Germany a prime location for business and M&A

With the impressive growth of the Indian economy in recent years, Indian companies have been engaged in outbound investments, acquisitions and joint ventures around the globe. One of their preferred investment destinations has been Germany, which is globally recognized as a top choice for know-how, innovation and R&D.

Germany offers a liberalized legal framework for foreign investment with hardly any investment restrictions. The only exceptions relate to non-EU investments in a very limited number of areas with an impact on national security. German law knows nothing comparable to the complex Indian regime for foreign direct investment.

Apart from M&A, there are basically two ways a foreign investor can set up business in Germany: (i) by incorporating a legally independent German company; or (ii) by registering a legally non-independent branch of a foreign company.

[ihc-hide-content ihc_mb_type=”show” ihc_mb_who=”3″ ihc_mb_template=”2″ ]

A German company can take various forms, the most commonly used by foreign investors being the GmbH, which is in various aspects comparable to the Indian private limited company. A branch is not recommended if a foreign investor wants to build a sustainable presence in Germany.

In terms of types of M&A deals, Germany does not look much different from India. Additionally, transaction documentation follows a relatively uniform international standard. In public M&A, i.e. acquisition of listed German companies, every acquirer must make a mandatory open offer to all shareholders in the target company upon holding/controlling at least 30% of the voting rights in the target.
Upon reaching 90% of the voting rights in a listed target in an open offer or 95% of the voting rights in a listed target outside an open offer, the majority shareholder is entitled to squeeze out all minority shareholders against cash compensation.

Taxes

Corporate income is taxed at a flat rate of 15%. Tax on distributions is levied on shareholder level depending on the nature of the shareholder. Individuals pay about 25%. For corporations as shareholders, only 5% of the gross dividends are taxable, which makes Germany an attractive holding company location.

The income of partnerships is taxed on the level of the partners (for corporations 15%; for individuals the personal progressive income tax rate of up to 45% applies). Domestic businesses also pay trade tax at an average rate of about 14%.

Germany has an extensive tax treaty network and a good ruling practice. Foreign investors can rely on a long tradition of well-known investment structures. In M&A deals, tax structuring can be achieved through a variety of share and asset deal options.

Labour law

Investors keen to start a business in Germany need to be aware of the labour and employment law issues triggered by their German headcount. Startups and smaller businesses must bear in mind that German statutory protection against unjustified dismissals applies to all businesses that employ more than 10 employees on a regular basis.

Businesses with at least five employees need to establish a works council at the employees’ request, which could affect the operational side of the business. Companies with over 500 employees may have to deal with employee representatives at the board level.

In M&A deals, buyers should pay special attention to any non-statutory pension plans in place at the target, because these usually cannot be revoked unilaterally and may result in a substantial cost. Using an asset deal structure for the transfer of a business does not avoid the transfer of all employees attributable to the business sold to the acquirer, which happens automatically by rule of law.

Merger control

Both the EU and Germany have mandatory merger control regimes. Which regime applies depends on certain turnover thresholds. In principle, the EU merger rules apply in transactions involving large companies where the parties involved have a minimum combined worldwide turnover of €2.5 billion (US$3.3 billion). However, additional turnover thresholds also have to be reached cumulatively, some of them relating to the number of member states involved.

A transaction falls within the scope of Germany’s merger control when the EU thresholds are not met, but the parties’ combined worldwide turnover exceeds €500 million and one party has a turnover in Germany exceeding €25 million while another party has a turnover in Germany exceeding €5 million, and de minimis exemptions do not apply.

The transactions covered by these rules include full mergers, acquisitions of control, joint ventures and, in Germany, potentially minority shareholdings as well. If the rules apply, a transaction cannot be closed prior to clearance or non-prohibition by Germany’s Federal Cartel Office within certain statutory time periods of, in general, between one and four months.

[/ihc-hide-content]

Benjamin Parameswaran, a partner in the corporate/M&A group in Hamburg and Cologne, and Daniel H Sharma, a partner in the litigation and regulatory group in Frankfurt and Brussels, jointly head DLA Piper’s India group for continental Europe. DLA Piper is the world’s largest legal practice with more than 4,200 lawyers in 76 offices across 30 countries.