Differences between branch registration and company formation in Germany

In Germany, establishing a branch and forming a company are two distinct ways of conducting business, each with its own set of legal and operational implications. 

Here's an overview of the key differences between a branch and a company formation:

1. Legal Entity:
   • Branch: A branch is not a separate legal entity from its parent company. It operates as an extension of the foreign company, and the parent company is fully responsible for the branch's liabilities and obligations.
   • Company Formation: When you form a company, such as a GmbH (private limited company) or AG (public limited company), it becomes a separate legal entity distinct from its founders or shareholders. The company is responsible for its own liabilities.
2. Liability:
   • Branch: The parent company assumes full liability for the branch's activities. Creditors can potentially go after the assets of the parent company to satisfy the branch's obligations.
   • Company Formation: Shareholders' liability is generally limited to the amount invested in the company. This limited liability protects personal assets from business-related debts and obligations.
3. Registration:
   • Branch: Establishing a branch in Germany involves registration with the local trade office and, in some cases, the commercial register. It must also comply with local tax and regulatory requirements.
   • Company Formation: Forming a company requires registration with the commercial register, and depending on the type of company, it may involve drafting articles of association, appointing directors, and fulfilling other legal requirements.
4. Autonomy:
   • Branch: The branch operates under the control and direction of the parent company. Decision-making authority often rests with the parent company.
   • Company Formation: A company has a separate management structure and can operate independently. The shareholders or directors make decisions based on the company's internal governance structure.
5. Taxation:
   • Branch: The profits of the branch are typically taxed in accordance with German tax laws. The parent company may also face tax implications in its home jurisdiction.
   • Company Formation: The company is subject to German corporate taxation. The profits are taxed at the corporate level, and dividends distributed to shareholders may also be subject to taxation.

When deciding between a branch and a company formation in Germany, it is crucial to consider factors such as the level of control, liability, and taxation implications, as well as the long-term business objectives. Consulting with a legal professional or tax advisor in Germany can help you make an informed decision based on your specific circumstances. 

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Our specialist lawyers for commercial and corporate law will be happy to advise you on the formation of companies such as UG, GmbH or GbR etc.. We offer packages at flat fees for company formations.

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Benefits of a German company (UG, AG, or GmbH) over a German Branch

With the separate entity approach, you can benefit as follows by forming a new German company:

1. Shielding effect for profits and losses generated in Germany
2. The new German company is eligible for benefits according to tax treaties
3. If you already have a foreign parent company, futher benefits apply:
   a) In the case your foreign entity is an EU based company, you can make a German company a wholly owned subsidiary of your European parent company. Net dividends can be disbursed tax free in Germany according to the EU regulation 2011/96/EU (mother-daughter directive).
   b) In such cases where your foreign entity is located outside of the EU, you can benefit from tax treaties which oftentimes reduce the tax on net dividends to a low amount of on average 5%. The only requirement will be that your foreign parent company needs to hold a minimum of stakes in the new German company you're forming. 
4. At your parent company, you can treat the setup cost towards forming your new German company as an investment
5. Tax-effective lease, loan and employment agreements are possible, even with the shareholders
6. Profit allocation is possible due to inter company invoicing

How does taxation of a German Branch vs. German UG or German GmbH work?

The taxation of a German Branch is usually the same as when forming a German UG or GmbH (around 30% including trade tax) if the foreign company type resembles the such of a corporation that files and pays tax on its own for the income generated. We refer to this as an intransparent unit regarded for tax purposes, meaning taxation of income is not directly passed onto the shareholder level.

What is the major difference if I form a German Branch of my foreign company?

The major difference of a German branch is that dealings between the German branch and headquarters need to be recorded even if not invoiced as the German branch and its head office form two separate tax subjects. This requires more extensive recording to abide by the at arm’s length principle.

A German branch doesn't have any attraction for your global sales. If the German branch supports your sales activities, this will however result in German tax nexus of such activities.

Why is it better to register a company instead of just registering a branch?

The decision to register a company instead of just establishing a branch in Germany depends on various factors and the specific needs and goals of your business. Here are some reasons why registering a company may be recommended in certain situations:

1. Limited Liability: One of the primary advantages of registering a company is the concept of limited liability. In a company structure, the liability of shareholders is generally limited to the amount of their investment in the company. This means that personal assets are protected from business-related liabilities. In contrast, a branch does not have its own legal personality, and the parent company is fully responsible for the branch's obligations, exposing its assets to potential risks.
2. Independent Legal Entity: A registered company is a separate legal entity from its founders or shareholders. This independence allows the company to enter into contracts, own assets, and incur obligations in its own name. A branch, on the other hand, is considered an extension of the foreign parent company without its own legal identity.
3. Operational Autonomy: A registered company has its own management structure and decision-making processes. This autonomy allows the company to operate independently in Germany, adapting to local market conditions and making decisions that align with its specific objectives. In contrast, a branch typically operates under the direct control and decision-making of the parent company.
4. Enhanced Credibility: Having a registered company may enhance your business's credibility in the local market. German customers, suppliers, and partners may prefer dealing with a local entity that is registered and subject to German corporate governance standards.
5. Tax Considerations: The tax implications of operating as a branch versus a registered company can vary. Depending on your business activities and the tax laws in both the home country and Germany, establishing a company may provide more favorable tax treatment. Companies are subject to German corporate taxation, and the tax structure may be more transparent and straightforward compared to the taxation of branch profits.
6. Ease of Expansion: If your business plans include expanding operations beyond the initial establishment, having a registered company provides a more scalable structure. It can facilitate the addition of branches or subsidiaries in the future while maintaining a clear legal and operational structure.

Ultimately, the decision between registering a company and establishing a branch depends on your specific business goals, risk tolerance, and the legal and operational framework that best suits your needs. It is advisable to seek professional advice from legal and tax experts in both your home country and Germany to make an informed decision based on your unique circumstances.