As the EU leader and a big country, Germany has collected a lot of deserved titles, such as: the biggest EU economy and the 5th economy in the world, the 2nd most numerous European nation, the 1st vehicles, machinery, household equipments and chemicals exporter in the world… this list can go on forever.
Germany is a member of 2 influential markets:
1. DACH market with 100 mil inhabitants from Germany, Switzerland and Austria put together, perfect logistics infrastructure and traditionally high levels of GDP;
2. Western European market, including Austria, Belgium, Czech Republic and the Northern sea countries. France, UK and Poland are nearby, so Germany combines two roles: of a separate market and one of an entry point for importers.
Looks good? Find below some things to know when doing business in Germany in order to avoid pitfalls a company can encounter when entering the local market.
Unlike most European countries, Germany has not that many restrictions on doing business locally, while offering state support for the SMEs and a very flexible legal framework. These are the main reasons why this country is one of the most attractive entrance points to the European market or a perfect place to start a new business.
When preparing to do business in Germany, keep in mind you’re going to enter a very competitive market, and get ready to overcome challenges. However, this country offers a very business friendly environment, and here are the conditions you’ll benefit from when entering the German market.
Strong economy
With GDP currently escalating to $4.2 trillion, Germany has an impressive spending power and is among the world’s technology innovations leaders. Benefiting from a perfect location right in the heart of Europe, and, as a result, from a developed transport & logistics network, the country is a great hub and market entrance point for foreign investors having investment affinities in this part of the world.
The place for your ideas implementation
Germany is the place for those who are worried about their intellectual property and inventions security. Here, these are perfectly protected on the state level by trademark and patent law, copyright and competition law. One of the ideas protection examples is the prohibition for your competitors to distribute fake information about your product with the goal of attracting your customers to themselves.
Law and financial support on state level
Germany provides professional consultancy and advice to entrepreneurs for free. There are information centers in each German state and a big online project Germany Works, describing the investment possibilities for the major local industries, established by the German Trade and Invest Agency (GTAI). The project helps businesses find relevant networks and suitable state funding programs.
Diversified nation
Germany is currently the home country for 7.7 mil people from 190 countries all over the world. They represent different cultures, religions and social values, forming a diverse society and providing a lot of possibilities for businesses of all sorts.
Stable business environment
The Business Climate Index reports achieved the record-breaking rate of almost 120 points in 2017. This demonstrates the high level of business confidence on this territory, as well as the optimistic attitude of the local business towards current economic situation and the future perspective, as the graph below from the ifo Business Survey shows.
Skillful workforce
The professional education level in one of the most prestigious sectors of German economy, the automotive industry, is very high. The educational system is created in a way to enable students to combine classroom studies with on-the-job training, so that they graduate from professional and high schools as ready-made specialists. Moreover, the EU principle of freedom of movement allows Germany to hire skilled labour from other EU countries, attracting it with high remuneration and social security levels.
Despite of the overall government support and favorable economic conditions, you might face several challenges and restrictions. Indeed, this is natural and expected, given the size of the market and its novelty for you as an investor. We’ve compiled some useful tips for doing business in Germany that will help you enter the local market and develop your business here.
The country is placed 20th in the World Bank rating for ease of doing business and in 25th in terms of progressive approach of doing business, according to the Index of Economic Freedom. This means that, even though Germany is an economic leader in Europe and one of the largest exporters in the world (the nation’s GDP is expected to grow with 1,9% in 2019), the business conditions it provides are very good but still not perfect.
When entering a new market, be that investment or any other form, it’s essential to study the regulations, legal restrictions and requirements of the host country. The second important thing is an appropriate target market research and an informed and careful expansion campaign planning.
Germany is well regulated. It’s economy has a clear structure and has trade organisations for the most industries, that, together with the local chambers of commerce, provide professional advice and legal help for a specific industry.
Companies planning to enter the German market have to do their due diligence carefully and ensure they are perfectly aware of the standards, that apply to their products or services in this country. They should also take care to get relevant testings and certifications, without which they’ll have no right to sell their product or/and service on the German territory.
Note that the regulations in Germany can be different (usually more strict) from those of the European Union. Here are just some examples.
Sophisticated safety environmental standards.
Due to the ‘building a green economy’ policy several qualification and certification measures were taken in Germany, obliging the companies to apply minimum social and ecological standards. Germany also supports the UN Global Compact initiative to enforce them in companies.
Agricultural restrictions.
The Common Agricultural Policy of the EU, naturally accepted by Germany, is strengthened by the local limitations concerning biotech agricultural products. So be careful about the products you’re planning to export and import.
The German market’s decentralisation has both positive and negative consequences for the foreign investors. On the one hand, this provides the market’s diversity, that would mean numerous types of businesses accepted in this country. On the other hand, differences in culture, interests and tastes between geographical regions could present quite a challenge in terms of understanding the needs of locals, their preferences and triggers that would provoke them use your product or service.
It’s strongly advised that you hire an experienced local tax consultant. Besides the quite high marginal tax rates, like the taxable income - 15% and another 5,5%, this time of solidarity surcharge, together forming the corporate income tax, you may face the sophisticated fiscal system.
The 14 different taxes types each company has to pay without the possibility to reduce or drain the several payments in one, take serious amount of time to process. Any commercial activity, for example, business properties registration, implies tough bureaucratic operations.
The multiple write-offs, deductions and allowances also have to be considered when looking in the German’s market direction. The local effective tax rates keep the international competitive levels due to these operations.
Germany Works from the German Trade & Invest association and The German Business Portal (iXPOS), launched by the Federal Ministry of Economic Affairs and Energy are the contact and consultancy platforms, that make Germany more clear for the foreign businesses.
Unlike the ‘ease of doing business’ 25th place in the world, the ‘ease of starting a business’ criteria puts Germany just in the 106th place in the world according to the International Finance Corporation (IFC) and the World Bank.
The requirements for new businesses:
Obligation to network and collaborate with the local Chamber of Industry and Commerce;
Requirement to join the relevant professional associations;
Local commercial registration;
Local office and local employees;
Acception of tax consultancy services;
Deep understanding of legal obligations, requirements and boundaries.
Plenty of rules - this is the first thing for a stranger to learn about German business culture, that is very structured and requires compliance with all rules from each participant.
Privacy level.
Germans strictly separate their work and private life.Keep in mind that business emails out of hours are even banned by the government, no matter how incredible it may sound. You’d better use phone calls for promptness.
By the way, promptness is highly valued in this country, so take care to answer your partner’s phone call or call back asap if you miss it. Or else this will be considered as a lack of respect and can lead to the termination of your business relationship.
Germans also use their second names in work. An invite to use the first name is a great honour.
Hierarchy and formalities.
- Mandatory use of professional titles and academic credentials on your business cards will help Germans asses your educational and professional background, to treat you accordingly.
- Discussions are organised in a logical and reasoned way, charts and statistics serving as the best arguments.
- Decision-making is inextricably linked to hierarchy. Every action of your partner has to be approved by his/her upper management. That is why negotiations and contract signs may take quite a time.
- When preparing to close a deal, remember that germans pay a lot of attention to details, various checks and thorough due diligence, so don’t expect the response soon.
Amiable environment.
You always have a chance for a better deal if you don’t pressure your German partner. Local business people would always come with conditions that suit the both parties, guided by their startlink sense of fairness.
Germany is among the world’s leaders in foreign language proficiency, but you’d better not overestimate their competence. Even though the German business people speak English at a very decent level, misunderstandings still have place when the discussion goes outside their area of expertise. Beware of missing the points on both sides; elaborate each important point in details rather than relying on the other side’s understanding of particular terms.
Though modern people tend to get rid of stereotypes, each of them is true to a certain extent. Germans are much more formal than other nations and appreciate good manners, punctuality and proper outfit. They get reserved noticing a too friendly attitude.
Germans are perfectionists. The decision-making process in Germany takes long time due to their scrupulous attention to the smallest details, that are reviewed thoroughly. Although this could be a test for your patience, don’t ever press your german partners to a decision. They may consider the deal hasty and cause a latent mistrust - the best way to ruin your partnership.
Local habits and attitudes differ from one German state to another, meaning that if you had business before with people from Hamburg or Dresden, this won’t be a guarantee that you’ll similarly achieve mutual understanding with businessmen from Rhine-land. They may have totally different expectancies and reactions.
Always run credit check on your prospect partners. Ideally this should be done from domestic sources, like German data banks, or reliable international business intelligence providers, that can guarantee the highest relevance rate. Otherwise you risk to run into unreliable and outdated information.
Beware of dealing with the wrong enterprise, check the name thrice. ‘Hermann Meier GmbH & Co. KG’ may look very much like ‘Hermann Meier GmbH’, but they definitely are not the same. You risk running credit check on the wrong company or even make an innocent company be sued in case of a dispute.
Put a condition of full payment for all your sales. This way even the bankruptcy will not be so hard for you. Remember to stipulate the retention of title in the sales contract; mentioning this on the bill or in the invoice won’t be enough.
Even though putting the important things in writing is a common habit of businessmen worldwide, the German legal framework makes this even more necessary. According to the German law, when an agreement is reached on the phone and later endorsed by a confirmation letter, the other side has to become a part of it immediately in case there are no objections.
While doing business in any country can be a quite challenging venture, Germany definitely is the country to make your best to succeed in. The economical and political leader of the European Union and one of the global leaders, this country offers multiple opportunities for business, its government providing all sorts of advice, support, consultancy and funding. So the tough bureaucracy and national mentality specifics definitely should not serve as an obstacle when entering the German market.
