Zweigniederlassung (Registered Office)

Legally independent branch establishment and legally dependent permanent establishment

I. Options for commercial activities, more particularly of foreign enterprises

Many enterprises wish to expand and set up a new location. This raises the question as to how the new branch can be organised legally within the corporate structure.

There are three alternatives:

the formation of a subsidiary with its own legal personality
the setting up of a legally independent branch (branch establishment)
the setting up of a legally dependent branch (permanent establishment)

1. Subsidiaries

With the formation of a subsidiary an enterprise, which is legally independent from the parent company, is created. As with every formation, the statutory provisions applying to the respective legal form are relevant.

In Germany there are no specific statutory terms and conditions or restrictions concerning formation by foreign companies. For a foreign founder exclusively German provisions apply in respect of the formation, registration of a trade and entry in the commercial register. The capital necessary for formation purposes may be imported without restrictions into Germany.

Information on the different German legal forms can be found in the section Legal and Tax Affairs.

2. Legally independent branch (branch establishment)

A branch establishment is not a separate legal entity from the enterprise of the main establishment. In legal and organisational terms it is part of the enterprise of the main establishment and, in that respect, subject to the laws of the main establishment. If the branch establishment is set up by a foreign enterprise, its internal constitution is governed by the memorandum and articles of association as well as the applicable foreign law.

Despite its internal dependency on the main establishment it participates in business transactions in a legally independent manner. The legal relationships of the branch establishment with its customers are governed by German law.

German law applies for the legal treatment of the branch establishment in Germany (more particularly entry in the commercial register).

In accordance with §§ 13 ff. HGB (German Commercial Code) a branch establishment is a branch which is geographically separate from the main establishment and which is created as an additional, permanent centre of the enterprise and must be entered in the commercial register.

The typical features of a branch establishment are:

- The branch establishment must be organised in such a way that a legally independent participation in business transactions is possible, i.e. it must be able to continue to exist in the event of cessation of the main establishment;

- It transacts business which is typical for the entire company;

- The branch establishment must have a certain legal independence by having its own management with separate freedom of disposition and own business assets allocated by the main establishment. The transactions of the branch establishment are reported separately in the balance sheet of the main establishment.

Formation

The branch establishment is created by the actual formation procedure. The entry in the commercial register is only of declaratory significance. The resolution about the formation of the branch establishment has to be adopted by the corresponding executive management bodies of the main establishment.

Capital

The legal status of the legally independent branch establishment requires own capital resources. However, no minimum capital is prescribed nor are the capital resources entered in the commercial register.

Object

A legally independent branch establishment can only be set up by a commercial enterprise. A non-commercial enterprise may only set up by a permanent establishment (= a legally dependent branch).

Internal constitution

The head of the branch establishment represents it independently vis a vis third parties.

However, the debtor in respect of liabilities is always the main establishment even if the branch establishment has been assigned certain property rights internally as own business assets.

Business name

The name of the main establishment and, by extension, of the branch establishment is governed by the law of the state in which the main establishment is located. The entry of the branch establishment is, however, to be refused if the business name infringes German public policy (Article 6 Introductory Act to the German Civil Code) because it is manifestly not compatible with the essential principles of German law.

In the business name of the branch establishment of a domestic or foreign company the business name of the main establishment must appear, as a matter of principle, unchanged (if necessary, also in a foreign language) including the addition relating to the legal form. If, in accordance with the respective foreign law, an addition to the business name is not necessary or if this addition to the business name is not usual or incomprehensible on the domestic level, a clarifying addition needs to be made in order to avoid possible errors. Furthermore, an addition may be made to the business name of the main establishment (e.g. branch establishment Frankfurt).

Executive bodies

The appointment of the executive bodies (head of the branch establishment) is governed by the law applying to the enterprise and, more particularly, the foreign memorandum and articles of association. However, the appointment of a head of the branch establishment is not prescribed by law.

For the purposes of representation of the branch establishment it is also possible to appoint a Prokurist (person with power to represent the company) and to enter said person in the commercial register. The power of representation (Prokura) may be restricted to the operation of the branch establishment. This is governed by German law.

Information on business letters

Domestic branch establishments of foreign enterprises must provide the following minimum information in correspondence from Germany on business letters:

- The register in which the branch establishment is entered

- The register number

- The full foreign business name with the addition of the legal form

- The register of the foreign enterprise

- The data prescribed for business letters under German law for the respective legal form, unless otherwise provided for by foreign law.

Business letters of foreign legal entities outside the EU or the EEA must include the following information: business name, place and state of the registered office of the enterprise in accordance with the memorandum and articles of association, legal representatives (family name with at least one first name).

Notarisation

An application for entry in the commercial register must be submitted in writing to the locally competent local court (Amtsgericht). The signature and the business name must be certified by a notary.

Founders who are unknown to the notary must prove their identity through valid ID documents. If a person appearing does not act in his own name but for another person: written power of attorney and/or subsequent consent in a notarised form. If the signature under a power of attorney is certified by a foreign notary, legalisation (or an Apostille) is necessary, depending on the country of origin. The first may be issued by a consul of the Federal Republic of Germany.

If a legal entity sets up the legally independent branch establishment, its existence must be evidenced through a certified excerpt from the commercial register (for foreign companies: the corresponding public registration documents).

Application for entry in the commercial register

The application for entry of a legally independent branch establishment of a foreign enterprise in the commercial register must be submitted by the competent bodies.

If a foreign enterprise intends to set up several branch establishments in Germany, a specific commercial register can be selected as the main register. All the above-mentioned documents (complete set) need only then be submitted to that commercial register.

Whether the legally independent branch establishment of the foreign enterprise is entered in the commercial register A or B depends on the legal form with which the foreign enterprise is comparable.

Registration of a trade

Furthermore, a trade must be notified for the branch establishment with the trade supervision office of the respective municipality (registration of a trade).

Opinion of the Chamber of Commerce and Industry (IHK)

In cases of doubt the competent Chamber of Commerce and Industry (IHK) comments vis a vis the local court on the admissibility of the business name and the eligibility for registration (legal independence) of the branch establishment. In order to exclude in a timely manner any risk of confusion or possible doubts concerning the truthfulness and clarity of the business name, it is recommended to contact the local Chamber of Commerce and Industry (IHK).

Controlling and financial statements

Controlling of the business activities by the competent bodies is governed by the law of the main establishment and hence possibly in accordance with the foreign law of the main establishment.

The obligation of the branch establishment to keep the accounts and prepare financial statements is governed by German law. In cases of doubt, the provisions for the German legal form, which is most similar to the legal form of the foreign enterprise, are to be applied.

3. Dependent branch (permanent establishment)

The same company can have several business premises (branches, branch offices). Such a branch office, also referred to as a permanent establishment under trade law, is dependent in every respect on the main establishment. Invoices are also issued on behalf of the main establishment. Since this concerns uniform business transactions at geographically different locations, branch offices may not have any separate business name deviating from the main establishment. Each permanent establishment must be registered with the competent trade supervision office; it is not entered in the commercial register.

It is not independent in its relationship with the main establishment of the enterprise. As a legally dependent permanent establishment it merely has to submit notification of a trade with the competent trade supervision office of the municipality (registration of a trade).

II. Overview of formal requirements

1. Registration of a trade

All commercial activities of a subsidiary, a branch establishment or a permanent establishment must be registered under trade law with the competent trade supervision office (in Frankfurt am Main: Gewerberegister beim Ordnungsamt, Kleyerstraße 86, 60326 Frankfurt am Main).

2. Entry in the commercial register

2.1. Subsidiaries

An application for the entry of legally independent subsidiaries in the commercial register must be submitted to the locally competent local court (Amtsgericht). The application must be made in a notarised form.

2.2. Branch establishment

In addition to the registration of the trade, a branch establishment requires an entry in the commercial register. In this way it is granted a separate registered office, a separate commercial register number and a separate place of jurisdiction. The application for entry must be made in a notarised form and submitted to the commercial register.

Whether the branch establishment of a foreign company is entered in the commercial register A or B depends on the legal form with which the foreign company is comparable.

2.3. Permanent establishment

Permanent establishments are not entered in the commercial register.

The registration of a trade is sufficient.

3. Necessary authorisations

For different trades it is necessary to obtain an authorisation from the competent authority in each case prior to the commencement of operations.

(Examples of trades subject to authorisation)

The commencement of any craftsman trade is, more particularly, subject to authorisation. The trade must be entered in the register of craftsmen of the regionally competent Chamber of Craftsmen. The prerequisite to an entry in the register of craftsmen is that the trade is managed by a master craftsman. Exceptions from the requirement of the master qualification are only admissible to a limited extent.

As for the rest, there is freedom to exercise trades. Most of the trades (wholesale and retail trade) are not regulated. In some cases exercise of the trade is subject in individual cases to specific provisions.

III. Information and documents

1. For the registration of a trade

The trade supervision office must be provided with the following documents in connection with the registration of a trade:

1.1. ID documents for the applicant:

- Proof of identity through ID card or passport

- If necessary (not legally certified) evidence of power to act for a third party (natural person or legal entity), for managing directors, board members or Prokurists (persons with power to represent the enterprise): extract from the commercial register concerning the enterprise

- Possibly authorisations (e.g. craftsmen card, broker permits etc.)

- A foreign national must submit a resident's permit of the competent foreigners’ office including the permission to commence an independent trade

1.2. Evidence for the enterprise:

An enterprise entered in the commercial register must prove entry in the commercial register through an excerpt from the commercial register.

An enterprise entered in a foreign commercial register must likewise submit the corresponding entry documents. Furthermore, a German translation must be submitted; as a rule, certification is not necessary.

In the case of a foreign enterprise, a domestic authorised person as well as a domestic address are required. The domestic authorised person must submit a power of attorney in his name (see above).

In cases of doubt, if for instance the address of the registering person deviates from the address of the business, the existence of the permanent establishment must be proven by submission of a lease contract or a confirmation by the lessor.

In justified cases a certificate of good conduct or information from the central register of trade and industry offences may be necessary.

2. For the application for entry in the commercial register

2.1. Application for a branch establishment of a domestic partnership

The application is submitted to the court of the main establishment and/or the registered office of the company; the necessary signatures must be deposited with the court of registration of the branch establishment. For the branch establishment the same information must be provided as was necessary for the entry of the main establishment.

2.2. Application for a branch establishment of a domestic corporation

The branch establishment of a corporation is registered with the court of the main establishment for entry by the managing director/board of directors.

In this connection the same information must be provided as mentioned above about the branch. The necessary signatures must be deposited with the court of the branch establishment. Furthermore, the following documents must be added:

- The memorandum and articles of association

- A list of shareholders for a private limited company (GmbH)

2.3. Registration of the branch establishment of a foreign company in Germany

The application for entry is made by the head of the branch with the court in whose district the branch establishment is to be set up.

The following information is necessary:

On the parent company:

- The register in which the enterprise is entered, if an entry is envisaged in accordance with the law of the State governing the enterprise

- The legal form of the enterprise

- If the enterprise is not governed by the law of a Member State of the European Union or another contractual State of the European Economic Area treaty, the law of the State which governs the enterprise

- The business name and registered office of the enterprise

- The object of the enterprise

- The date of conclusion of the memorandum and articles of association

- The managing directors and/or members of the management board as well as their empowerments

- The share capital/nominal capital

- A possible limitation of the enterprise in time

Information on the branch establishment:

- The address and object of the branch establishment

- The amount of the business capital

- The date of resolution on the formation

- The managing directors and/or members of the management board who may represent the enterprise in the branch establishment before and out of court and the scope of their power of representation

- A possible limitation of the branch establishment in time

Annexes:

- If necessary, evidence on the power to act for a third party (natural person or legal entity); for managing directors, members of the management board or Prokurists (persons with power to represent the enterprise).

- Extract from the commercial register.

- Proof of existence of the parent company. If German law provides for authorisation of the business and/or the object of the enterprise, evidence of the existence of the authorisation must be enclosed.

- An officially certified copy of the memorandum and articles of association and, if the documents are not available in German, a certified translation of said documents.

IV. Requirements under the laws governing foreign nationals

If subsidiaries, branch establishments or permanent establishments are to be managed by foreign nationals they require a resident’s permit under the Foreigners’ Act entitling them to exercise the intended trade. This is documented by a corresponding visa in the passport. This resident’s permit is necessary if the corresponding person intends to stay in Germany in the long-term. (Stay of a foreign managing director). If the activity is to be carried out with a usual place of residence outside Germany and occasional trips to the Federal Republic, the special resident's permit with authorisation to exercise a trade is not necessary.

These requirements do not apply to EU foreigners, citizens not belonging to the EU but to the European Economic Area (EEA) or to citizens of States with which special agreements have been entered into (e.g. USA, Switzerland, Canada).

V. Taxation of a foreign permanent establishment or branch establishment

If a foreign enterprise operates a permanent establishment or branch establishment in Germany (office, factory, or the similar) the profits of this permanent establishment are subject to taxation in Germany. The tax arising depends on the legal form of the enterprise. It corresponds to the tax which a company with a corresponding German legal form would have to pay.

The profit of the permanent establishment which is subject to taxation in Germany is either exempted from taxation in the other State or is subject to taxation in that State; in the latter case the tax paid in Germany is offset against the corresponding tax of the other State. Details can be taken from the double taxation agreements which Germany has entered into with the other State.

More particularly, income tax or corporation tax, solidarity contribution, wage tax, trade tax and value added tax arise.

More extensive information can be found in our brochure on Accounting and Taxation – Information for Business Founders.