How do you set up a business in Germany? Payroll, HR and entering the German market

Last checked and updated on 20 October 2022

As arguably the biggest economic powerhouse in Europe, Germany offers a rich vein of opportunities for entrepreneurs and business owners to turn a profit. Learn how you can become a wirtschaftsführer in Berlin or beyond. 

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Does Germany welcome overseas businesses?

The German authorities welcome overseas investment, especially if your business model promises to create jobs for the local labour force. An overseas business will not be treated differently to a domestic interest, for good or ill. 

SMEs, referred to as Der Mittelstand, are the backbone of the German economy. This means your application to trade in the country will likely be accepted, assuming you can provide an appropriate business plan.

Just be aware that, as a nation, Germany does not shy away from bureaucracy. There will be no shortage of red tape required to get your business off the ground, and you will be expected to keep detailed employee and financial records for at least ten years.

What industries are most popular in Germany?

The service industry covers over 50% of the German industrial economy. In SME terms, businesses in the following sectors will likely be popular but face stiff competition:

  • Business advisory services
  • Engineering, especially in the mechanical and chemical sectors (automobile production, for example, is a major component of the German economy)
  • Sporting management and promotion
  • Education
  • Medical services

Beyond the service industry, the most prominent sectors in Germany are real estate sales and management, catering, and wholesale manufacturing.

Is it easy to set up a business in Germany?

Doing business in Germany can definitely be rewarding, but it is not considered one of the easiest nations to set up a company. To get your business registered, you’ll need to follow these steps.

How to set up a business in Germany

  1. Determine if your business model means you will be operating as a freiberufler (freelancer) or gewerbetreibende (tradesperson.)

    If you plan to operate a business and take on employees, you will need to register as a gewerbetreibende.

  2. Get your work permit and residence permit in order

    (assuming that you or your employees plan to live in Germany).

  3. Identify your local Einheitlicher Ansprechpartner, or Point of Single Contact.

    Every state in Germany has one, and this office will provide help from English-speaking staff that guide you through the potentially laborious process of registering your business.

  4. Contact your nearest Gewerbeamt (local trade office)

    To determine if you will need a business license to trade in Germany. This only apples to certain business models.

  5. Determine what business model you would like to operate under – typically a GmbH or AG if you plan to hire employees

    And contact the Handelsregister, the German commercial register. You will then receive a Handelsregisternummer, a commercial registration number. This process may cost between €200–€500.

  6. Head back to the Gewerbeamt

    Armed with your Handelsregisternummer, and register your business.

  7. Apply to open a business bank account

    You can typically not do this until your business is registered and approved – you will certainly struggle to do so without a Handelsregisternummer.

  8. Wait to receive a Fragenbogen zur steuerlichen Erfassung, or Questionnaire for Taxation

    Or fill it in online using an Elektronische Steuererklärung (Electronic Tax Declaration).

  9. Register your tax status with the Bundeszentralamt für Steuern

    This is the Federal Central Tax Office.

Can I run a business in Germany while living overseas?

You can manage your company overseas without living in Germany, with appropriate permission from the relevant authorities. 

This will typically only be granted if you can prove that you will be able to fulfil all duties pertaining to running a business without restriction. These expectations must be notarised and agreed upon in a formal, legally-binding contract.

Running a business in Germany does not automatically grant you a right of residence. If you plan to spend significant periods in Germany, apply for a residence permit that alongside a work permit.

Cultural considerations when running a business in Germany

If you plan to do business in Germany, it will help to understand some of the cultural nuances associated with the country. These include:

  • Speaking fluent German is not necessarily mandatory, but it will make your life considerably easier – do not assume that bank tellers or wholesalers will speak English
  • Timekeeping is very important in Germany. Arrive for meetings on time – not early, and certainly not late
  • German businesses respect hierarchy, so address the most senior person in a room first. Associates should be addressed by a title, especially if they hold a professional qualification such as Doktor. If not, address people as Herr or Frau until invited to use given names
  • Do not try to mix business with pleasure. German business associates will be confused if you try to charm them by discussing personal matters in a workplace environment
  • Never behave in a way that could be considered unethical, such as inflating truths to drive a better deal. Avoid giving gifts, too – even a small token gesture could be viewed as an attempt at bribery

What business structures are supported in Germany?

These are the most popular structures if you wish to set up a business in Germany.

German business structureWhat is it?
FreiberuflichA freelancer or sole trader. If you register on these grounds, ensure you have a wide variety of clients. If you only work for one business and are treated as an employee by them, you risk being charged with scheinselbständigkeit – bogus self-employment – and may be prosecuted
Gesellschaft mit beschränkter Haftung (GmbH)A private limited company. This is the most popular business model in Germany, as it divorces your personal legal and financial affairs from that of your business. If your business struggles and you run into financial difficulty, fines and warnings for late or missed payments will be levied against the company – not you as an individual
Aktiengesellschaft (AG)A public company that trades on the German national stock market. You can open an AG with just one manager, but a minimum of three board members must be appointed, at least one of whom is female. There is a heavy administrative burden attached to operating an AG, so only consider this if you run a large business
Types of business entity in Germany

Alternatively, you can open a branch of your existing business that operates from overseas. This enables you to benefit from brand recognition, but it also means your parent business is liable for any legal or financial difficulties encountered while doing business in Germany.

Taxation in Germany

If you want to do business in Germany, you must understand the taxation rules and regulations that will impact your bottom line. 

What is the corporate tax rate in Germany? 

A business in Germany will be subjected to two corporate taxes:

  • The flat rate for corporate income tax throughout Germany, including a solidarity surcharge, is 15.825% on all profits generated within the country
  • Gewerbesteuer, a localised trade tax anywhere between 7% to 17%, will also be payable. Trade tax rates vary according to where you do business

Germany and the UK have agreed to a Double Taxation Treaty, so you will not need to pay corporate taxes in both countries.

If your annual turnover is less than €22,000 PA, you can apply for Kleinunternehmerreglung – small business regulation – and find yourself exempt from paying gewerbesteuer. When your business profit exceeds €22,000, you must re-register with a local tax office.

What are the employee income tax brackets in Germany?

Employees in Germany will need to pay income tax. Income tax brackets in Germany are as follows.

Annual salaryIncome tax payable
€9,408 or lower0%
€9,409 – €57,05014 – 42% (varying based on exact salary)
€57,051 – €270,50042%
€270,501 or above45%
Income tax bands in Germany

As an employer, you will be responsible for withholding income tax from employee payroll and filing these payments with the federal and regional tax offices.

How are taxes paid in Germany?

The German tax year runs from January to December. Payments are typically made in quarterly instalments, with deadlines of the 10th of March, June, September, and December.

Business owners and freelancers must complete an annual tax return – known as an Einkommensteuererklärung – by the 31st of July each year. Salaried employees (angestellters) are not required to complete this, but some choose to do so in the hope of receiving a tax rebate.

Payroll & hiring employees in Germany

Hiring the right talent can make or break a company. Ensure your German business interests are staffed by the best possible talent.

Does Germany welcome overseas talent?

Germany has recently experienced a labour shortage, so hiring overseas talent has been simplified. As always, though, there will be forms to fill in and hoops to jump through. However, the following vocations are considered most welcome in the country:

  • Craftspeople
  • Electrical engineers
  • IT experts and specialists
  • Qualified nurses and carers
  • Catering and hospitality managers

Who needs a visa or work permit to work in Germany?

If you hold a German passport or one issued by any of the following nations, you can live and work in Germany without restriction.

  • Any EU member state
  • Iceland
  • Liechtenstein
  • Norway
  • Switzerland

Anybody from outside these countries needs a residence permit to live in the Germany, and a work permit or visa to work or trade. For the avoidance of doubt, this includes UK passport holders.

Work permits available to overseas employees in Germany are:

  • General Work Permit – for unskilled roles that do not require particular qualifications or experience. This permit will not be granted unless you can prove that no member of the local labour force can fulfil the role
  • Highly Skilled Work Permit – granted to overseas employees that fulfil a labour shortage in particular industries where Germany lacks local talent. Refer back to our list of preferred vocations
  • EU Blue Card – allows the right to live and work in any EU/EEC country and is reserved for occupations with a salary of €56,400 or higher (€43,992 if the role is considered a shortage occupation)

Payroll options in Germany

An established payday must be confirmed in a contract of an employee, and payroll cannot be issued any less than once a month. If a month passes without an employee receiving wages, you will be liable for fines and even prosecution as a business owner.

You can run a payroll in Germany from outside the company using a global third-party business if you prefer, but given the logistical challenges that sometimes present themselves when doing business in this country, a domestic service is advisable.

What employee benefits are compulsory in Germany?

Employees in Germany are entitled to the following mandatory benefits.

  • Minimum of 20 personal holiday days (many companies offer more), plus 10 public holidays
  • Contributions to a state pension (employer and employee must both make these payments)
  • Unemployment insurance
  • Health insurance
  • Accident insurance

Employment law considerations in Germany

Employee rights are taken very seriously in Germany, and as a business owner, you must ensure you remain on the right side of regulations. Key considerations here include:

  • Minimum wage in Germany is €12 per hour (as of October 2022)
  • All hiring practices must abide by the General Equal Treatment Act
  • A gender quota is in place in Germany, meaning that female employees must hold 30% of management or board level positions
  • Maximum length of a probationary period is six months, during which any notice period is limited to two weeks
  • Most employees have a notice period of four weeks following the completion of a probationary period

Cultural considerations when hiring employees in Germany

As with doing business with partners and associates, there are some cultural considerations when hiring employees in Germany.

  • In Germany, authority is respected. Do not try to make friends with your employees – they will always see you as their superior and behave accordingly
  • German employees value their health. If an employee has a cold, they consider it insensitive and unprofessional to come to work and risk infecting others. Do not try to push back on an employee that calls in sick with a minor ailment, as frustrating as it may seem
  • German employees would rather start work early than finish late. Schools open their doors at 7.30am in Germany, so working parents are especially likely to be in the office earlier than you may expect – and may look to leave early
  • Employees in Germany expect their time off, especially paid holidays, to be respected. Do not try to contact your team out of hours unless it is a dire emergency
  • Employees cannot be asked to work more than 48 hours in any week. A typical working day is 8 hours, but this can be extended to 10 hours without notice – assuming the total hours worked in a week remain under 48
  • Employees must be granted a minimum of 11 hours rest between working days

FAQs about setting up a business in Germany

Still have questions or are seeking a swift answer to a basic query? Here are some of the most frequently asked questions about setting up a business in Germany.

What are the entry options for foreign companies wanting to set up in Germany?

The main options for setting up a new business entity in Germany are a Private Limited Liability Company (Gesellschaft mit beschränkter Haftung, or GmbH), or a Public Traded Company (Aktiengesellschaft, or AG). You can also register as a freelance sole trader (Freiberuflich.)

How long does it take to set up a German entity?

Plenty of red tape and paperwork is involved in setting up a business in Germany, so the process could take up to 12 weeks. It may be faster if you enlist help from a local professional service.

What is the total cost of employment to hire an employee in Germany?                 

Various factors will influence the cost of an employee in Germany. For example, a salary of €50,000 would likely cost closer to €62,000 per year once all benefits and necessary assets are considered.

What is the minimum share capital required to establish an entity in Germany?

The minimum capital required for an AG in Germany is €50,000, but if you’ll looking to open a GmbH this is reduced to €25,000.

Do you need to set up a local bank account in Germany?

Yes, any German business will need a local bank account. This can be set up overseas, but it’s much easier in Germany.

What is the standard working week in Germany?

German employees will expect to work between 36 and 40 hours per week. Employees cannot be expected to work more than 48 hours per week.

What are common supplementary employee benefits in Germany?

Many German employers offer superior holiday packages over and above the 20-day minimum allowance. Insurance policies in the event of disability are also popular, as are retirement and life insurance policies. Some German companies also offer employees company cars or transport allowances, flexible working hours, sustenance vouchers, and free or discounted childcare.

In Germany, can employment contracts be terminated at will by the employer?

Only if the decision is mutual and agreed in a written Separation Agreement. The Dismissal Protection Act dictates that a “socially justified” reason must be given in writing if employers wish to terminate a contract, and severance pay will likely be required.

Is there any standard annual leave entitlement in Germany?

Employees that work five days per week are entitled to a minimum of 20 personal holiday days, plus public holidays.

Can you establish a branch of your company in Germany?

Yes, you can open a branch of an overseas business or open an independent subsidiary company.

What work permits or visas are required in Germany?

If you do not have a passport issued by a country in the EU, EEC, or Switzerland, you will need a work permit to trade in Germany. A General Work Permit is open to anybody, but this will only be granted if the role cannot be filled by a local. Other permits include a Highly Skilled Worker Permit and an EU Blue Card.

How much is a work visa for Germany?

A German work permit costs €90. You will also need a residence permit to live and trade in Germany, which costs an additional €60.

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Important – The information provided in our articles is intended to be for general purpose use only, and not advice for you or your business. We strive to publish accurate information, but encourage you to fact-check and seek expert guidance. You should always speak to a qualified professional to get tailored advice about how to operate your business under your specific requirements and circumstances.