Germany has implemented the Authorized OECD Approach (AOA) on cross-border taxation of permanent establishments. A German branch is a permanent establishment. 

Basically, profit splitting occurs for all dealings between the German branch and its headquarters abroad. It is not possible to avoid tax in Germany on a portion of the entire company’s profits (including your headquarter’s operation abroad) once a German branch has been established. With a German branch, a certain apportionment of profits of the company must be taxed in Germany. 

All dealings with headquarters are evaluated by the at arm’s length principle. In result, even though a German branch and its headquarters abroad are one company, both are treated like separate companies. 

Article 7 of the OECD tax treaty assigns Germany the right to tax profits attributed to the German branch. However, dealings also result in taxation in Germany which are solely occuring abroad, if the German branch is fulfilling certain personnel functions for the operation at headquarters. Therefore, it is not possible to provide an easy and quick answer to how much tax will be due when planning on registering a German branch.

A tax advisor needs to review examples of the service or goods invoices the German branch is intending to issue, and needs to investigate insights on the nature of the dealings between the German branch and its headquarters abroad. What functions do they carry out with third parties, and particularly for each other? Answering this and other questions on taxation of a German branch is an undertaking that requires custom advice by a trusted professional in international taxation.

Cost for registering a German Branch

The fees for the establishment of a branch with our cooperation partner, Liesegang & Partner, attorneys at law, will be 1,800 EUR (for a company within the EU; which still applies for UK companies). For a company outside EU it will be 3,100 EUR.

Please see the following link to get more information about registering a branch in Germany:

https://www.liesegang-partner.eu/eshop/anmeldung-zweigniederlassung.html 

Please note that the branch will need a registered office in Germany. If you don’t have a German address which you can use, you’ll have to rent at least a so-called shared office which costs approx. 180- 250 EUR net monthly + deposit. Liesegang & Partner will gladly recommend you an appropriate provider.

In order to register the branch it is required to provide the German Commercial Register with the articles of association as well as with a proof of the existence of the foreign company and who is entitled to represent the company. This could be an excerpt from the foreign Commercial Register or a notarial confirmation. All documents must be certified and legalized with an Apostille (depending on the country) and require a certified translation into German. The registration of the branch is then carried out by the managing director of the foreign company. A lawyer from Liesegang & Partner will be happy to explain the exact requirements in your case.

Alternative: forming a new German subsidiary

What's important to know for your decisionmaking process on whether to register a German branch or form a new German subsidiary in cases involving a UK Limited is that the German tax admininstration considers these company forms to be transparent units. This means the taxation will occur on the shareholder level as if the UK Limited were a partnership.

Therefore, with a UK Limited, the formation of a new German subsidiary must be considered as an alternative to registering a German branch when entering the German market. Otherwise, the income tax rate may be as high as 42-45%. A newly formed German subsidiary, instead, has only an average tax rate of 31-34%.