Opening Subsidiary vs Branch in Germany in 2023
Are you considering extending your company’s activities to Germany?
Do you want to determine which option would be best for your company—establishing a branch office or a subsidiary?
When pursuing international expansion, selecting
the right business structure is critical for sustainable growth, meeting expectations, and ensuring cost-effectiveness. Careful consideration of these factors will pave the way for a successful long-term venture.
Germany is a developing European country that provides investors with various benefits to build their businesses. Investors who want to register their businesses in Germany, however, must think carefully about their business selection. The two most popular ways for investors to begin a business in Germany are through a subsidiary and a branch office.
Through this article, we shall compare branch offices and subsidiary firms in Germany. This will assist you in figuring out whether opening subsidiary vs branch in Germany is better for your business operations.
Meaning of Subsidiary
A subsidiary is an independent legal organization in which the parent corporation owns most of the shares. It was established in accordance with German corporate legislation.
Forming a subsidiary in Germany for expanding your commercial operations refers to starting a new business where the capital of the organization is completely or predominately possessed by the parent organization. Although the subsidiary runs independently, the parent firm retains authority over it.
The regulations governing subsidiaries in Germany state that a subsidiary is a limited liability business that possesses its own share capital, management framework, and accounting structure independent of the parent enterprise. The subsidiary may, nevertheless, still carry out all business operations under the parent organization’s name.
Characteristics of Subsidiary in Germany
- The subsidiary is governed by German tax legislation and rules.
- The establishment of a subsidiary in Germany creates a distinct legal entity from the parent business.
- In general, the parent firm holds most of the subsidiary’s ownership, giving it the ability to direct how the subsidiary operates and makes decisions.
- The subsidiary is responsible for keeping its particular accounting documents and creating financial reports that adhere to German accounting regulations.
Benefits of Forming a Subsidiary in Germany
The advantages of establishing a subsidiary business in Germany include the following:
- Operating as a wholly local business: A subsidiary is considered a local business in Germany. Being viewed as 100% locally owned expands commercial options for subsidiaries, making it a more popular choice among entrepreneurs.
- Can carry on business under a name other than that of the parent organization: A subsidiary firm may conduct operations in Germany under a name other than that of its parent firm, according to German corporate legislation. It can carry out additional or different commercial operations in accordance with German requirements and cultural norms.
- Tax benefits: The same tax regulations that apply to all other German-resident businesses also apply to subsidiaries. Other than that, Germany offers a number of tax breaks for establishing a subsidiary there.
- Local Market Presence: The parent business expands the corporation’s presence in the German market by forming a subsidiary. As a result, there may be a rise in market share, customer connections, and brand recognition.
Drawbacks of Setting Up a Subsidiary in Germany
Here are the drawbacks of setting up a subsidiary in Germany:
- Complex setup procedure: Setting up a subsidiary in Germany includes complying with numerous legal and regulatory regulations. This entails registering the business, acquiring the required licenses and permissions, and adhering to regional business governance laws.
- Expensive: A subsidiary often has higher startup and ongoing expenses than a branch. This covers charges for starting a business, ongoing operational and compliance obligations, as well as independent auditing and bookkeeping services.
Meaning of Branch Office
A branch office in Germany is a division of the overseas parent corporation that operates under its direction and supervision. As a result, the parent business is entirely liable for the operations and debts of the branch office. A branch office is not an independent legal organization and is governed by the same local regulations that apply to the overseas parent business.
Despite not being autonomous, the Branch runs its own company and is therefore required to be registered with the authorities in Germany. The business name of the overseas parent firm must be included in the Branch’s official name for identifying purposes. Germany has two different sorts of branches, which includes independent and dependent branch offices.
Characteristics of Branch in Germany
- Legal Status: In Germany, a branch office is not regarded as a distinct legal body. It functions as a division of the parent firm, conducting business operations using the parent organization’s name.
- Control and Decision-Making: The parent firm maintains complete supervision over the branch office’s activities and decision-making procedures.
- Liability: The parent business is entirely responsible for the debts and liabilities of the German branch office. Any obligations or legal claims resulting from the operations of the branch office may be pursued against the assets of the parent firm.
- Business Operations: The branch office can carry out a variety of commercial activities on account of its holding corporation. It can execute deals, complete transactions, enter into agreements, render services, and engage in other commercial activities within the limits of the parent organization’s business affairs.
Benefits of Forming a Branch Office in Germany
Here are the pros of forming a branch office in Germany:
Streamlined setup procedure
Comparatively, opening a branch in Germany is usually less complicated and quicker than opening a subsidiary. There is no necessity to incorporate a new business or satisfy onerous legal requirements.
Cost Efficiency
Forming a branch office is more affordable as compared to other business forms. By eliminating the need for a separate legal entity, it reduces additional administrative and operational expenses.
Local Presence
Having a physical presence by way of a branch office in Germany shows a dedication to the market and can improve the reputation of the parent firm. It makes it possible to connect directly with clients, partners, and suppliers, which strengthens business ties.
Flexibility in business operations
The parent company has more flexibility in managing business operations in Germany by establishing a branch office. It can engage in a variety of tasks, including marketing, sales, distribution, and customer service, enabling a thorough strategy catered to the demands of the regional market.
Control and centralized management
Having a branch office in Germany enables the parent firm to retain full operational control over its German operations. It allows for centralized decision-making and coordination, assuring adherence to the strategies and directives of the parent firm.
Drawbacks of Incorporating a Branch Office in Germany
- Unlimited Liability: Because a branch lacks a distinct legal character, the parent business is entirely responsible for its activities in Germany. As a result, there may be hazards and legal claims against the parent business’s assets.
- Absence of Autonomy: The branch is directly under the parent company’s supervision, which may restrict operational autonomy. Coordination with and approval from the parent firm may be necessary for decision-making and strategic planning.
Opening Subsidiary vs Branch in Germany: Comparison
Choosing between a subsidiary and a branch depends on business needs. A clear understanding of their distinctions helps individuals make informed decisions to maximize benefits and align with specific business activities.
Here, we will provide a concise overview of the pros and cons of opening subsidiary vs branch in Germany:
100% local
While considering opening subsidiary vs branch in Germany, one thing that you must keep in mind is that a subsidiary can be treated as a 100% local entity in Germany in contrast to a branch office.
Company formation procedure
While considering opening subsidiary vs branch in Germany, another thing you must consider is whether it is easy to establish the firm. In contrast to a subsidiary firm, the formation of a branch office is simpler because there are fewer stringent legal requirements to be met.
Affordability
Another issue to think about when considering opening subsidiary vs branch in Germany, is the expense related to your business. Creating a branch office is less expensive than creating a subsidiary company. This is possible because the parent firm may make use of its current assets, infrastructure, and knowledge.
Tax advantages
Another issue to think about when considering opening subsidiary vs branch in Germany, is the numerous tax benefits. A branch is not subject to separate corporation taxation in Germany, unlike a subsidiary. Profits are normally taxed in the country where the parent firm is located. Based on the nation’s tax regulations where the parent company is located, this may offer prospective tax advantages.
Taxation of branch or subsidiary in Germany
Corporate inhabitants in Germany are subject to a global income tax. However, revenue related to an overseas permanent establishment (PE) is often excluded by double taxation agreements (DTTs). In Germany, branches and subsidiaries are largely governed by the same tax laws. German businesses must pay both corporation tax and trade tax on their profits.
The corporate income tax (CIT) in Germany is usually applied to the revenue generated by a firm in the nation. The rate of business taxes is 15%, plus a 5.5% “solidarity surcharge” on top of that. As a result, the overall tax rate is 15.825%. When analyzing the operations and transactions carried out within Germany, German tax legislation is applied to calculate the branch’s taxable revenue.
Subisidaries are also subject to the normal CIT rate, and along with that, they might additionally be subject to trade tax. The trade tax rate includes a standardized tax rate of 3.5% with a local tax charge, based on the location where the PEs of the company are based.
Germany’s businesses are subject to the value-added tax, an indirect tax with a standard rate of 19% and a lowered rate of 7%. The social security tax, the transfer tax, and the withholding tax on earnings and royalties are among the additional taxes that apply to businesses in the nation.
The various tax kinds and rates that businesses in Germany are required to pay are shown in the following table:
Types of Taxes | Tax Rate |
Corporate Income Tax | 15% (plus a 5.5% solidarity surcharge) |
Trade Tax | 3.5% |
Value-Added Tax | 19% and 7% |
Withholding Tax | 25% (plus a 5.5% solidarity surcharge) |
Conclusion
Several aspects must be taken into consideration when considering opening subsidiary vs branch in Germany. A few of these variables are the desired amount of control, expenses, potential legal implications, tax advantages, and ease of business incorporation. While a subsidiary offers greater autonomy and limited liability, it comes with higher setup costs. A branch office, on the other hand, offers cost efficiency and centralized management, but the parent business takes on infinite liability. By conducting a comprehensive analysis of the advantages and disadvantages of opening a subsidiary vs branch in Germany, businesses can make an informed decision on which structure aligns best with their specific needs and objectives.
For a more clear idea of opening subsidiary vs branch in Germany, consult with our experts at Odint Consulting. Our experts have years of experience in guiding our clients in choosing the structure that best fits their needs. To learn more about your options, get in touch with us right away.
FAQ’s
In Germany, it is feasible to change a branch into a subsidiary or the other way around. However, the procedure may be subject to legal and regulatory regulations.
A German subsidiary and a branch differ in their legal status. A subsidiary is an independent legal organization in which the parent corporation owns most of the shares. A branch office is a division of the foreign parent corporation that functions under its direction and control; it is not a separate legal entity.
- A subsidiary may conduct business as a wholly owned local corporation.
- Subsidiaries are subject to the same tax laws as all other German-resident enterprises.
- A subsidiary company may operate in Germany under a different name than that of its parent company.
- A branch office is not recognized as a separate legal entity in Germany.
- The parent company continues to exercise complete control over all branch office operations and decision-making processes.
- The obligations and liabilities of the German branch office are fully the responsibility of the parent company.
