TAPPING INTO THE EUROPEAN UNION: BEST BUSINESS OPPORTUNITIES IN GERMANY

--Priyamvada Lonial, Legal Specialist

Germany is the largest economy in Eurozone, and one of the largest worldwide. Located at the crossroads of eastern and western Europe, it acts as a bridge among multiple countries. It is known for its high quality, world class products ranging from cars and trains, to food and beverages. Its European Union membership is another added perk, offering access to over 500 million consumers. Moreover, Germany is also home to a network of reputed universities; and is known to attract skilled talent from all over the world. Its strong trade linkages with major economies such as France, USA, and the Netherlands, among many others also solidify its position as a global trade giant. But hold on! It gets even better. The German government offers multiple fiscal and non-fiscal incentives to investors, along with industries being marked by the presence of clusters and R&D centres across the country. But what are the best areas to invest in? Let’s take a look.

THE GERMAN BUSINESS LANDSCAPE

Germany has the third largest economy in the world after USA and China, with the GDP standing at $4.1 trillion as of 2023, and a GDP per capita of more than $52,000. By virtue of its automotive and chemical exports, it is also the third largest exporter in the world. An increasing number of investors are attracted towards the option of investing their capital in German Greenfield companies, given its potential and Germany’s reputation worldwide.

German companies are subject to two kinds of corporate tax, namely the corporate income tax and the trade tax. Nationwide corporate tax is levied at 15% on annual business profits (taxable income). Additionally, a solidarity surcharge (solidaritatszuschlag), which is 5.5% of the corporate income tax, is also levied on top of the tax (please note that this solidarity surcharge is levied on the corporate income TAX, not on the income itself). Calculated together, the tax as a total is levied at a rate of around 15.8%. Trade tax, on the other hand, is levied at a municipal level with its rates varying from municipality to municipality. The minimum tax rate must be 7%; and though there is no statutory ceiling, the average trade tax rate in Germany stands slightly above 14%.

Germany offers a Cash Incentives Program (GRW), which allocates grants for investment. Supervised by the Federal Ministry for Economic Affairs and Climate Action, this program defines eligible investments and the maximum possible investment rates based on the region. Regions having the highest incentives offer grants of up to 45% of the eligible expenditure for small enterprises, and up to 25% for large enterprises. If you are investing in a new site, either the actual investment costs (e.g. for buildings or machinery) or wage costs (including social security contribution) for two subsequent years are eligible for funding.

KEY INDUSTRIES

Healthcare

Having the largest healthcare and life sciences market in Europe, the German healthcare sector grew by 5.4% between 2016 and 2021. While it employs well over 7.7 million people, the sector is home to 13,000 med-tech companies, more than 500 pharmaceutical companies, and 710 biotechnology companies. This sector has a lot of potential, especially given the fact that 31% of the total German population will be aged over 65 by 2035. Moreover, Germany has over 30 clusters centred on medical technology, which help entrepreneurs and entities secure funding for R&D projects, educational training programs, etc. Some of the most prominent biotechnology clusters are located in Berlin, Munich, Hessen, Nuremburg, Frankfurt and Bavaria; while the med-tech clusters are primarily situated in Aalen, Hamburg, Schleswig-Holstein, Wiesbaden, and Tuttlingen.

Energy

Germany has emerged as the leader in rooftop solar photovoltaic energy across Europe, and at 80.7 GWp, has the largest cumulative photovoltaic capacity as well. Moreover, Germany also has the biggest gas market in Europe, and one of the biggest wind energy industries in the world.

Environmental Technologies

Having the largest construction market and building stock in the EU, the German environmental technologies market is expected to contribute 2% to the total GDP by 2025. Further, the circular economy is growing rapidly and is expected to reach a turnover of €32 billion by 2030. The battery recycling market is perhaps the most lucrative option herein from an investor’s point of view.

Consumer Industries

Not only does Germany have the largest consumer market in Europe, but also Germans had €2.1 trillion of disposable income in 2021. This, along with the fact that Germany alone accounts for 25% of the European B2C e-commerce turnover goes on to show the profitability of being a part of this industry. Moving on to the food & beverage (F&B) industry, Germany is the largest food producer in Europe and its F&B industry is the fourth largest in the country overall. The production value generated in 2022 was around €220 billion, while the industry has around 6,000 companies, most of them being SMEs. Moving further, the franchising industry is a good investment option, and has a turnover of €142.2 billion and more than 900 active franchise concepts. 52% of the franchise systems in Germany work in the service sector, followed by the retail sector at 22%; food service, tourism & leisure at 20%; and skilled trades, construction, maintenance at 6%.

Services

The banking sector is the biggest contributor herein, consisting of more than 1500 institutions and providing employment to more than half a million people. The total assets in the banking sector’s possession amounted to €9,200 billion in 2020. The best location for the banking sector is Frankfurt, while other key locations include Munich, Dusseldorf and Hamburg. Moving forward, Germany has over 3 million SMEs, which generate employment for nearly 80% of the total workforce. The country is also emerging as an upcoming hub for fintech, especially after Brexit. Germany is soon set to become the fourth largest fintech market in the world, which is substantiated by the observation that many renowned fintech companies are relocating to Germany to tap into the large consumer base.

Industrial Production

Home to the largest 3D printing/ additive manufacturing industry in Europe and second largest in the word (only behind the US), Germany has various manufacturing facilities in multiple industries, thus making it a lucrative option for investors across the globe. Germany is also the leading player in the EU in terms of chemical sales, export, investment, and R&D expenditure; and employs nearly half a million people. Similarly, the electronic industry contributes significantly to the economy, having an estimated turnover of €182 billion, employing more than 1.5 million people (out of which more than 777,000 are employed overseas), and accounting for nearly 23% of the country’s total R&D spending. The exports of this industry are valued at €203 billion, thus accounting for nearly 13% of the total exports.

Mobility

Germany has the largest automotive industry in Europe, having a turnover of more than €410 billion. The automotive industry, which is also the largest in the country, consists of 44 automobile assembly and engine production plants with the capacity of over 1/3^rd of total automobile production in Europe, and employs more than 780,000+ people. Moving on, the aerospace industry is also a lucrative option for investors, generated more than €22 billion in revenue in 2022, employs more than 100,000 people and generated more than 5,000 jobs in 2022. This industry is marked by the presence of more than 200 companies and related institutions.

Digital Economy

Germany is one of the leading players in terms of digital economy, which is substantiated by the fact that 75% of the German companies have a digitalization strategy. The internet economy recorded revenues of nearly €26 billion in 2021. Moving on, Germany is home to more than 100,000 IT companies which employ more than 1.5 million IT professionals.

Creative Industries

The creative industries, which encompass the gaming, music, and film industries, generated a revenue of more than €174 million in 2019. Germany is also considered an attractive location for filming, especially due to the presence of incentives and subsidies for films produced in the country. The gaming sector is also rapidly growing and generated more than €8.5 billion in revenue in 2021. Gaming hubs, particularly in Hamburg, Berlin, Bavaria and Rhine are steadily growing.

RELOCATION

If you are a non-EU national wanting to set up a business in Germany, you may apply for a residence permit for self-employment [as per the Residence Act (AufenthG)] upon the fulfilment of multiple conditions, such as the presence of economic interest or regional demand for your products & services, positive impact on the German economy, ability to finance the establishment and operations of your business with your own capital or through a loan commitment, and ability to provide proof of adequate old age pensions in case you are older than 45. This residence permit is valid for a period of 3 years, and is subject to renewal, provided that you continue to meet the conditions on which the initial residence permit was granted. You can apply for permanent residence, i.e. settlement permit after having resided in Germany for a period of 3 uninterrupted years. As for citizenship by naturalization, you can apply for the same after 8 years of uninterrupted legal residence.

As for the expat community, at 13.89 million, over 16% of the German population is made up of expats, with the highest concentration being in major cities like Berlin, Munich, Hamburg, Frankfurt, and Dusseldorf. The largest expat communities belong mostly to other EU states such as Hungary, Spain and the Netherlands; while Indians and Americans also make up a significant chunk of the expat population.

Rest assured, our team at SUO Consulting GmbH shall be happy to assist you at every step of the way, starting from applying for a German residence permit on your behalf to ensuring a smooth settling in experience post your arrival in the country.

CONCLUSION

It can thus be said that Germany has multiple opportunities which are waiting to be explored. Though many industries like automotive and life sciences are already well established and even globally renowned, multiple sub-sectors therein, and even upcoming industries like gaming and renewable energy offer a wealth of opportunities along with scope for growth. Though living in Germany comes with its own set of challenges, you can establish your venture and get profitable returns on your investment, provided that your moves are strategically planned and backed by sound legal advice.