Germany: Indian Companies Investing In Germany – Protected By A Well-Founded Legal Framework

For foreign companies that are already in existence (other than a non-profit-making representative office) the obvious first choice is to establish a branch office. This does not require the creation of a legal entity that is separate from the existing company; the branch office remains both legally and organisationally part of the company. Within a group of branch offices differentiation can then be made between independent (those with their own accounting, management and funds - intended to exist for a longer period of time) and dependent (merely ancillary branch) offices. Any obligations entered into by the branch office are always ultimately the responsibility of parent company, however the branch office usually needs to be entered in the commercial register of the local court. Only in rare cases is prior approval required for setting up a branch office, such an example applies to foreign banks.

For small companies, or in the event that time constraints are an issue, sole proprietorship is a suitable operating form. An advantage of this arrangement is that the incorporation costs can be kept very low. From a corporate law viewpoint, only registration at the trade licensing office is required. In addition, the owner is free to take all decisions, which is often considered to be an advantage. However: the owner and all of his assets (including personal ones) are liable for the obligations of the sole proprietary firm. Unless the firm is entered in the commercial register of the local court (which is not compulsory in cases of low turnover and low profits), there is also no requirement to maintain detailed accounts. Once a certain scale of business activities is reached, however, the appropriateness of this operating form should be reassessed.

The two most important corporate forms for foreign investors are, without a doubt, corporations and private companies. In corporations, the participation of the shareholder is often confined to the limited amount of the capital invested (more on this under 1.4). In contrast, in private companies the shareholder plays a far more active role.

It follows on from this that, since private companies are not independent legal entities, their shareholders are, in principle, jointly and severally liable for the company's obligations, even, theoretically, with their personal assets. Shareholders cannot easily be replaced. Prior provision must therefore be made for how to proceed in the case of death, termination or insolvency of a shareholder. The most important forms of private company are the GbR (private partnership), the oHG (general partnership) and the KG (limited partnership).

In order to create a GbR at least two shareholders must come together to pursue a joint objective. This corporate structure is therefore often chosen for short- and medium-term projects, or as an intermediate form leading on to a more permanent, longer-term solution. All GbR shareholders have equal rights and are jointly and severally liable, along with their personal assets. A written partnership contract is recommended, but it is not compulsory.

Any GbR that has the intention of pursuing commercial activities over a certain scale automatically qualifies as an oHG and must therefore comply with the requirements applicable to oHGs. Thus, for example, registration on to the commercial register is compulsory. Although oHGs are not independent legal entities, they are nevertheless granted a certain amount of independence by the law. An oHG may acquire rights under its corporate name, as well as being allowed to enter into obligations, buy property, bring claims and have claims brought against them in court. In principle, all of a company's shareholders may represent it. Each shareholder, and all of his personal assets, is jointly and severally liable for the obligations of the firm.

KGs are a particular type of oHG. They are not independent legal entities, but, in many ways, they correspond in character to corporations. The incorporation of a KG requires at least two shareholders. In contrast to oHGs, however, in this case the liability of one or more shareholders can be limited to a specified amount of the capital invested. There are thus two kinds of shareholder, at least one of each must be present: one general partner having unlimited liability (Komplementär) and one limited partner whose liability extends only to a specified amount of the capital invested (Kommanditist). In practice, a limited liability company (GmbH) is often the general partner. This therefore means that in reality the liability of the general partner is also limited.

For large businesses in particular setting up a corporation is often the correct choice to make. With this option liability is borne by the company itself, rather than the shareholders. Upon the creation of a corporation a distinct legal entity, with its own and independent rights, obligations and name, comes into being. The company concludes contracts, pays taxes and owns property. Liability is, at the same time, limited to the assets of the company. However, a minimum initial share capital is prescribed for corporations. Accounting requirements are also generally considerably stricter than they are for private companies.

The most common form of corporation is the private limited liability company (Gesellschaft mit beschränkter Haftung, GmbH). This structure allows for a combination of both flexibility and relatively low administrative costs. The GmbH is incorporated upon the conclusion of an agreement, certified by a notary. The company must then be entered in the commercial register. The minimum capital required in order to establish a GmbH is 25,000 Euro (however the full amount does not need to be paid at the time of establishment); each shareholder must make a capital investment of at least 100 Euro. The share capital may also be provided by way of contribution in kind. A GmbH has one or more managing directors, who represent the company, but who follow the directions of the shareholders. Foreign nationals may also work as managing directors.

The stock corporation (Aktiengesellschaft, AG) offers the advantage that it can be placed on a broader capital base via the issuing of shares. It can be formed by a sole individual upon the certification by a notary of its articles of association. The original share capital must be a minimum of 50,000 Euro. The capital is divided into shares, these may be either par value shares (the nominal value is detailed on the share certificate and amounts to at least one Euro) or shares without a par value (the share certificate hereby represents a percentage of the original capital). A distinction is also made between bearer shares (whereby the respective holder of the share certificate is a shareholder of the company) and registered shares (whereby the shareholder is mentioned by name on the certificate). It is possible for these two types of shares to co-exist. Stock corporations are managed by a managing board and are also supervised by a supervisory board, which must, in some cases, approve the business transactions of the managing board. The supervisory board also represents the company vis-à-vis the members of the managing board. Within the framework of co-determination by workers, workers' representatives may also have to be elected to the supervisory board.

In order to promote good corporate management in Germany, a Corporate Governance Code has been developed. Companies are expected to comply with the Code.

To aide the making of a choice between the GmbH and the AG, some of the important differences can be briefly summarised as follows. The managing director of a GmbH must follow the instructions of the company's shareholders, whereas the managing board of an AG make autonomous decisions and are monitored only by a supervisory board. In the case of a GmbH the certification of a notary is required in order to transfer shares; the shares of an AG can, in general, be transferred freely. The shareholders of a GmbH have the right to inspect the books of the company; in the case of an AG, only the supervisory board has this right.

For Indian nationals, there is a general requirement of a visa. The visa must be applied for before entry into Germany, at the relevant German Embassy or Consulate. The so-called Schengen Visa is valid for entry into all of the Schengen States and for up to 90 days per half year. If a longer stay in Germany is planned it is possible to apply directly for a residence permit. After five years, and in some cases after just three years (for self-employed businessmen), this can be converted into a permanent right of residence. This requires proof of sufficient means for living and knowledge of the German language.

The decision on whether or not to grant a residence permit, taken by the Immigration Department, is linked to the decision of the Federal Agency for Employment to grant the necessary work permit.

It is normally straightforward for spouses and children up to the age of 16 to obtain a residence permit once the other spouse/parent has already been granted such a permit.

German labour law is quite complex. It is not definitively codified, but is found in a number of laws and is often further developed in case law. German labour law is also largely influenced by European Union law. Three general areas of the law can be identified: individual labour law (that is, employment contracts), which is considered in more detail below; collective bargaining agreements and provisions (regulating relations between employers and trade unions, which hold a strong position in Germany as a result of the principle of freedom of association); and law for the protection of workers' health.

In principle, contracts in Germany are not required to take any prescribed form. They can even be oral agreements, though a written form is recommended. They generally last for an indefinite period of time. If an employment contract is to be made for a specified period, a reason must be given for this limitation if the period is longer than two years. In this case a written contract is compulsory. Exceptions are made for newly established companies. Employers and employees can agree on a probationary period of a maximum six months. During this probationary period the employment contract may be terminated by either of the contracting parties, with a notice period of two weeks.

Working hours are governed by the terms of the employment contract and by the applicable collective agreement. In principle, a guideline of an eight-hour day applies, which can be extended to ten hours, provided that the average working day over a period of six months, or 24 weeks, does not exceed eight hours. Working is, on the whole, not allowed on Sundays or on public holidays. However there are, of course, numerous exceptions to these rules.

The remuneration of an employee is dependent on the employment contract and often also upon collective agreements. The employer is required to withhold from the employee, and pay directly to the respective administrative entities, the necessary sums for income tax, solidarity surcharge (intended to promote the development of East Germany), church tax (only applicable if a religion is cited on the employee's tax form) and social security contributions (for health insurance, pensions insurance, unemployment insurance and nursing care insurance). Employees unable to work through no fault of their own as a result of illness have the right to continued payment of wages or salary for up to six weeks.

In principle, employees have the right to at least 20 days holiday per calendar year, based upon a 5 day working week. However, there are often collective agreements in place which make provision for a longer period of holiday. The right to holiday comes into force six months after the commencement of the employment relationship.

The employment relationship can be brought to an end in a number of different ways: by reaching the end of the contractual period; by reaching the age of retirement (currently 65); with an agreement to terminate the contract; or by dismissal. A dismissal can occur as a proper termination in conformity with the notice period fixed either by law, the collective agreement or the individual employment contract, or it may take the form of immediate dismissal on extraordinary grounds. If the company has a workers' council then the employer must consult this council regarding each case of dismissal. Attention must also be paid to the legal provisions against unlawful dismissal, which are applicable to those companies that regularly have more than 10 employees.

In the event that the law against unlawful dismissal is applicable, a socially justifiable reason is required for a contractual dismissal. The law envisages a notice period of four weeks, up to the 15^th or end of the calendar month, for a contractual dismissal. However this period varies according to the duration of the employment relationship or as a result of individual employment contracts or collective agreements.

Serious cause is required for an extraordinary dismissal, as it may be announced without giving a period of notice. A serious reason can be said to exist if the employer cannot reasonably be expected to wait until the end of the usual notice period. Extraordinary dismissal is ultima ratio, to be used when all milder disciplinary methods have been exhausted or are of no use, including a formal warning. Examples of permissible grounds for dismissal include refusal by the employee to carry out the work assigned, feigning of illness or breach of confidentiality with respect to business secrets.

Social security in Germany is organised for pensioners, ill persons and invalids in need of permanent nursing through a system of redistribution. The costs of insurance schemes are borne by insured employees and by their employers. Social security comprises health insurance, nursing care insurance, unemployment insurance and accident insurance. These insurances are compulsory.