Neighbor Germany (2)
Author: Christian Lentföhr, attorney-at-law
F. Kötter-Boisserée, attorney-at-law, especially tax-law
German Company Law - legal and fiscal aspects
The German legal system is old-established. Many laws, regulations and decisions are older than the German Federal Republic. Some laws have been in force since the previous century. The German people appreciates the law and attaches great importance to bring business matters into line with existing law.
With regard to this legal history German law is complex. This working paper is not able to solve all problems. Its intention is to show the main aspects to be considered when operating a trading enterprise. We only treat those typical questions that arise when planning to get seated in Germany. Among those are the suitable sales organization as well as the legal form, questions of employment and law of contract. However, a solution for a special problem can only be found by examining the particular case.
I. Distribution
1.1 Commercial agent (Agency-Agreement)
The law of commercial agent for the most part is laid down in the Commercial Code (Handelsgesetzbuch).
A commercial agent is an independent contractor whose permanent business it either to act as a middleman in bringing about direct legal relations between his principal and the third party or to enter into binding agreements with the third party in the name of the principal. A commercial agent can be a company or a single person.
The German law of commercial agent was adapted to the European Directive in 1990. Despite of the legal unification there exist legal differences throughout Europe.
In case of settling an agency contract following aspects should be considered:
1.1.1 Written form
Principally contracts do not be subject to any formal requirements. But if one party demands, the contract must be made in writing.
Writing is also essential to the validity of exclusive distribution arrangements, non-competition or del credere clauses.
1.1.2 The commercial agent gets a lot of legal protection. These protective regulations cannot be contracted out, especially the regulations concerning commission as well as compensatory claim for loss of clientele.
The commercial agent and a foreign business partner can stipulate, that the contract is subject to foreign law.
1.1.3 Stipulation in restraint of trade
Generally the commercial agent is allowed to take over further representations, as far as he does not endanger his
principal’s interests. Diverging agreements are permitted.
1.1.4 The commercial agent can claim the commission, if the third party executes the contract or if the principal it responsible for the non-execution of the contract.
1.1.5 The commercial agent’s insolvency does not automatically terminate the agency agreement, but it can grant the right to give notice.
1.1.6 In case of agency agreement, the commercial agent gets a compensatory claim if clientele devolves on the principal or another commercial agent.
1.2 Authorized dealer (Distributorship-Agreement)
There is no special law concerning authorized dealers.
Authorized dealer means distribution in the way that one partner is obliged to take delivery of the other partner and to sell the delivery in his own name and on his own account. It is not decisive how the partners name their agreement.
The authorized dealer can be a company or a single person.
The authorized dealer often requests an obligation to the principal, which is granted by a reciprocal exclusive distribution agreement.
1.2.1 The contract does not require written form, as far as a distributional restraint it not settled. Distributional restraint and exclusive distribution arrangements require written form.
1.2.2 Supply commitments and terms of minimum acceptance are possible.
1.2.3 The authorized dealer’s insolvency grants the right to give notice.
1.2.4 The authorized dealer gets a compensatory claim if clientele devolves corresponding to the regulations concerning the commercial agent.
1.2.5 Advice:
The authorized dealer and the principal make a sales contract. The application of German law to the contract of a foreign businessman means the application of the UN Sales Convention (CISG).
1.2.6 Advice:
Exclusive distribution arrangements and terms of territorial protection generally are permitted. However, they have to be examined with regard to European and German cartel law.
These agreements are omitted, if they essentially interfere with free trading or there is no special justification.
1.3. Branch Office
A branch office is a direct establishment of the principal. There is no relationship between the office and the principal in civil law.
But under fiscal law a branch office can be a permanent establishment.
1.4. Subsidiary Company
Subsidiary Companies are independent legal persons. They have their own legal relation to the principal. They can be a commercial agent or an authorized dealer.
Mostly subsidiary companies are found as company limited by shares. The most suitable legal form is generally the limited liability company.
The limited liability company requires a share capital of at least DEM 50.000,00 and only one shareholder. The shareholder can be identical with the general manager. The general
manager’s power can be restricted, but the restriction has to be entered in the commercial register.
II. Company law
In case of distribution by subsidiaries, the subsidiary company can be acquired or newly-formed.
2.1 Purchase of enterprise (acquisition)
In case of purchase of enterprise the shares of the former shareholder are
transferred to the new shareholder. The sales contract and the transfer require notary recording. The representation of the new shareholder is permitted in special cases.
2.2 Formation of a company
The formation of a new company requires notary recording as well.
The share capital of a limited liability company amounting to DEM 50.000,00 can rendered cash or as contribution in kind. The evidence of rendering has to be produced to the notary. The statutes and the order of the commencement of proceedings have to be
recorded by notary.
The company has to apply for entry in the commercial register. Competent for the commercial register is the Amtsgericht (Civil Court) at the
company’s seat. Further, the company has to apply for entry in the trade register. The trade register is subject to the administrative authority.
2.3 Liquidation of companies
The liquidation of a company has to be entered in the commercial register. The general management has to retire from its office, as to close transactions and to wind up the
company’s affairs. The liquidator executes the liquidation. The liquidator can be identical with the former general manager. The shareholders appoint the liquidator. The liquidation has to be published in special newspapers. The creditors have to file their claims with the liquidator.
After the liquidation the company is striked off the commercial register. Then the company is no more in business. However, a striked-off company can be claimed for payment.
2.4 Insolvency
If a company can not , it is unable to pay and insolvent. In this case the general manager has to make an application of insolvency to the Amtsgericht (Civil Court).
The company’s over indebtedness as shown by the books is as well a case of insolvency, that does not often occur. The
over indebtedness has to be determined by the general management or an auditor.
The Amtsgericht (Civil Court) removes the general manager and a appoints an administrator in bankruptcy proceedings.
2.4.1 The German insolvency law does not require the continuing of the company. The administrator is entrusted with the selling of the
company’s assets and the collection of claims. Only in rare cases the administrator continues the
company’s business.
Advice:
Business with insolvent companies is often problematical with regard to securing unsettled claims. In
practice the administrator does not pay unsettled claims.
German law provides the reservation of title. The goods remains owner as long as the delivery is not paid, on the condition, that the seller declares this to the purchaser. Written form is not necessary, but is helpful as proof. There is no public registration of the reservation of title.
In case of insolvency the reservation of title continues. This concerns as well the extended reservation of title, if the administrator sells the goods.
2.4.2 German insolvency law changed in 1999. The new law it is the administrator’s duty to try the company’s current business.
III. Conclusion and notice of termination of contract of employment
3.1 Conclusion
A contract of employment can be made in written form or orally.
3.1.1 Minimum salary
There is no minimum salary, that has to be paid. But there exists a collecting agreement between the Union of Workers in Commerce, Banking and Insurance and those employers, that belong to an employer’s association. The collecting agreement sets a binding minimum salary.
3.1.2 Holiday
The legal entitlement of holiday runs to at least 24 working days; this corresponds to four weeks. In Germany the employers usually concedes holiday of 30 working days. German law rules, how and when the holiday is to take. The regulations of the Federal Holiday with Pay Act are binding.
3.1.3 Working time
The daily working time can contracted freely. The collecting agreement concerning the Union of Workers in Commerce, Banking and Insurance stipulates a weekly working time of 37,5 hours.
3.2 Notice of termination
The termination of employment agreement is difficult and in most cases not possible.
Advice:
Therefore we recommend to take legal advice. Faulty terminations often have the consequence that the employer has to pay a compensation amounting to several salaries. This can ruin an enterprise.
3.2.1 Usually a probationary period of three or six months is contracted. While the probationary period the employment contract can be terminated without giving reasons within the time of two weeks ending on the 15th or 30th of a month.
3.2.2 The Termination of Employment Act grants the employee much protection. This law is applicable if the enterprise employs a specific number of persons.
If the employment contract was concluded before the 1 October 1996, there must be more than five employees.
If the employment contract was concluded after the 1 October 1996, there must be more than ten employees.
3.2.3 The Termination of Employment Act demands a ground for giving notice:
- personal reasons,
- reasons in the field of labour practice
- operational reasons.
In most cases of unfair labour practices the employer has to send the employee a reminder before he gives notice of termination. The reminder is necessary to give the employer the chance to forbear unfair labour practice.
A sick employer is protected extensively by dismissals protection law. Mostly he only can be given notice in case of total disability.
If there is not enough work, the employer can give notice for operational reason. The employer has no freedom of decision concerning the person who has to quit. The employer has to comply with a special selection procedure. Those employees should be given notice to which is not hardly affected with regard to his social situation.
Advice:
Again, we point out, that a notice of termination should be given by an advocate. The dismissals protection law is one of the elementary problems of German commercial law. Even for an expert it is a difficult problem to solve.
IV. Contract Law
4.1 Law of sales contract
Every export business is subject to the Vienna Convention on International Sales of Goods (CISG), as far as German law is applicable to the sales contract.
4.2 General terms and conditions of business
General terms and conditions of business are standard conditions, formulated in advance and used for contracts of the same kind.
The use and the admissible contents are regulated in the Gesetz über Allgemeine Geschäftsbedingungen (AGBG), supplemented by a lot of judicial decisions.
Actually, the law was to protect the consumer. Meanwhile it is applicable to a lot of conditions which are used in business dealings.
The provisions of the AGBG are especially to observe in case of
- warranty terms,
- limitations on liability,
- purchaser’s obligation to furnish information
- delivery proviso self supplying.
General terms and conditions of business which are for use in Germany should content a reservation of ownership.
V. Fiscal aspects of distribution in Germany
1. Corporation income tax concerning companies limited by shares
Corporations generally have to pay tax on their income:
30%, if and as far the income is not retained (but subject to shareholder’s
personal income tax)
40%, if and as far the income is retained.
The capital, which may be used for distribution, is determined by the tax-balance.
2. Income tax
- partnership
- individual person
- income from self-employment
3. Turnover tax (generally 16 %; exceptional 7 %)
4. Other taxes
4.1 trade income tax and trade capital tax
4.2 tax on the transfer of real property
5. Obligation to keep books; requirements of registration; obligation to preserve commercial records; other obligations
5.1 Obligation to keep books
Businessman - including partnerships and companies limited by shares – and self-employed persons as well as agriculturists and forestry are obliged to record all business activities.
Small companies can determine their profit by accounting on a cash basis.
Big companies have to determine their capital by comparison of the operating assets at the beginning and the end of a business year (balance sheet). The balance sheet is part of the annual account. The annual account contains further the profit and loss account plus notes to the financial statements.
These are obligations according to commercial law, which are as well applicable to tax law.
Big companies are obliged to keep books, if in the previous business year
- the turnover was more than DEM 500.000,00
- the business capital was more than DEM 125.000,00
- the fiscal income was more than DEM 48.000,00.
5.2 Requirements of registration
Public authorities and notaries have to notify certain events to the tax and revenue authorities. This concerns for example:
- Application of the business to be entered in the Commercial Register
- (Companies` Registrar in the competence of the local Civil Court)
- Application for registration of a trade to the Trade Supervisory Office
- (competence of the local authorities)
- Recording of sale of real property
- (competence of the recording notary)
Further distributions of profits of German companies paid to their foreign shareholders have to be notified.
5.3 Obligation to preserve commercial records
Certain records have to be preserved for 10 years, for examples
- commercial books (inclusive data medium)
- inventory
- salary statements, as far as they belong to the annual accounts
- annual accounts (inclusive business records) and annual reports.
Less important commercial records only have to be kept for 6 years, for example
commercial letters (incoming mail and copies of outgoing mail)
contracts (6 years on and after termination of the contract)
accounting records (e.g. purchase invoices and sales invoices)
records concerning tax matters (e.g. tax declarations and tax assessments)
These periods of time generally are valid with regard to tax law and to company law.
5.4 Other duties
Certain kinds of taxes and fees, which refer to recurring facts, require an application. The following taxes require an monthly or quarterly application:
- turnover tax
- wage tax
social insurance.
In case of any questions, do not hesitate to contact Christian Lentföhr, Rechtsanwalt
(attorney-at-law).