May 2023

Germany

Law Over Borders Comparative Guide:

The New World of Foreign Direct Investment

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1 . After more than a half century of increasingly liberalized world trade, there are signs of change. Do you see world trade patterns evolving in new and different directions? What does this mean for your country and your clients?

The German economy has experienced a considerable upswing during the liberalization of world trade over the last 50 years.

German companies benefited from global production opportunities at low-cost. The increased importance of foreign trade came with new forms of business organization and production, particularly the concepts of outsourcing and lean production. In conjunction with the growing demand for low-cost, high-quality consumer goods, domestic sales opportunities multiplied. The increase in goods exports led to a steady rise in gross domestic product. Due to its above-average foreign trade ratio, the country is the third strongest exporter in an international comparison.

However, the strong dependence on foreign trade is not exclusively advantageous for domestic companies. For example, the global economic crisis of 2008/2009 and the accompanying global economic downturn led to major challenges for German companies. 

In 2020, the COVID-19 global pandemic triggered a severe recession. Pandemic-related protective measures such as plant closures, short-time work and hiring freezes drastically restricted the growth of companies based in the manufacturing sector. In the tourism and hospitality sectors, development came to a complete standstill in some cases. Thanks to the country’s expansive monetary and fiscal policy, the consequences of these crises have so far been mitigated by the state. Compared to other countries in the European Economic and Monetary Union (EMU), Germany has therefore largely recovered from the consequences of the pandemic.

However, the domestic economy is already facing new problems. The persistent shortage of important trade goods continues to cause delivery delays. War-related trade embargoes, especially for German domestic trade with Russia and Belarus, as well as between China and Taiwan, have had a significant impact on the generation of intermediate goods and the energy supply of domestic companies.

In addition, protests regarding global climate development have come to a head. Sustainable production, reduction of CO2 emissions and the conservation of resources demand a change in corporate thinking and call for new concepts.

In this context, consultation on international trade conditions, sustainable corporate development, and corporate restructuring is of crucial importance for organisations to successfully participate in the global markets.

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2 . Historically, foreign direct investment was embraced by governments as a way to strengthen domestic economies. Has your country’s government adopted an aggressive posture in regulating foreign investors?

As the largest economy in Europe, Germany is an attractive destination for foreign investors.

According to §1 of the Foreign Trade and Payments Act (AWG), “The trade in goods, services, capital, payment transactions and other types of trade with foreign territories, as well as the trade in foreign valuables and gold between residents (foreign trade and payments) is, in principle, not restricted. It is subject to the restrictions contained in this Act or prescribed by ordinances issued on the basis of this Act.” 

In order to protect domestic security from the negative effects of foreign direct investment, acquisitions by non-EU and non-EFTA investors are subject to a cross-sectoral review by the Federal Ministry of Economics and Climate Protection. In accordance with the EU Screening Regulation, the other member states and the European Commission are also at liberty to submit statements and comments on public safety and order, which are considered in the screening decision.

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3 . Are there specific sectors of your country’s economy or industries where foreign direct investment is barred or highly regulated?

In sectors that are particularly sensitive to security, such as military technology, governmental IT security and confidential patents, a sector-specific review process is carried out. If a foreign investor acquires 10% or more of the company’s shares, the Federal Ministry of Economics and Climate Protection must be informed and the acquisition is subject to a comprehensive audit, regardless of the investor’s citizenship. 

This includes an evaluation of expected risks to essential security concerns. If the outcome is likely to endanger domestic safety and order, the acquisition will be prohibited by the state.

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4 . The global supply chain has been collapsing worldwide since 2020. How has this impacted businesses in your country and what steps has your country’s government taken to respond?

In 2020, the COVID-19 pandemic in Germany highlighted the fragility of global supply chains. In the past, many companies focused on the optimization of their processes. In minimizing operational costs, reduction of stock levels and increment of plant utilization, as well as through relocation of entire manufacturing sectors to foreign countries and just-in-time production, the dependency of German companies on other economies was more evident than ever. Finally, the pandemic revealed that sustainable entrepreneurial decisions cannot rely solely on profit-oriented economic factors.

In addition, the United Kingdom’s exit from the European Union on January 31, 2020, also had devastating consequences for the German sales market, as the UK was the third most important export market for German products, especially in the automotive industry. 

In order to provide financial support for domestic companies and protect them from the risk of insolvency, the German government launched a series of programs, such as interim and restart grants. The main focus was on recapitalizing businesses and providing state credits to companies. In addition, companies received temporary support and were granted guarantees and export credits. Taxation of domestic companies was simplified in various ways, such as the extension of the tax deferral period, the return and adjustment of advance tax payments and the extension of the loss carryback period.

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5 . In M&A transactions as well as joint ventures in your country, what are the most critical issues foreign investors must evaluate prior to contemplating a transaction?

The acquisition of, or the participation in, a German company requires a well-defined concept. These are the critical issues to consider:

  • Risk assessment. In order to avoid risks, it is necessary to determine earnings, liquidity, equity and debt capital, existing financing structure and related value enhancement potentials as well as the legal situation of the target company, in particular pending legal disputes, in advance within the scope of a due diligence review. 
  • Examination under antitrust law. A competition and market analysis must be carried out with regards to the subject of the company and the business model. If the fusion is subject to antitrust law, it must be reported to the Federal Cartel Office for further monitoring.
  • Protection of intellectual property. If the target company holds intellectual property rights such as patents, trademarks and designs or related licenses, their coverage must be identified. 
  • Company acquisition. Finally, the target company is transferred as part of an asset deal, through the acquisition of individual assets, or a share deal, by acquiring the majority shares of the company. Depending on tax and liability advantages, the two separate companies either merge to a single company or are combined as independent subsidiaries under a holding group. The acquisition of a corporation listed on the stock market must also be reported to the BaFin (Federal Financial Supervisory Authority). A stock prospectus must be published for the initial public offering. 

It is important to find efficient solutions oriented on a company’s objectives in order to create a corporate structure that is the most sustainable as possible.

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6 . What is the best strategy for acquiring interests in real estate or other tangible property in your country? Is this more difficult for foreign investors?

The purchase of German real estate is independent of the buyer’s nationality. Domestic and foreign individuals and companies follow the same requirements. The transaction is divided into three steps:

  • A notarized contract of sale.
  • A notarized agreement in kind.
  • The entry of the new owner in the register of real estate.

In a preliminary step, it would be recommended to inspect the register of real estate in order to obtain an overview of existing liens on real property, such as land charges and mortgages, or easements, such as rights of passage and other servitudes. These are occasionally transferred to the purchaser. 

When land is transferred, real estate transfer tax is charged at different rates, depending on the state in which the property is located. This should also be included in the purchase decision. 

If the buyer’s objective is the conversion of the property, its feasibility should also be clarified. By means of consultation and professional interpretation of the zoning plans and development plans available at the local authority, a statement can be made in this regard.

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7 . What laws or regulations exist in your country to protect data exchange and privacy, and is the protection of intellectual property challenging for foreign investors?

With the development of digital technology, the importance of data security in Germany has increased rapidly. As data storage, processing, collection, transfer and analysis become increasingly simple, it is important to provide a framework for this development in order to protect the privacy of the individual.

In order to create regulations that are the most uniform possible and to promote a free exchange of information between individual nations, German regulations are based on the international guidelines of the “Guidelines on the Protection of Privacy and Transborder Flows of Personal Data”. 

On a European legal basis, the protection of personal data is a fundamental right that is directly applicable in Germany through the General Data Protection Regulation and is monitored by the European Convention on Data Protection.

In accordance with the case law of the German Federal Constitutional Court, data privacy is to be classified as a fundamental right, as an embodiment of the individual’s right to informational self-determination (Article 1 I in conjunction with Article 2 I of the German Constitution (GG)). At a national level, the Federal Data Protection Law (BDSG) regulates data protection for federal authorities and the private sector. In addition, data privacy regulations can be found in the German Telecommunications Act and the German Telemedia Act, as well as in individual laws of the German states. Companies that provide telecommunications and postal services on a commercial basis are subject to supervision by the Federal Commissioner for Data Protection. Corporations operating in other sectors are supervised by the data protection commissioner of the respective federal state. 

The protection of intellectual property is a different issue. This also represents a fundamental right and is protected at both the German and the European legislative level (see Article 14 I of the German Constitution (GG) and Article 17 II of the Charter of Fundamental Rights of the European Union (GrCh)). 

On a national basis, a distinction must be carried out between copyright and industrial property rights. Copyright arises naturally, simply through the creation of a work, whereas industrial property rights, such as patents, trademarks and designs, require registration with the German Patent and Trademark Office. 

Intellectual property is also protected under the law of the European Union. Agreements under EU law, such as the Paris Convention for the Protection of Industrial Property, the TRIPS Agreement and the Patent Convention, set minimum standards of protection in this respect. It is conceivable to register an EU trademark under European law, or a cross-state bundle trademark, bundle patent or bundle design by applying the law of the respective member state. 

Unlike data protection, however, compliance with the protection rights is not automatically checked by a protection supervisor, but is subject to judicial reprimand in the event of violation by the affected individual.

In order to avoid high compensation and sanction payments, we therefore advise our clients to take legal precautions in the advance of a measure that is sensitive to data protection or possibly interferes with intellectual property.

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8 . Describe the most common legal structures used by foreign investors when doing business in your country.

The companies involved in the economy are subject to a mandatory legal framework. German law essentially distinguishes between partnerships and corporations:

Partnerships include: 

  • Civil law partnership. 
  • General partnership.
  • Limited partnership, especially Limited liability company and Co. Limited partnership. 
  • Silent Society. 
  • Partnership Company. 

Corporations are divided into: 

  • Limited liability company, especially Entrepreneurial Company. 
  • Public limited company.
  • Partnership limited by shares. 

A suitable form of company must be selected according to the company’s objectives and the respective founding requirements. Partnerships and corporations essentially differ in the following characteristics:

  • Number of partners. While at least two different shareholders are required to form a partnership, a corporation can also be formed by a single person. 
  • Management. Within the partnership, the business must primarily be managed by the partners themselves (so-called self-organization). In the case of corporations, an external managing director may be employed for the business management (so-called principle of foreign organisation). 
  • Partners’ liability. Besides the company itself, the partners of partnerships are also fully liable for the company’s obligations with their private capital. Such liabilities do not exist for corporations in general. 
  • Founding capital. In order to compensate for the lack of shareholder liability in the case of corporations, the prerequisite for their formation is the payment of a certain share or founding capital, such as EUR 25,000 for the German limited liability company (GmbH) and EUR 50,000 for the German stock corporation (AG).
  • Formation of will. Since the structure of partnerships is highly personalized, decisions made on behalf of the company must always be taken unanimously. In the case of corporations, on the other hand, the decision-making process is based on the principle of multiple votes. 
  • Taxation. Corporations are subject to the German Corporate Income Tax Act (KStG) and therefore to independent taxation. The profit shares distributed in favor of the shareholders are only taxed according to the German Income Tax Act (EStG) if they are not already covered by the capital income tax (so-called separation principle). The situation is different in the case of partnerships. The partners themselves are subject to taxation in accordance with the German Income Tax (EStG) on the basis of their profit shares (the so-called transparency principle). Further taxation of the partnership will not take place.

In order to find an appropriate solution for our clients’ objectives, we consult them on finding a suitable business form as well as on concretizing and customizing the particular legal regulations by means of signing the articles of association.

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9 . What are the most attractive opportunities for foreign investors in your country at this time?

Considering the rising inflation rate and the resulting economic recession, it is currently a balancing act to make reliable investment predictions. Finding solid, crisis-proof investments with stable values and decent profits is a challenge for both small and wealthy investors as well as for business owners. Since negative interest rates and rising inflation significantly erode any financial assets investment in tangible assets is to be recommended. These values are stable and enduring, unaffected by the stock markets and the overall development of interest rates. Moreover, they are crisis proof and unaffected by inflation. 

  • Real estate. The value of real estate is not subject to short-term fluctuations in stock prices. In most cases, real estate is acquired as an investment property, which generates income through ongoing rental income and long-term growth of value. Especially in fast-growing and metropolitan areas, real estate prices are increasing rapidly. Due to the inflationary trend, the rents for apartments are also expected to rise. Nevertheless, every purchase of real estate in Germany is subject to real estate transfer tax, whose rate of assessment is set by the individual federal state. Moreover, real estate is subject to property tax no matter what the owner’s financial circumstances are. Selling a property is a private sale transaction, which is subject to income tax. From a long-term point of view, the acquisition of real estate, as a rare and desirable asset, means a significant value increment. On top of that, there are low mortgage interest rates, which currently offer attractive financing options. But tax disadvantages and regional real estate price developments must also be taken into account. 
  • Equities and ETFs. Equities that are able to impose their selling price on customers in times of increasing purchase prices provide the best protection against inflation. These companies act as price setters and thus maintain their profit margins. Due to their favorable competitive situation, shares in German companies, particularly those in innovative sectors, are at the top of the list in this context. For long-term investments, the annual return covers more than the inflation rate, and can even exceed it if the investment is diversified widely. Despite the levying of capital gains taxes, a portfolio of shares and ETFs spread over many companies and sectors, particularly in the sector of German research and development, proves to be highly beneficial. 
  • Know How. Germany is a country of research and development. In hardly any other country do science and innovation experience this kind of public funding. German development, whether within the automotive industry, environmental or medical technology, provides milestones for worldwide progress. Besides public funding, domestic research is mainly financed by disposing patents and licenses. By acquiring these, investors are not only assured of a long-term income source, but also participate in technical and medical progress. 

Despite the current economic situation, it is therefore possible to profitably invest in a long-term perspective. 

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10 . Do specific laws or mechanisms exist in your country to protect foreign direct investors?

A fundamental instrument for protecting foreign investors is the multilateral investment promotion and protection agreements. More than 130 such agreements are maintained by Germany, especially with third-party countries. 

Foreign investments in German companies regularly contribute to secure and expand domestic employment. These projects frequently serve to improve the country’s market development and the corresponding enhancement of sales opportunities and facilitation of access to foreign markets.

Considering the above, the German Ministry of Economy and Climate Protection has consistently advocated for the establishment of uniform and transparent regulations within the scope of an FTA with cross-cutting investment protection. The Free Trade Agreement (FTA) of the European Union and Member States of the European Union with Canada (CETA), the EU and EU member states’ Investment Protection Agreement with Singapore and Vietnam, as well as the Free Trade Agreement (FTA) with Mexico and Chile, are all of German origin. 

The European Commission has adopted these approaches broadly and launched the TTIP transatlantic trade and investment partnership agreement between the European Union and the United States. After the presidential election of Donald Trump, however, negotiations initially stalled. Facing current circumstances, the German Chancellor's Office chief once again advocated for their resumption in October 2022. 

As of August 13, 2021, all existing bilateral investment contracts between member states within the European Union were cancelled and replaced by a single EU-wide agreement. 

Investment and free trade disputes have until now been settled in the context of arbitration procedures by the parties to the respective agreements, i.e. the investment courts or, within the European Union, the European Court of Justice (EuGH). Germany, as a member state of the European Union, together with the European Commission, plays a key role in establishing a uniform investment court for international commercial law. 

Today, multilateral collaboration and interstate commerce contribute more than ever to international economic growth. The direction in which the transnational investment structure evolves is yet to be seen. However, Germany, as the third largest export nation, is particularly interested in expanding this structure, hence global involvement is to be expected in future as well.

EXPERT ANALYSIS

Chapters

Australia

Angela Harvey
James Skelton
Mary Digiglio

Brazil

Eduardo Tranjan
Gabriel Bon de Macedo
Hermano De Villemor Amaral (neto)
Mariana Rossi

Bulgaria

Trayan Targov

China

Junzhou JIN
Lu DANG
Shihao XIAO
Sijia ZHANG
Yao RAO
Shuaijie LU

Finland

Peter Jaari

France

Neil Robertson

Japan

Darcy H. Kishida
Hiromasa Ogawa
Naoki Takahashi

Kenya

Jinaro Kipkemoi Kibet, SC
Lorraine Igoki Njiru

Mexico

Alejandro Martínez Galindo
Hugo Cuesta Leaño

Norway

Christoph Morck

Republic of Korea

Jihn U. Rhi
Jong Jae Lee

Tunisia

Ismaël M’rad

United Kingdom

Carolyn Thurston Smith
Jen Lee
Mark Hough
Nicola Tong
Russell Gardner
Sally Jones

United States

Dennis Unkovic