normal case a plaintiff or defendant is entitled to three instances. Court rulings can be appealed against. In such a case, the higher court of jurisdiction negotiates the case and a ruling is handed down.

Foreign investments may be reviewed by the German Federal Ministry for Economic Affairs and Energy (BMWi) on the basis of the German Foreign Trade and Payment Act (AWV). In recent years, several amendments have extended the scope of review and the BMWi tightened its review approach. This trend is being set forth by recent government plans. Facing the COVID-19 pandemic, the BMWi presented another draft amendment to the AWV in May 2020. The draft provides that the threshold to review investments specifically in the public health sector will be lowered. Furthermore, following an EU regulation that will begin to apply in October 2020, the German government plans to adapt rules that will further lower the review threshold for the BMWi. It should be noted, however, that these amendments are not yet in force and to this point only constitute drafts.

The German legal framework distinguishes between two types of foreign investment review (which extends to share and asset deals).

A cross-sector investment review applies for investments by investors from outside the EU or the European Free Trade Association (EFTA) (ie, the EU, Iceland, Liechtenstein, Norway and Switzerland). An investor acquiring at least 10% of the voting rights in domestic companies operating "critical infrastructure", developing software for certain areas of sensitive sectors (eg, energy, water, IT, telecommunications, finance, transport, traffic and food) or media companies with a mass impact falls within the scope of the cross-sector investment review. The government currently plans to extend this list, adding businesses operating in the public health sector.

With regard to domestic companies operating in any other sector, the acquisition of 25% of the voting rights falls within the scope of this review. For such investments, a prior approval is not required for completion. However, within five years, the BMWi can review the investment and issue a prohibition subsequent to the completion of the investment. Under current legislation, a prohibition is possible if the investment poses a threat to Germany’s public order or security. The government’s recent plans to lower the review threshold, however, include that the BMWi may also take into account security interests of other EU member states and that it may prohibit an investment that is only likely to affect such interests.

To mitigate the risks of a subsequent prohibition, investors can apply for a clearance certificate. If no decision on the certificate is made by the BMWi within two months, the clearance certificate is deemed to be granted. The clearance certificate thus is a useful tool to gain transaction security before completion of the investment.

A sector-specific investment review applies for investments by a non-German investor acquiring at least 10% of the voting rights in domestic companies operating in particular security-relevant industry sectors; eg, military and defence or producing IT security products. Such investments have to be notified and approved by the BMWi prior to completion.

In the case of a cross-sectoral investment review, the investor has to notify the investment to the BMWi after completion. If the investor has already received a clearance certificate, no further notification is necessary. If the BMWi subsequently prohibits an investment, infringements against the prohibition would constitute administrative offences and could result in a fine of up to EUR500,000 as well.

In the case of a sector-specific investment review, the investor has to notify the BMWi of the investment prior to its completion and provide information on the potential investment. The BMWi then has three months to review the investment and decide on the approval. Under current legislation, it may only prohibit the investment in order to protect essential security interests of the Federal Republic of Germany. However, the government currently intends to lower the threshold enabling the BMWi to consider security interests of other EU member states. If no such security interests are at stake, the BMWi will explicitly approve the investment. If the BMWi does not initiate a formal investment review within three months, the investment is deemed to be approved. In the event that the BMWi prohibits the investment, any infringements against the prohibition would constitute an administrative offence and could result in a fine of up to EUR500,000.

Within the scope of the sector-specific review as well as the cross-sector review, it is recommended for investors to exert influence during the administrative proceedings by working closely with the BMWi. This can help to avoid costly and uncertain legal proceedings in a court of law afterwards.

The BMWi does not necessarily condition its approval on any commitments by the investor. It rather depends on the individual case and whether there are – and, if so, which – commitments the BMWi may demand from an investor.

In the case of a cross-sector review, the BMWi can issue a clearance certificate prior to the investment in connection with certain conditions. In the case of a sector-specific review, the BMWi can issue general administrative orders to protect essential security interests of the Federal Republic of Germany and can thus dictate commitments to the investor.

Within both review regimes, the BMWi may also conclude public contracts with potential investors in order to obtain certain commitments.

If the BMWi does not approve an investment, the investor can challenge such decisions in court. If the BMWi decides to prohibit an investment in the case of a sector-specific review, the prohibition itself can be challenged by means of an action for annulment before the administrative court. This also applies to general administrative orders and subsequent prohibitions of an investment in the case of a cross-sector review.

The most common forms of corporate vehicles in Germany are limited liability companies (GmbHs), stock corporations (AGs), European stock corporations (SEs) and limited partnerships (KGs).

The GmbH is a private limited liability company governed by the German Limited Liability Company Act (GmbHG). It can be incorporated by one or more shareholder(s) with a minimum share capital of EUR25,000. The sale and transfer of shares in a GmbH requires notarisation. The GmbH is used for all kinds and sizes of business (including as a holding company and acquisition vehicle in M&A and financing transactions).

The AG is a public limited company governed by the German Stock Corporation Act (AG; for listed AGs, the German Corporate Governance Code also applies). It can be incorporated by one or more shareholder(s) with a minimum share capital of EUR50,000. Due to higher share capital and governance requirements, and more formalised proceedings, the AG is generally recommended for larger and medium-sized companies, and if a listing for trading at a stock exchange is contemplated in the near future.

The SE is also a public limited company governed by EU law. The AG rules apply mutatis mutandis. The minimum share capital is EUR120,000. The SE rules require a company to have a business in at least two member states of the European Economic Area (EEA). The German co-determination rights of the employees can be negotiated, which can provide additional flexibility.

The KG is a limited partnership and governed by the German Commercial Code (HGB). It requires a general partner (eg, GmbH) and a limited partner. The limited partner is generally excluded from managing and representing the KG. The sale and transfer of limited partnership interests requires the consent of all partners. Traditionally, small and medium-sized businesses as well as family businesses in Germany are often set up as limited partnerships.

During the COVID-19 pandemic, numerous temporary amendments have been introduced by the legislator regarding corporate vehicles in Germany. These comprise, in particular, certain facilitations for general and extraordinary meetings of the shareholders. Also, certain amendments of the law governing partnerships are currently being discussed. Most importantly, these include the introduction of a partnership register and the recognition of the legal capacity of a civil law partnership.

The incorporation/formation of the GmbH, AG, SE and KG is standardised and can take between one and six weeks. A fully online process is not (yet) available. Alternatively, the shares and interests in each of them can be acquired from shelf company providers within 24 hours.

The GmbH incorporation requires a notarised resolution by the founding shareholder(s) and registration with the commercial register. Following the notarisation, the shareholders have to pay their capital contribution. Upon receipt of the contributions, the application for registration has to be signed by all managing directors and filed with the commercial register. Upon registration, the GmbH is incorporated.

For the incorporation of an AG, the founding shareholder(s) have to prepare, in addition, a formation report that has to be reviewed by the management board and the supervisory board. The application for registration has to be signed by all founding shareholder(s), and members of the management board and the supervisory board, and filed with the commercial register.

The incorporation of the SE is more complex (ie, by way of merger, formation of a holding company, or subsidiary or transformation). It requires stock corporations and/or companies from at least two EEA member states.

The formation of the KG requires a limited partnership agreement. There is no minimum capital requirement. The application for registration of the KG has to be signed by the founding general partner and limited partner(s), and filed with the commercial register.

Private companies are subject to certain filing, reporting, disclosure, audit and publication obligations in Germany. They need to keep books and records for all transactions and an accounting system that provides for accurate, reliable and timely information on the property, financial and income situation.

The annual accounts (balance sheet, profit and loss statement, notes and management report; the latter for larger companies) have to be prepared within three months after the business year (six months for small companies). Additional accounting, auditing and publication requirements apply for small, medium and large companies based on certain thresholds (total balance sheet amount, net turnover and average headcount during the business year). The annual accounts are approved by the shareholders. They have to be published within 12 months after the end of a business year.

Amendments to the articles of association or limited partnership agreement (change of company/partnership name, registered seat, capital increase, etc) as well as certain changes regarding the company/partnership (appointment/dismissal of managing directors, change of business address, etc) have to be filed and registered with the commercial register.

The shareholders in a GmbH are registered in the list of shareholders and filed with the commercial register. Any share transfers or changes in the person of a shareholder in a GmbH have to be filed without undue delay and registered with the commercial register. Any shareholding, except by private individuals, of more than 25% of the shares in an unlisted AG has to be notified by the shareholder to the AG without undue delay. Any shareholding of an AG of more than 25% and/or 50% of the shares in another German company has to be notified by the AG without undue delay.

With the implementation of the Second Shareholders' Rights Directive, a disclosure of related-party transactions was introduced for listed companies also in Germany.

The general remuneration system of the management board of listed German companies as well as the resolution by the general meeting must be published without undue delay on the company website for the duration of the term of the remuneration system, but at least for ten years.

Under German anti-money laundering rules, beneficial owners have to be disclosed by notification to an electronic transparency register. The disclosure is deemed fulfilled if and to the extent the necessary information can be retrieved electronically from other public registers in Germany (eg, the commercial register). For KGs, the disclosure requirements have been extended recently and the beneficial owner(s) have to be notified except in a number of cases. In addition, the fines for breaches of disclosures in the transparency register have been increased up to EUR5 million or 10% of the total turnover.

Finally, COVID-19-related legislation introduced a suspension and accompanying amendments for the suspension of the obligation to file for insolvency until 30 September 2020. The suspension period may be extended until 31 March 2021 by legislative decree.

A GmbH has a shareholder meeting and managing director(s). The managing director(s) are responsible for the day-to-day management and represent the GmbH vis-à-vis third parties. The shareholder meeting is the ultimate decision-making body of the GmbH. The shareholders exercise their rights in the shareholder meeting with a simple majority of 50% of the votes cast (eg, approval of annual accounts, appropriation of profits, appointment/dismissal of managing directors) or a qualified majority of 75% (eg, amendments to the articles of association, capital increase, liquidation) unless provided otherwise in the articles of association. A dismissal of a managing director is possible at any time. A supervisory or advisory board can be set up in the GmbH unless it is mandatory pursuant to German co-determination rules.

An AG has a general meeting and a mandatory two-tier board system, with a management board and a supervisory board. The management board is responsible for the management of the AG and its representation vis-à-vis third parties. The supervisory board supervises the management board and is responsible, among other things, for the appointment and dismissal of the members of the management board. The dismissal of a member of the management board is possible at any time for good cause. The shareholders exercise their rights in the shareholder meeting. The shareholder meeting appoints and withdraws the members of the supervisory board. It is responsible for certain general matters (eg, approval of annual accounts or appropriation of profits; a simple majority of 50% of the votes cast) and material structural matters (eg, amendments to the articles of association, capital increase or decrease, sale of material assets, mergers, profit and loss pooling agreements, liquidation; a qualified majority of 75%) as provided in the law and the articles of association.

The SE can be structured with a one-tier board system (monistic model) or a two-tier board system (dualistic model). Under the monistic model, the board manages the SE and its members are directly appointed by the shareholder meeting. The board members represent the SE and may delegate the day-to-day management to one or several of its members (executive directors). The dualistic model is similar to the governance in an AG with a management board and a supervisory board.

A KG is managed and represented by its general partner vis-à-vis third parties. The partners are free to determine the majority requirements in the limited partnership agreement except for matters concerning the core area of the interests of the partner (including right to profit, voting right), for which the consent of the respective partner is required. Typically, the admission of new partners, transfer of partnership interests and material transactions are subject to consent from all partners or a qualified majority. An advisory board can also be set up at the KG.

The GmbH, AG and SE are limited liability companies. Accordingly, there is generally no shareholders’ liability except in the case of a breach of capital maintenance rules and destruction of the economic basis of the company, which can result in a piercing of the corporate veil.

In a KG, the general partner and the limited partners are jointly and severally liable for all liabilities incurred by the KG. The general partner is personally liable without any limitation. The liability of the limited partner(s) is generally limited to the amount of their respective registered capital contribution.

Managing directors, and members of the management and supervisory board have to conduct their duties with the due care of a prudent businessman. In the event of a breach, they are severally and jointly liable to the company for damages caused, unless they have been acting in good faith, on the basis of adequate information and in the best interest of the company (business judgement rule). Generally, managing directors, and members of the management and supervisory board are not liable vis-à-vis third parties for acts and obligations of the company. However, they can be liable vis-à-vis third parties in some cases (eg, withholding of salaries, failure to pay social security contributions, violation of the obligation to file for insolvency, removal of assets in the event of illiquidity or over-indebtedness, breach of certain tax obligations).

In a KG, the general partner is liable vis-à-vis the KG and the limited partners for any violation of its duties in connection with the management of the KG.

The individual employment relationship in Germany is governed by the employment agreement, the German Civil Code (BGB) and numerous specific labour and employment laws (eg, the Protection against Unfair Dismissal Act (KSchG), the Law on Part-time Employment (TzBfG), the Continued Remuneration Act (EFZG), the Federal Paid Leave Act (BUrlG) and the Works Constitution Act (BetrVG)). Case law plays an important role, as some questions – like industrial disputes – are not specifically regulated. Furthermore, collective rules such as collective bargaining agreements, work council agreements and custom/practice impact the employment relationship.

Due to the COVID-19 pandemic, there have been a number of (temporary) changes in labour law and other employment-related regulations. For instance, the requirements for obtaining short-time work allowances from the state to compensate reduced worktime schedules for employees have been lowered, the short-time work allowances have been increased and a compensation for parents for loss of earnings due to closure of childcare and schools has been established. A special occupational health and safety standard (eg, regarding distance and hygiene concepts) to protect the workforce has been established as well and should be observed when employees return to their workplaces.

A permanent employment for an indefinite period is the general rule for German employment agreements. An employment agreement may be concluded verbally. However, if employers do want to close a fixed-term employment agreement, a written clause on the fixed term is required. Otherwise, the fixed term is invalid and the contract has been entered into for an indefinite period.

Besides, the Act on Evidence (NachwG) states that employees have a right to receive their working conditions in writing after starting to work. However, as the contents of a verbal contract are difficult to prove, German employment contracts are usually concluded in writing. On the other hand, German employment law also recognises a situation where the parties enter into an employment agreement by treating each other like parties in an employment agreement typically would. Such cases, also referred to as "hidden employment" (and possibly resulting in severe consequences for the 'employer', including fines and taxes), may occur when working with freelancers.

Regarding the duration of fixed-term employment contracts, the TzBfG provides for the permitted duration of a fixed-term employment contract. In principle, the employment contract can only be limited in time for an objective reason (eg, temporary representation or project work); otherwise, the employment contract may only be limited for up to two years if the employee was not previously employed by the same employer.

In principle, working time must not exceed eight hours per working day (Monday-Saturday). Longer working hours are possible up to an absolute maximum of ten hours if, on average, eight hours per working day have not been exceeded in the last six calendar months or within a period of 24 weeks. These regulations also apply to overtime hours. The employee is only obliged to work overtime if this is stipulated in the employment contract, collective bargaining agreement or works agreement.

In principle, overtime hours are to be remunerated in the same way as regular working hours. Working and overtime hours are often covered by collective bargaining agreements. For employees exceeding a certain salary threshold, overtime may be compensated with the regular salary (however, certain limitations apply). According to a new decision of the ECJ, employers must establish a system to record objectively any working time of their employees. Germany is awaiting legislation covering such requirement very soon. For the time being, only overtime has to be recorded.

In Germany, employment contracts can be terminated by observing a certain notice period or for cause, if there are proper grounds. Notice periods derive from the employees’ contracts or from the law (whatever is more beneficial). The length of the statutory notice period relates to the years of service. These notice periods are rather short (eg, only four weeks within the first two years). While shorter periods can also be agreed in collective bargaining agreements, only longer notice periods can be (and usually are) agreed in employment contracts.

In the case of a termination upon notice of an employee who has worked more than six months in a company of a certain size (with regularly more than ten employees), a social justification is required for a valid termination. This means that the termination must be based on reasons related to the person or behaviour of the employee, or to urgent operational requirements. For example, long-lasting illness/incapacity for work, serious violations of the employment contract or partial or entire closure of the business can be examples for social justifications. In any case, the parties’ interests must be carefully weighed against each other before terminating an employment contract.

In addition, the works council must be consulted before any termination. Any termination without the works council (if existent) being comprehensively informed is void, except for the termination of an executive employee. In that case, the works council has to be informed, but non-compliance cannot affect the validity of the termination.

Although a dismissal is generally possible, there are some limitations for terminations under special circumstances. In particular, pregnant or severely disabled employees, or works council members can only be terminated in exceptional cases.

A dismissal for cause is an extraordinary termination of the employment contract with immediate effect. It has very strict requirements, which means it has to be fully unreasonable for the employer to accept a continuance of the employment relationship until the notice period has expired. The termination, including the works council hearing, has to be issued within two weeks following the employer having obtained knowledge of the circumstances justifying the dismissal for cause.

The employer must pay an appropriate indemnification to a dismissed employee, if a court declares the termination void, but the employee cannot reasonably be expected to continue the employment relationship. However, German employment law does not generally provide for a severance payment regarding unfair dismissals. The affected employee may only seek reinstatement of the employment relationship in court, but it is common for unfair dismissal proceedings to end with an in-court settlement. This settlement generally provides for a termination of the employment relationship against payment of severance.

Regarding mass lay-offs, the employer has to comply with multiple regulations of German employment laws. Firstly, the employer must notify the employment agency prior to their implementation under observance of certain formal rules. Those requirements apply to a company of a certain size (at least 21 employees) that dismisses a certain number of employees (at least six) within 30 days. Secondly, the employer must inform the works council in time and discuss options to avoid the lay-off.

In companies with a works council, mass lay-offs have to be negotiated with the works council and a social plan (mitigating the employees' disadvantages connected to the lay-offs) may have to be established. Works council agreements and collective bargaining agreements may also provide for additional limitations/requirements in connection with dismissals/mass lay-offs.

In Germany, employee representative bodies exist on a local level (works councils) and at company or group level (co-determined supervisory board).

Rules of co-determination only apply if the employer is a certain type of legal entity (eg, GmbH or AG) and employs more than 500 employees. In that case, the One-Third Participation Act (DrittelbG) applies and requires one third of the members of the company’s supervisory board to be elected employee representatives; whereas if the company employs more than 2,000 employees, the rules of the German Co-determination Act (MitbestG) apply, which require half the members of the company’s supervisory board to be elected employee representatives. Co-determination is the strongest type of employee involvement for a company. There are certain group structures and entity types where the rules of co-determination do not apply, even though the company or group has more employees than mentioned above.

The works council represents employees (except executive employees) on a local level and mainly in social matters. All employees of a company may elect the works council for a regular period of four years. The number of members of the works council depends on the number of employees in the relevant site. The BetrVG regulates most of the rules that apply to the works council. The principle of co-operation in good faith determines the relationship between the employer and the works council. One of the works council's most important tasks is the mediation between employees and management. In addition to dismissals, the works council must also be involved, for instance, in relocations of employees, the introduction of IT systems and operational changes (eg, relocation and closure of operations). If an agreement between the employer and the works council is necessary in certain cases and if such an agreement is not reached, a conciliation body may be called to implement the decision.

There is no legal obligation for companies to have a works council. If more than one local works council exists, so-called joint works councils are formed and group works councils may also come into existence. Under certain circumstances, there is also a European works council.

A person qualifies as an employee for tax purposes if he performs "dependent" work for the benefit of another person or legal entity. This distinguishes the work of an employee from services performed by a freelancer or independent contractor. An employee is, inter alia, dependent on the employer if the employer has the right to issue directives on the place and time as well as the details of the work of the employee. Further, the employee must be integrated in the organisation of the employer by being assigned a certain workplace and being integrated into workplace hierarchies.

Wage tax as well as social security contributions must be withheld by employers from salaries on a monthly basis. Tax rates depend on the amount of the annual salary and range from 0% to 45% (annual salary exceeding EUR265,327 in 2019) plus a solidarity surcharge of 5.5% thereon.

Social security contributions must be withheld from the monthly gross salary and are roughly equally shared by the employer and employee. This applies in 2019 to pension insurance (18.6%) and unemployment insurance (2.5%) on a monthly salary up to EUR6,700 (West Germany), and health insurance (14.6%) and nursing care insurance (3.05%, increased by 0.25% for childless employees) on a monthly salary up to EUR4,537.50.

Corporations are subject to corporate income tax (15% plus a 5.5% solidarity surcharge thereon) and, a permanent establishment in Germany provided, trade tax (depending on the multiplier of the competent municipality, usually in the range from 7% to 17.5%). Distributions from a corporation to its shareholders are subject to withholding taxation at a rate of 25% plus a 5.5% solidarity surcharge thereon. Withholding tax may be reduced/refunded if the shareholder is eligible to a reduction under domestic law, the Parent Subsidiary Directive or a double tax treaty and if the anti-treaty/directive-shopping provisions (see 5.7 Anti-evasion Rules) are not applicable.

(Deemed) commercial partnerships are subject to trade tax (rates from 7% to 17.5%, see above), whereas their partners are subject to corporate income tax (corporations) or income tax (individuals) under the transparent regime. Trade tax may be deducted fully or in part from the income tax on the level of individuals.

Interest payments are generally not subject to withholding taxation. However, a withholding taxation of 25% plus a 5.5% solidarity surcharge may apply on interest from convertible bonds, profit-sharing bonds, participation loans and income from silent partnerships.

Royalties are in general subject to withholding tax of 15% plus a 5.5% solidarity surcharge thereon. However, royalty payments to EU associated companies are exempt from withholding taxation due to the EU Interest and Royalties Directive.

Germany does not levy stamp duties. The transfer of real estate as well as the direct or indirect transfer of shares/interests in real estate holding companies may trigger real estate transfer tax if – as a general rule – at least 95% (a reduction to 90% is in discussion) of share capital/interest is transferred. The tax rates vary by federal states in a range between 3.5% and 6.5%.

The German value-added tax (VAT) system is harmonised under the EU VAT Directive. Entrepreneurs for VAT purposes – which includes corporations, partnerships and individuals – are liable to VAT (19% regular rate, 7% reduced rate; exemptions may apply) and entitled to reclaim input VAT. VAT returns must be filed on a monthly, quarterly or annual basis, depending on the turnover amount. Further provisions exist for VAT groups and exemptions for small businesses.

As a reaction to the COVID-19 pandemic, the tax authorities have been instructed to defer taxes if the collection would be a considerable hardship because of COVID-19, to temporarily waive deferral interest as well as enforcement measures and to reduce advance payments if the respective income is likely to be lower as well as with respect to advance VAT payments. The possibility of a lump-sum loss carry-back from the year 2020 in 2019 has been implemented by the Federal Ministry of Finance as well as the option to apply for a retroactive reduction of income tax prepayments made for 2019. Further measures have been implemented; eg, to support cross-border commuters who had to stay in a home office, employees who have been put on a short-time work scheme and employees who received certain support payments and advantages from employers.

A participation exemption is applicable for dividends distributed to corporations if the shareholding is at least 10% in capital (corporate income tax and trade tax limited to EU shareholdings) and 15% (trade tax in domestic and non-EU shareholdings). The participation exemption effectively exempts 95% of the dividends from corporate income tax and trade tax. Further, a participation exemption of effectively 95% on capital gains collected by corporations is applicable without the requirement of a minimum shareholding for corporate income tax and trade tax purposes.

Individuals are in general taxed on their received interest, dividends and capital gains with a reduced flat rate of 25% plus a 5.5% solidarity surcharge thereon, usually withheld by the company/the custodian.

Tax losses may be carried forward indefinitely. However, a minimum taxation applies – ie, losses are to be set off against the first EUR1 million of net income in a given year without restriction – any remaining loss may be set off against up to 60% of the net income exceeding this limit. A loss carry-back is applicable to losses up to EUR1 million and limited to a carry-back to the previous year.

A controlling and a controlled legal entity may be treated as if they form one single unit; ie, profits and losses are pooled in the hands of the controlling company for corporate income tax and trade tax purposes. Losses of each company may be set off against profits realised within the group. However, losses of the controlled company from financial years before the one in which the tax group becomes effective are not deductible. The controlling entity becomes liable to corporate income tax and trade tax on the pooled profits.

The German group taxation is applicable for controlled companies in the legal form of a corporation, incorporated under the laws of an EU member state/EEA country with its place of effective management in Germany. In contrast, the controlling entity can be in the legal form of a corporation, a resident individual or a commercial partnership. The controlling entity must hold directly or indirectly the majority of voting rights in the controlled entity (financial integration) from the beginning of the financial year of the controlled company for which group taxation is sought to apply. Further, a profit-and-loss pooling agreement must be concluded with a minimum term of five years under which the controlled entity becomes obligated to transfer its total profit to the controlling entity and under which the controlling entity becomes obligated to balance any losses of the controlled entity. Transferred profits are fully tax exempt; ie, no dividend taxation applies and participation exemption is not required.

The formation of a cross-border group is possible if the controlling entity maintains a permanent establishment in Germany and the participation in the controlled entity can be allocated to this permanent establishment. As a result, profits and losses are pooled on the level of the permanent establishment.

German thin capitalisation rules are widely in accordance with the harmonised EU-standards under the Anti-Tax Avoidance Directive, which means that interest expenses are fully deductible from the tax base only to the extent that the taxpayer earns positive interest income in the same financial year. Interest expenses in excess of interest income is deductible up to 30% of tax earnings before interest, tax, depreciation and amortisation (EBITDA). Unused tax EBITDA can be carried forward for a maximum period of five years. Further, non-deductible interest expenses may be carried forward, thereby increasing the interest expenses in the following year.

The thin capitalisation rules do not apply if the interest expense exceeds positive interest income by less than EUR3 million or the business in question qualifies as a standalone business, or has an equity ratio that is not more than 2 percentage points less than that of the group. The standalone escape is not applicable to corporations where the "shareholder debt financing" test is not met.

Transactions between a company and its corporate or individual shareholder must be carried out in accordance with the arm’s-length principle, which applies in both domestic and cross-border cases, and does generally not depend on the degree of the shareholder’s participation or control in the company.

Transactions between a corporation and its shareholder/related persons being not at arm’s length may qualify as constructive dividends/hidden contributions resulting in an adjustment of the tax base in the respective amount. Further, constructive dividends are generally subject to withholding taxation (25% plus a 5.5% solidarity surcharge thereon).

In addition, the German Foreign Tax Act (AStG) provides a general basis for transfer pricing adjustments in cross-border transactions between related persons. Persons are related for the purposes of this provision if one of them holds a 25% participation in, or controls, the other, or if a third person holds a 25% participation in, or controls, both. Furthermore, persons are related if one of them can exercise a major influence on the other in negotiations or if one has a personal interest that income arises in the hands of the other.

Standard methods for transfer pricing are the comparable uncontrolled price method, resale price method and cost-plus method. Advance pricing agreements are, as a matter of principle, possible but not very common.

A general anti-abuse provision is applicable if an inappropriate legal structure is chosen that leads to a tax advantage for which the taxpayer cannot provide significant non-tax reasons. If there is an abuse of law, the structure is disregarded for tax purposes.

Special anti-evasion rules are applicable; eg, for controlled foreign companies (CFC rules) and anti-treaty/directive shopping.

CFC rules are widely harmonised in the EU under the Anti-Tax Avoidance Directive. In general, resident companies or individuals are deemed to have received a dividend paid out of the profits of a non-resident company if more than 50% of the non-resident company’s capital or voting rights is owned by resident companies and/or resident individuals, the non-resident company is subject to foreign tax at a rate lower than 25% and the non-resident company generates passive income (passive income defined by a certain catalogue). The participation exemption is not applicable to this deemed dividend. However, if the controlled company distributes its profits or if the shares are sold, distributions and gains may be exempt under the participation exemption (effectively 95%) in the hands of resident corporate shareholders and may be fully exempt in the hands of resident individual shareholders if the period between the deemed dividend taxation and actual dividend distribution does not exceed seven years.

Stricter CFC rules apply to passive income with an investment character; ie, the relevant shareholding is reduced to 1%. Exemptions may apply if the passive gross income does not exceed 10% of the non-resident company’s total gross income and if income attributable to one shareholder from several controlled foreign companies does not exceed EUR80,000. In conformity with ECJ jurisprudence, the taxpayer may escape from CFC taxation by providing that the controlled foreign company is resident in an EU/EEA country and carries out genuine economic activity.

The anti-treaty/directive shopping provisions provide that a non-resident company that receives a payment subject to German withholding tax may not be entitled to withholding tax relief, including withholding tax relief sought under the parent subsidiary directive, to the extent that certain requirements are not met; ie, if the shareholder of the receiving company would not be entitled to a respective reclaim in the case of a direct holding or if certain business-related/substance requirements are not met.

Further anti-evasion rules apply to exit taxation and royalty payments (royalty barrier).

The Federal Cartel Office (FCO) is the competent authority regarding the enforcement of the German merger control provisions stipulated in the Act against Restraints of Competition (GWB).

Relevant M&A transactions ("concentrations") are subject to mandatory pre-closing notification/clearance where in the last business year preceding the concentration the combined aggregate worldwide turnover of all participating groups of companies ("undertakings") exceeded EUR500 million; and the domestic turnover of at least one participating undertaking amounted to more than EUR25 million and that of another participating undertaking exceeded EUR5 million (a recent draft law provides for an increase of this threshold to EUR10 million). Particular turnover calculation rules apply to activities in the media sector and for wholesale and retail activities.

Recently, another set of thresholds was added, whereupon a concentration has to be notified if in the last business year preceding the concentration the combined aggregate worldwide turnover of all participating undertakings exceeded EUR500 million, the domestic turnover of one participating undertaking amounted to more than EUR25 million, the consideration for the acquisition exceeds EUR400 million and the target undertaking has significant operations in Germany. The consideration encompasses all assets and other monetary benefits that the seller receives from the buyer in connection with the merger or acquisition. The significance of the operations in Germany may be established merely on the basis of the market share even if the annual domestic turnover is below EUR5 million.

The relevant concentration events include:

  • the acquisition of all or a substantial part of the assets of another undertaking (eg, production sites, even just trade marks, pharmaceutical licences, etc, if these are "substantial" for the generation of revenues on the market);
  • the acquisition of (direct or indirect, sole or joint) control over another undertaking or its parts by one or several undertakings;
  • the acquisition of another company’s shares resulting in an overall shareholding of 25% (or more) or 50% (or more) of the capital or the voting rights (regardless of whether control is acquired); and
  • any other combination of undertakings enabling one or several undertakings to exercise a competitively significant influence on another undertaking directly or indirectly. This is, compared to the rules of other EU member states, a low threshold. It covers situations of less than 25% shareholdings where the rights or factual possibilities to exercise influence resemble or exceed those of a 25% shareholder (eg, through the right to appoint one out of three members of the supervisory board).

German merger control also applies to all joint venture situations where two or more parties acquire or continue to hold a shareholding of 25% or more (or can exercise joint control). Each of these parties is a participating undertaking in terms of the turnover thresholds mentioned above. Also, the creation and/or acquisition of a relevant shareholding in non-full-function joint ventures (eg, joint purchasing organisations and R&D joint ventures) is notifiable under German law.

Generally, all parties involved in the transaction are responsible for filing of the notification. A transaction that is subject to merger control cannot be implemented before clearance or expiry of the relevant waiting periods in the absence of a decision by the FCO.

Within one month of the notification (Phase 1), the FCO has to inform the participating undertakings whether it has initiated the main examination proceedings (Phase 2). The main proceedings have to be completed within four months from the notification; an extension is only possible under certain circumstances. Only preliminarily, for merger control notifications submitted between 1 March and 31 May 2020, a COVID-19 related amendment law provided for an extension of the Phase 1 and Phase 2 deadlines (two months, respectively six months from the date of notification). In Phase 2, the FCO can prohibit a concentration or impose conditions or obligations on the participating undertakings based on their commitment offerings.

The majority of notified transactions are cleared in Phase 1 and main proceedings are only initiated if further examinations are required. Besides judicial review, the Federal Minister for Economic Affairs and Energy has the power to overturn a prohibition decision of the FCO if the concentration is justified by an overriding public interest or if the competitive restraint is outweighed by advantages to the economy as a whole.

The applicable rules governing anti-competitive agreements, decisions and concerted practices essentially resemble the EU rules. Agreements between undertakings, decisions by associations of undertakings and concerted practices that have as their object or effect the restriction of competition are prohibited. This includes horizontal and vertical restrictions of competition. Some particularities (as compared to the EU rules) may apply in merely domestic situations where only small and/or medium-sized companies are involved.

Under certain conditions, anti-competitive agreements are exempted from prohibition. The respective national provision, again, reproduces the conditions required under EU law. Exemptions can apply if an agreement serves to improve the production of goods or promotes technical progress while allowing consumers a fair share of the resulting benefit. This applies, in particular, to certain types of efficiency-enhancing co-operation agreements between competitors; eg, purchasing co-operations and specialised production co-operations. While the law has not been changed in response to the COVID-19 pandemic, certain types of co-operation may appear more economically necessary and more beneficial to customers in the crisis situation than otherwise. In practice, this can open doors for some types of co-operation that would be viewed more critical in "normal" times. However, COVID-19 may never be an excuse for so-called hardcore antitrust infringements like price and capacity-related cartels. The EC's block exemptions apply mutatis mutandis for the application of the exemption clause. Agreements or concerted practices in violation of the rules governing anti-competitive agreements and practices are null and void.

According to EU Council Regulation No 1/2003, the FCO is required to apply EU rules (ie, Article 101 of the Treaty on the Functioning of the European Union) where an agreement or concerted practice may affect trade between member states. Conduct allowed under EU rules must not be prohibited under German national law under such circumstances. The GWB applies to all competitive constraints that directly and appreciably affect competition in Germany. Thus, an undertaking does not need to have operations or a subsidiary in Germany to fall within the scope of the GWB.

The abuse of a dominant position by one or several undertakings is prohibited. An undertaking is dominant if it has no competitors, is not exposed to any substantial competition or has a paramount market position in relation to its competitors. To determine whether a company holds a dominant position in a relevant market in relation to its competitors, it is necessary to assess all competition-relevant criteria, such as the market shares, the availability of relevant resources (eg, patents and distribution networks), barriers to entry and the buying power of the opposite side of the market. Under German law, an undertaking is presumed to be dominant if it has a market share of at least 40%. However, this presumption is rebuttable. There are also certain market share thresholds for the presumption of oligopolistic dominance.

Abusive practices are actions that a dominant company enforces or tries to enforce in the context of its market power and that usually have an exploitative or exclusionary effect against other companies in a way that would not be possible if effective competition existed. The prohibition applies to the market in which the dominant position exists, to markets that are affected by the dominant position and to other markets where the dominant position is used as leverage.

Additionally, subject to further requirements and as such stricter than EU law, German law prohibits abusive conduct by undertakings with so-called relative or superior market power (below the "threshold" of market dominance). Encompassed are companies that hold no dominant position, but on whose supply or demand SMEs depend. Hotly debated provisions are the so-called tapping prohibition (request to be granted advantages without objective justification), which also applies to undertakings with only relative market power, and the prohibition to offer or sell food below cost price. A recent draft law also provides for a tightening of rules concerning digital companies with "gatekeeper", "platform" and similar functions.

Finally, these prohibitions apply to every abuse of market power that directly and appreciably affects competition in Germany.

German patents, which provide for protection in Germany, can be granted for inventions in all fields of technology if they are novel, involve an inventive step that is not obvious to a person skilled in the art and are capable of industrial application.

German patents can be applied for by filing a national application with the German Patent and Trade Mark Office (DPMA), by filing a European application with the European Patent Office designating Germany (as one of more than 30 possible countries in the EU) or by filing an application with the World Intellectual Property Organization (WIPO). A unitary patent, a European patent with unitary effect in all European member states, is in the legislative process but does not exist yet. Because of Brexit, a unitary patent might even fail.

German patents can be in force for a maximum of 20 years from the filing date if the annual prolongation fees are paid. If certain requirements are met, the term of protection for medicinal and plant protection products can be extended upon application by a supplementary protection certificate by up to five years and six months.

The patent owner may prevent others from the unlicensed use (manufacture, offer, place on the market, use, possession or import of infringing goods) of the patented technology and claim information, disclosure of records, the destruction of infringing products and damages from infringers. Damages can be calculated based on lost profits of the patent owner, licence analogy or profits of the infringer. Punitive damages cannot be claimed in Germany.

German court proceedings regarding patents are bifurcated. Infringement proceedings and nullity actions are dealt with before two types of courts.

Utility models are similar to patents and protect an innovative act resulting in a technical product. They can be applied for with the DPMA. There is no international equivalent for utility models. The application process for utility models is faster and cheaper than for patents because for utility models the DPMA only checks the formalities of the application. Novelty, existence of an inventive step and industrial applicability are assessed only if a third party initiates cancellation procedures. The success chances of cancellation procedures against utility models are therefore relatively high. The maximum lifespan of a utility model is ten years.

Trade marks protect signs suitable to distinguish goods or services of their owner from other enterprises’ goods or services. Words, letters, numbers, images, colours, holograms, multimedia signs and sounds may serve as trade marks if they are of sufficient distinctive character.

German trade marks may be applied for with the DPMA. European trade marks that provide protection for all EU member states have to be applied for with the European Union Intellectual Property Office. Registration for German and European trade marks is also possible through the WIPO.

German trade marks are initially protected for ten years. The protection may be prolonged for an indefinite number of times upon timely payment of the prolongation fees.

Not only the unlicensed use of a trade mark is forbidden but also the exploitation of its reputation – eg, by allegations – is regarded as an infringement. To enjoy the exclusivity right of a trade mark, the trade mark owner has to use the trade mark for the goods or services it is registered for. In the event of a trade mark infringement, the trade mark owner may claim injunctive relief, rendering of accounts, damages, a product recall and even the destruction of the infringing goods. As for patents, the jurisdiction for infringement and nullity proceedings is bifurcated in Germany.

Two-dimensional patterns and three-dimensional designs are aesthetic creations that can be protected under the German Design Act by registration with the DPMA if the design in question is new and has an individual character.

The registration gives the owner a property right over the design and he is entitled to use, license and prevent others from using the registered design (even the use of a substantially similar design is prohibited) without consent.

In the case of a design right infringement, the owner may claim injunctive relief, rendering of accounts, damages, product recall and even the destruction of the infringing goods.

Protection for a German design right can be extended for a maximum of 25 years.

A German design right is only valid in Germany. However, the owner of the design right may apply for a European community design or an international industrial design.

Under the German Copyright Act, creative work – regardless of its embodiment, including software and databases – can be protected as an immaterial asset if the work is an author’s personal and intellectual creation, whereas such creation can be literary, scientific, artistic, etc.

In Germany, the author enjoys copyright protection without the need for formal application or registration; copyright protection arises automatically. The mere work creation gives authors a property right over their work; they are entitled to use, license and prevent others from distributing, reproducing or performing their copyright without their consent. In addition, authors have the rights to the recognition of their authorship.

In the event of a copyright infringement, the author may claim injunctive relief, rendering of accounts, damages, a product recall and even the destruction of the infringing goods.

German copyright protection ends 70 years after the author’s death.

The new German Act on the Protection of Trade Secrets improves the legal protection of trade secrets.

A trade secret is any information that is not generally known or readily accessible to the persons in the circles who normally deal with this type of information and is therefore of economic value, that is subject to appropriate confidentiality measures by its lawful holder and in whose confidentiality the holder has a legitimate interest. Hence, any owner of a trade secret must enforce "appropriate measures" and establish the confidentiality of the trade secrets to ensure protection. Such appropriate measures may be the implementation and documentation of IT security measures as well as the implementation of confidentiality agreements with employees and business partners, etc.

The German Act on the Protection of Trade Secrets further stipulates the allowed actions for discovering a trade secret: so-called reverse engineering is now permissible in Germany in general, if it does not violate contractual obligations or other mandatory statutory law. In addition, there are certain exemptions that protect whistle-blowers, journalists and employees.

In the event of an infringement, the trade secret’s owner may claim the cessation of or the prohibition of the use or disclosure of the trade secret and even a product recall regarding the infringing goods and/or their destruction as well as damages.

The General Data Protection Regulation (Regulation (EU) 2016/679; GDPR) forms a uniform and unitary data protection law throughout the EU and EEA, and is directly applicable in Germany. Additional provisions can be found in the German Federal Data Protection Act (BDSG).

The GDPR uses a broad definition of personal data. Any data that can be related to a specific individual (the data subject) directly or indirectly will be personal data. Examples of personal data include names, pseudonyms, key codes, email addresses, Internet Protocol (IP) addresses, vehicle number plates or session IDs stored in a cookie. Health data, genetic data, data about race or ethnicity and other special categories of personal data as well as personal data relating to criminal convictions and offences enjoy additional protections.

Processing of personal data (including disclosure to third parties) must be lawful, transparent and fair. It must be limited to specific purposes and to the data necessary for these purposes (data minimisation). Other principles include that data must be accurate, kept secure and not be stored for longer than needed (storage limitation). The GDPR also requires businesses to inform the data subject how their data is used and to document compliance with the GDPR. Data subjects have the right to access their personal data, to request corrections and to have it deleted (or restricted) under certain conditions.

Businesses may be required to designate a data protection officer (DPO), who can be an employee or an external service provider. Germany requires a DPO for all businesses that employ ten or more persons using computers to handle personal data. Smaller organisations may need a DPO if they perform certain high-risk activities set out in the GDPR and BDSG.

Additional provisions regarding data protection and privacy in the context of telecommunications are set out in Directive 2000/31/EC (ePrivacy Directive). Germany has transposed this into, inter alia, the Act Against Unfair Competition (UWG) and the Telemedia Act (TMG). The most significant aspect here is the rules on direct marketing via email, which requires prior consent of the recipient (opt-in) or that the recipient has previously purchased similar goods or services from the sender (also known as "soft" opt-in). Unlike other EU member states, Germany applies these strict rules for marketing to both consumers and businesses.

Businesses not established in the EEA will be subject to the GDPR if they offer goods and services to individuals in the EEA, or if they monitor the behaviour of data subjects who are in the EEA. Non-EEA businesses who do this on a regular basis or in conjunction with certain high-risk activities will have to designate a representative in the EEA. Under these rules, websites that are directed at an EEA audience or that track visitors from the EEA will need to comply with the GDPR. Note that only the location of the individuals matters; contrary to a common misconception, their citizenship is not a relevant factor.

EEA and non-EEA businesses should be careful when sending marketing email into Germany; the strict German rules will apply if the recipient resides in Germany.

For data transfers from Germany to other EEA countries, there are no special requirements. When personal data is transferred outside the EEA, however, then this requires – with a small number of exceptions – either a decision of the EC that the destination country ensures an adequate level of protection (this is the case, eg, for Switzerland, Canada and Japan as well as – limited to the EU-US Privacy Shield framework – the USA), or appropriate safeguards to protect the data subjects’ rights (such as the EC's standard data protection clauses or binding corporate rules approved by a supervisory authority).

Compliance with the GDPR and the BDSG is monitored in Germany by 18 data protection authorities (one federal data protection authority and 17 state data protection authorities – two in Bavaria and one in each of the other 15 federal states). Private businesses and individuals will usually deal with data protection authorities at the state level; the federal data protection authority is only responsible for federal public entities. Bavaria, as a special case, has two separate data protection authorities for the private and the public sector, respectively, whereas all other state data protection authorities supervise both private and public entities at the state level.

The tasks of the data protection authorities include raising awareness and advice to businesses. They have the power to investigate violations, issue orders to stop non-compliant behaviour and impose fines up to EUR20 million or 4% of the worldwide annual turnover, whichever is higher. As of May 2020, the highest fines imposed in Germany were EUR14.5 million for the inadmissible storage of tenant data by Deutsche Wohnen, a housing company, and EUR9.55 million for the accidental disclosure of customer data via a telephone hotline by 1&1 Telecom, an internet and phone service provider.

The German data protection authorities co-ordinate their work and positions in regular meetings at the Data Protection Conference (DSK).

McDermott Will & Emery

Nymphenburger Str. 3
80335 Munich

+49 89 12712 0

+49 89 12712 111
Author Business Card

Law and Practice


McDermott Will & Emery partners with leaders around the world to fuel missions, knock down barriers and shape markets. With 20-plus locations in six countries, the team works seamlessly across practices, industries and geographies to deliver highly effective – and often unexpected – solutions that propel success. More than 1,100 lawyers strong, the firm brings its personal passion and legal prowess to bear in every matter for its clients and the people they serve. In Germany, McDermott Will & Emery has three offices in Düsseldorf, Frankfurt a.M. and Munich with more than 120 lawyers. Clients are regularly advised on the full spectrum of corporate and commercial matters, including cross-border M&A, joint ventures, the establishment of subsidiaries (and related personnel and visa matters), cross-border financings and securities issues. The firm’s lawyers are well-respected experts in the areas of antitrust and competition; capital markets; corporate law; health services and life sciences; IP; labour and employment; private equity and venture capital; restructuring and insolvency; real estate; taxation; and telecommunications, media and IT. In February 2020, McDermott Will & Emery launched a global and multidisciplinary COVID-19 Task Force that helps its clients to navigate through the pandemic.

Compare law and practice by selecting locations and topic(s)


Select Topic(s)

loading ...

Please select at least one chapter and one topic to use the compare functionality.