Market expansion: How does the migration of companies to Germany work?

Hardly any companies from the USA , Britain or Canada decides overnight to focus on the German market. It usually starts with a first major client, a single sales representative working from home in Berlin, or... A skilled worker who already intends to move to Germany. Only when the numbers add up do they set up an office, team, and their own company. This gradual approach is economically sound – but legally more complex than it appears. Even the first stage can trigger tax, social security, and immigration obligations that management and HR departments in their home country rarely consider.

Why is a phased market entry worthwhile?

German law does not recognize a single "market entry" model, but rather a spectrum of increasingly complex forms of market presence. In our consulting practice, we generally recommend the following sequence to foreign companies: employees working from home, sales representatives, a dependent branch office, a permanent establishment for tax purposes, a registered branch office, and finally, a subsidiary. Each stage brings greater visibility, but also more obligations to the trade office, tax office, and commercial register. What matters is not the structure a company chooses on paper, but the structure it actually operates within. German authorities assess based on the actual circumstances – and this is precisely where the most costly surprises arise.

How do you hire your first employee without a German company?

The simplest form of employee presence is a worker who works from home. Anyone working in Germany is generally subject to German social security according to the territoriality principle of Section 3 of the German Social Code, Book IV (SGB IV) – regardless of where the employer is located. Companies have two models to choose from. With Employer of Record (EOR), a German service provider becomes the formal employer. This is generally considered temporary staffing, meaning the provider needs a permit under Section 1 of the German Temporary Employment Act (AÜG). The maximum assignment period of 18 months according to Section 1, Paragraph 1b of the AÜG is often overlooked – those who extend the market test beyond this period must restructure in a timely manner. With a payroll service, on the other hand, the foreign company remains the employer and concludes the payroll contract. The employment contract itself; the service provider only handles the payroll. However, according to Section 38 Paragraph 1 of the German Income Tax Act (EStG), the foreign company is only obligated to withhold income tax if it is considered a "domestic employer," for example, because it already has a permanent establishment or a permanent representative in Germany.

This is precisely the hidden trap: If an employee regularly concludes contracts on behalf of the company while working from home, they can be considered a permanent representative under Section 13 of the German Fiscal Code (AO), and the home office itself can, under certain circumstances, constitute a permanent establishment. What initially appears to be a straightforward test can then retroactively become a taxable presence. Nationals of [country name missing] benefit from this under immigration law. USA , Great Britain and Canada, that they can enter visa-free according to § 41 AufenthV and their Residence permit or You can apply for an EU Blue Card (§ 18g AufenthG) directly in Germany. In practice, check Immigration authorities scrutinize employers without a German subsidiary particularly closely to determine whether a genuine domestic employment relationship exists, complete with a company registration number and German social security coverage. Without this proof, inquiries and delays are inevitable.

When is a sales representative the better solution?

Companies that do not wish to employ staff often use a commercial agent. According to Section 84 of the German Commercial Code (HGB), this is a self-employed businessperson who is permanently entrusted with brokering or concluding transactions for another company. As long as the agent is genuinely independent and works for multiple clients, he establishes a taxable income according to Article 5, Paragraph 6 of the OECD Model Tax Convention, to which the double taxation agreements with the EU are derived. The USA , the United Kingdom, and Canada largely follow this principle, which does not establish a permanent establishment. However, if the agent is economically dependent and regularly concludes contracts, a so-called agent permanent establishment may be established. Furthermore, there is the risk of bogus self-employment under Section 7 of the German Social Code, Book IV (SGB IV), if the agent is effectively integrated like an employee.

One detail that US legal departments are regularly surprised: The compensation claim of a commercial agent under Section 89b of the German Commercial Code (HGB) cannot simply be excluded by choosing the law of New York or Delaware if the agent is based in the The European Court of Justice already clarified in the Ingmar case (C-381/98) that a commercial agent operating within the EU must have a residence permit. If the commercial agent is a third-country national, he also needs a residence permit. Self-employment according to § 21 of the Residence Act or as Freelancer .

What applies to a mere branch office?

When a company rents its first office or coworking space, it typically establishes a dependent branch office. This must be registered with the relevant trade office in accordance with Section 14 of the German Trade Regulation Act (GewO) . The branch office does not have its own legal personality and is not entered in the commercial register; however, the trade office automatically informs the tax office and other relevant authorities. At this point, the question of the business premises is no longer purely theoretical.

When does a permanent establishment arise within the meaning of the double taxation agreement?

According to Section 12 of the German Fiscal Code (AO) and Article 5 Paragraph 1 of the OECD Model Tax Convention, a permanent establishment is any fixed place of business that serves the activities of an enterprise. The consequences are significant: Profits attributable to Germany are subject to limited corporate income tax liability (Section 2 No. 1 of the German Corporate Income Tax Act (KStG), Section 49 Paragraph 1 No. 2 lit. a of the German Income Tax Act (EStG)) and trade tax (Section 2 of the German Trade Tax Act (GewStG)), the company becomes an employer for payroll tax purposes, and value-added tax (VAT) must also be reassessed. The establishment of the business must be reported to the tax office within one month, as stipulated in Section 138 of the German Fiscal Code (AO). In our experience, obtaining the tax identification number is the real bottleneck: Invoices, payroll processing, and sometimes even opening a bank account depend on it, and waiting times of several weeks are not uncommon.

What distinguishes a branch office from a subsidiary?

Establishing an independent branch office is the first step, requiring registration in the commercial register. For foreign corporations, Sections 13d et seq. of the German Commercial Code (HGB) govern the registration process, which must be notarized. The registry courts, in Berlin the Charlottenburg District Court, require proof of the parent company's existence and representation, such as a Certificate of Good Standing with apostille and certified translation. This is particularly important for companies from Delaware or... In England, incomplete documentation regularly leads to interim rulings. Legally, the branch remains part of the parent company, which is fully liable for its debts.

Those wishing to shield themselves from this liability establish a subsidiary, usually a limited liability company (GmbH) with a share capital of €25,000 (§ 5 GmbHG), of which at least half must be paid in upon registration (§ 7 para. 2 GmbHG), or an entrepreneurial company (limited liability) according to § 5a GmbHG. According to § 13 para. 2 GmbHG, only the company's assets are then generally liable. For several years now, notarization according to § 2 para. 3 GmbHG has also been possible via video communication – a real convenience for shareholders in Toronto or Seattle.

What role does residency law play in the development of the structure?

The corporate structure directly determines which entry routes are available. Anyone who establishes, supervises, or manages a domestic subsidiary for a company headquartered abroad is not considered to be engaged in employment within the meaning of immigration law, according to Section 16 of the Employment Ordinance (BeschV) – preparations for this can therefore be undertaken as business trips. Once a German entity exists, further options become available: Managing directors of a GmbH (limited liability company) receive a residence permit without the approval of the Federal Employment Agency, according to Section 19c Paragraph 1 of the Residence Act (AufenthG) in conjunction with Section 3 No. 2 of the Employment Ordinance (BeschV), and managers or specialists from the group can be seconded via the ICT Card according to Section 19 of the Residence Act (AufenthG). For each Furthermore, the relevant social security agreement should be checked for each posting to avoid double contributions. The Berlin State Office for Immigration offers companies the Business Immigration Service for this purpose, which, however, requires a complete and coherent application – including applications for family reunification. Family .

Why isn't a standard solution sufficient?

Many companies rely on the standard contracts of international EOR platforms or simply wait until the tax office or the The immigration authorities may inquire on their own initiative. Both are risky. The typical cases of damage we see involve an undiscovered business establishment with back taxes, a bogus self-employed sales representative, or a key worker whose The visa process is delayed because the chosen structure does not align with the requested residence permit. Therefore, we consider corporate, tax, and immigration law together from the outset and align the sequence of steps with the planned personnel strategy.

Conclusion

Migrating a company to Germany is not a one-off event, but a process in stages – from home office to sales representatives, branch offices, and permanent establishments, all the way to subsidiaries and affiliates. Each stage has its own points of contact and its own risks, and even the first stage can unintentionally trigger obligations. Those who strategically plan their market entry and consider the relocation of key personnel from the outset save time, money, and stress. We support companies and their... skilled workers from the USA , Great Britain and Canada on this path – from the first business trip to their own German company.