How to become a German citizen

You have lived in Germany for a number of years and would like to become a German citizen?

Here are the requirements in a nutshell:

Legal residence in Germany

You must have lived in Germany for the approprate length of time:

8 years, or
7 years with completed integration course, or
6 years with better German skills than level B1, or
3 years, if you have been married to a German citizen for at least two years (or have lived a civil partnership for an equivalent period).

During these periods you must have had uninterrupted legal residence in Germany.

Legal residence means that you hold a permanent or temporary residence permit (Aufenthaltserlaubnis or Niederlassungserlaubnis). Certain types of temporary permits, for instance student residence permits and researcher residence permits, are not sufficient. (EU citizens and citizens of Switzerland do not need a residence permit in Germany).

Proof of your identity and nationality

Can be established with a valid national passport or ID card.

Support of the German constitution


You are not a member or supporter of any organganization that engages in terrorist or extremist activity.

Self-sufficiency

You must be able to support yourself. If you or your family receive long-term unemployment benefits or social walfare payments („Hartz IV“) you do not qualify.

Repudiation of your current nationality


As a general rule, Germany does not allow dual citizenship. You are expected give up your current nationality when naturalizing in Germany. However, there are certain exceptions to this rule, for example, if giving up your current nationality would mean a hardship – especially financially – to you. For example, if your job or professional activities require you to be able to travel to your home country and work there, and you would suffer substantial losses, if you lost that ability, you may be given permission to retain your home nationality when naturalizing in Germany.

Citizens of the EU and Switzerland will not have to repudiate their nationality.

No criminal record

Misdemeanors and minor offenses will not be considered, if they did not result in sentences of fines equivalent of 90 days’ earnings or prison sentences of over 3 months.

German language skills

You have an oral and written knowledge of German at least at the B1 level.

Civics test and social integration


You will have to pass a civics test, in which you will have to answer 33 questions out of a catalouge of 310, 17 of which you will have to answer correctly in order to pass the test. The questions mainly cover the areas democracy, equality and civil rights under the German constitution, and freedom of religion. If you have successfully completed university studies in law, social, political or administrative sciences in Germany, the civics test will be waived.

Where and how to apply

You need to apply at the local immigration office (Staatsangehörigkeitsbehörde) at the municipality where you reside.

In Berlin, for example, the boroughs (Bezirke) offer (and require) initial consultations (free of charge), where you will receive detailed information and the application forms. You will need to bring an valid passport or government ID card to the appointment. Procedures in other municipalities are similar.

The naturalization process may take several months or over a year, depending on where you reside. An administrative fee of 255,00 Euro per person (51,00 Euro for children) applies.

Contact us today, if you have any questions regarding the naturalization process in Germany.

Company Formation

Are you planning on starting a business in Germany or the United States? We can give you comprehensive advice, from helping you find the best business form, to handling the entire formation process, to providing counsel and advice to your business as it continues to grow and expand. Starting a business is a process. It is important to understand the different options before you make commitments, and once you start down the path of creating a company you will want trusted advisors who can help you through the various steps and answer the questions that come up along the way. We specialize in company formation for businesses big and small both in Germany and in the United States.

We are also uniquely suited to advise on interntational business models, including subsidiaries, branch offices, and the many questions that come with running an international business. There are a lot of questions to consider when starting a business. Here are three basic questions to start with:

Control / Investment

The first question is how do you want to structure your business in terms of who makes decisions. Is it just you? Do you have partners – and if so, who makes what decisions? Is a more sophisticated structure with shareholders, a board of directors, and corporate officers necessary? The attendant question to this is, what type of investments are you expecting? Some investors are happy to loan the money with a guarantee of repayment (with interest), and might not care about having any say in business decisions. Others will want to have their say with what happens with their investments. The corollary to keep in mind is: the more say someone has in business decisions, the more liability they have for what the business does.

Liability

One of the biggest concerns for people going into business (or at least, it should be a major concern), is what type of liability are you taking on? There is financial liability (what if the business goes bankrupt, cannot pay it’s expenses, cannot fulfill a contract, cannot pay back it’s loans?) as well as more direct liabilities (what if someone gets hurt because of your product, what if someone loses money because you didn’t fulfill a contract, what if the business infringes on someone else’s intellectual property and gets sued?)Life and business are always full of risks, but you can at least set up your company in a way that would provide you with some personal protection should something with the business goes wrong. This is one of the main benefits of chosing a corporate structure, or any of the “limited liability” (“haftungsbeschränkt”) company forms. These structures limit the scope of liability to the assets of the company, and put up a protective “corporate veil” between the individuals involved in the company (e.g. investors, officers, employees) so that their personal assets are protected from liability.However, there are limits to the protection that company structures can provide from liability that you need to be aware of, for example, criminal behavior. Make sure you understand what type of liability, and what level of protection you are taking on.

Taxes

The third major question for deciding on a business structure is the tax implications. Different company forms are taxed differently, for example: a sole proprietor is taxed once on the business profits as personal income, whereas a corporation pays taxes on its revenue, and then the shareholders and employees pay an additional tax on their capital gains and personal income, respectively.Taxes can get complicated, especially when your company is operating internationally, or when you as an individual have to file taxes in more than one jurisdiction (see Americans abroad: How to avoid double taxation). Again, it is advisable to do your research at the beginning to save trouble or surprises down the road. If you have questions about company formation and what options are best for your business, don’t hestitate to contact us. We are happy to set up an initial consultation to go over your business plan, the various company structures available, and what options would work best for you.Of course, we are also here to advise you through the company formation and beyond. With expertise in German, American, and international business law, we are excited to help your business succeed.Common company forms that we readily advise on include:

United States

  • Sole Proprietorship
  • Partnerships
    • General Partnerships
    • Limited Partnerships
    • Limited Liability Partnerships (LLP)
  • Corporations
    • General Corporations (C Corp.)
    • S Corporations (S Corp.)
    • Delaware Corporations
  • Limited Liability Companies (LLC)

Germany

  • Sole Proprietorship (“Einzelunternehmer”)
  • General Partnership (“Offene Handelsgesellschaft” – OHG)
  • Limited Partnership (“Kommanditgesellschaft” – KG)
  • Limited Liability Company (“Gesellschaft mit beschränkter Haftung” – GmbH)
  • Entrepreneurial Company with Limited Liability (“Unternehmergesellschaft (beschränkter Haftung” – UG)
  • Stock Corporation (“Aktiengesellschaft” – AG)

Contact us today for more information. We look forward to helping you build your business!

Americans abroad: How to avoid double taxation

U.S. citizens and permanent residents are required to file and pay American taxes no matter where they live. This means, Americans living in Germany still need to file their taxes with the IRS. (The only way out of this is to renounce U.S. citizenship, a decision which should not be taken lightly, but is something we can advise on for those who are interested.) Luckily, there are so-called double taxation treaties between many countries, including between the U.S. and Germany, which set out what taxes are paid to which country in cases where a person would have to pay taxes in more than one jurisdiction. This helps the countries attract foreign business and workers by not doubling their tax burden, and it also helps individuals and businesses by making sure they don’t have to pay the same tax twice in two jurisdictions. U.S., citizens and permanent residents who file their income taxes have two options under the U.S.-German double taxation treaty to limit their tax liability: either the Foreign Earned Income Exclusion or the Foreign Tax Credit.

Foreign Earned Income Exclusion – IRS Form 2555

The Foreign Earned Income Exclusion allows a U.S. citizen or permanent resident to exclude a portion of the income they earned outside the U.S. – reducing their taxable income in the U.S. The amount that can be excluded changes slightly every year, and is $107,600 for the 2020 tax year. That essentially means that no U.S. income taxes would need to be paid on the first $107,600 of income for a U.S. citizen or permanent resident earning income outside the U.S.

Note: You still have to file even if your income is below the threshold! An IRS Form 2555 will have to be filed to declare the foreign earned income in addition to the regular tax forms.

Note: Amounts earned in foreign currencies must be calculated into USD for the purposes of filings and determining income and credit amounts.

Example: John Smith is a U.S. citizen living and working in Berlin with an annual income of €60,000. Because he is a U.S. citizen, he files and pays his German taxes and files his U.S. taxes with the IRS using From 1040 and Form 2555. The foreign income of €60,000 is then excluded from his U.S. taxable income, and because it is under the $107,600 threshold, he owes no U.S. taxes on that income.

In order to qualify for the Foreign Earned Income Exclusion, you need to meet one of two tests:

Bona Fide Residence Test

The the bona fide residence test if you are a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year.

Physical Presence Test

You meet the physical presence test if you are physically present in a foreign country or countries 330 full days during any period of 12 consecutive months including some part of the year at issue. The 330 qualifying days do not have to be consecutive.

Foreign Tax Credit – IRS Form 1116

The other option available to U.S. citizens and permanent residents is the Foreign Tax Credit. The Foreign Tax Credit is – as its name implies – a tax credit – meaning it is subtracted from the tax amount payable (as opposed to reducing the taxable income). With the Foreign Tax Credit, the amount of taxes paid outside the U.S. is subtracted from the tax amount owed in the U.S.: The Foreign Tax Credit may alternatively be used as a tax deduction – meaning the amount is subtracted from your taxable income. This is similar to the Foreign Earned Income Exclusion, but the difference is that the taxable income is reduced by the amount of taxes paid abroad, as opposed to the amount of income earned abroad.

Note: You can only use either the Foreign Earned Income Exclusion or the Foreign Tax Credit for a particular set of income. That means you cannot exclude the foreign income and then also get a tax credit for the same income – you have to choose which method you want to apply. (If income is above the $107,600 limit, you may apply the Foreign Earned Income Exclusion to the first $107,600, and then use the Foreign Tax Credit on the income above that amount.)

Example: Tom Miller is a U.S. citizen living and working in Frankfurt with an annual income of €150,000 (calculated to $183,800). Because he is a U.S. citizen, he files and pays his German taxes and files his U.S. taxes with the IRS using Form 1040 and Form 1116. Because his income is above the $107,600 threshold for the Foreign Earned Income Tax Exclusion, he decides to opt for the Foreign Tax Credit. In Germany, he paid €40,000 (calculated to $49,000) in German income tax, which can now use as a tax credit in the U.S. The IRS applies income tax to his entire $183,800 income which comes to $30,000. The $49,000 is then subtracted from the $30,000 owed income tax as a tax credit (30,000 – 49,000 = -19,000), leaving Tom with a tax liability of $0.

Alternatively, Tom could have applied the Foreign Earned Income Tax Exclusion to his first $107,600, and then calculated the tax he paid on the rest of his income above that, and then subtracted that amount from his remaining tax liability in the U.S. So if the German tax paid on the $76,200 amount above the Earned Income Tax Exclusion ($183,800 – $107,600 = $76,200) was $30,000, that $30,000 could then be applied as tax credit and subtracted from his remaining U.S. tax amount.

We are happy to set up a consultation meeting to discuss the international tax system, how it applies to you or your business, and what strategies you can use to minimize your tax liability. We work with top-notch accountants in Germany and the U.S. who are experienced with complex international filings, or we are happy to work with your current accountant to implement an international tax strategy that works for you. Contact us via email or phone to schedule an appointment. We look forward to helping you!

What information must be included on an invoice in Germany?

You have recently started a new business in Germany and you are excited that you have found your first customers. Now you want to go ahead and issue your first invoices. Before you do so, make sure you have included all legally required information. Section 14 of the German Value Added Tax Act (Umsatzsteuergesetz, UStG) stipulates a number of mandatory details for invoices. They include:

  • Full name and address of the issuer
  • Full name and address of the recipient
  • Consecutive invoice number (important!)
  • Tax number or VAT identification number of the issuer
  • Date of issue of the invoice
  • Date of delivery or service
  • Quantity and type of product delivered or type and scope of service provided
  • Agreed bonuses, rebates, discounts (if not already included in the stated invoice amount)
  • Statement of the applicable VAT rate (currently 16 %, as of December 2010)
  • Statement of net invoice amount in euros and amount of VAT levied, based on net amount, plus a statement of total invoice amount (gross)
  • Reference to any tax exempt goods or services (or applicable reduced VAT tax rates, e.g. 5 % on books (as of December 2020)
  • Notice of the recipient‘s obligation to maintain a copy of the invoice for statutory periods, if applicable (e.g. section 14a UStG)
  • Reference to tax exemption under small business regulation: Self-employed persons who make use of the small business regulation do not have to report sales tax. Small entrepreneurs are those whose turnover in the year of establishment does not exceed 17,500 euros. Invoices issued by small entrepreneursmust include a statement that no VAT is charged a reference to section 19 UStG. To do this, you can simply add the following sentence to the form: “In accordance with section 19 UStG, the invoice amount does not include VAT“ (in German).

While not mandatory, it is also recommended to formulate a payment term. Tell customers when the invoice amount is due payable (if no particular due date is agreed, an invoice is due payable immediately). It is, of course, necessary to specify the bank details to which payment should be made.

(Other legal requirements may exist, depending on the particular circumstances).

Online business registration soon available in Germany?

The formation and registration of a Limited Liability Company (Gesellschaft mit mit beschränkter haftung – GmbH), the standard business entity in Germany, is a tedious and and time-consuming endeavor compared with the formation procedures in other European countries. Estonia, for example, offers online company registration to be completed within a matter of days. Not so in Germany. However, new rules are on the horizon.

Commission proposes new EU Directive

On 25 April 2018, the European Commission presented the “Company Law Package” with the aim at digitizing company law. The measures contained in this proposal for an EU Directive are currently being discussed by the EU Council and the European Parliament.

One key element of the Company Law Package is to create the possibility of the online formation of companies in Europe across country borders and the corresponding establishment of local branches. Unlike in some European countries, in Germany and many other EU member states, the electronic formation of corporations is not yet available. The Commission wants this to change, at least for entities like the Limited Liability Company (GmbH and UG (haftungsbeschränkt)). Implementation of the Commission proposal will be optional for all other types of companies.

Online business registration in 5 days

One of the consequences of the planned online establishment of a company would be that the personal presence of the managing director at a notary would no longer be required for commercial register registrations. Instead, the necessary identification could be carried out using new online identification procedures, such as identification by new ID cards with “E-ID function” or by video conference on a smartphone and the use of blockchain technology.

According to the EU Commission, the member states should also implement new rules for the establishment and registration of companies on the national level. The aim is that online company formation should also be completed within five working days.

The Commission’s proposals for the online formation of companies, if implemented, are disruptive in nature for the traditional German company law, where the role of the notary has been pre-eminent. Issues remain, such as protection against digital abuse or the personal responsibility of managing directors and their concrete implementation by the EU and national legislators, but generally, these changes are highly welcome and, as in many other areas, it is about time that Europe strengthens its efforts to keep up with technological trends of the 21st century.

Notaries no longer involved?

However, and not surprisingly, the Commission proposal has been subject to strong criticism from certain interest groups in Germany and elsewhere. Therefore, in February 2019, the Council and Parliament agreed on an amendment to the Commission proposal and sent the amended version to the Committee of Permanent Representatives of the Member States for an opinion.

One of the changes to the original proposal, among other things, is the possibility for national legislation to implement rules that will include the involvement of notaries in the online filing process. Another one is to limit the availability of the expedited (5-day) registration only in cases where the new company is founded by natural persons (versus legal entities), and only if they use the pre-approved form articles of association envisioned by the Commission.

The Committee’s decision and the formal agreement of the Council and Parliament are still pending and it remains to be seen whether the final result will bring real improvements to the antiquated company formation system that exists in Germany and most European countries, and a step towards a more business-friendly environment that is much-needed in light of the ever-increasing competition from the United States and China.

Forming A Corporation In Germany

Thinking about setting up a corporation in Germany? There are several key decisions you will want to consider, including how you want your company to be organized, what type of liability you are comfortable with, as well as how much and what kind of investments you anticipate. This article covers three of the most basic German corporate forms: the GmbH, UG (or “Mini-GmbH”), and AG, and some of the key differences that you will want to keep in mind.

Why A Corporation?

Corporations are not the only types of company you can have in Germany. There are also sole proprietorships – where one person effectively is the company, and a number of partnership models with varying complexities and benefits. Generally, these types of companies are called Personengesellschaften.

The main difference between these types of companies and the corporate forms discussed below are liability, taxes, and organization.

Liability

In corporations, there is a legal barrier between the assets of the corporation and the personal assets of the people involved with the corporation (e.g. the managers, board members, and shareholders). If the corporation owes money or gets sued for damages, other parties can go after the assets of the corporation, but are legally not allowed to go after the personal assets of the people involved with the company. This protection has limitations (to be discussed later in a post on “piercing the corporate veil”), but is generally speaking a huge advantage over non-corporate business forms.

Taxes

One should consider the different tax outcomes for the varying business forms. (More specifics of various tax requirements will be covered in a later post). Generally speaking however, while Personengesellschaften and corporations will both pay certain business taxes, corporations will also pay corporate income taxes. The overall corporate tax rate in Germany is currently around 30%, depending on local taxes and other factors. Additionally, if the corporation pays dividends on its shares, capital gains taxes will come into play.

Organization

In terms of organization, a sole proprietorship offers absolute control over the company to one person. Partnerships will share control among partners depending on how the partnership is set up, for example two general partners sharing all control and liability equally, or one partner having more control and the other having less liability.

Corporations have different organizational control depending on the form (discussed more below), but generally are managed by a group of individuals entrusted with making the company’s decisions. With corporations, there is also a system of rules for allowing shareholders to exercise some amount of control depending on a number of factors. What an entrepreneur loses in control by using a corporate form is balanced by the increased respectability of the company and attraction for investors. Shareholders are more willing to invest in a company when they know (A) that they are protected from personal liability if something goes wrong, and (B) have at least some limited say in what the company does.

What Type Of Corporation?

So you’ve decided to set up a corporation, now what type do you want? There are three main corporate forms in Germany: GmbH, UG (or “Mini-GmbH”), and AG.

Gesellschaft mit beschränkter Haftung – GmbH

The most common corporate form in Germany is the Gesellschaft mit beschränkter Haftung or “GmbH”. A GmbH protects the people involved in the company from personal liability, pays corporate income taxes, and has a straightforward organizational model.

Formation:

Setting up a GmbH is relatively simple, however it does require an up front investment of at least 25,000 Euro (which may include “in kind” assets), half of which must be put in a bank account in the name of the company.

The actual formation of a GmbH requires a notarized deed of formation and notarized articles of association. Notaries in Germany operate slightly differently than notaries in other countries, so be sure to research the process and plan the necessary time and required information.

Once the deed of formation and articles of association have been notarized, the company is registered with the Handelsregister at which point it becomes a legal entity. After that, the company must also be registered with the local trade office (Gewerbeamt or Ordnungsamt).

Management:

A GmbH is managed by the managing directors. There has to be at least one managing director who does not need to have shares in the company and does not need to be German. Shareholders of a GmbH may exercise some level of control depending on a number of factors.

Unternehmergesellschaft (haftungsbeschränkt) – UG

An Unternehmergesellschaft (haftungsbeschränkt) or “UG”, commonly referred to as a “Mini-GmbH” is the same as a GmbH with the key difference that in order to found a UG you only need one Euro of investment capital instead of 25,000 (this has led to the nickname “One Euro GmbH”). In exchange for the low initial investment amount, UGs are required to put aside 25% of their annual profits in a “corporate reserve” until the reserve reaches the level of 25,000 Euro, at which point the UG may chose to convert into a regular GmbH (there are other methods of conversion as well).

Because of the low investment capital requirement for UGs, this corporate form is ideal for entrepreneurs and startups.

Aktiengesellschaft – AG

Many of Germany’s largest and most prestigious companies are organized as Aktiengesellschaft or “AG”. These are shareholder corporations, and are especially well suited for large companies who sell their stock to the public. AGs are more difficult to set up both because the process is more complicated and work intensive, and because they are required to have a capital investment of at least 50,000 Euro. AGs are managed by a management board called the Vorstand. However, shareholders may also exercise some level of control in a number of ways, and a supervisory board called the Aufsichtsrat is meant to monitor the management board as well.

For advice or assistance with setting up a company in Germany, Budding Legal offers a full range of legal services ranging from initial consultation to final formation and everything in between. We also provide a full range of legal services for your company, from contracts and agreements to employment and immigration, we are dedicated to helping you succeed. Give us a call today.

***NOTE, this article is meant as a general informational outline and is NOT legal advice.***

Blue Card EU for Germany

Blue Card EU for GermanyGermany’s economy is booming and the country is in desperate need of skilled professionals in various industries. In order to attract highly qualified individuals, Germany introduced the Blue Card EU for Germany in 2012, (based on a European Union Directive, 2009/50 EG).

The Blue Card EU for Germany is a residence and work permit that offers certain advantages over „regular“ work and residence permits, which continue to be available. These advantages include:

  • Shorter processing times, since the Federal Labor Agency (Bundesagentur für Arbeit) will usually not be involved in the application process, which would otherwise be required in most cases.
  • „Fast track“ to permanent residency: Blue Card holders qualify for permanent residency after 33 months of having paid contributions to the German public pension system (a requirement that comes with employment) – as opposed to 60 months of contributions required for “regular” residence permit holders.
  • If sufficient language skills can be shown (German level “B1”), Blue Card holders may apply for permanent residency as early as after 21 months!
  • Family members will be able to move to Germany with the Blue Card holder immediately.

Who qualifies for a Blue Card EU for Germany?

There are a number of requirements that applicants have to meet in order to obtain a Blue Card in Germany:

  • A university degree, either German or foreign. If the degree was obtained abroad, there is a procedure to ascertain whether the degree will be accepted in Germany.
  • A concrete job offer from German employer (to be evidenced by a written employment contract)
  • The offered salary must be at least EUR 55,200 (gross) annually in 2020. Certain benefits, such as bonuses may be counted towards to the gross income, if they are guaranteed in the employment contract. For certain professions in which qualified individuals are in especially high demand, such as

– scientists

– physicians (excluding dentists)

– mathematicians

– engineers

– IT and communication technology specialists

the salary threshold is reduced to EUR 43,056.00 (2020)

 How to apply for the Blue Card EU for Germany?

Generally, applicants must apply to the German diplomatic mission (Embassy or Consulate) at their place of residence, (unless they already legally reside in Germany). There are exceptions for the following nationalities:

Australia, Israel, Japan, Canada, South Korea, New Zealand, United States.

Citizens from these countries may enter the country without a visa and apply for the Blue Card from within Germany.

The following documents will have to be submitted:

  • Application form (there are various forms available, depending on the municipality where residence will be taken
  • Valid passport
  • One new biometric photo (35mm x 45mm)
  • University degree
  • proposed employment contract

If you are interested in applying for a Blue Card EU for Germany, we can answer any questions you may have concerning the subject and handle the application process for you.

Contact us today!