As Europe’s largest economy, Germany is a major destination for foreign direct investment (FDI) and has accumulated a vast stock of FDI over time. Germany is consistently ranked as one of the most attractive investment destinations based on its reliable infrastructure, highly skilled workforce, positive social climate, stable legal environment, and world-class research and development.
The United States is the leading source of non-European foreign investment in Germany. Foreign investment in Germany mainly originates from other European countries, the United States, and Japan. FDI from emerging economies (and China) has grown slowly over 2015-2018, albeit from low levels.
The German government continues to strengthen provisions for national security screening inward investment in reaction to an increasing number of high-risk acquisitions of German companies by foreign investors in recent years, particularly from China. German authorities strongly support the European Union framework to coordinate Member State screening of foreign investments, which entered into force in April 2019, and are currently enacting implementing legislation.
In 2018, the government lowered the threshold for the screening of investments, allowing authorities to screen acquisitions by foreign entities of at least 10 percent of voting rights of German companies that operate or provide services related to critical infrastructure. The amendment also added media companies to the list of sensitive businesses.
Further amendments, still in draft as of May 2020, will
a) introduce a more pro-active screening based on “prospective impairment” of public order or security by an acquisition, rather than a de facto threat,
b) take into account the impact on other EU member states, and
c) formally suspend transactions during the screening process.
Furthermore, acquisitions by foreign government-owned or funded entities will now trigger a review, and the healthcare industry will be considered a sensitive sector to which the stricter 10% threshold applies. The Federal Ministry for Economic Affairs and Energy said it would draft a further amendment later in 2020 which would include a list of sensitive technologies (similar to the current list of critical infrastructure) to include artificial intelligence, robotics, semiconductors, biotechnology, and quantum technology. Foreign investors who seek to acquire at least 10% of ownership rights of a German company in one those fields would be required to notify the government and potentially become subject to an investment review. With these draft and planned amendments, Germany is implementing the 2019 EU Screening Regulation.
German legal, regulatory, and accounting systems can be complex and burdensome but are generally transparent and consistent with developed-market norms. Businesses operate within a well regulated, albeit high cost, environment. Foreign and domestic investors are treated equally when it comes to investment incentives or the establishment and protection of real and intellectual property. Foreign investors can rely on the German legal system to enforce laws and contracts; at the same time, this system requires investors to closely track their legal obligations. New investors should ensure they have the necessary legal expertise, either in-house or outside counsel, to meet all national and EU regulations.
German authorities are committed to fighting money laundering and corruption. The government promotes responsible business conduct and German SMEs are aware of the need for due diligence.
|TI Corruption Perceptions Index||2019||9 of 180||http://www.transparency.org/research/cpi/overview|
|World Bank’s Doing Business Report||2019||22 of 190||http://www.doingbusiness.org/en/rankings|
|Global Innovation Index||2019||9 of 129||https://www.globalinnovationindex.org/analysis-indicator|
|U.S. FDI in partner country ($M USD, historical stock positions)||2018||140.331 billion USD||https://apps.bea.gov/international/factsheet/|
|World Bank GNI per capita||2018||54,560 USD||http://data.worldbank.org/indicator/NY.GNP.PCAP.CD|
1. Openness To, and Restrictions Upon, Foreign Investment
Policies Towards Foreign Direct Investment
The German government and industry actively encourage foreign investment. U.S. investment continues to account for a significant share of Germany’s FDI. The 1956 U.S.-Federal Republic of Germany Treaty of Friendship, Commerce and Navigation affords U.S. investors national treatment and provides for the free movement of capital between the United States and Germany. As an OECD member, Germany adheres to the OECD National Treatment Instrument and the OECD Codes of Liberalization of Capital Movements and of Invisible Operations. The Foreign Trade and Payments Act and the Foreign Trade and Payments Ordinance provide the legal basis for the Federal Ministry for Economic Affairs and Energy to review acquisitions of domestic companies by foreign buyers, to assess whether these transactions pose a risk to the public order or national security (for example, when the investment pertains to critical infrastructure). For many decades, Germany has experienced significant inbound investment, which is widely recognized as a considerable contributor to Germany’s growth and prosperity. The investment-related challenges facing foreign companies are broadly the same as face domestic firms, e.g high tax rates and labor laws that complicate hiring and dismissals. Germany Trade and Invest (GTAI), the country’s economic development agency, provides extensive information for investors: https://www.gtai.de/gtai-en/invest
Limits on Foreign Control and Right to Private Ownership and Establishment
Under German law, a foreign-owned company registered in the Federal Republic of Germany as a GmbH (limited liability company) or an AG (joint stock company) is treated the same as a German-owned company. There are no special nationality requirements for directors or shareholders.
The provision of employee placement services, such as providing temporary office support, domestic help, or executive search services, requires registration of a business in Germany.
Germany maintains an elaborate mechanism to screen foreign investments based on national security grounds. The legislative basis for the mechanism (the Foreign Trade and Payments Act and Foreign Trade and Payments Ordinance) has been amended several times in recent years in an effort to tighten parameters of the screening as technological threats evolve, particularly to address growing investment interest by malevolent actors in both Mittelstand (mid-sized) and blue chip German companies. Amendments to implement the 2019 EU Screening Regulation are in draft or have been announced as of May 2020. In addition, authorities will make “prospective impairment” of public order and security the new trigger for an investment review, in place of the current standard (which requires a de facto threat).
Other Investment Policy Reviews
The World Bank Group’s “Doing Business 2020” and Economist Intelligence Unit both provide additional information on Germany’s investment climate. The American Chamber of Commerce in Germany also publishes results of an annual survey of U.S. investors in Germany (“AmCham Germany Transatlantic Business Barometer”, https://www.amcham.de/publications).
Before engaging in commercial activities, companies and business operators must register in public directories, the two most significant of which are the commercial register (Handelsregister) and the trade office register (Gewerberegister).
Applications for registration at the commercial register, which is available under www.handelsregister.de , are electronically filed in publicly certified form through a notary. The commercial register provides information about all relevant relationships between merchants and commercial companies, including names of partners and managing directors, capital stock, liability limitations, and insolvency proceedings. Registration costs vary depending on the size of the company.
Germany Trade and Invest (GTAI), the country’s economic development agency, can assist in the registration processes (https://www.gtai.de/gtai-en/invest/investment-guide/establishing-a-company/business-registration-65532 ) and advises investors, including micro-, small-, and medium-sized enterprises (MSMEs), on how to obtain incentives.
In the EU, MSMEs are defined as follows:
- Micro-enterprises: less than 10 employees and less than €2 million annual turnover or less than €2 million in balance sheet total.
- Small-enterprises: less than 50 employees and less than €10 million annual turnover or less than €10 million in balance sheet total.
- Medium-sized enterprises: less than 250 employees and less than €50 million annual turnover or less than €43 million in balance sheet total.
Germany’s federal government provides guarantees for investments by Germany-based companies in developing and emerging economies and countries in transition in order to insure them against political risks. In order to receive guarantees, the investment must have adequate legal protection in the host country. The Federal Government does not insure against commercial risks.