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					                   Die Unternehmer-Anwälte




Doing Business in Germany
2009
Content
Doing Business in Germany Content                                       02 | 03




          Page


            06 _ About Luther and this Legal Guide

            08 _ Introduction

            10 _ Authors and Editors

            12 _ Legal Forms of Doing Business in Germany

            38 _ Taxation in Germany

            48 _ Mergers and Acquisitions

            60 _ Anti-Trust Law

            68 _ Competition Law

            72 _ Protection of Trademarks and Commercial Designations

            80 _ Protection of Plant Innovations

            84 _ Copyright Law

            90 _ Distribution Law

          100 _ Labor Law
          118 _ Data Protection and Privacy

          124 _ Information Technology

          130 _ Litigation, Arbitration and Mediation

          136 _ Real Estate and Construction Law

          140 _ Planning Law and Building Regulations

          144 _ Green Building

          150 _ Architectural and Construction Law
Page


156 _ Commercial and Residential Lease Agreements

160 _ Property Transactions

166 _ Environmental Law

172 _ Emission Trading

176 _ Nature, Soil and Water Protection

182 _ Recycling Economy and Waste Act

186 _ Energy

192 _ Regulatory Matters

196 _ Product Liability

204 _ Public Private Partnership

216 _ Public Subsidies and State Aid Control

222 _ Public Procurement

230 _ Banking, Finance and Capital Markets

240 _ Restructuring and Insolvency Law

248 _ Insurance Law

260 _ Media and Broadcasting Law

264 _ Sports and Events

268 _ Health Science and Pharma

277 _ Contacts
Doing Business in Germany   04 | 05
About Luther and this
Legal Guide




This publication contains general information only. Individual legal advice is neither given nor intended herein. No
reader should act on the basis of the information contained in this publication without first seeking professional
legal advice. Every effort has been made to ensure that the contents hereof are correct and complete. However,
we cannot assume responsibility for errors or omissions. This publication may not be reproduced in whole or
in part without the prior written consent of Luther Rechtsanwaltsgesellschaft mbH.
Doing Business in Germany About Luther and this Legal Guide                        06 | 07




Luther is one of the leading law firms in Germany and is represented by 280 lawyers
and 12 offices in all major German economic centres. Luther is also a founding
member of the international network PMLG which includes more than 1,000
lawyers in a global network spanning 13 countries across Europe and Asia. Luther is
furthermore an active member of Taxand, a global network of leading tax advisors
from independent member firms in nearly 50 countries around the world. Our
law firm also collaborates closely with a network of commercial law firms in other
European countries who are market leaders in their respective countries.

In addition to our international structure, Luther is able to provide a full interdisci-
plinary service and to offer integrated and coordinated legal, tax and transaction
advisory services in order to ensure that the most suitable economic solution is
achieved for our clients. Luther has specialist knowledge and experience in all areas
that are important to small and mid-size businesses, major corporations and the
public sector. The size of our practice allows our lawyers to focus on and to develop
their expertise in specific areas and industries. All of the authors of this publication
are lawyers and/or tax advisors at Luther. They have many years of professional
experience and excellent know-how in their respective specialist areas.

Although in the preparation of this guide every effort has been made to offer
current and correct information, this publication may only give general guidelines
and cannot substitute individual advice. Therefore, this publication is distributed
with the understanding that Luther, PMLG and/or Taxand cannot be held respon-
sible for the results of any actions taken on the basis of information contained in
this guide, nor for any errors or omissions contained herein. Rather, companies
doing business in Germany or planning to do so are advised to obtain current and
individual information and guidance.

This guide reflects information current at May 2009. Additional copies may be
obtained from:

Luther Rechtsanwaltsgesellschaft mbH
Dr. Michael Rath
Anna-Schneider-Steig 22 | 50678 Cologne, Germany
Telephone +49 (221) 9937-0 | Fax +49 (221) 9937-110
contact@luther-lawfirm.com | www.luther-lawfirm.com
Introduction
Doing Business in Germany Introduction                                                           08 | 09




           Dear Reader!

           Although influenced by the financial crisis in the same way as most other countries
           in the world, the Federal Republic of Germany is still considered to be the largest
           European economy and the third largest economy in the world in real terms, be-
           hind the United States and Japan. Furthermore, Germany still ranks as the world’s
           top exporter, ahead of the United States and China. Its major trading partners
           include France, the United States, the United Kingdom, Italy and the Netherlands.
           A recent survey among international top executives has revealed that Germany
           is regarded as the most attractive business location in Western Europe and ranks
           among the top 6 locations worldwide – not least because the top managers
           questioned expressed the opinion that Germany is coping extremely well with
           the current financial crisis.

           Doing Business in Germany therefore still offers many lucrative business oppor-
           tunities for foreign and domestic investors. This guide is intended to serve as an
           introduction to the legal and tax regime which is applicable whilst doing business
           in Germany. The basic principles outlined in this guide are intended to provide an
           idea of how many alternatives there are to efficiently structure a company with its
           business seat in Germany. As an interdisciplinary law firm we have the necessa-
           ry legal and tax experts for all the challenges involved in setting up a successful
           business in Germany.

           Please do not hesitate to contact us if you have any questions or comments. It
           would be our pleasure to advise you and to answer your questions regarding the
           German jurisdiction and market.

           Yours sincerely,




           Dr. Stefan Kraus
           (Managing Partner)
Authors and Editors
Doing Business in Germany Authors and Editors                                    10 | 11




Authors

Hans-Christian Ackermann                        Dr. Alexander Mönnig, LL.M.
Silvia C. Bauer                                 (Manchester), E.M.L.E.
Rüdiger Bonnmann                                Dr. Stefan Müller
Carsten Brutschke, LL.M. (EHI)                  Dr. Kay Oelschlägel
Guido Dornieden                                 Ulf-Dieter Pape
Dr. Gernot-Rüdiger Engel                        Dr. Michael Rath
Ingo Erberich                                   Dr. Borris Richrath
Dr. Ulrike Freigang                             Dr. Wulff-Axel Schmidt
Dr. Michael Fritzsche                           Dr. Frank Seidel
           c
Bojana Grbi´                                    Dr. Markus Sengpiel
Franz-Rudolf Groß, LL.M. (London)               Friederike Sieberg, LL.M. Eur.
Dr. Hans-Georg Hahn                             Ulrich Siegemund
Anne Hausmann, LL.M. (Cape Town)                Dörthe Stalmann, LL.M.
Dr. Stefanie Hellmich, LL.M. (Madrid)           (Temple University)
Thomas Henßler                                  Dr. Holger Stappert
Stefan Hitter                                   Volker Steimle
Marcus M. Hotze                                 Detlev Stoecker
Dr. Helmut Janssen, LL.M. (London)              Thomas Weidlich, LL.M. (Hull)
Dr. Oliver Kairies                              Reinhard Willemsen
Dr. Thomas Kapp, LL.M. (UCLA)                   Matthias Winter
Dr. Dirk Kleveman                               Jutta Wittler
Dr. Stefan Kobes                                Dr. Angelika Yates
Dr. Thomas Kuhnle
Thomas Leidereiter                              Editors
Claudia Leyendecker, M.C.J.
(New York)                                      Hans-Christian Ackermann
Dr. Detlef Mäder                                Dr. Michael Rath
Achim Meier                                     Dr. Marcel Klugmann
Doing Business in Germany Legal Forms of Doing Business in Germany                                         12 | 13




Legal Forms of Doing
Business in Germany

German law offers a broad variety of legal forms which may be used
for business. There have been some significant new developments in
recent months, including a comprehensive reform of German company
law (“Company Law Reform 2008”). All business vehicles are subject to
registration requirements with the Commercial Register (Handelsregister)
at the local District Court (Amtsgericht) at the place of operation of the
business, respectively the registered office. Keeping all basic information
on the business entity in electronic form, the Commercial Register is
publicly available to anybody interested in the legal details of the owner
and managers of a business.




In Germany, foreign investors might start a business       paea) – to identify which vehicle might fit best the
either through a “dependent” structure (a branch or        needs of a potential investor.
representative office of the foreign entity) or through
an independent German legal entity (a corporation          Representative Offices
or partnership).
                                                           Foreign entities exploring the German market for the
The following provides a brief overview of the main        first time will often consider the establishment of a
features of the different German business vehicles         “representative office” (Repräsentanz).
– including the legal form of the European Public
Company (Societas Europaea) and the proposed               Opening a representative office is regarded as a first
European Private Company (Societas Privata Euro-           step when venturing into a new market and is often
used as an opportunity to evaluate the local market          A branch has no separate legal entity status and,
conditions. This can be achieved by simply second-           therefore, is regarded as an integral part of the for-
ing an employee to Germany and arranging for                 eign company. It has to be kept in mind that a branch
the employee to explore the local market from a              creates not only jurisdiction for the foreign company
German based office. Also, it is possible to engage          in Germany, but also a permanent establishment
an independent agent who generates business and              (Betriebsstätte) for tax purposes. The foreign compa-
might also be entitled to conclude contracts (Handels-       ny owns all assets and incurs all liabilities and debts
vertreter) on behalf of the foreign entity. Such structure   deriving from the branch’s operations. Consequently,
must be considered carefully in order to avoid creating      the foreign company is also the contractual partner
a permanent establishment (Betriebsstätte) in Ger-           for customers and business partners of the German
many as this could have adverse tax effects.                 branch. However, claims can be brought up in Ger-
                                                             man courts at the location of the branch.

Branch                                                       The choice between doing business in Germany
                                                             through a branch or through a separate German legal
Foreign companies who do not wish to set up a new            entity is mostly tax-driven. Leaving aside tax conside-
business vehicle or who are not yet sure about the           rations, a branch is the suitable business vehicle if
sustainability of their involvement and commitment           the business conducted in Germany is unlikely to
to the local market can simply register as a branch          have any substantial size and/or the foreign company
(Zweigniederlassung) with the Commercial Register            does not have a long-term commitment to setting up
and with the local Trade Office of the municipality          business in Germany.
where the branch office is to be located.
                                                             If a sustainable medium for long-term investment is
Whereas the Trade Office only requests basic infor-          sought, a potential investor should consider setting
mation about the branch name, its owner, represen-           up an independent German business vehicle.
tatives and type of business, the application for
registration with the Commercial Register must also
include details of the relevant foreign company such         Corporations
as its legal form, place of incorporation, principal
place of business, share capital and the names of            The German law allows the establishment of three
its officers and directors. The application must be          major forms of corporations (Kapitalgesellschaften):
accompanied by certified copies of the certificate           the GmbH (Gesellschaft mit beschränkter Haftung –
of incorporation and articles of association of the          limited liability corporation), the Aktiengesellschaft
foreign corporation and must be signed by the                (AG – stock corporation) and the rarely used KGaA
directors of the foreign company. A notary public            (Kommanditgesellschaft auf Aktien – partnership
must certify the signatures of the directors. The reg-       limited by shares). Since October 2004, an investor
istration procedure can be quite time-consuming              can also use a European Public Company (Societas
(especially where translations of the relevant docu-         Europaea or SE) as a business vehicle in Germany.
ments are required).                                         A new European Private Company (Societas Privata
Doing Business in Germany Legal Forms of Doing Business in Germany                                             14 | 15




Europaea or SPE) has also been proposed, but is not        Incorporation and Registration
yet available under European and German law.               A GmbH is formed by the founding shareholder(s)
                                                           executing a deed of formation and articles of asso-
                                                           ciation before a German notary public. A GmbH can
GmbH                                                       also be set up with only one shareholder and is not
                                                           restricted to a maximum number. Foreign individuals,
The GmbH is the corporate entity most commonly             partnerships or corporations may become sharehol-
used in Germany. The structure of a GmbH is best           ders of a GmbH. A representative of the founding
described as a private company limited by shares. It       shareholder(s) acting under power of attorney (which
is designed for closely held businesses (an IPO is not     also must be certified by a notary public) may execute
possible) with a clear and stable shareholder struc-       the deed of formation and the articles of association.
ture. A GmbH provides full liability protection to its
shareholders in that they are generally only liable up     As a result of the Corporate Law Reform 2008, model
to the maximum amount of their capital contribution.       incorporation documents have been introduced to
                                                           accelerate the formation and registration process.
The German Limited Liability Companies Act (GmbHG)         These model documents only allow for up to three
has recently undergone its most comprehensive re-          shareholders and one Managing Director. The statu-
form since it came into force some 110 years ago, the      tory share capital must be contributed in cash. The
relevant amendments taking effect from November 1,         founding shareholders are not allowed to deviate from
2008. The main objective of the Corporate Law              the model documents. This means that the standard
Reform 2008 was to achieve greater flexibility and         procedure may not be suitable in all instances. How-
deregulation in order to make the German GmbH              ever, further amendments to the articles of association
more attractive and competitive to the international       and/or the appointment of additional Managing Direc-
market, as well as to address certain areas of misuse.     tors may be carried out at any time once the GmbH
                                                           has been formed and registered with the local Com-
Advantages of a GmbH                                       mercial Register. Notary costs incurred in connection
The main advantages of a GmbH compared with the            with the formation of a model company are also likely
other legal forms available in Germany are as follows:     to be much lower if the standard incorporation pro-
                                                           cedure is used.
  the formation of a GmbH is quite simple;
  the articles of association (Gesellschaftsvertrag) of    Immediately after notarisation of the deed of forma-
  a GmbH can be easily adapted to the requirements         tion and articles of association, but prior to filing the
  of the shareholders;                                     application for registration with the Commercial Reg-
  a GmbH is not subject to as many strict legislative      ister, the GmbH must open a bank account. Cash
  regulations as an AG or the SE;                          contributions to the share capital must be deposited
  the shareholders of a GmbH may issue binding             in said account prior to filing for registration. In addi-
  instructions or directions to the Managing Directors     tion to other registration documents, the Commercial
  and can thereby exercise direct influence on the         Register may request that bank statements be sub-
  GmbH’s management.                                       mitted to confirm that the cash contributions were in
fact deposited into the company’s bank account. The             Although a GmbH may commence business prior
Managing Director(s) must certify to the Commercial             to its registration, its net assets, as of the date of
Register that said cash contribution is still at the            registration, must not be less than the amount of its
company’s disposal as of the date of filing of the              registered share capital. If this is the case (for exam-
application.                                                    ple, as a result of losses incurred prior to the regis-
                                                                tration of the GmbH), the shareholders will be liable
The application for the registration of a GmbH needs            for the shortfall between the amount of the regis-
to be signed by all Managing Directors in person be-            tered share capital and the net assets as of the date
fore a notary public, who must certify their signatures         of registration.
and instruct them about their duties as Managing
Directors vis-à-vis the German courts. The certifying           Limited Liability of Shareholders
notary may be a foreign notary, in which case, how-             Once registered in the Commercial Register only the
ever, the notary’s certificate must then be legalised           GmbH itself is liable for its debts. The liability of the
(in most countries by way of an Apostille under the             shareholders is limited to their capital contribution.
Hague Convention), unless this requirement has                  Courts will pierce the “corporate veil” i. e. the limited
been waived pursuant to a bilateral treaty.                     liability status, only on very rare occasions. The mere
                                                                fact that a shareholder is permanently and compre-
Liability Prior to Registration                                 hensively controlling the GmbH will not result in the
Following notarisation of the deed of formation and             piercing of the corporate veil. A controlling sharehol-
the articles of association, the company will exist as          der will only be liable for a loss suffered by the GmbH
a so-called “Company in Formation” (Vorgesellschaft)            if he or she acts wilfully contrary to the best interests
and may commence business. However, only once                   of the GmbH and to the detriment of its creditors and
the company has been registered with the Commer-                does not respect the integrity and independence of
cial Register does it become a separate legal entity.           the GmbH. In particular, a shareholder might forfeit
                                                                the protection of the limited liability shield if the share-
Rights and liabilities arising from pre-registration ac-        holder intentionally abuses his controlling position to
tivities are legally the rights and liabilities of the          the disadvantage of the GmbH or its creditors.
Company in Formation, but only to the extent that
the Managing Director(s) are acting within the au-              Articles of Association
thority vested in them by the articles of associa-              Depending on the degree of flexibility desired by
tion or by shareholders’ resolutions. The Managing              the shareholders, the articles of association may be
Director(s) and the Company in Formation remain                 formulated in short form setting out only minimum
jointly and severally liable to creditors for any liabilities   mandatory provisions regarding purpose, name, re-
incurred prior to registration of the GmbH with the             gistered office, duration, registered share capital,
Commercial Register. Upon registration of the GmbH,             nominal value of each share assumed by the share-
all rights and obligations of the Managing Directors            holders, representation and management of the
assumed prior to registration are assigned by law to            corporation. The articles of association may, on the
the GmbH and the Managing Directors shall no longer             other hand, constitute a comprehensive document
have any personal liability in respect of these.                including detailed provisions on shareholders’ rights
Doing Business in Germany Legal Forms of Doing Business in Germany                                           16 | 17




and obligations, classes of shares and restrictions on     As a result of the Corporate Law Reform 2008, it is
the transfer of shares.                                    no longer essential for the place of the management
                                                           (Verwaltungssitz) of the company to be the same as
A GmbH may be formed for any lawful purpose which          the registered office, and it can be located anywhere
has to be stated in the articles of association. No        within Germany and even abroad. This means that
doctrine of ultra vires exists under German law. A         foreign shareholders can manage their subsidiaries
GmbH may therefore enter into binding obligations          registered in Germany from a head office outside of
with third parties, which may not necessarily relate to    Germany and German corporations with a worldwide
its corporate purpose, in which case, however, the         operating business can run their foreign investments
Managing Director(s) may be liable for damages             – with a few exceptions – in the familiar legal form of a
caused by such obligations to the GmbH.                    GmbH. Within the EU, existing foreign corporations
                                                           can be merged into a GmbH, which is registered with
A GmbH may also use any name including fictional           a Commercial Register in Germany, but which is
names provided that no risk exists of confusing the        managed and operated at the location of the trans-
name with any other corporation within the same            ferring foreign entity abroad.
local area and that the name is not misleading. It
should be noted, however, that registration officials      Share Capital
remain cautious regarding the use of the words “In-        The minimum share capital of a GmbH is C25,000.00
ternational” and „Germany“ in a corporation’s name if      with the exception of a special form of a GmbH (the
no substantial international business actually exists      so-called “Small GmbH”) described below. The
or if the corporation only conducts local business         shareholders are free to divide the share capital
rather than business throughout Germany.                   into any number of shares. The minimum nominal
                                                           amount of a single share is C1.00. Shares may be
German corporation law is federal law; from a legal        issued in any nominal amount which is divisible
perspective this means that there is no advantage if       by C1.00 and any shareholder can subscribe for
the corporation is registered in a particular German       several shares with different nominal amounts (as
state. Tax advantages may, however, arise if a GmbH        part of the Corporate Law Reform 2008 the pre-
is registered in a particular city because trade tax       vious minimum nominal value of C100.00 was
rates are determined by municipalities and conse-          abolished).
quently vary from location to location.
                                                           The GmbH is not required to issue share certificates
While a GmbH may only have one registered office, it       or to maintain a share register. The ownership of the
may maintain any number of branches or offices             shares is documented only in the incorporation deed
throughout Germany. In case a branch (Zweignieder-         and any later transfers will be documented in notarial
lassung) is set up, the branch has to be registered        transfer deeds and the shareholders’ lists. Upon in-
with the respective local Commercial Register. The main    corporation and each subsequent transfer or division
registered office shall be the place where the GmbH        of shares the Managing Directors or the involved
operates its business or where its management is lo-       notary public must submit an up-dated list of share-
cated. The registered office must be within Germany.       holders’ to the Commercial Register.
Contribution and Maintenance of Capital                    emption rights etc). In order for the acquirer to exer-
Contributions to the share capital may be made in          cise the rights of a shareholder vis-à-vis the compa-
cash or in kind. For contributions in kind, the articles   ny (i. e. the voting rights), an updated shareholders’
of association must set out the specific form of the       list must be filed with the commercial register.
contribution as well as the amount of the nominal
value of the shares. The shareholders must provide         It is not yet clear whether a foreign reorganisation
a report on the valuation of the contribution in kind      of the shareholder of a German GmbH (i. e. a merger)
and, if the contribution in kind is a business to be       will trigger the automatic transfer of the shares in a
transferred to the GmbH, the financial results of the      German GmbH (i. e. by way of universal succession)
business for the previous two years. The contribution      or whether the German statutory formalities also
in kind must ultimately be worth at least as much as       have to be satisfied. Since there are no binding court
the corresponding nominal value of shares issued.          rulings available and the law does not provide suffi-
The shareholder must pay any shortfall in cash.            cient guidance, it is recommended that the GmbH
                                                           shares are also in addition transferred by way of a
In the case of a cash contribution, at least 25 % of       notarised transfer deed in the course of the reorga-
each nominal share value and in total at least 50 % of     nization abroad, when implementing any foreign
the minimum share capital must be paid up in cash          re-organisation which may have an impact on the
at the time of filing for registration of the GmbH.        shareholder structure of a GmbH.

The legislation governing the GmbH contains several        Managing Directors
provisions designed to ensure that the share capital       A GmbH is managed and legally represented by its
of a GmbH is fully paid up and maintained. A GmbH          Managing Director(s) (Geschäftsführer). Although a
is generally not authorized to make any payments           GmbH must have at least one Managing Director,
or grant any other benefits to shareholders, which         there is no maximum number and it is possible for
would reduce the net assets of the corporation be-         it to have as many as it likes. A Managing Director
low the stated amount of its registered share capital.     does not need to be a shareholder or a German res-
If such payments or benefits are made to the share-        ident (for further details regarding the immigration
holders violating the capital maintenance rules, the       procedures of a non-EU resident, please refer to the
respective shareholders are obliged to repay the           chapter “Visiting, Living and Working in Germany”).
received contributions and the Managing Directors          Only an individual (and not a corporate entity) may,
of the company, being responsible for the unlawful         however, be appointed as Managing Director.
contributions, can be held liable for any damages
sustained by the company.                                  In the absence of any restrictions, each appointed
                                                           Managing Director may act for and bind the GmbH
Transfer of Shares                                         vis-à-vis third parties. Any restrictions on the authority
The transfer of a share in a GmbH requires a notar-        of the Managing Director(s) to bind the GmbH which
ised transfer deed. The articles of association may        are set out in the articles of association, in a share-
provide that other requirements must also be met           holders’ resolution or in the service contract of the
(for example, consent of the other shareholders, pre-      Managing Director (particularly any requirement to
Doing Business in Germany Legal Forms of Doing Business in Germany                                            18 | 19




obtain the prior approval of the shareholders prior           must call a shareholders’ meeting if more than half
to entering into certain transactions) do not affect          of the stated share capital is lost;
the Managing Director’s ability to bind the GmbH. The         must ensure that the GmbH keeps proper records;
breach by the Managing Director of any of the afore-          must ensure that the shareholders’ list is up-dated.
mentioned restrictions may subsequently, however,
give rise to a claim for damages by the GmbH against        A Managing Director of a GmbH can be held perso-
the Managing Director.                                      nally liable for any damage resulting from an incorrect
                                                            list of shareholders. A Managing Director should there-
If only one Managing Director is appointed, he/she is       fore always carefully review the current list of share-
the sole representative of the GmbH. If more than one       holders which is filed with the Commercial Register.
Managing Director is appointed, generally, they will
represent the GmbH jointly. The shareholders may,           Supervisory Board
however, grant one or several Managing Directors            A GmbH may voluntarily establish a supervisory
the right to either: (i) represent the GmbH individually;   board consisting of “non-executive” members. How-
or, (ii) represent the GmbH jointly with one or more        ever, if a GmbH has more than 500 employees the
other Managing Directors or authorized officer (Pro-        installation of a supervisory board is mandatory and
kurist), who will be a representative of the company        1/3 of its members must be employees’ represen-
with a general power of attorney. The power of re-          tatives. If the number of employees of the company
presentation of each Managing Director and each             exceeds 2,000, half of the members of the super-
authorized officer (Prokurist) is registered with the       visory board must be employees’ representatives. In
Commercial Register and is binding in relation to           case of the voluntary establishment of a supervisory
third parties.                                              board, the functions of the supervisory board may
                                                            be stipulated in the articles of association. The basic
The Managing Directors must manage the compa-               function of the supervisory board is to supervise
ny’s business with the due care of a prudent business       the management of the company and it may also
person. Additional specific obligations may be im-          be assigned the right of appointment and removal
posed by the articles of association or the service         of the Managing Directors, adoption of the annual
contract or in shareholders’ resolutions. Further, the      financial statements and calling of shareholders’
shareholders – acting by a simple majority resolution       meetings.
– can give binding instructions to the Managing
Directors which they have to obey unconditionally           Shareholders and Shareholders’ List
unless the instructions are unlawful. Managing direc-       The shareholders of a GmbH are subject to various
tors who are in breach of their duties are jointly and      rights and duties. The most important of which are
severally liable for any damages sustained by the           as follows:
company. In particular, Managing Director(s):
                                                              voting rights;
  may not disclose trade secrets of the GmbH;                 the right to participate in the profits of the company;
  must file for bankruptcy if the GmbH is over-               rights to any surplus upon liquidation;
  indebted or insolvent;                                      the right to obtain information.
Only a shareholder who is actually registered in the        not mean, however, that the shareholder should
list of shareholders will be considered by the company      place the interests of the GmbH above his/her own
to be a shareholder. The acquirer of GmbH shares            in each case, but it does place some limits on the
may generally rely on the accuracy of the list of share-    extent to which a shareholder may pursue his/her
holders if no objection has been raised to a false entry    own interests to the detriment of the company.
during the last three years. It is possible to acquire
GmbH shares in good faith from a registered share-          Ongoing Accounting Obligations and
holder even if the list of shareholders subsequently        Disclosure Requirements
turns out to be incorrect.                                  A GmbH must keep accounting records and prepare
                                                            annual financial statements in accordance with the
The shareholders exercise their powers in relation to       provisions of the German Commercial Code (HGB)
the GmbH by passing resolutions in a general meeting        which lays down detailed requirements as to the form
(or by circular resolution). A shareholder will generally   and content of the annual financial statements. Fur-
have one vote per one C of share capital. The articles      thermore, medium-sized and large corporations must
of association may, however, provide otherwise.             have their annual financial statements audited. The
                                                            (audited) annual financial statements must be filed
Shareholders’ resolutions must be approved by a             with the commercial register within twelve months
simple majority (i. e. more than 50 % of the votes cast)    of the end of each financial year.
unless mandatory law or the articles of association
require a higher majority and/or the consent of certain     However, German corporations are not obliged to
shareholders to be obtained.                                lodge an annual confirmation or up-date of their regi-
                                                            stered details (also known as “annual returns” in other
For example, amendments to the articles of association      jurisdictions) with the commercial register. Only actual
require a special majority (75 % of the votes cast). This   changes relating to the registered information (e. g.
majority requirement may only be increased, and not         registered office, articles of association, registered
decreased, by the articles of association. German law       share capital, etc.) must be notified and registered.
requires the consent of certain shareholders, or indeed
all of them, when the obligations of some or all of the     “Unternehmergesellschaft (haftungsbeschränkt)”
shareholders are to be increased, and in this case it       or “Small GmbH”
will only be possible to make such change with              The Corporate Law Reform 2008 introduced the
the consent of those shareholders whose rights will         so-called “Small GmbH” as a new type of GmbH in
be affected.                                                response to foreign entities entering the German
                                                            market. It can be set up quickly and does not require
Shareholders have the right to inspect the books            a minimum capital. A Small GmbH only differs from a
and records of the GmbH and to be informed about            “proper” GmbH in relation to three major points:
the company’s affairs.
                                                              The Small GmbH is not subject to the statutory
Each shareholder owes a duty of loyalty to the com-           minimum capital of C25,000.00 applicable to a
pany as well as to the other shareholders. This does          “normal” GmbH. The Small GmbH may therefore
Doing Business in Germany Legal Forms of Doing Business in Germany                                             20 | 21




  be incorporated with a statutory share capital            on a stock exchange. However, some closely held
  of C1.00. The application for the registration of         businesses have also adopted this corporate form
  a Small GmbH is only allowed if the share capital         due to the arguably higher market reputation which
  is fully contributed. Contributions to share capital      an AG has and the fact that the management of an
  may be only made in cash, not in kind.                    AG is not bound by the directions of shareholders.
  A Small GmbH must allocate one quarter of its
  annual profits to its capital reserves. This obligation   An AG is subject to extensive legal regulation. Because
  ceases only after the shareholders have either con-       most of the applicable regulations are mandatory, little
  verted such capital reserves into statutory share         flexibility exists to adapt the articles of association to
  capital or increased the statutory share capital by       include specific shareholder requirements. Certain
  additional contributions to at least an amount equal      standards regarding the articles of association of a
  to the statutory minimum share capital required for       listed AG have also developed in practice, and
  a “proper” GmbH (i. e. C25,000.00).                       these will need to be applied if the shares of an AG
  Finally, the Small GmbH must indicate its status as       are subsequently listed on a stock exchange.
  a Small GmbH in its company name which there-
  fore reads “Unternehmergesellschaft (haftungs-            Another important feature of an AG is the indepen-
  beschränkt)” or “UG (haftungsbeschränkt)”. Only           dence of the Management Board in relation to the
  after the shareholders have increased the share           day-to-day management of the AG. The members
  capital to the statutory minimum of C25,000.00            of the Management Board are appointed by the
  can the suffix for a Small GmbH be dropped and            Supervisory Board (which is mandatory for an AG)
  replaced with the usual suffix “GmbH”.                    rather than by the shareholders. In addition, and in
                                                            contrast to a GmbH, neither the shareholders nor
                                                            the Supervisory Board may issue binding directions
Aktiengesellschaft (AG)                                     to the Management Board. Furthermore, the mem-
                                                            bers of the Management Board can only be dis-
The stock corporation AG (Aktiengesellschaft) is the        missed during the term of their office for good
corporate form adopted by many of Germany’s largest         cause. As a result, neither the shareholders nor
corporations and the vast majority of listed compa-         the Supervisory Board have direct influence on the
nies. It is also used by some of the major publicly held    management of the AG.
US corporations for their German subsidiaries, for
example Ford AG (German subsidiary of Ford) and             Incorporation and Registration
Esso AG (German subsidiary of Exxon).                       An AG may be established by one or several share-
                                                            holders. The formation procedure of an AG is similar
Advantages of an AG                                         to that of a GmbH. In particular, it requires notarisa-
The AG is the German legal form which is most com-          tion of the articles of association and subscription
parable to a public limited liability company in Anglo-     for the initial shares by its founding shareholder(s).
Saxon jurisdictions. The principal advantage of an          The founding shareholder(s) then must appoint the
AG is that, unlike a GmbH, the shares of an AG may          first Supervisory Board and the first auditor of the
be transferred with relative ease and can be listed         company. Such appointments must be notarised. The
first Supervisory Board appoints the first Manage-          Articles of Association
ment Board. The founding shareholder(s) must pre-           The minimum contents of the articles of association
pare a written formation report which must state            are prescribed by the German Stock Corporation
all relevant details concerning the establishment of        Act (Aktiengesetz, AktG), which regulates the AG,
the AG. The Management Board and Supervisory                and include:
Board will then scrutinise the foundation procedure
and in particular circumstances (e. g. where members           company’s name and registered seat;
of the Management Board or the Supervisory Board               object of the company;
take up shares or where shares are issued against              amount and division of the company’s share capital;
contributions in kind) the formation report must be            type of shares (bearer shares or registered shares);
audited by an independent auditor.                             number of the members of the Management Board
                                                               or the rules for determining such number.
The formation of the AG must be registered with the
Commercial Register and the application for regis-          The articles of association may regulate other issues,
tration must be signed before a notary public by            but can only deviate from the provisions of the AktG
all founding shareholders, as well as by the initial        where this is expressly permitted by law. Since only
members of the Management Board and the Super-              few and limited deviations are permissible, there is
visory Board. Upon registration the AG exists as a          very little flexibility in drafting the articles of association
separate legal entity. Persons acting for and on behalf     of an AG.
of the AG prior to registration will be personally liable
for any debts incurred.                                     Share Capital
                                                            An AG must have a minimum share capital of
The Corporate Law Reform 2008 made it possible for          C50,000.00. Shares may be issued either with a
an AG (just as for a GmbH) to move its management           par value (Nennbetragsaktien) of at least C1.00 per
within Germany and also abroad, irrespective of the         share or multiples thereof or without a par value
company’s official registered seat with a Commercial        (Stückaktien). German law further distinguishes be-
Register in Germany.                                        tween bearer shares (i. e. shares where the name of
                                                            the owner is not registered in the share register of the
Limited Liability of Shareholders                           AG – bearer shares are the vast majority) and regis-
As is the case with the GmbH, upon registration with        tered shares (i. e. where the name of the owner has
the Commercial Register, only the AG will be liable         been registered in the AG’s share register – registered
for its debts and the liability of its shareholders shall   shares are rather rare). The articles of association must
be limited to their respective capital contribution.        specify the type of shares that may be issued. Bearer
Arguably, the principles developed by the courts, re-       shares may not be issued unless they are fully paid in.
garding the piercing of the corporate veil of a GmbH
(cf. above), would also apply to an AG. However,            The transferability of bearer shares may not be re-
since the shareholders do not have the same power           stricted, whereas the articles of association may pro-
of influence over the management of an AG, such             vide that registered shares can only be transferred
cases rarely arise in practice.                             with the consent of the Management Board.
Doing Business in Germany Legal Forms of Doing Business in Germany                                           22 | 23




Furthermore, shares may be issued as ordinary shares         Transfer of Shares
or as preferred shares (Vorzugsaktien) which is similar      Shares in an AG are transferable with relative ease.
to but not identical with “preference shares” in many        Unlike the transfer of shares in a GmbH, a transfer of
common law jurisdictions. The latter may be issued           shares in an AG does not require a notarised trans-
with or without voting rights. The holders of preferred      fer deed. Restrictions on the transfer of registered
shares are entitled to preferred dividends, usually cal-     shares (but not on the transfer of bearer shares) may
culated as a fixed percentage of the nominal value of        be imposed in the articles of association.
the preferred shares (a mere link to the annual profits
earned by the AG is not allowed). Shares with mul-           Notification Requirements
tiple voting rights are not permitted.                       Any direct or indirect shareholding in an unlisted
                                                             AG exceeding 25 % of the registered share capital
Contribution and Maintenance of Capital                      must be notified by the relevant shareholder to
Contributions to the share capital may be made in            the AG in writing. The same notification require-
cash or, if permitted by the articles of association, also   ment applies again if the shareholding exceeds 50 %
in kind. As with a GmbH, the value of a non-cash             of the registered share capital or the voting rights.
contribution must be at least equal to the share             Without proper notification, the shareholder rights
capital to which it relates. Certain procedures must         attached to such shares will be suspended. If the
be followed in order to safeguard this principle (i. e.      shareholding falls below these thresholds, the same
formation report of the founding shareholders, audit         notification requirements also apply.
of the formation report by an auditor and examination
by the courts). Generally contributions in kind must         In the case of a listed AG, shareholders must notify
be fully made upon incorporation although if the con-        any direct or indirect shareholding exceeding (or
tribution in kind involves the transfer of a particular      falling below) 3, 5, 10, 15, 20, 25, 50 or 75 % of
asset, such transfer must be made any time up to the         the voting rights to the AG and the German au-
expiry of the period ending five years from the date of      thority supervising listed entities (Bundesanstalt für
registration of the AG with the Commercial Register.         Finanzdienstleistungsaufsicht, BaFin).

If shares are issued for cash, at least 25 % of the par      Management Board
value of each share (plus the full amount of any             The Management Board bears the sole responsibility
premium) must be paid up prior to filing for registration    for managing the day-to-day business of the AG. In
of the AG with the Commercial Register.                      contrast to a GmbH, neither the shareholders nor
                                                             the Supervisory Board members may issue binding
As with a GmbH, the legislation governing an AG is           directions to the Management Board regarding the
designed to ensure that share capital is paid up and         management of the AG. Stock corporations with
maintained. The rules applying to an AG are in fact          more than C3 million in share capital must have a
even stricter in this respect. Contributions may gen-        Management Board of at least two persons, unless
erally not be repaid to shareholders, irrespective of        the articles of association provide otherwise. Only
whether this would reduce the net assets of the              individuals may be appointed to the Management
AG below its registered share capital.                       Board.
An AG with more than 2,000 employees must have a            jointly and severally liable for any damages sustained
so-called Industrial Relations Director (Arbeitsdirektor)   by the company. The liability of the members of the
as a member of the Management Board holding                 Management Board imposed under the AktG is
responsibility for employment and social affairs.           quite strict. In particular, the burden of proof lies with
                                                            the members of the Management Board who must
Members of the Management Board are appointed by            prove that they complied with their duties. However,
the Supervisory Board. Shareholders may not direct          the so-called “business judgement rule” applies
the Supervisory Board as to who should be appointed         which means that the members of the Management
as a member of the Management Board. Sharehold-             Board are not liable where they could reasonably
ers’ agreements on the composition of the Manage-           assume (based on an appropriate level of informa-
ment Board are therefore not enforceable. In practice,      tion and after obtaining external advice) that they
however, informal consultations usually occur between       were acting in the best interests of the company.
the Supervisory Board and the majority shareholder(s)
regarding the appointment of the members of the             Supervisory Board
Management Board and usually the Supervisory                An AG must have a Supervisory Board. If the AG
Board will only appoint members who are acceptable          has over 500 (but less than 2,000) employees or if
to majority shareholder(s). Members of the Manage-          the AG has less than 500 employees but was regis-
ment Board are appointed for a maximum term of five         tered prior to August 10, 1994 and is not family-
years (although this term can be renewed for further        owned, 1/3 of the members of the Supervisory
periods of up to five years). Once such an appoint-         Board must be employees’ representatives. If the
ment is made, however, it can only be revoked for           AG has more than 2,000 employees, half of the
good cause by a resolution of the Supervisory Board.        members of the Supervisory Board must be em-
                                                            ployees’ representatives.
The manner in which the members of the Manage-
ment Board may legally represent the AG must be             The function of the Supervisory Board is to supervise
expressly set forth in the articles of association (indi-   and advise the Management Board. If there are no
vidually, jointly, etc.). The powers of the members         employees’ representatives on the Supervisory Board,
of the Management Board may be limited by the               all members of the Supervisory Board are appointed
articles of association or by the Supervisory Board         by a simple majority vote of the shareholders, unless
by stipulating that certain matters require the con-        the articles of association provide that a particular
sent of the Supervisory Board or the shareholders in        shareholder may appoint one or more members of the
general meeting. Such limitations do not, however,          Supervisory Board. If the AG has more than 2,000
affect the validity of the actions of the Management        employees (with 50 % of the members of the Super-
Board vis-à-vis third parties.                              visory Board being employees’ representatives), the
                                                            Chairman of the Supervisory Board who is elected
The members of the Management Board must apply              by the members of the Supervisory Board, has a
the due care of a prudent and conscientious man-            casting vote in the event of a tie. The voting proce-
ager in managing the company. If they breach their          dure set forth in the relevant legislation is designed in
duties, the members of the Management Board are             such a way that the Chairman may not be elected
Doing Business in Germany Legal Forms of Doing Business in Germany                                            24 | 25




against the wishes of the shareholders’ representa-         The members of the Supervisory Board must apply
tives to the Supervisory Board. This procedure, to-         the same due care as the members of the Manage-
gether with the Chairman’s casting vote, ensures            ment Board and in case of a breach of their duties
that the ultimate decisions of the Supervisory Board        may also be liable for any damages sustained by
rest with the shareholders’ representatives. Members        the company. In particular, the members of the Su-
of the Supervisory Board are appointed for a maxi-          pervisory Board must not disclose any confidential
mum term of five years.                                     information regarding the company and its affairs.
                                                            Along with tightening corporate governance stan-
Members of the Supervisory Board may be dismissed:          dards, Supervisory Boards are increasingly under
                                                            scrutiny for (not) pursuing liability claims against the
  by a court ruling, for good cause, upon the initiative    Management Board.
  of the other members of the Supervisory Board;
  by a 75 % majority of votes in a general meeting          Shareholders
  (only applies to shareholders’ representatives);          The shareholders of the AG exercise their powers
  by the appointing shareholder, if a specific right        by passing shareholders’ resolutions in general mee-
  to appoint is set out in the articles of association      tings. An AG must hold its annual general meeting
  (only applies to the representative of the appointing     within the first eight months after the end of every
  shareholder).                                             financial year in order to conduct routine business.
                                                            During such annual general meetings, the annual
The main functions of the Supervisory Board are as          financial statements of the previous financial year
follows:                                                    will be laid before the shareholders and the share-
                                                            holders will pass resolutions relating to dividend
  appointment and dismissal of the members of the           payments and the exoneration of the members of
  Management Board;                                         the Management Board and the Supervisory Board
  supervision of the Management Board, involving            with respect to their actions in the previous finan-
  the examination of both legal and commercial              cial year.
  aspects of Management Board actions;
  representation of the AG in its dealings with the         The Management Board is entitled (and in certain
  Management Board;                                         cases obliged) to convene extraordinary general
  representation of the AG (together with the Ma-           meetings, although the Supervisory Board may also
  nagement Board) in litigation relating to the validity    call such extraordinary general meetings in certain cir-
  of shareholders’ resolutions;                             cumstances. Furthermore, shareholders holding at
  consent to major business decisions of the Mana-          least 5 % of the registered share capital may require
  gement Board as required by the articles of associ-       the convocation of a shareholders’ meeting. The arti-
  ation or by the Supervisory Board (e. g. by internal      cles of association may, in addition, grant the power
  rules of the Management Board issued by the               to call general meetings to other persons, for exam-
  Supervisory Board or by individual resolutions on         ple, to majority shareholders. The calling of a general
  a case by case basis);                                    meeting of an AG is subject to quite onerous notice
  review and approval of the annual financial statements.   requirements.
Shareholders’ resolutions require a simple majority         with the Commercial Register within twelve months
(more than 50 % of the votes cast) unless man-              of each financial year.
datory law or the articles of association require a
greater majority. For example, a 75 % majority of the       However, German corporations are not obliged to
votes cast is required for any amendments to the            lodge annual confirmations or up-dates with the
articles of association, increases or decreases in          Commercial Register. Only actual changes relating
share capital, control agreements with other com-           to the registered information (e. g. registered office,
panies (i. e. agreements whereby a corporation sub-         articles of association, registered share capital etc)
mits itself to the control of another or agrees to          must be notified.
transfer its profits), the transfer of all assets and the
change of corporate form. Furthermore, the AktG
requires the consent of certain shareholders when-          KGaA
ever their rights are affected by certain measures of
the company.                                                The partnership limited by shares (Kommanditgesell-
                                                            schaft auf Aktien, KGaA) is a form of a corporation
As mentioned above, the shareholders decide on the          which is not used very often in Germany.
distribution of profits in general meetings. The share-
holders are, however, bound by the annual financial         The KGaA is a hybrid structure that combines the
statements prepared by the Management Board and             features of a limited partnership with those of an
approved by the Supervisory Board; such decisions           AG. The KGaA must have at least one general partner
may therefore not deviate from the profits stated in        who is personally liable for all debts and liabilities of
said financial statements.                                  the KGaA. Corporations with limited liability can act
                                                            as the general partner of a KGaA, e. g. a GmbH & Co.
In making their decisions, shareholders of an AG            This means that it is possible for investors to be
have a duty of loyalty to the company, but not to the       completely shielded from any liability. The KGaA is
other shareholders. Similar to a GmbH, the share-           similar to the very popular partnership structure of
holders of an AG must be treated equally under equal        a GmbH & Co KG. Apart from the general partner,
circumstances.                                              there can be an unlimited number of capital investors
                                                            (Kommanditaktionäre or limited shareholders) who
Ongoing Accounting Obligations and                          hold shares in a KGaA. The limited shareholders
Disclosure Requirements                                     are protected from any personal liability so long
An AG must keep accounting records and prepare              as they have properly paid for their relevant capital
annual financial statements in accordance with the          contribution.
provisions of the German Commercial Code which
lay down detailed requirements as to the form and           Although legally treated like an AG, as a corporation
content of the annual financial statements. Further-        with separate legal entity status, the internal mana-
more, medium-sized and large corporations must              gement of a KGaA is more comparable to that of a
have their annual financial statements audited. The         KG (i. e. a limited partnership). The provisions gover-
(audited) annual financial statements must be filed         ning the KG in particular also apply to the relation-
Doing Business in Germany Legal Forms of Doing Business in Germany                                           26 | 27




ship between the general partner(s) and the limited          European Public Company
shareholders and to the representation of the KGaA
vis-à-vis third parties. This means that the KGaA is         Since December 2004, it has been possible to form
managed and legally represented by the general               an European Public Company, also-called Societas
partner(s), who are personally liable for all debts and      Europaea or abbreviated „SE“, as a legal entity in
liabilities of the KGaA. The limited shareholders have       Germany. The provisions that govern the SE in
more or less the same legal rights and obligations           Germany are based on an EU Regulation that has
as shareholders in an AG.                                    been implemented by German national law. Even
                                                             though the provisions of the EU Regulation directly
The shares are freely transferable. It is also possible      apply in each of the EU member states, the EU Reg-
for the shares of a public KGaA to be listed. Due to         ulation has left some room for the EU member states
this extraordinary hybrid structure and the lack of          to adopt supplemental legislation. Accordingly, there
precise legal provisions regarding its internal mana-        are slightly different provisions which relate to the
gement, a potential investor willing to choose the           operation of the SE in various European jurisdictions,
KGaA as a investment vehicle is likely to face some          and this means that the choice of member state in
difficulties (but will also receive the benefit or certain   which the SE is incorporated is likely to make a dif-
specific advantages) when compared to the tradi-             ference for foreign investors planning to invest in
tionally used forms of corporations. Furthermore, due        Europe via an SE.
to the limited number of corporations which have
been established as a KGaA, only very limited court          The SE has become increasingly popular in recent
rulings which relate to the operation of the KGaA            years. Europe-wide over 300 European Public Com-
exist. This leaves uncertainty regarding a number of         panies have been set up (as of February 2009). In
legal issues in relation to the operation of this form of    Germany more than 100 SE (approx. one third of all
corporation. However, a KGaA has the same ongoing            SEs) have been established despite the fact that
accounting and disclosure obligations as an AG.              the German SE is based on the very complex con-
                                                             cept of an AG. Prominent examples are Allianz SE,
Any investor who is contemplating using a KGaA               BASF SE, Fresenius SE and Porsche SE. An SE
as an investment vehicle should be aware that this           comes with a number of advantages in running a
rarely used form will not only trigger additional in-        group of companies compared to the traditional
corporation costs but that there will also be higher         German company forms. As explained below, the
tax compliance costs. Therefore, the KGaA might only         SE offers more flexibility as to how the supervisory
be considered as the appropriate vehicle to carry out        board is constituted. Another common major reason
business, if:                                                why German firms have adopted this legal form is
                                                             that employee participation can be negotiated and
   it is possible to attract a large number of limited       therefore be less rigid. Furthermore, the SE brings a
   shareholders via a public offering, (avoiding the         European corporate identity to a company.
   control rights applicable to shareholders of an AG);
   a preferred tax treatment can be achieved (e. g.          The features of a German SE are very similar to those
   in an acquisition scenario).                              of an AG. However, like any SE (regardless of the
Member State in which it is incorporated), the Ger-     Minimum Share Capital
man SE must have a link to at least two member          The SE must have a minimum share capital of
states of the EU. Therefore, a mere German business     C120,000.00. This specified minimum capital is im-
operation cannot be conducted through an SE.            perative and must be fixed in the articles of asso-
                                                        ciation of the SE. Where a member state requires
Formation and Registration                              larger capital for companies carrying out certain
The German SE can only be formed in one of the          types of activity, the same requirement will also apply
following four ways:                                    to an SE with its registered office in that member
                                                        state, e. g. the minimum capital of an investment
  merger of two or more existing public companies       stock corporation in Germany (Investmentaktien-
  (including existing SE) based in different EU mem-    gesellschaft, InvAG) is C300,000.00.
  ber states into a newly formed SE;
  at least two existing corporations (including ex-     Management
  isting SE) based in different EU member states        The major difference between the internal structure
  setting up a holding SE;                              of a German SE and an AG is that the German
  at least two existing corporations or other legal     SE may choose to have a one-tier board system
  entities (including existing SE) based in different   (Administration Board) rather than the otherwise
  EU member states forming a subsidiary SE; or          mandatory two-tier board system of an AG (Mana-
  by transforming an existing stock corporation         gement Board and Supervisory Board). As a result,
  based in an EU member state into an SE (the           the German SE may have only one administrative
  existing stock corporation must have a subsidiary     body that is responsible for the management of
  in a different EU member state for at least two       the company. The German legislation provides that
  years).                                               the (one-tier) Administration Board may then appoint
                                                        certain persons who will be responsible for the
Upon formation the SE must be registered with the       day-to-day business and the management of the
relevant Commercial Register (in the state where it     SE, including its legal representation. Such persons
has its registered office) and the registration of an   may or may not be members of the Administration
SE must be disclosed for information purposes in        Board. The Administration Board of a German SE
the Official Journal of the EU. The SE is entitled to   is likely to consist of executive and non-executive
relocate not only its principal place of management     members, which is more similar to the one-tier board
but also its registered office to another EU member     system applied in Anglo-Saxon jurisdictions.
state. The transfer of the registered office of an SE
does not result in the winding up of the SE or in the   Employees’ Participation Rights
creation of a new legal person. This therefore leaves   The EU Regulation does not set out specific require-
a degree of flexibility for future development and      ments regarding the participation of employees’ re-
could be one of the main reasons for choosing an SE.    presentatives on the Supervisory Board or Adminis-
                                                        tration Board of the SE. Instead, it provides for a
                                                        complex negotiation model. In a nutshell, a negotia-
                                                        tion committee consisting of employees’ represen-
Doing Business in Germany Legal Forms of Doing Business in Germany                                            28 | 29




tatives (Besonderes Verhandlungsgremium) must              capital of C1.00. The European Parliament has,
negotiate in good faith with representatives of the        however, suggested an amendment which means
founding companies’ management in order to reach           that the C1.00 minimum capital shall only be
a decision as to whether or not and, if so, to what        sufficient for SPEs whose executive management
extent, employees’ representatives will be included        signs a solvency certificate; otherwise the minimum
in the administration of the SE. In the event that         share capital shall be C8,000.00.
no agreement can be reached, the highest level
of employees’ participation currently existing in the      The SPE’s main features will be comparable to those
founding companies (usually the German AG) must            of the German GmbH (and most other national pri-
be maintained within the SE (so-called “before/after       vate companies available within the EU). Like an
principle”). However, if none of the founding com-         SE, the creation of an SPE will be subject to a cross-
panies had employees’ participation rights imme-           border requirement, but this cross-border component
diately prior to forming the SE, the SE may avoid          will be more flexible and broader. This means that
employee participation, even if the relevant thres-        such component can be satisfied by evidence of a
holds of employee headcounts are likely to be ex-          cross-border business intention or corporate object,
ceeded in the future.                                      or an objective to be significantly active in different EU
                                                           member states, as long as this can be demonstrated
European Private Company                                   by the SPE within two years of registration. Informa-
In June 2008 the EU Commission presented a pro-            tion about SPEs in all member states of the EU will
posal for a Regulation on a European Private Com-          be held (retained) in the new central European register.
pany, also called the Societas Privata Europaea or
abbreviated ”SPE” (the “SPE Regulation”).                  Under the proposed SPE Regulation shareholders
                                                           should have the power to determine the management
Although this proposal has been generally welcomed         structure of the SPE in the articles of association of
by the Committee of Legal Affairs of the European          the company, i.e. whether the SPE will have a single
Parliament, a number of amendments were sug-               director or several directors, a one-tier or a two-tier
gested in March 2009. This has created uncertainty         board system etc. It is envisaged that, as a general
regarding some specific details of the proposed            principle, the rules regarding the participation of em-
SPE Regulation. The next steps to be taken and final       ployees in the member state in which the SPE has
implementation date for the proposed SPE are not           its registered office should apply. If more than 500
therefore clear and remains to be seen.                    employees of the SPE are working in another mem-
                                                           ber state (or states) which provide more accommo-
The main aim of the SPE is to reduce compliance            dating rules regarding the participation of employees,
costs for the creation and operation of businesses in      special provisions of the proposal on SPE Regula-
different EU member states arising from the dispari-       tion should also be applied. These special rules are
ties between national company laws.                        very similar to the SE rules regarding the participation
                                                           of employees.
Under the current proposal, the SPE will be a private
company limited by shares with a minimum share
Other National European Corporations                        Partnerships

Due to various landmark decisions of the European           Partnerships (Personengesellschaften) are available
Court of Justice it is also possible for foreign corpora-   as general partnership (Offene Handelsgesellschaft,
tions incorporated in a member state of the EU to           oHG) and limited partnership (Kommanditgesell-
relocate their principal place of management, imme-         schaft, KG).
diately after their incorporation, to Germany provided
that the respective EU jurisdiction allows and respects     The only major difference between the two forms is
the expatriation of the corporation.                        the liability of the partners. While all partners of an
                                                            oHG face unlimited liability for the partnership’s debts
For instance, a UK company with limited liability duly      and liabilities, a KG consists of at least one general
incorporated and registered in England with a ma-           partner with unlimited personal liability and one or
nagement located in Germany, will be recognised as          more limited partners which are only liable with their
a legal entity in Germany and allowed to carry out          subscribed and registered partnership contribution.
its business from and in Germany without facing any         A partnership has a quasi-legal entity status, i. e. it
restrictions. With respect to companies incorporated        can enter into contractual relationships, own assets
in the State of Delaware in the USA, for example,           and incur liabilities in its own name and on its own
which relocate to Germany, the same principles apply        behalf.
(based on a German American bilateral agreement).
                                                            The major reasons for investors using a partnership
Whether a foreign (shelf) company is a feasible alter-      instead of a corporate structure are:
native to a German corporation, for a company consi-
dering the establishment of a business in Germany,            greater flexibility in tailoring the internal affairs to
depends upon a number of aspects which should be              the individual needs of the partners;
carefully considered. Apart from questions regarding          possible tax advantages;
the acceptance by German customers and the repu-              fewer publication requirements (the partnership
tation in the market, the tax and accounting implica-         agreement need not be filed with the Commercial
tions of forming a foreign company located in Ger-            Register);
many should also be carefully assessed.                       more possibilities to dissolve a partnership and
                                                              to distribute its capital to the partners;
                                                              direct management by the (general) partners.

                                                            Against this background, partnership structures are
                                                            commonly used for smaller and family owned busi-
                                                            nesses or for certain fund structures.

                                                            Formation and Registration
                                                            At least two partners are required to set up a
                                                            partnership. Possible partners (general as well as
Doing Business in Germany Legal Forms of Doing Business in Germany                                             30 | 31




limited partners) of a German partnership can be             However, limited partners in a KG are excluded by law
individuals, German or foreign corporations or other         from managing the partnership. It is therefore only
partnerships.                                                possible for a limited power of attorney to be granted
                                                             in favour of a limited partner (i.e. for certain types of
The formation of a partnership requires the execution        transactions only). The management responsibility is
of a partnership agreement. While it is possible to          assumed by the general partner(s) of a partnership
have an oral partnership agreement, it is more com-          (oHG and KG). However, it is possible in some in-
mon and preferable for it to be in writing (although         stances to restrict a general partner from managing
the partnership agreement does not need to be nota-          the partnership. If the general partner is a corporation,
rised or filed). The partnership must then be registered     it will be the management of such corporation (rather
with the relevant Commercial Register. To achieve            than the general partner) which therefore manages
the liability protection for the limited partners of the     and legally represents the partnership.
KG and for the KG to become legally effective, the
amount of the subscribed partnership contribution            The limited partners have certain information rights.
must be properly registered with the Commercial              In particular, they are entitled to request a written
Register. If the KG commences its business activi-           copy of the financial statements of the KG, as well
ties prior to its registration, all partners including       as to inspect the records and accounts of the KG
the limited partners are, in principle, fully liable for     in order to verify that the financial statements are
any obligations arising from such pre-registration           correct. The partners can make decisions on the
dealings. The liability of the limited partners will only    affairs of the partnership through partnership reso-
become limited upon the registration of both the             lutions. Partnership resolutions must generally be
KG and the subscribed partnership contribution with          passed unanimously. Although the partnership agree-
the Commercial Register.                                     ment may modify this principle, there are certain key
                                                             matters (fundamental issues relating to the partner-
Transfer of Partnership Interest                             ship) which by law require the unanimous resolution
The transfer of any partnership interest (as a limited or    of all partners. The position of partners who acquire
general partner) requires an agreement (written or           only a minority interest in a partnership is, therefore,
oral) between the transferor and the transferee to-          slightly stronger than it would be in a GmbH or AG.
gether with the consent of all other partners unless
the partnership agreement provides otherwise. The            Ongoing Accounting Obligations and Disclosure
partnership agreement may also impose certain                Requirements
restrictions relating to the transfer of a partnership in-   A KG must keep accounting records and prepare
terest. The change of partners must be registered            annual financial statements in accordance with the
with the Commercial Register, although this is not a         provisions of the German Commercial Code (HGB)
requirement for the effectiveness of the transfer.           which lay down detailed requirements as to the
                                                             form and content of the annual financial statements.
Management                                                   Unless at least one general partner is a natural
The partners may, in principle, freely agree upon their      person, a medium-sized or large KG must have its
rights and obligations in the partnership agreement.         annual financial statements audited. Subject to the
same exception (one general partner being a natural           must, however, receive remuneration for assuming
person), the (audited) annual financial statements            the role as general partner.
must be filed with the Commercial Register within
twelve months of the end of each financial year. Any
actual changes relating to the registered information         Conversion
(e. g. registered office, registered partnership contri-
bution etc) must also be notified to the Commercial           The German Transformation Act (UmwG) sets out
Register.                                                     several restructuring options, including such in rela-
                                                              tion to the conversion of a legal form (Formwechsel).
                                                              Nearly all types of entities, including partnerships
GmbH & Co. KG                                                 (oHG, KG) and corporations (GmbH, AG, KGaA),
                                                              can be converted into another legal form under the
A popular way of achieving the advantages of a                German Transformation Act.
partnership structure (i. e. better tax treatment), whilst
shielding the partners from the risk of unlimited per-        For a conversion to be effected, a notarized resolu-
sonal liability, is to appoint a corporation (generally       tion of the partners/shareholders of the converting
a GmbH) as the sole general partner of the KG,                entity must be passed by a special majority of at
thereby forming a so-called GmbH & Co. KG. Usu-               least 75 %. The conversion must be registered with
ally, the limited partner(s) also hold all shares in          the Commercial Register and will become effective
the GmbH which acts as the general partner. The               immediately upon registration. The entity in its new
result of this structure is that the limited partner(s)       legal form will generally be able to keep its existing
are not only holding all of the interests in the KG di-       business name, but must add a suffix indicating its
rectly and indirectly via the GmbH, but that they are         new legal form.
also controlling the partnership via their shareholding
of the GmbH even though they are excluded from                The registration of the new legal form has the follow-
managing the KG directly.                                     ing effects:

                                                                the converting entity continues to exist but under
UG & Co. KG                                                     the new legal form;
                                                                the partners/shareholders of the converting entity
The formation of a UG (haftungsbeschränkt) & Co. KG             now keep their interest in the entity in accordance
can be an interesting alternative for holding com-              with the law applicable to the new legal form.
panies as this has the form of a German limited part-
nership (i. e. a GmbH & Co. KG). While the holding            Since the EU Cross-Border Merger Directive has
company still benefits from the corporate shield              been implemented into the national law of most
which will be created as the general partner (in this         EU member states, it is now also possible to con-
case the newly introduced “Small GmbH”) will still            vert a corporation from one EU member state into
have limited liability, less share capital will be required   a corporation operated in accordance with the laws
to form the holding company. The Small GmbH                   of another EU member state (i. e. a UK Limited into a
Doing Business in Germany Legal Forms of Doing Business in Germany   32 | 33




German GmbH). Such a “cross-border conversion”
can be achieved by the existing entity (i. e. UK Limit-
ed) setting up a subsidiary in the target legal form
(i. e. German GmbH) and then carrying out a cross-
border down stream merger between the parent
UK Limited and the subsidiary German GmbH. As
a result, all assets and liabilities of the UK Limited
will be assumed by the German GmbH and the UK
Limited will be automatically dissolved. The German
GmbH will continue to exist with the same share-
holder structure as the dissolved UK Limited. The
process of a cross-border merger is rather complex
since two national laws (here English law and Ger-
man law) and two national registration proceedings
will apply in parallel. It will also be important to en-
sure that there are no adverse tax consequences as
a result of the merger, i. e. as a result of disclosing
hidden reserves.



Thomas Weidlich, LL.M. (Hull)
thomas.weidlich@luther-lawfirm.com
Telephone +49 (221) 9937 16280

Dr. Angelika Yates
angelika.yates@luther-lawfirm.com
Telephone +49 (221) 9937 25797
Comparison of legal forms


                 Gesellschaft mit     Unternehmerge-       Aktiengesell-        Societas                GmbH & Co. KG **
                 beschränkter         sellschaft (UG;      schaft (AG)          Europaea (SE)
                 Haftung (GmbH)       “Small GmbH”)
Incorpo-         Approx. C600.00      Approx. C600.00      Approx. C1,000.00    Depends on              Approx. C1,000.00
ration and       to C1,000.00 *       to C1,000.00 *       to C1,500.00 *       type of formation       to C1,500.00 * (inclu-
Registration                                                                    (merger, conver-        ding incorpora-tion
Costs                                                                           sion etc).              of general partner
                                                                                                        GmbH)
Duration         2 to 6 weeks         2 to 6 weeks         2 to 8 weeks         Depends on type         2 to 8 weeks
of Incorpo-                                                                     of formation (mer-
ration and                                                                      ger, conversion
Registration                                                                    etc) – usually fairly
                                                                                lengthy process
                                                                                (several months).
Minimum          One                  One                  One                  One                     Two
Number
of Share-
holders
Formal Re-       Notarisation of      Notarisation of      Notarisation of      Notarisation of         Execution of part-
quirements       deed of incor-       deed of incor-       deed of incor-       formation docu-         nership agreement
of Incorpo-      poration and         poration and         poration and         ments (merger,          (notarisation only
ration           registration with    registration with    registration with    conversion etc.)        required with respect
                 commercial           commercial           commercial           and registration        to incorporation of
                 register.            register.            register.            with commercial         general partner GmbH)
                                                                                register.               and registration with
                                                                                                        commercial register.
Minimum          C25,000.00           C1.00                C50,000.00           C120,000.00             No minimum part-
Share                                                                                                   nership contribution
Capital                                                                                                 required.
Capital          25 per cent of       100 per cent of      25 per cent of the   25 per cent of the      No minimum payment
Contribution     the nominal value    the nominal value    registered share     registered share        requirements. How-
(Cash)           of each share        of the shares.       capital (minimum     capital (minimum        ever, if the contribution
                 (but at least half                        C12,500.00) plus     C30,000.00) plus        is not fully paid in, the
                 of the minimum                            full amount of any   full amount of any      limited partner is per-
                 share capital                             premium.             premium.                sonally liable up to the
                 C12,500.00).                                                                           subscribed amount.




* not including legal fees
** with respect to the general partner GmbH we also refer to the information contained in the first column
Doing Business in Germany Legal Forms of Doing Business in Germany                                                      34 | 35




            Gesellschaft mit            Unternehmerge- Aktiengesell-               Societas          GmbH & Co. KG **
            beschränkter Haftung        sellschaft (UG; schaft (AG)                Europaea
            (GmbH)                      “Small GmbH”)                              (SE)
Capital     100 per cent of the         Initial share       100 per cent of the See AG.              100 per cent of the
Contri-     nominal value of the        capital must be     nominal value of the                     nominal value of the
bution      shares; documents           contributed in      shares; documents                        partnership contribu-
(in kind)   evidencing value of the     cash. Thereafter,   evidencing value of                      tion. No evidence of
            contributed assets are      same as GmbH.       the contributed as-                      value of contributed
            required (e. g. valuation                       sets are required                        assets required. How-
            report). Any shortfall                          (e. g. valuation                         ever, if the fair market
            must be paid in cash.                           report). Any short-                      value of the contribut-
                                                            fall must be paid                        ed assets is below the
                                                            in cash.                                 nominal value of the
                                                                                                     partnership contribu-
                                                                                                     tion, the limited partner
                                                                                                     is personally liable up
                                                                                                     to the shortfall amount.
Mainte-     Payments to share-          See GmbH.           Prohibition on:        See AG.           No specific restric-
nance of    holders which would                             - repayment of                           tions apply. However,
Capital     reduce the company’s                              capital to share-                      the limited partner is
            net assets below its                              holders; and                           personally liable up
            registered share capital                        - financial assis-                       to the subscribed
            are not allowed.                                  tance for acqui-                       amount if his contri-
                                                              sition of its own                      bution is paid back
                                                              shares.                                to him.
Manage-     Generally one tier struc-   See GmbH.           Two tier structure:    One or two        The general partner
ment        ture with minimum of                            management board       tier structure.   GmbH manages the
            one managing director.                          and supervisory        Employees’        partnership.
            Supervisory board only                          board required.        participation
            required if more than                                                  rights depend
            500 employees.                                  Participation of       on outcome
                                                            employees:             of negotiation
            Participation of                                                       procedure or
            employees:                                      - if more than 500     “before/after
                                                              employees 1/3;       principle”.
            - if more than 500                              - if more than 2,000
              employees 1/3;                                  employees 1/2
            - if more than 2,000
              employees 1/2                                 of the members
                                                            of the supervisory
            of the members of the                           board must be
            supervisory board                               employees’ repre-
            must be employees’                              sentatives.
            representatives.
Comparison of legal forms


              Gesellschaft mit     Unternehmerge-       Aktiengesell-        Societas              GmbH & Co. KG **
              beschränkter         sellschaft (UG;      schaft (AG)          Europaea (SE)
              Haftung (GmbH)       “Small GmbH”)
Directors’    The directors are    See GmbH.            The directors are    See AG.               The general partner
Liability     liable for breach                         liable for breach                          GmbH is liable for
              of their managing                         of their managing                          breach of its managing
              duties.                                   duties                                     duties.
Share-        Limited to capital   Limited to capital   Limited to capital   Limited to capital    Unlimited liability of
holders’      contribution.        contribution.        contribution.        contribution.         the general partner
Liability                                                                                          GmbH; liability of the
                                                                                                   limited partners is
                                                                                                   limited to their (paid
                                                                                                   in) partnership contri-
                                                                                                   bution.
Transfer of   Notarised transfer   See GmbH.            Transfer agree-      See AG.               Transfer of the interest
Shares        deed required.                            ment. No notari-                           in the KG requires
                                                        sation required.                           the consent of all
                                                                                                   partners. Notarisa-
                                                                                                   tion required if shares
                                                                                                   in the general partner
                                                                                                   GmbH are also
                                                                                                   transferred.
Costs of      Notary fees          See GmbH.            No notary fees       See AG.               Transfer of interest in
Share         depending on the                          incurred.                                  the KG does not incur
Transfer      purchase price.                                                                      notary fees.
Mobility      Registered office    See GmbH.            Registered office    Relocation of the     Registered office
within EU     must remain in                            must remain in       registered office     and principle place
              Germany. Reloca-                          Germany. Reloca-     and the principle     of administration must
              tion of registered                        tion of registered   place of adminis-     remain in Germany.
              office results in                         office results in    tration is possible   Relocation results in
              the dissolution                           the dissolution      within EU.            the dissolution of
              of the company.                           of the company.                            the KG.
              However, reloca-                          However, reloca-
              tion of principle                         tion of principle
              place of adminis-                         place of adminis-
              tration allowed                           tration allowed
              within EU.                                within EU.
Doing Business in Germany Legal Forms of Doing Business in Germany                                                 36 | 37




                Gesellschaft mit      Unternehmerge-     Aktiengesell-         Societas           GmbH & Co. KG **
                beschränkter          sellschaft (UG;    schaft (AG)           Europaea (SE)
                Haftung (GmbH)        “Small GmbH”)
Cross-bor-      Can participate       Can participate    Can participate       Can participate    Can participate in
der merger      in cross-border       in cross-border    in cross-border       in cross-border    cross-border mergers
within EU       mergers pursuant      mergers pursuant   mergers pursuant      mergers pursuant   (as absorbing entity
                to sections122a       to sections122a    to sections122a       to sections122a    “import merger”)
                et seq. German        et seq. German     et seq. German        et seq. German     based on SEVIC
                Transformation        Transformation     Transformation        Transformation     case of the European
                Act.                  Act.               Act.                  Act (prevailing    Court of Justice.
                                                                               view) and SE
                                                                               Regulation.
Taxation        Taxable in Ger-       See GmbH.          Taxable in Ger-       See AG.            Partnership is only
                many (corporation                        many (corporation                        subject to trade tax.
                tax and trade tax).                      tax and trade tax).                      Profits are taxed
                                                                                                  at the level of the
                                                                                                  partners.
Doing Business in Germany Taxation in Germany                                                            38 | 39




Taxation in Germany

The German tax system is truely complex and has undergone several
major reforms over the last few years. The recent 2008 Business Tax
Reform introduced significant changes including amongst others a
reduction in the corporate income tax rate (bringing it down to 15 %) and
a broadening of the tax base.




With effect from the beginning of the 2001 tax year,    porations from 33 – 41 % to 23 – 33 %. To finance
the imputation/corporate tax credit system (Anrech-     such a reduction, various accompanying measures
nungsverfahren), which was previously applicable, has   were taken to broaden the tax base, including intro-
been replaced by the so-called half-income system       ducing a restriction on interest deductions (“interest
(Halbeinkünfteverfahren) in respect of dividends re-    barrier” or “earnings-stripping rules”) and a tighten-
ceived from corporations and capital gains derived      ing of the loss trafficking rules. Further changes have
from the sale of shares in corporations. From the       also been introduced by the 2009 Tax Act.
beginning of 2009, the half-income system has been
modified to a partial income system (Teileinkünfte-
verfahren) and a uniform standardised tax rate of       Corporations
25 % plus solidarity surcharge on the various forms
of capital income has now been introduced for indi-     General
viduals (Abgeltungssteuer).                             German corporations (i. e. AG, GmbH and KGaA)
                                                        and foreign corporations which are tax residents in
A comprehensive reform of enterprise taxes with         Germany are subject to German corporate income
effect from the beginning of the 2008 tax year was      tax (Körperschaftsteuer, CIT), plus a solidarity sur-
introduced by the 2008 Business Tax Reform. One         charge on their worldwide income (unlimited tax
of the most significant changes was the reduction       liability). A corporation is tax resident in Germany if
in the current standard total tax rate of German cor-   it has its legal seat in Germany or if it is effectively
managed and controlled in Germany. The place of            option for partnerships to be taxed as a corporation.
effective management and control is defined as the         Partnerships engaged in commercial activities are
place where the management is making day-to-day            also subject to TT (cf. below).
decisions of a certain importance.

Corporations not tax resident in Germany are subject       Permanent Establishments (Branches)
to CIT plus solidarity surcharge on their German source
income (limited tax liability). Corporations are also      General
subject to Trade Tax on income (Gewerbesteuer, TT).        Non-resident corporations or individuals who derive
                                                           income from a permanent establishment located in
                                                           Germany are subject to limited CIT or IIT liability in
Tax Rates                                                  relation to such income. Under most of the German
                                                           tax treaties with other countries a permanent esta-
Until 2007 CIT was generally levied at a rate of 25 %.     blishment is defined as a fixed place of business from
The 2008 Business Tax Reform Act introduced a              which business activities, in excess of mere auxiliary
tax rate of 15 % for corporate entities. Additionally,     activities such as storage of goods or procuring of
a solidarity surcharge, which was introduced after         information, are carried out. A permanent establish-
the German reunification to meet the financial needs       ment is also created by a dependent agent or a repre-
of the east German states, is levied at a rate of          sentative of a dependent status who has the authority
5.5 % of the actual CIT burden. Neither CIT nor the        to conclude contracts in the name and on behalf of
solidarity surcharge or Trade Tax is tax deductible.       the foreign principal.

                                                           Tax Rates
Partnerships                                               Income derived from a German permanent establish-
                                                           ment by a foreign corporation is subject to CIT at a
Both general and limited partnerships (OHG and KG)         rate of 15 % plus solidarity surcharge. Progressive
are treated as transparent for the purposes of Ger-        IIT rates (plus solidarity surcharge) apply to foreign
man CIT and IIT (Einkommensteuer, Individual Income        individuals. Furthermore, the income is subject to TT.
Tax). Income derived by a partnership is allocated
to its partners, and each partner is subject to CIT        Individuals
or IIT (plus solidarity surcharge) on the partner’s pro-   Please refer to the chapter “Labor Law” for further
portional share of income at the partner’s individual      information.
tax rate, regardless of whether the income is retained
in the partnership or withdrawn by the partners. With-
drawals of income by the partners are therefore tax
neutral. Whether the partners are subject to CIT or
IIT on their income share will depend on whether the
partner is a corporation or an individual. The German
tax system does not provide for a „check the box“
Doing Business in Germany Taxation in Germany                                                               40 | 41




Trade Tax                                                  amount the utilisation of loss carry forwards is lim-
                                                           ited to 60 %, i. e. the remaining 40 % of the income
General                                                    in excess of C1 million is subject to tax, even if
Any income derived from business activities carried        additional loss carry forwards are available (so-called
out through a fixed place of business in Germany is        minimum taxation).
subject to TT, irrespective of the form in which the
business is carried out (e.g. sole proprietorship, part-   TT losses may not be carried back, but may be car-
nership or corporation). TT is a municipal tax, the        ried forward under the same conditions as CIT and
assessment rate of which is set by the municipali-         IIT losses.
ties. TT qualifies as a non-deductible expense for
CIT purposes. Partnerships are not treated as trans-       Further restrictions on the use of losses apply in
parent for TT purposes and are therefore themselves        certain circumstances if more than 25 % of the
subject to TT on their trade income.                       shares in a loss-making corporation are transferred
                                                           or if the corporation is merged (cf. below).
Tax Rates
Because the assessment rate for TT is determined
by the municipalities, tax rates vary from munici-         Taxable Income
pality to municipality and therefore depend on where
the business is located. Effective TT rates generally      Income for CIT Purposes
range from 7 % to 17,2 %. A minimum TT rate of 7 %         The basis for determining the taxable income for
was introduced to close down municipal TT havens.          CIT purposes is the income shown in the German
                                                           GAAP commercial profit and loss statement to
Individuals conducting a business as sole traders or       which certain adjustments will be made. The princi-
through a partnership are granted a partial tax credit     pal differences result from non-deductible items such
for TT on their personal income tax liability to avoid     as CIT, TT and solidarity surcharge, hidden dividend
and at least reduce the extra tax burden suffered by       distributions, 30 % of entertainment expenses and
an individual on business income due to being subject      50 % of the compensation paid to members of a
to individual IIT and TT.                                  Supervisory Board, and from the different tax treat-
                                                           ment of self-created intangible assets, provisions for
Losses                                                     contingent losses, liabilities and provisions for long-
CIT and IIT losses may either be offset against            term obligations exceeding one year, pension and
income in the same year or may be carried back             anniversary provisions, provisions for maintenance
to the previous tax year (up to a maximum of               and write-downs in value.
C511,500). CIT and IIT losses can also be carried
forward without limitation as to time or amount;           Except for capital gains derived from the sale of
although there are restrictions on the utilisation of      shares in corporations, the German CIT system does
the loss carry forwards in any given year. Loss            not distinguish between regular trade income and
carry forwards may be fully offset against income          income derived from the sale of assets. German
of up to C1 million. For income in excess of this          source capital gains are calculated as the difference
between the current book value of an asset and               non-deductible expense and will thus in effect be
the proceeds received, and are in principle subject          subject to CIT. Actual expenses incurred in connec-
to CIT at the regular rate. The taxation of capital gains    tion with the shareholding in a corporation are fully
from the sale of certain fixed assets (i. e. land and        tax deductible.
buildings) can be deferred under certain conditions
by deducting them from the acquisition cost or cost          Income derived from permanent establishments loca-
of production of replacing assets (roll-over relief) or by   ted in treaty countries is exempt from CIT under most
setting-up a tax-free reserve.                               German tax treaties. Tax credits are available for tax
                                                             on income derived from permanent establishments
Capital gains derived from the sale of shares in a Ger-      in non-treaty countries.
man or foreign corporation are generally tax exempt,
irrespective of the amount of shareholding or the pe-        Income for Individual Income Tax Purposes
riod for which the shares were held prior to the sale.       Please refer to the chapter “Labor Law” for further
However, in the same way as dividends, 5 % of the            information.
tax-exempt capital gain will be treated as non-deduc-
tible expense and will thus in effect be subject to tax.     Income for TT Purposes
                                                             The assessment basis for TT is calculated by mak-
The tax exemption does not apply to the extent that          ing various adjustments to the income subject to CIT
tax effective write-downs in value on the shares have        (or ITT, if applicable). The most important examples
been claimed in earlier years and have not been re-          thereof are the increase of the CIT basis by adding
captured in the meantime and the exemption does              back 25 % of interest on debts and on a deemed
not apply to shares held as trading stock by banks           interest portion included in certain other expenses
or financial institutions. Further, the exemption does       (annuities, payments to the silent partner, leasing and
not apply if the shares in the corporation have been         rent payments for movable and immovable assets,
issued in exchange for the contribution of business          licence payments). The add-back applies as far as
assets at a value below fair market value under the          the sum of C100,000 is exceeded for such kind of
German Transformation Tax Act (Umwandlungssteu-              payments. Other add-back items are the dividends
ergesetz, UmwStG) prior to 2007 and these shares             from German or foreign corporations for which certain
are sold within a period of seven years after the con-       holding and activity requirements are not fulfilled. The
tribution. Losses incurred in connection with the sale       profit shares from German or foreign partnerships are
of shares in corporations are non-deductible. Write-         deducted from the TT basis as well as income from
downs in value on the shares are not accepted for            real estate for businesses not performing actively
tax purposes.                                                besides just holding real estate assets.

Dividends received from a German or foreign corpora-
tion are generally exempt from CIT (except dividends
on shares held as current assets by financial insti-
tutions). However, in the same way as capital gains,
5 % of the tax-exempt dividend will be treated as
Doing Business in Germany Taxation in Germany                                                               42 | 43




Withholding Taxes                                          Royalties
                                                           Royalties, e. g. for the use of patents, know-how and
Dividends                                                  other intellectual property rights, are only subject to
From 2009 dividends distributed by a German cor-           WHT if paid to a non-resident. The WHT rate amounts
poration are subject to withholding tax (WHT) at a         to 20 % and in case of payments to non-resident
rate of 25 % (plus 5.5 % solidarity surcharge). How-       corporations 15 % (plus 5.5 % solidarity surcharge),
ever, there is a potential refund of 10 % for non-         however, reductions of, or exemptions from, WHT
resident corporations (subject to tight substance          are available under most German double tax treaties
requirements). Where distributions are made to EU          and the EU Interest and Royalties Directive.
corporate shareholders the WHT is, upon application,       Wage Tax
reduced to zero if the EU entity directly has held at      Employers are responsible for withholding wage tax
least 10 % of the share capital of the German cor-         (plus solidarity surcharge) from wages and salaries
poration for an uninterrupted period of at least 12        paid to employees.
months at the time of the dividend distribution. A
refund is possible if after the distribution the 12        Tax Consolidation
month period is met. For distributions to foreign          Tax consolidation is available for CIT and TT purpo-
non-EU shareholders, the double tax treaties with          ses under the “Organschaft” (tax group) concept.
the respective countries usually provide for WHT           Such Organschaft exists where one or more German
reductions to 5 %, 10 % or 15 % if certain holding         corporations are financially integrated (i. e. majority
and substance requirements are fulfilled.                  of the shares or the voting rights in the German
                                                           corporation is held by) into the business of a Ger-
In order to benefit from a WHT reduction under a           man parent corporation or an active partnership or a
treaty or under EU rules, the shareholder must meet        German branch of a foreign enterprise and have
substance requirements that have been significantly        concluded a profit and loss absorption agreement
tightened, effective 2007. The substance test needs        (with a minimum duration of five years) with the
very careful consideration and is, for instance, often     parent so that the profits and losses generated by
not met in the case of holding companies.                  the integrated companies will be allocated to and
                                                           aggregated with the profits or losses of the parent
Interest                                                   for tax purposes.
Interest and all other kinds of capital income derived
by individuals are basically taxed at a standardised
tax rate of 25 % (plus solidarity surcharge). The tax is
levied as a withholding tax (Abgeltungsteuer). In the
case of interest payments made to non-residents,
there is no necessity to withhold the standardised
tax, however the premises need to be proved by
a certificate of exemption from the German Federal
Tax Office.
Administration                                            Anti-Avoidance Rules

Filing of Tax Returns                                     General
The tax year in Germany is the calendar year. While       The German tax system operates under the principle
companies may have business years deviating from          of “substance over form” and places particular em-
the calendar year, the change of the business year        phasis on the economic background and intention
from the calendar year to a different period requires     of transactions and structures. Agreements, even if
the prior approval of the Tax Authorities. CIT and        legally invalid, are taken into account for tax purpos-
TT returns must be filed annually. The general filing     es to the extent that the parties in fact observe the
deadline is five months after the end of the tax year     economic effects of such agreements. The General
under assessment, i. e. May 31, 2010 for business         Tax Code contains provisions according to which
years ending in the year 2009. An automatic exten-        tax laws may not be avoided by the abuse of legal
sion of 7 months is granted for tax returns prepared      structures. The Income Tax Act (Einkommensteuer-
by a tax advisor. Further extensions may be granted       gesetz, EStG) furthermore contains an express pro-
upon application, but this requires specific grounds.     vision against treaty shopping.

Payment of Taxes                                          CFC Legislation
Quarterly CIT and TT prepayments have to be made          Germany has extensive CFC legislation under which
and these will be assessed by the tax authorities         income created by passive foreign subsidiaries in low
based on the taxable income of the prior year or, for     tax countries can be attributed to the German share-
newly established businesses, based on a forecast         holder and subjected to German tax. For subsidiaries
from the taxpayer.                                        in EU countries those rules have been amended
                                                          taking into consideration EU non-discrimination rules.
Tax Field Audits
All substantial business operations are subject to        Transfer Pricing
full scale, on-site tax field audits on a more or less    Inter-company pricing between affiliated companies
continuous basis. Annual taxes will normally be as-       must be on an arm’s length basis to be accepted
sessed subject to review, based on the tax returns        for tax purposes. The German Ministry of Finance
filed by the taxpayer, and final assessments will only    (Bundesfinanzministerium) has issued a „Decree
be issued after a tax field audit has been carried out.   Concerning the Principles Applying to the Income
The tax authorities may, in the course of a tax field     Allocation Between Internationally Affiliated Enterpri-
audit, request access to the EDP system of the            ses“ which provides principles on how to determine
taxpayer which enables them to apply their own            arm’s length prices. Inter-company pricing is pursued
review tools to the EDP system.                           particularly vigorously by the German tax authorities
                                                          where multinational groups are involved. Charges
                                                          for goods and services to a German enterprise by a
                                                          foreign affiliate (and vice versa) that are not on an
                                                          arm’s length basis will be adjusted accordingly and
                                                          will increase the basis for German CIT and TTI.
Doing Business in Germany Taxation in Germany                                                                 44 | 45




In addition there are documentation requirements              The new rule stipulates that a taxpayer will only be
for transfer prices with affiliated companies, i. e. the      able to immediately deduct net interest expenses
taxpayer is obliged to record the types and conten-           (interest expense less interest income) up to 30 %
ts of its cross-border transactions with related par-         of the income before interest, taxes, depreciation
ties, and to provide information on the economic              and amortisation (EBITDA). The EBITDA is calculated
and legal background of inter-company transactions            according to tax rules, so that, for instance, the
to the extent relevant for the determination of arm’s         EBITDA of corporations is increased by the addition
length transfer prices. If such documentation cannot          of hidden distributions and reduced by tax exempt
be provided the tax authorities can make an income            dividends and capital gains. Tax groups (Organ-
adjustment based on estimates and penalties can be            schaften) are treated as one business.
imposed. A transfer of “functions” to another country
could trigger a taxation based on the idea that po-           The limitation does not apply if one of the following
tential future income is transferred abroad. A decree         exemptions is met:
on the relocation of functions for the Federal Ministry
of Finance was published in 2008.                               net interest expense (interest expense less inter-
                                                                est income) is less than C1 million (de minimis
Interest Barrier (Earnings Stripping Rules)                     threshold). This threshold has been increased to
A new interest deduction limitation was introduced              C3 million temporarily for the years 2008 to 2009.
in 2008. It is referred to as “earnings stripping rules”        If this threshold is exceeded, the full amount,
or “interest barrier” (Zinsschranke). The new rules             rather than only the exceeding amount, is sub-
replaced the thin capitalisation rules. A decree on             ject to the 30 % restriction. There is no general
the application of the earnings stripping rule was              allowance of C1 million (respectively C3 million);
published on July 4, 2008 by the Federal Ministry               the taxpayer is not part of a corporate group
of Finance.                                                     (non-group affiliation);
                                                                the equity ratio of the borrower is at least equal to
The rules apply to any compensation which is paid               or higher than the equity ratio of the whole group,
in connection with the lending of money including               with a tolerance of 1 percentage point being al-
compensation for profit-participating loans, yields on          lowed (Escape-Clause in the event of group affilia-
typical silent partnership agreements, profit-sharing           tion). The equity ratio is the balance sheet equity
bonds and yields on participation rights. Unlike the            divided by the balance sheet total. The concept
old thin capitalisation rules, the interest barrier applies     is different from the debt-to-equity ratio that was
irrespective of whether the lender is a shareholder or          applicable under the old thin capitalisation rules.
a third party, irrespective of the term of the loan and
irrespective of whether or not a security is granted. As      Whether or not a business belongs to a group and
a rule, and again unlike under the old thin capitalisa-       also the determination of the equity ratio of the busi-
tion legislation, the interest barrier also applies to all    ness and of the group is, as a rule, determined based
businesses regardless of their legal form.                    on IFRS financial accounting. Local GAAP of an EU
                                                              member state or US-GAAP may be accepted as a
                                                              basis for these issues if certain requirements are met.
In determining the equity ratio the figures originating    details, please consult the following section on the
from IFRS, local GAAP or US-GAAP are subject to a          tightening of loss trafficking rules.
number of specific adjustments for tax purposes.
                                                           Loss Trafficking Rules (Change-of-Ownership Rules)
In the case of a corporation, the exemption for non-       Stricter loss trafficking rules are applicable since
group affiliation and the escape clause are subject        January 2008. Under the new rules any carry for-
to the additional requirement that the corporation is      wards of tax losses (corporate income tax and
not acquiring shareholder debt to a harmful extent.        trade tax) will be completely forfeited if more than
Shareholder financing is tainted if more than 10 % of      50 % of the shares or voting rights in any company
the entity’s net interest expense accrues to share-        are directly or indirectly transferred to an acquiring
holders holding more than 25 % (substantial sharehol-      shareholder or a group of acquiring shareholders
der) or to a person that is related to such shareholder.   within 5 years.

For the escape clause, even third party interest           In case of a direct or indirect transfer of more than
can be tainted if – subject to the 10 % rule – the third   25 %, but not more than 50 % of the shares, within
party has recourse to a substantial shareholder or to      the 5-year period, the carry forwards of tax losses
a related party. Shareholder financing and security        will be forfeited proportionally. Capital increases and
granted between members of the consolidated group          decreases might also be treated as transfers of
are, in turn, disregarded for this test.                   shares, resulting in the forfeiture of the carry forwards
                                                           of tax losses, if there is an effect on the proportion
The escape clause requires that not only the Ger-          of shares owned by an existing shareholder.
man entity in question undergoes this shareholder
financing test, but rather each and every world-wide       Several shareholders may be regarded as one share-
member of the group. Therefore, the escape clause          holder if they are deemed to have aligned interest.
requires proof which can be burdensome to obtain,          There is no relief for intra-group transfers. The rules
especially for larger groups of companies.                 also apply if a change in shareholding takes place
                                                           at an upper-tier level within a group structure.
In contrast to the rules which were applicable up until
2007, the disallowance of interest deduction under         According to the tax authorities, certain transac-
the interest barrier rule will no longer trigger with-     tions such as a merger or a contribution in kind into
holding tax.                                               the loss company or the acquisition of own shares
                                                           might also be treated as transfers of shares, resul-
Non-deductible interest expenses can be carried for-       ting in the forfeiture of the carry forwards if there
ward and be deducted in future years in compliance         is an effect on the proportion of shares owned by
with the 30 % EBITDA rule.                                 an existing shareholder. Also, agreements on voting
                                                           rights (e. g. waiver of voting rights) might be regard-
Interest carry forwards will be lost in the event of       ed as a harmful transaction and could lead to a
harmful shareholder changes, as defined in the             (proportional or complete) forfeiture of the losses.
recently amended loss trafficking rules. For more
Doing Business in Germany Taxation in Germany                                                                  46 | 47




A relief from the strict loss trafficking rules has been    partners occurs if, within a period of 5 years, at least
enacted for the years 2008 to 2009 for cases in             95 % of the partnership interest is transferred to one
which the shareholder change is part of a concept           or several new partners. The tax rate amounts to
to avoid insolvency or over-indebtedness. Strict re-        3.5 %, except for properties located in Berlin and
quirements have to be met to benefit from the relief.       Hamburg (4.5 %). The basis for RETT is the conside-
                                                            ration paid for the real estate or, in certain situations,
                                                            a special assessed tax value of the real estate.
Other Taxes
                                                            Inheritance and Gift Tax
Value Added Tax                                             Inheritance and Gift Tax (Erbschaftsteuer) is levied
Value Added Tax (Umsatzsteuer, VAT) is currently            on the transfer of property by gift or by inheritance.
levied on the supply of goods and services in Ger-          Where neither the donor/decedent nor the beneficiary
many at a rate of 19 %. A reduced rate of 7 % applies       is a German resident, taxation is limited to property
to certain goods and services including the delivery        located in Germany. The tax rates vary from 7 % to
of books, certain food items and taxi services within       50 %, depending on the degree of family relation
city limits.                                                and on the value of the property inherited or best-
                                                            owed. Tax allowances are available for spouses and
The German VAT system is governed by EU law. Any            children, and for the transfer of business assets
entrepreneur supplying goods or services in Ger-            and shares in corporations resident in the European
many is liable for VAT, regardless of legal form            Economic Area. A comprehensive reform of the in-
and nationality. VAT charged to an entrepreneur for         heritance and gift tax took place recently.
goods supplied or services rendered by another
entrepreneur may be claimed as input VAT, with
some restrictions.                                          Ulrich Siegemund
                                                            ulrich.siegemund@luther-lawfirm.com
The entrepreneur has to file quarterly or, if VAT due       Telephone +49 (6196) 592 16364
in the previous year exceeded C7,500.00, monthly
preliminary VAT returns as well as annual VAT returns.      Dr. Frank Seidel
                                                            frank.seidel@luther-lawfirm.com
Real Estate Transfer Tax                                    Telephone +49 (6196) 592 24815
Real Estate Transfer Tax (Grunderwerbsteuer, RETT)
is levied on the sale and transfer of real estate located
in Germany and on certain other transactions deemed
to be a transfer of real estate, such as the transfer
of at least 95 % of the shares in a company owning
real estate to one purchaser or a group of related
purchasers or the complete or almost complete
change of the partners in a partnership owning real
estate. A complete or almost complete change of
Doing Business in Germany Mergers and Acquisitions                                                         48 | 49




Mergers and Acquisitions

The catch-all term “mergers and acquisitions” (M&A) covers all kinds of
corporate consolidations including the acquisition of a business or a com-
pany in whole or in part, management buy-outs, management buy-ins,
initial public offerings (IPO), joint ventures and other cooperations, as well
as all transactions relating to such acquisitions, such as pre-sales and
post-completion restructurings.




In the following, the typical features and procedures of   In Germany, there are no laws relating specifically to
M&A transactions, particularly with respect to cross-      the acquisition of businesses. The key German law
border transactions, will be outlined.                     governing business transactions and combinations,
                                                           depending on the structure of the business combina-
                                                           tion, consists of the following legislation:
General Aspects
                                                             Civil Code (Bürgerliches Gesetzbuch, BGB)
While the decision on the sale or acquisition of a busi-     Commercial Code (Handelsgesetzbuch, HGB)
ness is frequently driven by many different objectives       Limited Liability Company Law (GmbH-Gesetz,
(external growth, changes in the field of business,          GmbHG)
financial issues, etc.), the actual deal structure is        Stock Corporation Act (Aktiengesetz, AktG)
often shaped by the financing of the transaction as          Reorganisation Act (Umwandlungsgesetz, UmwG)
well as tax issues. As these issues have to be               Takeover Act (Wertpapiererwerbs- und Übernah-
handled as the case arises, the following description        megesetz, WpÜG)
will concentrate on the main types of transactions           Securities Trading Act (Wertpapierhandelsgesetz,
under German law.                                            WpHG)
                                                             Act Against Restrictions on Competition (Gesetz
                                                             gegen Wettbewerbsbeschränkungen, GWB)
  Securities Prospectus Act (Wertpapierprospekt-          the assets/participations sold. However, both agree-
  gesetz, WpPG)                                           ments are normally incorporated in one document.
  Insolvency Order (Insolvenzordnung, IO)
  Co-Determination Act (Gesetz über die Mitbestim-        The distinction between “Verpflichtungsgeschäft” and
  mung der Arbeitnehmer, MitbestG)                        “Verfügungsgeschäft” has to be considered irrespec-
  Works Constitution Act (Betriebsverfassungsge-          tive of the structure of the transaction as Asset or
  setz, BetrVG)                                           Share Deal.
  One-Third-Participation Act (Drittelbeteiligungs-
  gesetz, DrittelbG)
                                                          Deal Structure of Asset Deals
The German Limited Liability Company Law has been
reformed by a new legislation (Gesetz zur Moderni-        When a business is sold in an asset deal (in whole
sierung des GmbH-Rechts und zur Bekämpfung                or in part), the purchaser acquires individual assets
von Missbräuchen, MoMiG) on November 1, 2008.             that in aggregate make up the business sold. This
These changes will influence transactions in which        kind of deal structure is often used if the purchaser is
German limited liability companies are involved (e. g.    not interested in acquiring the whole business or if
due diligence, share and purchase agreement, finan-       certain risks have been identified which the purchaser
cing etc.). However, even for these transactions          do not wish to take on. To a certain extent, an asset
there will be no fundamental structural modifications     deal enables the purchaser to do “cherry picking”.
in M & A transactions and therefore in the following
reference is made only when appropriate.                  The following aspects should be highlighted with
                                                          respect to national asset deals:
The existing legal provisions on the sale of individual
rights and assets do not cover the specifics of the       Sale and Transfer of Individual Assets
sale of a business as a collectivity of rights and as-    With respect to the sale and transfer of individual as-
sets. Therefore, the parties ordinarily agree on their    sets and liabilities, the parties have to especially con-
own set of rules.                                         sider the following:

In contrast to many other legal systems, German             Sale and transfer agreement: as a number of indi-
Law has one characteristic which has a considerable         vidual assets and (possibly) liabilities are sold and
impact on the structuring of transactions under Ger-        transferred, the sale and transfer agreement must
man law: under German law the legal transfer of             specifically describe and define the assets and
assets/participations comprises two separate legal          liabilities being sold. A general description such as
acts: an agreement under the law of obligations (=          “all fixed assets and inventory relating to the busi-
sale and purchase agreement, Verpflichtungsgeschäft)        ness“ is not fully sufficient. This requirement can
in which the parties agree on the commitment to             be met by geographical localisation of the assets
transfer the relevant assets/participations, and a          to be transferred (e. g. “all assets located on the
further agreement in rem (= transfer agreement, Ver-        real estate xy”) or, which is preferable for the
fügungsgeschäft) for the change in ownership of             sake of clarity for the buyer and the seller, by
Doing Business in Germany Mergers and Acquisitions                                                             50 | 51




  attaching computer printouts of the assets and            Transfer of Employment
  liabilities sold, which are often available from the      The employment relationships of all employees be-
  electronic accounting system of the target busi-          longing to the business being sold are transferred
  ness. However, the compilation of the relevant            automatically to the purchaser pursuant to Sec. 613a
  data can be time-consuming and should there-              of the German Civil Code (Bürgerliches Gesetzbuch,
  fore be started early enough.                             BGB). The purchaser assumes all rights and obliga-
  Transfer of accounts payable/contracts: the trans-        tions resulting from the employment relationships ex-
  fer of accounts payable and contracts requires the        isting at the time of transfer. However, as employees
  consent of the respective creditors and contracting       are free to choose their employer, they have the right
  parties. This consent may be, and usually is, ob-         to object to their employment relationships being
  tained after the execution of the sale and transfer       transferred. To enable the employees to exercise this
  agreement. In this case, the purchaser has to insist      right, the seller or the purchaser must notify the em-
  on specific provisions in the event that such con-        ployees of the transfer of the business prior to such
  sent is not given (e. g., reduction of the purchase       transfer. As to the content and the coverage of such
  price, right of withdrawal, etc.).                        notification, there exists extensive case law which has
  Transfer of licences and permits: as a rule, public       to be considered. The effect of an objection by an
  licence and permits relating to the operation of the      employee is that his or her employment relationship
  business (betriebsbezogene, sachliche Genehmi-            is not transferred to the purchaser and remains with
  gungen) may be transferred. On the other hand             the seller. Unless the latter has another position for
  licences and permits relating to a specific person        the employee raising the objection, it may terminate
  (personenbezogene Genehmigungen) cannot be                the employment relationship for compelling business
  transferred from the seller to the purchaser, as a        reasons. The purchaser is not entitled to terminate
  rule; the purchaser has to apply for a new licence        employment merely on the grounds of the business
  in order to continue the acquired business.               transfer. Termination of employment for other reasons,
  Further approval requirements: besides the con-           e. g., because of reorganization measures following
  sent requirements mentioned above, there might            the transfer of the business, is, however, still possible.
  be – depending on the assets sold – further re-
  quirements of approval from third parties (e. g.,         Employees’ rights and obligations which are gover-
  in the case of a chattel mortgage or if the assets        ned by the terms of a collective agreement or by a
  constitute almost the entire property of the seller).     works agreement form the basis of the employment
  Requirements as to the form of the contracts: the         relationship between the purchaser and the employ-
  sale and transfer agreement only requires a specific      ees and may not be modified to the detriment of
  form if assets are sold whose sale and transfer           the employees for one year from the date of transfer.
  mandatorily requires execution in a specific form         This does not apply, however, if and to the extent
  (e. g., the sale and transfer of real property requires   that the purchaser has collective agreements or
  a notarial deed). Otherwise, for purposes of proof,       other works agreements covering the same subject
  the written form is advisable.                            matter, in which case these agreements replace those
                                                            relating to the transferred business even if they are
                                                            less favourable.
For further details please refer to the section Industrial   assets, the purchaser acquires the company with all
Relations and Labor Legislation.                             its assets, receivables, liabilities, obligations (even
                                                             those it does not know about) and generally public
Liability of the Purchaser                                   licences and permits. The possibility for the purchaser
In principle, the purchaser assumes only the liabilities     to continue the business “as is” may be the decisive
expressly assigned to it pursuant to the sale and            argument for carrying out a share deal.
transfer agreement. Under mandatory German law
however there is an exception with regard to the             The following aspects should be highlighted with
following liabilities:                                       respect to national share deals:

Tax law: if the purchaser continues the business op-           Transfer of interests/shares: since the interests in
erations, it is jointly and severally liable for tax debts     German partnerships (OHG, KG, GmbH & Co. KG)
which have their sole basis and origin in the acquired         are not freely transferable, such transfer always
business and which arose in the year preceding                 requires the approval of all other partners, unless
the transfer of the business. This concerns trade tax          the partnership agreement provides otherwise. In
and VAT in particular.                                         comparison, shares in a German corporation
                                                               (GmbH, AG, KGaA) are freely transferable unless
Commercial law: if the purchaser continues the ac-             otherwise stipulated in the company’s bylaws.
quired business under the former company name,                 The bylaws of family-owned GmbHs in particular
then it assumes joint and several liability for all debts      often stipulate certain transfer restrictions (e. g.,
of the seller originating from the seller’s business op-       approval by the company or by the shareholders’
erations unless it is – following the parties’ application     meeting). The bylaws of an AG may only stipulate
– stated in the Commercial Register that such liability        such restrictions with respect to the transfer of
has not been transferred to the purchaser or unless            registered shares, while such consent require-
the seller or the purchaser have notified a third party        ments are not allowed for bearer shares.
accordingly. However such liability can also be avo-
ided by variation of the former company name.                  Requirements as to the form of the contracts: the
                                                               sale and transfer of interests in a partnership and
Employment law: the purchaser is jointly and severally         of shares in an AG does not need to be executed
liable for obligations relating to transferred employees       in a specific form; simple written form of the rele-
that fall due on or up to one year after transfer of the       vant contracts is sufficient. If an AG has issued
business.                                                      share certificates, the shares may be transferred
                                                               by endorsement (and delivery of the share certifi-
                                                               cate) or by simple transfer of the right, with title
Deal Structure of Share Deals                                  to the share certificate following by law. In contrast,
                                                               contracts for the sale and transfer of shares in a
In a share deal, the purchaser acquires the shares in          GmbH must be drawn up in notarized form.
a company that owns a business. As a share deal
does not affect the ownership of the company’s
Doing Business in Germany Mergers and Acquisitions                                                             52 | 53




Joint Ventures                                               venture, the rights and duties of the participants,
                                                             the sharing of returns and related costs, the duration
A joint venture is a commercial arrangement between          of the legal relationship, etc.
at least two economically and legally independent
partners. The establishment of a joint venture may
be prompted by the scale of a project such as the            Typical Procedure in M&A Transaction
joint financing of an expensive project or the need for
special expertise (e. g., technical, marketing or cultural   Although every M & A transaction is a unique and
expertise). In particular, when a foreign investor in-       complex procedure, there is a typical pattern to all
tends to invest in a country with quite different cultural   such deals. Generally, an M&A Transaction passes
and/or political conditions, a joint venture is often        the following phases: Preparatory Phase or Pre-Sale
used as the first move into the new market.                  Reorganization, Transaction Phase and Post-Closing
                                                             Integration Phase.
A joint venture can be established either by creating a
new company or taking on shares in the joint venture         Preparatory Phase/Pre-Sale Reorganization
company or by agreeing to collaborate on a contrac-          The Preparatory Phase is probably the most impor-
tual basis. In the first two cases, the parties become       tant phase for the success of the transaction.
joint shareholders of the joint venture company. Thus,
the company’s bylaws (Gesellschaftsverträge, Sat-            Ideally, the seller can sell its business “as is” and
zungen) constitute the basis for the rights and duties       the potential purchaser is interested in exactly
of the parties as shareholders. However, since bylaws        that business. However, often there is a need for a
of corporations have to be published in the Com-             Pre-Sale Reorganization in order to construct the
mercial Register under German law, the shareholders          business to be sold (restructuring, carve-out etc.).
generally also enter into a separate shareholders’           Such Pre-Sale Reorganization may also be triggered
agreement (Konsortialvertrag) in order to regulate           by tax-optimation issues.
those rights and duties that shall be kept confidential.
Such shareholders’ agreements often set out detailed         During the Preparatory Phase the seller has to decide
rules on the management of the company and its               whether he intends to sell the business by contact-
business (e. g., appointment of the members of ma-           ing one or a limited number of potential buyers or
nagement and other corporate bodies, determination           through a controlled auction. Controlled auctions
of management transactions requiring the prior ap-           are increasingly used even for smaller and mid-cap
proval of the shareholders, exercise of voting rights,       transactions to facilitate negotiations with one or
financing, call options, put options, etc.)                  more potential buyers at home and abroad, to ac-
                                                             celerate the decision-making and to optimize the
                                                             results for the seller (purchase price, guarantees etc.).
When the parties agree to collaborate on a contractu-        In an auction situation it can be beneficial for the
al basis, the cooperation agreement commonly sets            seller to perform a legal vendor due diligence to
forth similar provisions to that of the shareholders’        identify issues early in the sale process allowing it
agreement, e. g., the scope and financing of the joint       time to either solve issues or at least put a positive
“spin” on them, to the extent possible. A legal ven-       carry out the contemplated transaction, states the
dor due diligence which will be made available for         outcome of previous negotiations and defines the
the potential buyers can also help to attract bidders      further course of the transaction procedure. As the
who might otherwise be put off by the cost to be           purchaser incurs considerable costs and expenses
incurred early in the process.                             during the subsequent phases, in particular in con-
                                                           nection with the due diligence review of the target
If the M & A transaction is not carried out via a con-     business, it is in the purchaser’s interests to agree on
trolled auction and the seller has granted exclusivity,    an exclusivity period during which the seller is not
the potential purchaser might also request a specific      allowed to otherwise sell or negotiate the sale of
business structure, in order to make a tax-optimized       the target business.
acquisition from his point of view.
                                                           No exclusivity will be granted in controlled auctions. In
Transaction Phase                                          that case the LoI/MoU will contain an even more
With the Transaction Phase the direct contact be-          detailed description of the further transaction proce-
tween the seller and the potential buyer(s) is being       dure in particular regarding the time and the content
started.                                                   for a first indicative and a following binding offer for
                                                           the business to be acquired. The indicative offer is
                                                           usually requested before the business can be ex-
Information Memorandum                                     amined in detail in the following due diligence. The
                                                           information necessary for such offer has usually
The first contact between the seller and the pur-          been included in the information memorandum or
chaser may be organized by the parties or by an            will form part of the LoI/MoU. In some cases the
M & A advisor, such as an investment bank. The             seller or its M & A advisors may ask for a first indi-
M & A advisor normally prepares an information             cative offer after having transmitted the information
memorandum to inform the potential purchaser               memorandum.
about key data of the target business (size, locations,
number of employees, sales markets, etc.).                 Although the LoI/MoU could be legally binding, the
                                                           parties normally agree that it shall be a predominant-
If there is contact between seller and buyer the parties   ly non-binding document. In any case the LoI/MoU
will usually sign a non-disclosure agreement which         shall be binding regarding the non-disclosure of
contains sanctions for the breach of the agreement.        information, the regulations as to cost and the
                                                           sanctions for the breach of the LoI/MoU. However,
                                                           experience shows that even if the LoI/MoU is in-
Letter of Intent                                           tended to be non-binding, it is often difficult to
                                                           depart from the terms set forth in the LoI/MoU
If the parties decide to pursue the transaction fur-       in subsequent negotiations.
ther, they usually agree on a letter of intent (LoI)
or memorandum of understanding (MoU). Primarily,
this LoI/MoU confirms the intent of the parties to
Doing Business in Germany Mergers and Acquisitions                                                          54 | 55




Due Diligence                                              Negotiation Phase

The LoI/MuO is usually followed by a due diligence         If the due diligence has not revealed any deal break-
review. A due diligence review is a review of the          ers, it is followed by the negotiation of the specific
target’s legal, economic, financial, tax, personnel and    terms and conditions of the transaction and the
other affairs, such as environmental, cultural and         preparation of the contractual documents. Unless
technological, that is carried out by the purchaser        the bargaining position of the seller is much stronger
and its advisors. The potential purchaser normally         than that of the purchaser (as is generally the case
sends a request list for information before starting the   in controlled auctions), the drafting is normally done
due diligence procedure, on which the seller prepares      by the purchaser.
or completes an already prepared data room. The
data room will be set up physically or in electronic       The negotiation phase is certainly highly sensible as
form, whereas the electronic form is more often used       cross-border mergers are often accompanied by a
in controlled auctions. During the due diligence pro-      clash of cultures, languages and management styles.
cess the potential buyer(s) is/are usually entitled to     These differences may arise during the negotiations
ask for further information or open/unclear issues         and it is important for the success of the transaction
and these questions are answered during the due            to take these “cultural aspects” into consideration
diligence process by the seller (Q & A session).           even for the predominant party.
Questions may as well be asked during a presenta-
tion of the management of the seller about the
business to be sold. The results of the due diligence      Signing and Closing
review are summarized in a due diligence report.
                                                           The Anglo-Saxon concept pursuant to which the
The purpose of a due diligence exercise is, on the one     signing of the sale and purchase agreement and
hand, to enable the purchaser to examine the target        the closing or consummation of the transactions
business to decide whether or not it meets its expec-      traditionally take place at two different points in time
tations. On the other hand it shall enable the purchaser   is being adopted in Germany to an increasing extent,
to figure out potential risks and/or “Deal Breakers”.      even though it is not necessary under German law.
Furthermore the due diligence shall provide a sound        However, this concept is mandatory in connection
basis for subsequent negotiations, in particular with      with large, complex transactions that require several
respect to the determination of the purchase price         rounds of approval, including board approval or
as well as representations and warranties. Thus, the       merger clearance (for details regarding merger clear-
due diligence is an essential precursor to contractual     ance, please see the chapter on anti-trust law). In
protection and helps to identify the level and areas of    these cases, the sale and purchase agreement is
protection needed.                                         signed when the parties have agreed on all terms
                                                           and conditions, while closing occurs at a later point
                                                           in time, usually after all approvals or other conditions
                                                           precedent have been obtained or fulfilled.
Post-Closing Integration Phase                            Although international standards for M&A contracts
The success of an acquisition is especially depen-        that have evolved in the Anglo-Saxon world in par-
dent on the successful integration of the acquired        ticular are increasingly being adopted in Germany,
business into the existing operations of the purchaser.   a contract governed by German law is still much
Such integration is normally less complex in a share      “shorter” than a contract subject to common law.
deal than in an asset deal, since in the latter case      Since German law has codified many general and
every individual asset and liability sold must be         abstract rules which take effect unless otherwise
transferred and integrated. Moreover, in an asset         stipulated by the parties, there is no need to describe
deal there will be other post-completion matters to       and define every single detail, as is the case in
attend to, such as administrative matters, insurance,     common law contracts, but it is sufficient to make
payroll, VAT and pensions.                                reference to codified legal definitions and codified
                                                          legal consequences.
With respect to representations and warranties, each
purchaser is advised to set up a process to monitor       According to German international law, the parties are
any potential warranty claims that arise, so that the     only free to decide on the law governing the sale and
deadlines are not missed. If the seller grants certain    purchase agreement, and have no choice regarding
guarantees as to the amount of equity of the target       the law applicable to the transfer since the transfer
company, as of the closing date (in a share deal) or      of assets/participations is mandatorily governed by
the amounts of accounts receivable (in an asset deal),    the law of the country in which the assets are located
a closing balance sheet or other financial statements     or – with respect to participations being sold – in
must be prepared after the acquisition. Sometimes,        which the company is based. If bearer stocks shall
the purchaser also decides on post-sales restructu-       be transferred the transfer is mandatorily governed
ring. This is often performed for tax purposes.           by the law of the country in which the stocks are
                                                          located during the completion of the acquisition.

Special Features of Cross-Border                          Dispute Resolution
M & A Transaction                                         Arbitration clauses are regularly used in German
                                                          M & A transactions especially if foreign parties are
Choice of Law                                             involved. In addition to the well-known advantages
In cross-border transactions it is essential for the      of the arbitration compared to ordinary courts (con-
parties to choose the law that will govern the con-       fidentiality, special expertise of the arbitrators, shorter
tracts. There may be disagreement because both            duration and higher flexibility of proceedings etc.) the
the seller and the purchaser wish the governing law       arbitral court is not bound to the German language
to be the law of their home country, particularly if      and may hear a case at the parties’ option.
the parties come from different legal systems (e. g.,
civil-law system versus the common-law system; an         Choice of Language for the Negotiations
overview over the German legal system is available        and Documents
under www.lawmadeingermany.de).                           Besides the choice of law and dispute resolution,
                                                          the choice of language is an important issue – even
Doing Business in Germany Mergers and Acquisitions                                                              56 | 57




from a psychological perspective. Clearly, if the           man company by a foreign investor based outside
parties do not ordinarily communicate in the same           the EU or EFTA if the acquisition puts public safety
language, each party will try to ensure that the ne-        and order at risk. As to the scope of application,
gotiations are conducted and contracts drafted              “utilities and service providers of strategic relevance”
in their own language. The choice of law and the            are given as an example in the explanatory notes
choice of language are usually interconnected: if           to the Act. Legal certainty for investors is ensured
the parties wish to regulate their legal relationship in    inasmuch as investors are legally entitled to a clear-
one particular language, there is likely to be some         ance certificate if a risk does not exist; this certificate
logic to adopting the law of the jurisdiction where         is deemed issued when an examination procedure
that language is spoken, and vice versa. However,           is not initiated within one month after the – voluntary
the number of transactions negotiated and/or docu-          – submission of an application for approval (the
mented in English is increasing and this applies in         Federal government estimates that not more than
particular for transactions in the form of controlled       10 such procedures will be initiated annually). If an
auctions where the involvement of foreign investors         application is not filed, the Federal government may
is common.                                                  interdict the takeover ex post within a period of three
                                                            months. Even if strategically relevant (large) compa-
So, even though English has become the common               nies in the above sense are acquired, the new rule will
language in international transactions, a German            not normally lead to a delay if the transactions are
seller does not have to agree on using English. Under       planned carefully, given that the transactions will
certain circumstances it could also be advantageous         in such cases probably additionally be subject to
for the foreign investor to waive the usage of the          mandatory notification under anti-trust law and that
English language for the negotiations and the docu-         both examinations can be carried out simultaneously.
ments and to accept, in negotiations with a German
seller, the German language instead, as this could be       Interdisciplinary Questions During M & A Transactions
seen as a positive signal to the German contractual         Beyond the questions about the choice of law and
partner that the foreign investor is not interested in an   the choice of language, there is typically a whole array
unfriendly takeover of the German business but is           of economic, legal, technical and social issues to
willing to cooperate (particularly if the target is a       address during M&A transactions. Thus, it is advis-
family-owned business).                                     able for each party to select an interdisciplinary team
                                                            of advisors for all phases of the transaction in order
Foreign Investment Control                                  to ensure that all relevant issues will be considered.
Germany is one of the most open markets world-              From the seller’s point of view, the involvement of an
wide, with very liberal regulations concerning govern-      interdisciplinary team is already important during the
ment approval of foreign investments. The acquisition       planning phase if the seller is looking to restructure
of arms manufacturing companies by non-resident             the business up for sale and to address all relevant
purchasers is traditionally subject to such approval.       issues and disclose potential risks relating to the
In addition, it has been possible for the Federal           business sold in order to be prepared for the nego-
government since 2009 to interdict the acquisition          tiation phase.
of a minimum of 25 % of the voting rights in a Ger-
Mergers Between a German and a Foreign Company
Based on the developments regarding the permissi-
bility of mergers between a German and a foreign
company during the last years, especially since the
implementation of the EC Merger Directive into the
Reorganisation Act on April 19 2007, cross-border
transactions within the European Community will
become more important in the future. Particularly
from a German point of view, lengthy restructurings
are no longer necessary in order to merge the busi-
ness of a foreign investor into a German company, or
the business of a German company into a foreign
company. The new provisions provide for detailed
regulations regarding the procedure, the legal conse-
quences and how such merger becomes effective.



Dr. Thomas Kuhnle
thomas.kuhnle@luther-lawfirm.com
Telephone +49 (711) 9338 19193

Matthias Winter
matthias.winter@luther-lawfirm.com
Telephone +49 (6196) 592 27046
Doing Business in Germany   58 | 59
Doing Business in Germany Anti-Trust Law                                                                60 | 61




Anti-Trust Law

Price-fixing cartels, resale price maintenance, discrimination by dominant
firms, creation of market dominance by way of combination with other com-
panies – these are but a few examples of where anti-competitive practices
can be subject to German and European anti-trust law. This chapter out-
lines the principles of both the German Act Against Restraints of Compe-
tition and the European rules which are directly applicable in Germany.




Two sets of anti-trust regulations are applicable in     lead to different results in practice depending upon
Germany. First, the GWB, which covers restrictions of    whether the EC Treaty or the GWB provisions are
competition that have an effect within Germany.          applicable and which authority or court applies them.
Second, Article 81 to Article 86 of the Treaty of Rome
(“EC Treaty”) and the regulations based on it (espe-     Unlike other jurisdictions, German law does not treat
cially the Merger Regulation, see below), which catch    offences against anti-trust regulations as criminal
anti-competitive practices that restrict trade within    acts. Another difference that can be of relevance to
the European Union.                                      a foreigner seeking recourse to German anti-trust
                                                         law: while a person suffering financial loss from an
The purpose of the GWB is to protect freedom of          anti-competitive conduct can claim damages to
competition. It aims to achieve this by prohibiting      compensate for this loss, he may not be awarded
anti-competitive behavior and by safeguarding com-       “treble damages”, a remedy highly relevant in the
petitive market structures. EC anti-trust law has as     USA, for example.
its objective not only the freedom of competition, but
also the integration of the internal European market.
Furthermore, consumer welfare seems to be a
concept that is advocated more by the EU than the
German anti-trust authority. This can sometimes
German Anti-Trust Law                                       tribution of goods or promotion of technical or eco-
                                                            nomic progress, while allowing consumers of fair
General                                                     share of the resulting benefit; furthermore, the re-
The GWB applies to all restraints of competition that       strictions must be indispensable and they must not
have an effect within the area of the Federal Republic      eliminate competition.
of Germany, even if such restraints have their origin
outside Germany. The provisions of the GWB may              Vertical Restraints
therefore apply extra-territorially to the behavior of a    All vertical restraints are null and void unless they
company that is based or acts outside of Germany if         benefit from an exemption. The GWB provides the
such behavior significantly affects competition in the      same general exemption clause as EC law. In ad-
German market. The GWB has consequently been                dition, the European block exemption regulation for
applied by the Federal Cartel Office (Bundeskartell-        vertical restraints has been integrated into German
amt, FCO) to agreements between foreign manufac-            law. Therefore, most vertical restraints, except for
turers on terms and conditions for exports to Germa-        especially minimum resale price maintenance, are
ny or on agreements between foreign manufacturers           exempted from the general prohibition if the mar-
regarding prices for goods exported to Germany.             ket share of the enterprises involved is below
                                                            30 %. Under these circumstances, maximum resale
Horizontal Restraints                                       price maintenance, non-mandatory recommenda-
Restrictions between parties that operate on the            tions within a distribution system and most favored
same level of the market are commonly referred to           clauses are admissible.
as horizontal restraints (e. g. two manufacturers of
specific filters enter into a specialization agreement,     Dominant Companies
or a foreign investor forms a “strategic alliance” with     Companies that have a dominant position in the
a German competitor or concludes a “cooperation             relevant market may neither abuse this position nor
agreement”). All agreements between competitors,            discriminate or hinder other undertakings in an unfair
decisions by associations of competing companies            manner. The abuse of a dominant position is pro-
and concerted practices aiming at or causing the            hibited and can lead to substantial administrative
prevention, restriction or distortion of competition are,   fines and damages actions. Market dominance is
in principle, prohibited. The prerequisite of “compet-      assessed by evaluating the supply and the demand
ing companies” is fulfilled if companies are factual or     side of a market: all products or services can be
potential competitors in the relevant market. Compa-        allocated to a certain relevant market if such pro-
nies are deemed “potential competitors” if, from a          ducts or services are, in the opinion of the other
business point of view, they are in a position to           party, interchangeable in terms of feature, purpose
penetrate the market of the other. The prohibited           of use and price, and are therefore suited to meet
agreements or practices must furthermore have a             a certain demand.
significant effect on competition. There is a statutory
exemption of restrictive practices if they fulfill the      A company dominates a market when it has no
following conditions: the restrictive agreement must        competitors, is not subject to substantial competition
contribute to the improvement of production or dis-         or enjoys a paramount market position. In order to
Doing Business in Germany Anti-Trust Law                                                                     62 | 63




determine whether or not a company has a para-              unfair hindrance, as well as unjustified discrimination,
mount market position, all relevant factors must be         requires the interests of the companies affected to
taken into account: market share, financial strength,       be considered and balanced. When undertaking the
access to supplies or markets, links with other             balancing test, neither interests of third parties nor
companies, ability to shift its supply or demand to         interests which lie outside the scope of the protection
other goods or commercial services, legal or factual        of competition (e. g. environmental issues) may be
barriers to market entry for potential competitors,         taken into account.
actual or potential competition by other companies,
the ability of the market participants to resort to other   Companies with Strong Market Position
companies. An enterprise with a market share of             A peculiarity of German law is the application of the
one third is presumed dominant, but this presumpt-          prohibition of discrimination and unfair hindrance to
ion is rebuttable.                                          companies with a strong market position, rather than
                                                            only to dominant companies. A strong market posi-
There are two basic forms of abuse. The first type          tion will be assumed if small and medium-sized
deals in particular with the relationship between the       companies are dependent on a strong company.
dominant company and its competitors. An abuse              Therefore, under German law the rules of discrimina-
exists if the dominant company – without having any         tion and unfair hindrance may apply below the level
objective justification – impairs the ability of other      of market dominance. This particularity of German law
companies to act on the market in a competitive             applies to the unilateral behavior of a strong company,
manner. This rule applies, for example, to some             despite the general supremacy of European law. This
rebate systems. The second type of abuse is the             means that in a cross-border case such a behavior
so-called exploitation. Exploitation is deemed to           may be permitted by EC law but prohibited by Ger-
exist if, for example, the dominant company requests        man law. Typical examples for such an unilateral
a price or asks for business conditions different from      behavior are the refusal to deal and predatory pricing.
those that would be likely if effective competition
existed. Another example: the dominant company              Merger Control
is prohibited from requesting a less favorable price        The acquisition of all or a substantial part of a com-
or business conditions than it requests from custo-         pany’s assets or shares, a public takeover, or the
mers in comparable markets, unless the difference           creation of a joint venture – these are typical trans-
is objectively justified.                                   actions that qualify for merger control. As a rule, a
                                                            transaction has to be notified to the FCO if, firstly,
A dominant company is prohibited from, be it directly       there is a combination between companies and, se-
be it indirectly, hindering another company in an un-       condly, certain turnover thresholds are exceeded. If
fair manner in conducting business activities that          a notification is required the merger is suspended
are usually accessible to similar companies. Further-       until clearance by the FCO. Any transaction consum-
more, the dominant company must not discriminate            mated without obtaining this clearance is invalid and
against another company (i. e. treat differently from       subject to a fine.
similar companies) unless there is objective justifi-
cation for the different treatment. The determination of
A planned transaction must be notified to the FCO if       European Anti-Trust Law
the annual worldwide turnover of all companies in-
volved exceeds C500 million and if the total turnover      European anti-trust law (especially Articles 81 and
in Germany of one participating company exceeded           82 EC Treaty and the Merger Regulation) is directly
C25 million and of another participating company ex-       applicable in Germany. It applies to anti-competitive
ceeded C5 million in the business year preceeding          practices that restrict trade within the European Union.
the merger. For the purpose of calculating the rele-
vant turnover, all affiliated companies controlled by or   Cartel Prohibition
controlling one of the participating companies must        Article 81 EC Treaty prohibits all agreements between
be added, too.                                             undertakings, decisions by associations of undertak-
                                                           ings and concerted practices that may affect trade
The FCO is the sole German authority competent             between EU Member States and restrict competition
to investigate mergers. It has to prohibit mergers         within the Common Market. Any agreement infringing
that might create or strengthen a dominant market          this prohibition is, in principle, null and void.
position, unless the participating companies can
demonstrate that the joining of their forces would         There is a general exemption clause which is self-
in effect promote competition and that this promo-         executing; a formal clearance or any other adminis-
tion would outweigh the disadvantages of their do-         trative act by an authority is neither necessary nor
minant market position. As the GWB also applies to         usually attainable. Thus, all restrictive agreements
foreign transactions that might restrict competition       are exempted from the cartel prohibition if they
within Germany, mergers of foreign companies may           contribute to the improvement of production or
also fall within the scope of German merger control.       distribution of goods or the promotion of technical
                                                           or economic progress, while allowing consumers a
The FCO is obligated to decide within one month            fair share of the resulting benefit; they have to be
after receipt of the complete notification whether it      indispensable and must not eliminate competition.
will initiate an examination of the concentration. If
the FCO decides to do this, the second phase of            Agreements that fall within the scope of the so-
the concentration review should be completed with-         called block exemptions are, as a rule, permitted.
in four months after receipt of the complete notifica-     Horizontal block exemptions cover e. g. specializa-
tion. If the FCO does not decide within one month          tion and research and development agreements. For
to initiate the second phase of its investigation, the     vertical restraints, there are several block exemptions.
merger is deemed approved.                                 One covers the most frequent restrictions in vertical
                                                           relationships (e. g. in distribution and in franchising
                                                           contracts), another covers the distribution of motor
                                                           vehicles, and a third one covers technology transfer
                                                           agreements. There are also block exemptions for
                                                           the transport and the insurance sector, all three
                                                           of which are currently undergoing legislative review.
                                                           The European Commission has issued horizontal
Doing Business in Germany Anti-Trust Law                                                                     64 | 65




and vertical guidelines in addition to the respective        the aggregate Community-wide turnover of each
block exemptions mentioned above. In practice, it will       of at least two of the companies exceeds
in most cases be difficult to claim that an agreement        C250 million, or
that is not covered by a block exemption will fall under     the combined aggregate turnover exceeds C2.5
the general exemption clause of Article 81 EC Treaty.        billion on a worldwide basis, the combined aggre-
                                                             gate turnover of all companies concerned further-
Dominant Companies                                           more exceeds C100 million in each of at least
Article 82 EC Treaty prohibits any abuse of a dominant       three Member States and the aggregate turn-
position within the Common Market or in a substantial        over of each of at least two of the companies
part thereof affecting trade between member states.          concerned exceeds C25 million in the afore-
Similar to the provisions of the GWB on dominant             mentioned three Member States and the aggre-
firms, the relevant market has to be identified. In ad-      gate Community-wide turnover of each of at
dition, it has to be determined whether a company            least two of the companies concerned exceeds
is actually dominant. In both instances the tests            C100 million.
applied under European law are, by and large, the
same as under the GWB. Typical cases of abuse              Even if a concentration fulfills these criteria, the
are: imposition of unfair purchase or selling prices       Regulation will not apply if each of the companies
or unfair trading conditions, hindrance of another         concerned achieves more than two-thirds of its
company in an unfair manner in business activities,        aggregate Community-wide turnover in one and
especially the refusal to provide a competitor access      the same Member State.
to one’s own infrastructure (so-called essential facili-
ties), and tying arrangements. In December 2008            If a concentration would significantly impede effec-
the European Commission issued a communication             tive competition in the Common Market or in a sub-
which gives guidance on the Commission’s enforce-          stantial part thereof, the European Commission will
ment priorities with respect to the application of         prohibit it. This will occur in particular if the concen-
Art. 82 EC Treaty and which focuses on abusive             tration creates or strengthens a dominant position.
exclusionary conduct and emphasizes a more eco-            Similar to the GWB, the Merger Regulation provides
nomic approach in the assessment of potentially            for a procedure in two phases: within 25 working
abusive behavior. This approach is more effects-           days after receipt of the complete notification the
based and gives a high priority to consumer welfare.       European Commission has to decide whether it
                                                           intends to initiate a closer investigation. It must, as
Merger Control                                             a rule, pass a final decision within 90 working days
The acquisition of control of one company over             after the procedure has begun.
another (“concentration”) must be notified if certain
turnover thresholds are exceeded. A notification to        Actions for Damages
the European Commission is required where:                 There is a strong tendency in the European Union to
                                                           enhance private enforcement of cartel law. In spring
  the combined aggregate worldwide turnover of             2008 the European Commission issued a so-called
  the companies involved exceeds C5 billion and            White Paper on damages actions for breach of the
EC anti-trust rules. The purpose of this initiative is to
confer more practical effectiveness to private dam-
ages actions. It is expected that the Commission
will submit its proposals for a bill in summer 2009.

In Germany, legislation facilitating private cartel en-
forcement is already in place. One example is the
joint and several liability of all companies participating
in a cartel. This means that the victim of a cartel is
free to decide whether he pursues a claim against
one or more participants – in any event he can claim
his entire damages from any of them. Also, the
claimant can base his action on a decision of an
anti-trust authority of a Member State of the Euro-
pean Union. In such so-called follow-on proceedings,
the period of limitation is extended until six months
after the final termination of the investigations of the
cartel authorities. On the other hand, there are no
US style class actions in Germany. A Commission
bill that was to be submitted in summer 2009 has
been subject to heavy criticism by member states and
has disappeared from the agenda for the time being.



Dr. Helmut Janssen, LL.M. (London)
helmut.janssen@luther-lawfirm.com
Telephone +32 (2) 6277 763

Dr. Thomas Kapp, LL.M. (UCLA)
thomas.kapp@luther-lawfirm.com
Telephone +49 (711) 9338 21145
Doing Business in Germany   66 | 67
Doing Business in Germany Competition Law                                                                    68 | 69




Competition Law

German Competition Law comprises several acts against unfair compe-
tition. Although there is no “European Act Against Unfair Competition”, in
Europe the national laws against unfair competition are largely consistent
nowadays.




The aim of competition law is to ensure the protection   reversed this deregulation process. For instance,
of free competition for the benefit of participants in   under the harmonised law any omission of informa-
commerce. In Germany, the basic rules are set out in     tion that could be essential in order to enable con-
the “Act Against Unfair Competition” (Gesetz gegen       sumers to make a decision may be considered
den unlauteren Wettbewerb, UWG). The European            misleading – such general duty to provide informa-
Law Against Unfair Competition has now been large-       tion did not previously exist under German Law.
ly harmonized by the “Unfair Commercial Practices
Directive” (EU Directive No. 2005/29/EC) which was       Sec. 3 UWG now prohibits “unfair commercial prac-
implemented into German Law by the amended               tices”, i. e. acts or omissions before, during or even
UWG with effect from December 30, 2008. Whilst           after the conclusion of a contract. The new term
the protection of consumers is the main objective of     replaces the term “unfair competition act” and covers
the reform, the UWG also explicitly seeks to protect     all kinds of commercial acts and omissions directly
competitors and the general public’s interest in un-     related to the promotion, sale or supply of products,
distorted competition.                                   including their advertising and marketing. Another
                                                         novelty is that breaches of General Terms And
In 2004 and 2008, the UWG was thoroughly revised         Conditions Law may entitle competitors to bring an
in order to modernize the German Law Against             action against the user of the respective general
Unfair Competition. One of the objectives of these       terms and conditions wherever those were used
reforms was the deregulation of markets. The             (“flying jurisdiction”). In order to assure legal certainty
comparatively restrictive Directive, however, partly     Europe-wide and a smooth functioning of the internal
market, the harmonized law therefore contains a               seen as a misrepresentation regarding the price of a
“blacklist” which defines several commercial practices        product if a low-price product is offered for sale in
considered to be automatically unfair.                        quantities insufficient to meet foreseeable demand
                                                              or, if a product is advertised with a price lower than
Sec. 3 para. 1 UWG is the basic rule which provides           the one it is actually on offer for.
that “unfair commercial practices” are prohibited,
whilst Sects. 4 to 7 UWG provide for a non-exhaus-            “Unfair influence” on a customer may also be seen
tive list of the commercial practices that would              as a “psychological coercion” which encroaches
usually be considered as being unfair and, there-             upon a customer’s free choice. As a consequence
fore, illegal. In addition, the “blacklist” defines several   of an aggressive sales approach, for instance, a
irrefutably illegal, misleading and aggressive com-           customer may feel obliged to purchase a product
mercial practices considered as being an unfair in-           which he or she might otherwise not have been
fluence on consumers.                                         interested in. This may be the case if a customer
                                                              has to enter a shop in order to receive a gift or, if
According to Sec. 8 et seq. UWG, a person or legal            a customer receives goods which he or she did not
entity in breach of the UWG may be subject to a               order. In order to restrict such situations which may
cease and desist claim as well as a damage claim              lead to psychological coercions, regulations con-
and may also incur a penalty.                                 cerning sweepstakes or competitions relating to
                                                              the disposal of products or services are very strict.
Unfair Influence on Customers                                 Unless such sweepstakes or competitions are nec-
In principle, traders are obliged to advertise their          essary, i. e. by their nature, connected to the sale of a
products and services without encroaching upon the            product or service, they shall be arranged in such a
customer’s independent judgment and free choice.              way that allows the participation of non-customers
Advertising statements regarding the quality, quantity,       without any discrimination.
origin and price of products and services shall be
true, accurate and not misleading. For instance,              As to the question whether an omission of information
superlatives such as “the best” or “the largest” may          should be regarded as being misleading, the law pro-
not be used if it cannot be shown that the advertised         vides that one shall particularly consider the relevance of
trader, product or service is significantly better or         the information for the business decision according to
larger in comparison to the competitors or their              common opinion as well as the general possibility that
products or services. Signs which may be under-               such kind of omission influences such kind of decision.
stood as indications of origin may not be used if the
products are, in fact, not produced in the respective         If products or services are offered in a way that en-
place or region. Furthermore, product information             ables an average consumer to decide that he or
may also be misleading where an allegedly „inde-              she wants to buy these products or services without
pendent“ third party opinion is referred to in adver-         any additional act or statement of the offeror, i. e. in
tisements, for example, and where such third party            case of mail orders based on catalogues or web-
is found, in fact, to not actually be acting inde-            sites, the provider is in either case obliged to provide
pendently from the advertising party. It may also be          detailed information about the product or service,
Doing Business in Germany Competition Law                                                                     70 | 71




its identity and address, terms and conditions of            petition may be restrained by an extensive distribu-
the contract, a possible right of withdrawal.                tion of free products. Plagiarism as well as taking
                                                             advantage of or being detrimental to a competitor’s
The law basically prohibits advertising via telephone        repute may also be considered as being unfair ac-
calls, automated calling systems, e-mails and faxes          cording to the UWG.
which are targeted at consumers and other market
participants who have not explicitly agreed to receive       Comparative advertising is permitted in principle.
such advertisements. An exception applies to direct          Having been restrictive in the past, German courts
advertising via e-mail where there is already an estab-      nowadays adopt a more liberal approach towards
lished customer relationship and if the customer is          comparative advertising. However, the UWG pro-
given the opportunity to reject this kind of advertising     hibits comparative advertising if it could lead to a
at any time. In case of e-mail advertising, the person or    likelihood of confusion regarding the products of
legal entity responsible for the advertising as well as a    competitors, for instance, or, if it contains criticism
valid address that the receiver can use to request their     of the products or services of a competitor.
removal from the general mailing list has to be displayed.
                                                             Violations of Other Laws as
The so-called “blacklist” mentions several commercial        “Unfair Commercial Practices”
practices considered as being an unfair influence on         The general public’s interest in undistorted competiti-
consumers and therefore being irrefutably illegal. For       on may be affected by violations of other laws. Viola-
instance, a trader may state that they have signed           tions of laws other than those dealing directly with
a code of conduct when this is not true or offer pro-        unfair commercial practices may therefore be consi-
ducts or services at a certain price without disclos-        dered as an infringement of „good ethics“ if they result
ing any grounds he may have for believing that he will       from a competitive action and have an impact on
not be able to supply these products or services at          competition. For example, a breach of the law of con-
that price for an appropriate time in appropriate            tract may constitute unfair commercial practice, par-
quantities (bait advertising). Also, a trader may not        ticularly in relation to distribution systems. Breaches
create the impression that a consumer will be pre-           of laws aimed at protecting important areas of public
vented from leaving a certain location until a contract      interest, for example laws related to public health,
is concluded.                                                could also constitute unfair commercial practices.

Unfair Restraint of Competition
The law further prohibits unfair restraints on com-          Dr. Wulff-Axel Schmidt
petition. Even if such unfair restraints can only be         wulff-axel.schmidt@luther-lawfirm.com
traced back to the superior performance of a com-            Telephone +49 (6196) 592 27078
petitor, certain acts may still constitute unfair prac-
tices if that competitor intended to constrain certain       Dr. Kay Oelschlägel
other competitors or prevent competition in general.         kay.oelschlaegel@luther-lawfirm.com
For instance, price undercutting may violate “good           Telephone +49 (40) 18067 12175
ethics” if this is done with an unfair intention. Com-
Doing Business in Germany Protection of Trademarks and Commercial Designations                                 72 | 73




Protection of Trademarks
and Commercial
Designations

The protection of trademarks and commercial designations has always been
an important measure to protect the relevant names and symbols in the
German market. However, as a result of the growing variety of goods and
services offered and the internationalization thereof, the protection of
such signs has become even more important. With regard to the level of
protection, company names that are used in the market have a similar
protection under the relevant laws as trademarks.




On a national level, trademark protection may be            Requirements for Protection
obtained with the registration of a German trade-
mark. Such protection may be extended interna-              Suitable for being registered as a trademark is a
tionally. Moreover, a Community trademark (Gemein-          name, a company name, a term, a logo, or a combi-
schaftsmarke) granting protection for the whole EU          nation of these, which identifies a company, its goods,
and a market of 500 million consumers may be                or its services. Signs that are associated with a specific
achieved by an according registration.                      manufacturer/supplier may take the form of symbols,
                                                            words, illustrations, audio signatures, color designs,
                                                            packaging or the like. Additionally, a company or a
                                                            product name that has acquired a secondary meaning
                                                            as a trademark due to its independent value can
                                                            also be eligible for trademark protection. Therefore,
trademark applications may be filed with the German           works, sound works, cinematographic works, stage
Patent and Trademark Office (Deutsches Patent- und            works etc.).
Markenamt, DPMA) for words, letters, numbers, pic-
tures, 3-dimensional-forms and even colors or sounds.         Further to the abovementioned registered trademarks
                                                              and commercial designations, trademark protection
However, protection will not be granted if trade-             may be achieved in cases where a sign has acquired
marks consist exclusively of signs or indications which       secondary meaning (Verkehrsgeltung) or from the
may serve to designate the kind, quality, quantity,           fact that a sign has notoriously become well-known
intended purpose, value, geographical origin or the           (notorische Bekanntheit). However, certain levels of
time of production of the goods or service. Moreover,         use and/or very high profile need to be achieved in
protection will be refused if said signs have become          order to gain such protection. Thus, the court prac-
customary in the current language or the established          tice has set high demands for such protection, which
practices of trade. Furthermore, a protection will not        often will be difficult to fulfill and even more difficult
be granted if the intended trademark is contrary to           to prove. Therefore, the “normal” registration of a
public policy or morality or if it is likely to deceive the   trademark is much easier to achieve.
public with respect to the nature, quality or origin of
goods or services.                                            Similar rules apply to the application and registra-
                                                              tion of a Community trademark with the Office for
In contrast to other legal systems, the DPMA does             Harmonization in the Internal Market (OHIM) in
not carry out any research regarding conflicting signs        Alicante, Spain.
of third parties. As a consequence, it is strongly re-
commended to carry out trademark research in-
cluding Community trademarks and international                Registration Proceedings
trademarks with protection in Germany and German
company names prior to the filing of a trademark              Foreigners may register trademarks on the same
application with the DPMA. Otherwise, third parties           terms as German nationals. However, applicants
with older rights may take legal action against the           having neither a domicile nor an establishment in
registration of a trademark or the use of such later          Germany must – as customary in most other juris-
signs.                                                        dictions – appoint a qualified lawyer in Germany as
                                                              its representative for filing the application.
Commercial designations, such as company names,
enjoy similar protection under German law as regis-           Applications have to be executed by using the official
tered trademarks. Although protection arises from             forms of the DPMA and must contain information on
the use of the name in the market, the filing of              the applicant, the trademark and a list of goods and
a trademark for commercial designations is highly             services for which the protection is requested for.
recommended, especially if certain names or titles            This list determines the scope of protection and
shall be used as a symbol for products or services            cannot subsequently be extended. Therefore, it is
rendered to third parties. The same applies to work           recommended to also include such goods and/or
titles (names or particular designations of printed           services which might be intended to be conducted
Doing Business in Germany Protection of Trademarks and Commercial Designations                                 74 | 75




in the near future. However, an obligation by law has       Official Fees
been stipulated for the use of the registered goods
and services within five years from the trademark           The official fees of the DPMA for the registration of
registration. For this reason, only those goods and         a national mark with protection in three classes
services should be included in the list, which are          amounts to C300.00. For each further class, an
intended to and most likely will be carried out with-       additional amount of C100.00 incurs. Furthermore,
in five years following the successful registration.        the DPMA offers an accelerated process for the
                                                            registration proceedings, which results in a short-
The DPMA and the OHIM might refuse the registra-            ened process of verifying the necessary qualifica-
tion of a trademark based only on absolute or relative      tions of the application. Said process is highly
grounds. However, the fact that a sign has acquired         recommended, but will cause additional costs
secondary meaning or has notoriously become well-           of C200.00. Hence, the official fees will amount to
known may be, both in Germany and the EC, used as           a sum of C500.00 in the case of protection for
a tool to overcome such obstacles for registration.         three classes.

In addition, oppositions may be filed by owners of          If a trademark protection within the EU (Community
similar or identical trademarks registered earlier or       Trademark) is sought, the official fees will amount
filed within three months from publication of the           to C1,050.00 for paper filings and C900.00 for
registration, possibly delaying the process of the          e-filings. As a significant cost reduction, the registra-
registration of a trademark. Contrary to German law,        tion fee claimed for earlier registrations of C850.00
where oppositions may be filed after the registration       has been omitted. The application fee also in-
and publication of such registration, a Community           cludes protection for three classes. The costs for
Trademark will only be registered after it has been         each further class amount to C150.00.
published for opposition purposes. Therefore, the
registration process may take much longer. Op-
position proceedings – which are very formal – may          Opposition Proceedings
delay the registration for several years.
                                                            Oppositions may be filed against trademark appli-
For the protection of geographical indications of           cations by owners of similar or identical trademarks
origin, applications emanating from Germany need            registered or filed earlier. In Germany, oppositions
to be filed via the DPMA – even for protection for          (regularly based on older trademarks) can be filed
all EU member states. Applications will first be            within three months from the publication of the
published to give third parties the opportunity to          trademark registration.
express concerns.
                                                            As to the procedure, an opposition against a German
                                                            trademark application needs to be filed by using
                                                            an official form from the DPMA. With this filing, no
                                                            reasoning needs to be given. However, in order to
                                                            give the case more chances of success and more
weight, it is highly recommended to give reasons for      forwarded to him, the applicant also has two months
the opposition right away instead of waiting for the      to reply to the opposition. The applicant can either
later trademark holder to give his counter-reasoning      question whether the earlier marks have been used
to the DPMA first. After such reasoning, detailed         by filing a request for proof of use, or he can file
arguments would need to be filed with the DPMA            observations and evidence in order to convince the
anyway.                                                   responsible examiner that the opposition should
                                                          fail. If the applicant files evidence and observations,
Once an opposition has been filed, the DPMA will          the opponent is again given two months to comment
inform the holder of the opposed trademark applica-       on the submissions of the applicant. After these ex-
tion, giving him at least one month in order to respond   changes the opposition is normally ready for decision
to the opposition. Afterwards, the opponent will be       by OHIM, but also another period for comments from
informed of the holder’s response, and also be gran-      each party might be granted. In addition, decisions by
ted a period of at least one month for his counter-       the Opposition Division at OHIM may be questioned
response. It is common practice to expand these time      at the Board of Appeal and appeals to the Court of
limits. Moreover, this procedure might be repeated,       First Instance and the European Court of Justice at
depending on the arguments filed by each party. Ac-       last instance are also possible. The current opposition
cording to our experience, an opposition procedure        fee of the OHIM amounts to C350.00.
will take at least half a year or even longer, until a
decision of the first instance from the DPMA is
reached. As to the costs, the official fees for each      Assignment and Licensing
opposition amount to C120.00.
                                                          Trademarks may be sold and assigned in total or
Opposition proceedings against a Community Trade-         in part of the protected goods and services. However,
mark are very similar, but again might take much          if applicable, consequences for an international reg-
longer than national proceedings. The notice of op-       istration need to be observed. There are no specific
position has to be received by the OHIM in written        formal requirements for licensing to be observed
form within the opposition period. After filing an op-    under German law.
position, the parties will be granted a period during
which parties can negotiate a settlement, the so-         However, it is generally recommended to enter cer-
called “cooling-off” period. This period is set to        tain aspects into a licence contract in order to avoid
expire two months from the notification of admissibi-     disaccord, e. g. whether the license granted shall
lity, but can be extended up to a total of 24 months.     be exclusive or non-exclusive, which goods or ser-
                                                          vices the license shall be granted for and if the
Once the cooling-off period has expired, the adver-       licence shall be territorially restricted. Usually the
sarial part of the proceedings begins. The opponent       license will be part of a commercial contract, as
is then allowed two more months to submit all the         the granting of a license will often be a condition
evidence and observations he thinks necessary to          throughout commercial negotiations.
make his case. After these two months, or once
the submitted evidence and observations have been
Doing Business in Germany Protection of Trademarks and Commercial Designations                                76 | 77




Infringements and Remedies                                   injunction under German law is usually only accepted
                                                             by courts if the applying party has had knowledge
A trademark owner may act against third parties              of the infringement for no longer than 4 – 6 weeks.
using identical or similar signs, if such use may cause      Otherwise, a lengthy regular court proceeding has
the likelihood of confusion. However, such likeli-           to be initiated.
hood of confusion is not necessary if a well known
sign is concerned.                                           A preliminary injunction will only be granted, if the
                                                             infringement of the trademark right is obvious and
Generally, in cases of infringements against trade-          highly visible. However, there is no guarantee that
marks, it is common to send a warning letter (Abmah-         a court will not rule other than the preliminary esti-
nung) to the infringing party, claiming the trademark        mate of the applicant. In such case, a prompt hearing
rights violated combined with a request to give a de-        will be summoned.
claration to cease and desist the infringing behavior
under a contractual penalty. Usually, a short time limit     Within normal court proceedings, subsequently to
(approx. 3 – 4 days) will be given to respond to such        claim for ceasing and desisting the infringing behav-
warning letter.                                              ior, the owner of the trademark is entitled to claim
                                                             damages. These include inter alia damages as well
In case the infringing party does not submit to the          as the lawyers fees according to the German lawyer’s
requested declaration within said time limit, court          fee ordinance (Rechtsanwaltsvergütungsgesetz, RVG).
proceedings can be initiated against the infringing          The applicant can, furthermore, request information
party, aiming to obtain a preliminary injunction enjoin-     about the infringing behavior (names and addresses
ing the infringing party to refrain continuing the in-       of producers, dealers, commercial purchasers and
fringing behavior. The infringing party will – after         third parties having ordered infringing goods) in order
serving of such court decision – be legally bound by         to be able to raise his concrete damages. Some
the preliminary injunction. Once the request is filed,       infringements of both, German and community
the court usually rules within a few days, assuming          trademarks, can even be criminally punished under
that no oral hearing will be appointed.                      Sects. 143 and 143a MarkenG.

Alternatively, a petition for a preliminary injunction       Thus, rights conferred by a community trademark
can be filed directly as the warning letter is not a legal   can be exhausted once goods have been correctly
requirement for such proceedings. However, as court          entered into the market of the European Community
proceedings can be expensive, it is common to                or, for German trademarks or commercial designa-
send a warning letter first to avoid that the infringer      tions, the European Economic Area or the European
accepts said injunction right away – which might             Community. The resale of such products can possi-
lead to the fact that the applicant has to bear all of       bly not be subject of a legal proceeding. Thus, it can
the court costs.                                             not generally be determined whether an infringe-
                                                             ment occurs, but rather requires a detailed inspection
Overall, the proceeding shall not take more than a           of the case.
few weeks. In addition, the right to file a preliminary
Summary

In general, trademark protection has become very
important within worldwide trade actions and the
protection of business assets. Thus, internationally
operating businesses should provide for obtaining pro-
tection in all countries where business is carried out.

If extensive protection is sought, a trademark should
be registered in all member states of the European
Union by registering a community trademark or for
non-EU-countries through an international trade-
mark. However, a German trademark can be regis-
tered cheaper and much faster. Moreover, even the
scope of protection may differ. Additionally, the scope
of the protection of a German trademark can be ex-
tended to a protection within the EU or internationally
to certain countries, gaining the advantage of the
priority date of the German trademark application.
Very often its seems advisable to file a national
application first and – after a quicker registration –
extend it internationally.

The enforcement of trademark rights can easily and
with preliminary measures be achieved in Germany.
Insofar, initial court decisions can be reached and
served within a few days.



Dr. Detlef Mäder
detlef.maeder@luther-lawfirm.com
Telephone +49 (211) 5660 25767

Anne Hausmann, LL.M. (Cape Town)
anne.hausmann@luther-lawfirm.com
Telephone +49 (221) 9937 24637
Doing Business in Germany   78 | 79
Doing Business in Germany Protection of Plant Innovations                                                       80 | 81




Protection of Plant
Innovations

Effectively protecting the results of breeding and R&D work has never been
more important. The agricultural as well as the horticultural industry is con-
stantly under pressure to safeguard the protection of their innovations. Ef-
fective protection requires a sophisticated IP strategy making use of the
various available protection systems. Plant Variety Rights form an essential
part of the IP strategy of breeders.




Plant Variety Rights                                        Entitlement to and Application for a CPVR

Plant innovations, in particular new plant varieties,       The person who bred, or discovered and developed
may be protected by applying for a Plant Variety Right      the variety or his successor in title, shall be entitled to
(“PVR”). Although a German national legal system of         apply for CPVR protection. After a recent amendment
protecting plant innovations through the granting of        of the applicable regulation, an application for a CPVR
PVR exists, it seems advisable to seek protection           may be filed by any natural or legal person, or any
for plant innovations on a European level. The Coun-        body ranking as a legal person under the law appli-
cil Regulation on Community plant variety rights            cable to that body. A former limitation with regard to
(„CPVR“) established a uniform protection system for        foreigners has been lifted in 2008.
new varieties in the entire territory of the community, a
market of 500 million customers. Under the applicable       Persons who are not domiciled or do not have a seat
Council Regulation, varieties of all botanical genera       or an establishment within the territory of the Euro-
and species, including, inter alia, hybrids between         pean Community may participate as party to pro-
genera or species, may form the object of a CPVR.           ceedings before the competent Community Plant
Variety Office (“CPVO”) only if they have designated        number of plants of the candidate variety for one or
a procedural representative who is domiciled or has         more growing periods. The DUS test is performed by
his seat or an establishment within the territory of        one of the co-operating testing offices of the CPVO.
the European Community.

The application for a CPVR may be filed at CPVO             Costs for the Application
directly or at a national office, in Germany the Bun-
dessortenamt, Hannover. The application must be             A number of individual fees will be charged by the
accompanied by a detailed description of the sup-           CPVO during the process of examining the applica-
posedly new variety and contain a proposal for a            tion for a CPVR. The overall fees have just recently
variety denomination.                                       been increased by the CPVO. An application fee of
                                                            C900 applies. Depending on the species, the costs
                                                            for the technical examination range from C1,200 to
Examination of the Application –                            C2,500 for each year of DUS testing. Upon the grant-
Granting of CPVR                                            ing of a CPVR an annual fee of now C300 applies.

The CPVO will conduct a formal, a substantive and
a technical examination of the application. In the          Objections
course of the formal examination, the CPVO verifies
that the formal conditions of filing an application         Anybody may lodge an objection to the grant of a
are fulfilled and that the application fee has been paid.   CPVR. It can be based on the grounds that the DUS
                                                            conditions or the novelty requirement is not complied
During the substantive examination it is ascertained        with or that the applicant is not entitled to a CPVR.
that the object of the application is a variety and that    Also the objection may be raised against the variety
the variety is new, i.e. has not been commercialized        denomination. Objections may only be filed until the
prior than one year before the application within the       granting of a CPVR or, in case of objections against
territory of the European Community or prior than           the variety denomination, within three months of the
four years outside said territory before the date of        publication of the proposal.
application. In addition it is verified that the appli-
cant has appointed a representative when this is
required and whether the proposed variety denomi-           Appeals against decisions of the CPVO
nation is suitable.
                                                            Against the majority of the decisions of the CPVO,
The last and most important examination mainly              an appeal may be lodged before the office’s own
consists of the so-called DUS Test, i. e. the test          Board of Appeal, an independent body established
whether or not the variety is Distinct, Uniform and         within the CPVO. Any natural or legal person may
Stable. These essential conditions must be fulfilled        appeal against a decision addressed to him. In ad-
by any plant innovation to qualify for CPVR protec-         dition, appeals may be lodged by third parties, di-
tion. The test is performed by growing a sufficient         rectly and individually concerned by the decision in
Doing Business in Germany Protection of Plant Innovations                                                   82 | 83




question. For the procedures before the CPVO and            (“farmers privilege”) or the breeding of new varieties
the appeal proceedings, a set of rules is provided for      using material of a protected variety (“breeders’ ex-
in the applicable regulations. Decisions of the Board       emption”). Also, the concept of exhaustion applies.
of Appeal may be further appealed against before the
Court of First Instance of the European Communities         With regard to the remedies in case of infringements,
(“CFI”). A decision by the CFI may then be appealed         reference can be made to our explanations in
only on grounds of law to the Court of Justice of the       the previous chapter Protection of Trademarks and
European Communities.                                       Commercial Designations (page 79) which apply
                                                            mutatis mutandis.

Assignment and Licensing
                                                            Dr. Wulff-Axel Schmidt
A Community plant variety right may be the object of        wulff-axel.schmidt@luther-lawfirm.com
a transfer to one or more successors in title. It may       Telephone +49 (6196) 592 27078
also form in full or in part the subject of contractually
granted exploitation rights. Exploitation rights may be     Thomas Leidereiter, LL.M. (University of Wales)
exclusive or non-exclusive. It is generally recommen-       thomas.leidereiter@luther-lawfirm.com
ded to enter into a formal licence contract to avoid        Telephone +49 (40) 18067 12944
any misunderstandings as to the scope and content
of the licence granted. The holder of a CPVR may
invoke the rights conferred by the CPVR against a
licensee who contravenes any of the conditions or
limitations attached to his exploitation right.



The scope of protection –
Infringement and Remedies

The following acts in respect of variety constituents
or harvested material of the protected variety require
the authorization of the holder of the CPVR: produc-
tion or reproduction (multiplication); conditioning for
the purpose of propagation; offering for sale; selling or
marketing; exporting from or importing to the Euro-
pean Community or stocking for any of the aforesaid
purposes. The protection also covers so-called es-
sentially derived varieties (e. g. mutations of a pro-
tected variety). There are limitations as to the use of
variety constituents of a protected variety by farmers
Doing Business in Germany Copyright Law                                                                     84 | 85




Copyright Law

As in most European jurisdictions, copyright in Germany is intrinsically
linked to the creator of the work. It is therefore not possible to fully assign
copyright. But the German Copyright Act provides for some specifics,
particularly as copyright and neighboring rights have not been comprehen-
sively harmonized within the European Union. Therefore, it is worth taking
a closer look at some of the issues relating to copyright law in Germany.




Requirements for Protection                                Term of Protection

Personal intellectual creations such as literary, scien-   The term of protection (Schutzdauer) of a work pro-
tific and artistic works are protected under Sec. 2        tected by German copyright is the lifetime of the
UrhG. The scope of copyright protection afforded           author plus 70 years, Sec. 64 UrhG. Where a work
to different types of works is basically identical. The    has been created by several co-authors, the term of
degree of creativity and originality required by Ger-      protection will be the lifetime of the longest surviving
man law is rather low. Even instruction manuals have       co-author plus 70 years. Protection for neighboring
been found worth protecting by German courts.              rights differs from 25 years from publication for scien-
                                                           tific editions to 50 years from publication of a sound
Artistic performances are protected as well. The per-      recording. Recent EU proposals have argued for an
formers of such works are granted so-called neigh-         extension of the term of protection for performers and
boring rights. Such rights are given even to authors       sound recordings from 50 to 95 years.
of non-creative photographs or non-creative films,
Sec. 72 UrhG.
Ownership                                                   Furthermore, moral rights (Urheberpersönlichkeits-
                                                            rechte) protect the ideal ties between author and
According to Sec. 7 UrhG, the author is the “owner”         work. This means that if the exploiter, for example,
of his work. Such legal ownership can only be               wants to publish a work, he will need the author’s
transferred by inheritance. Copyright cannot be fully       prior consent according to Sec. 12 UrhG as pub-
assigned (the same applies for some neighboring             lishing would affect the author’s moral right. How-
rights). Instead, the author may grant an exclusive         ever, exploitation can be effected if certain rights can
or non-exclusive license for the exploitation of his or     be waived, although it is important to remember that
her work. If the author creates a work as part of           core moral rights (like the right to interfere in case of
his duties to his employer, he or she still remains the     deformation, Sec. 14 UrhG), cannot be waived.
owner of the copyright: There is no “work-for-hire”-
principle in German copyright law. An employed com-
puter programmer, for example, will formally obtain         Limitations to Copyright
ownership of all programs he or she has created.
Sec. 69b UrhG, however, states that the employer will       German copyright law lacks a general “Fair Use”
be entitled to exploit the software unless it is agreed     clause, allowing free use of protected copyright or
otherwise between the parties. The same applies for         neighboring rights by third parties under certain cir-
authors involved in film productions, Sec. 89 UrhG.         cumstances. Instead, there are specific exemptions
Notwithstanding this, it is recommended that the            (Schranken) which regulate the free use and availabil-
terms of the respective employment agreement spe-           ity of legal licenses in respect of a certain copyright.
cifically state that exclusive rights of use and exploi-    For instance, public libraries and other public institu-
tation to works created during the employment are           tions may exploit the author’s work in certain ways
granted to the employer. If works are created by se-        under the terms of a legal license. Fees payable under
veral co-authors (Miturheber), Sec. 8 para. 2 UrhG          the terms of such license are collected and distributed
provides for additional requirements.                       by certain state supervised collecting societies (Ver-
                                                            wertungsgesellschaften) such as GEMA or VG Wort.
                                                            Use granted “for free” is limited to specific instances
Exclusive Rights and Moral Rights                           such as where copies of works are used in court
                                                            or administrative proceedings, where works are
Germany copyright law grants the author certain             reproduced as part of an educational broadcast,
exclusive rights (Ausschließlichkeitsrechte). He or she     citations, etc.
may, for instance, exclusively reproduce, distribute,
exhibit or broadcast his or her work, make it available
to the public or perform it publically. Unless copyright    Licensing
limitations (Schranken) explicitly allow third parties to
use the protected works, the author has to give his         Basically speaking, there are no formal requirements
explicit consent to each form of exploitation.              for licensing under German copyright law. However,
                                                            the licensee can only acquire rights the licensor is
                                                            entitled to grant. A license may be granted exclusively
Doing Business in Germany Copyright Law                                                                         86 | 87




or non-exclusively, and may furthermore be contrac-          or equal to 50 % of what is considered to be equitable.
tually restricted with respect to time, content or terri-    If the exploitation of the author’s or performing artist’s
tory. In the absence of such contractual provisions,         work is mainly on German territory, the abovemen-
exploitation rights are generally limited by the intention   tioned Sects. 32 and 32a UrhG may not be excluded
of the contracting parties (Zweckübertragungsgrund-          even in cross-border agreements, Sec. 32b UrhG.
satz, Sec. 31 para 5 UrhG). Therefore, it is important       This is different for contracts concerning unknown
to prepare clear and unambiguous agreements which            future types of exploitation and claims for equitable
specify which forms of use will be permitted under           remuneration deriving from such type of use. A form
the terms of the license.                                    of use will be regarded as known, if it is technically
                                                             known and commercially exploitable (the internet is
                                                             regarded as a known form of use, for example, since
Remuneration                                                 1995). For new forms of use, authors and performing
                                                             artists are granted certain revocation rights which
Authors and performers are given an equitable right          need to be executed within three months after the
to remuneration (angemessene Vergütung) for every            licensee informed the author about the intended
use of their work, cf. Sects. 32, 32a, 79 UrhG. Buy-         exploitation. If the parties agree on equitable remu-
out-contracts, however, do not generally provide for         neration for the exploitation in the new form of use,
equitable remuneration. Therefore, it is important to        revocation rights are suspended.
consider whether the amount paid for a “total buy-
out” can be viewed as equitable throughout the
whole period of use.                                         Copyright Infringements and Remedies

The law does not fix remuneration terms, and the so-         According to Sects. 97, 98 UrhG, the infringer will be
called common rules of remuneration (gemeinsame              held directly liable for illegal exploitation of exclusive
Vergütungsregeln, Sects. 36, 36a UrhG) which were            rights or violation of moral rights. This may lead to
intended to set a remuneration framework for each            civil law claims for injunctions, damages, recall or
relevant branch, are still rather uncommon. The same         restitution of infringing goods. Moreover, German
applies for collective wage agreements (Tarifverträ-         courts have held that persons contributing to an
ge). Where there is such lack of collective regulation,      infringement (by action or omission) may be found
contracts may be individually reviewed and assessed          to be vicariously liable.
according to “honest practices” in the relevant branch
of industry, Sec. 32 para. 2 UrhG.                           Compensation for actual damages can be obtained
                                                             in a number of ways. The right holder may sue the
Where earnings received as a result of the exploitation      infringer for lost profits and damages, claim for da-
of the work are obviously disproportionate to the            mages in the amount of the required license (Lizenz-
author’s remuneration (auffälliges Missverhältnis), the      analogie) or claim for the infringer’s profits received
judge may review the remuneration conditions. Earn-          as a result of the exploitation. Compensation for im-
ings will be considered to be disproportionate to the        material damage, on the other hand, will only arise
remuneration paid if the remuneration paid is less than      in the event of a severe and substantial infringement
of a moral right. Despite the fact that the UrhG lacks     cent case law before requesting an injunction or
provisions which would enable claims to be brought         filing an action.
in respect of specific information held, such claims
have been successful in the German courts for a
number of years. Sec. 101 UrhG, implemented in             Dr. Michael Rath
2008, provides for additional rights against third         michael.rath@luther-lawfirm.com
parties who possess infringing copies, accepted or         Telephone +49 (221) 9937 25745
provided infringing services, or were involved in any
of these acts. However, according to the principle         Dr. Stefan Müller
of proportionality, such right will only be enforced       stefan.mueller@luther-lawfirm.com
where the infringement can be shown to be beyond           Telephone +49 (89) 23714 15309
reasonable doubt.



Copyright Enforcement

As a first reaction to a potential copyright infringe-
ment, the entitled right holder should initiate a warn-
ing letter (Abmahnung), demanding the infringer sign
a cease and desist statement (Unterlassungserklä-
rung), Sec. 97 UrhG. Attorney fees for the warning
letter can be claimed if claims for infringements are
justified, Sec. 97a UrhG. There is a reimbursement
limit of C100.00 for simple cases with minor in-
fringements if consumers are involved.

The entitled right holder may also file for a prelimina-
ry injunction (einstweilige Verfügung). However, an in-
junction should only be filed before sending a warning
letter if damages are not considered to be a sufficient
remedy and a preliminary injunction is needed im-
mediately. In a main action (Hauptsacheverfahren),
the entitled right holder can request a permanent
restraint. In broadcasting or internet matters, the
claimant is allowed to chose between several courts
in which it could bring its claim. Some federal states
have established specialized courts which deal with
copyright matters. However, as jurisprudence may
differ, it is advisable to thoroughly scrutinise the re-
Doing Business in Germany   88 | 89
Doing Business in Germany Distribution Law                                                                    90 | 91




Distribution Law

Control and influence on the one hand as well as distribution costs and
the economic risks on the other are basic criteria for finding the ideal dis-
tribution channel. The most important types of distribution intermediaries
in Germany are commercial agents, distributors and the use of franchisees.
Since there is no special distributor and franchising law – like in almost
all other European countries – the German Commercial Code as well as
the Act of Insurance Contracts are the most important legal sources to be
considered to establish an effective distribution business in Germany.




Introduction                                                facturer has no fixed costs so there should be no
                                                            risks or problems with the profitability of the distribu-
German law offers a variety of possibilities and legal      tion, but this means the loss of almost any influence
vehicles to a foreign manufacturer or service provider      on the handling of the distribution and the positioning
who wishes to distribute its products in Germany.           of the brand. This lack of an effective coordination
The manufacturer may establish its own distribution         may damage the value of a brand and impair
company, which gives it the maximum influence on            the manufacturer’s business. The manufacturer must
the behaviour of “its” distributor, e. g. pricing, selec-   therefore balance control and influence on the dis-
tion criteria, service levels, sales personnel etc. in      tribution of its products, against participation in dis-
the foreign market. On the other hand, this entails         tribution costs and economic risks, when deciding
not only considerable expenses, but also requires           which distribution channel ideally fits its purposes.
extensive organisation and control. Another option
is the sale of goods through independent traders            In order to avoid these extremes, small to medium-
where there is a mere buyer/seller relationship (im-        sized manufacturing companies in particular tend to
porters, wholesaler, retailers). In this case, the manu-    engage independent sales intermediaries who are
still subject to a certain degree of control. These       of this, the commercial agent’s remuneration consists
relationships may be established as exclusive rela-       of either a commission or a fixed amount (or a com-
tionships. Eventually, the distribution structure that    bination thereof), whilst the distributor’s remunera-
meets the best objectives of a foreign company            tion usually comprises the profit it achieves as a result
that wants to successfully enter the German market        of the difference between the original purchase price
may not lose sight of tax issues.                         and the final sale price, i. e. the original purchase
                                                          price will often reflect discounts and rebates on
The most important types of distribution intermedi-       the list price of a product which are granted to an
aries in Germany are commercial agents (Han-              agent by the manufacturer. Moreover, in contrast to
delsvertreter) and distributors (Händler). The use of     a relationship with a distributor, the fiduciary duties
franchisees and commission agents is also quite           owed by a commercial agent to its principal are
common. In general, foreign suppliers are not sub-        more extensive. As a result the principal has more
ject to specific regulations with regard to their dis-    influence over the behaviour of the commercial
tribution channel. However, if they choose to not rely    agent in the market and the commercial agent is
on a direct distribution but on the aforementioned        supposed to be more dependant on its principal for
independent sales intermediaries, a variety of man-       certain protection.
datory rules have to be considered. German law
provides regulations for commercial agents and com-       The franchisee distinguishes from a commercial
missionaires in Sects. 84 – 92c respectively Sects.       agent by selling goods or offering services in its
383 – 403 of the German Commercial Code (Han-             own name and for its own account like a distributor.
delsgesetzbuch, HGB). In addition to this, the law        In contrast to a distributor, however, the franchisee
on commercial agents has been addressed and               is far more integrated into the organisational and
harmonised in the European Member States based            advertising system provided by the franchisor since
on an EU Directive, and there are special regulations     it is entitled – and also obliged – to use the brand,
for commercial agents who act as insurance agents         selling and production techniques developed by the
in Sects. 59 – 68 of the Act on Insurance Contracts       franchisor. This means that this relationship is typically
(Versicherungsvertragsgesetz, VVG). In spite of the       subject to a detailed contractual arrangement.
practical importance, Germany and almost all other
European countries still lack codification of distribu-   A commission agent sells goods in its own name,
tor and franchising law.                                  but for the account of the principal. Commissionaire
                                                          agreements are not very widespread but are used
The main difference between commercial agents and         where the intermediary has a strong position in a
distributors is that commercial agents are only inter-    narrow market, e. g. in the financing sector, stock
mediates in transactions between the manufacturer         exchanges etc. They sometimes are used in order
and its customers concluded in the manufacturer’s         to optimise the tax structuring on intra-group supply
name and for its account, whereas a distributor           chain management arrangements.
purchases the contracting partner’s products in a
long-term business relationship and resells them in       As a very rough guideline, one could say that a com-
its own name and for its own account. As a result         mercial agent provides for the highest degree of con-
Doing Business in Germany Distribution Law                                                                   92 | 93




trol by the principal, followed by the commissionaire      The extent and limits of a commercial agent’s acti-
and then the franchisee. The least degree of control       vities largely depend on the contractual agreement.
is provided by a distributor arrangement, although
this depends upon whether exclusive or non-exclusive       In the absence of an explicit contractual agreement
distribution is being considered. The degree of con-       that provides otherwise, German courts tend to ac-
trol is mirrored by the business risks assumed (e. g.      cept that an implied undertaking is given by the
in relation to the keeping and financing of inventories,   commercial agent not to represent competing man-
after-sales obligations, obtaining of permits for the      ufacturers during the term of the agency agreement.
relevant products etc.) and – consequently – the profit    However, this is not a post-contractual non-com-
margins typically to be granted to the intermediaries      pete restriction which would require not only explicit
for the different distribution channels.                   written agreement but would also be restricted to a
                                                           maximum duration of two years starting on the date
                                                           on which the contract was terminated. To be valid
Commercial Agency                                          such post-contractual non-compete restriction also
                                                           needs to vest the commercial agent with a claim for
Conclusion of Contract                                     a reasonable compensation during the period in
As a general rule, agency agreements do not need           which competition is restricted.
to be in writing and can therefore be concluded
orally or even tacitly. However, the HGB provides          As a general principle, the commercial agent is ob-
two exceptions. First, a del credere agreement, un-        liged to obey the instructions of its principal. This
der which the commercial agent guarantees the fulfil-      applies to all respects of the distribution and allows
ment of the customer’s obligations resulting from          the principal to e. g. fix the resale prices or any other
a transaction, must be concluded in writing (Sec.          terms to be agreed with the customers. Restrictions
86b HGB). Second, a post-contractual non-compe-            on this principle arise, as a general rule of thumb, if
tition undertaking is only binding when in written         the parties have chosen the contractual vehicle of
form, cf. Sec. 90a HGB. Notwithstanding these re-          agency to circumvent the rules of cartel law. Further
quirements, a commercial agent may also claim that         care has to be taken that the commercial agent’s
a written document containing the oral agreements          independence is not impermissibly impaired. Other-
and signed by the principal has to be established          wise the commercial agent may be regarded as an
anyway, Sec. 85 HGB.                                       employee of the principal and, as a result, special
                                                           labor law regulations will apply.
Contractual Obligations of Commercial Agent
The main obligation of the commercial agent is to          As an option, del credere agreements and com-
seek to arrange the conclusion of transactions for         mitments to collect customer receivables can be
the principal on an ongoing basis. Not only is it the      agreed. In particular, the conclusion of collection
responsibility of the commercial agent to maintain         agreements often makes sense in cross-border
and increase the business with existing customers,         agency agreements. The commercial agent residing
but also to acquire new customers for the products         within the relevant market is generally better posi-
of the principal and to regularly give reports thereon.    tioned in this regard than the principal residing
abroad who is not necessarily familiar with local           but which are only due at the end of said agreement
law and customs like payment habits. Besides                (so-called overhang commissions) or when the trans-
these, some further duties, which are not provided          action concluded or arranged by the agent consists of
by the HGB, can often be agreed.                            a long-term framework agreement with the customer
                                                            which survives the duration of the agency agreement.
Contractual Obligations of the Principal
The German Commercial Code sets out a number                In addition to the obligation to remunerate the com-
of obligations with which the principal is required to      mercial agent for its activities, the principal is com-
comply where a relationship has been established            mitted to provide all necessary information to its
with a commercial agent. The main obligation is to          commercial agent. The importance of fiduciary duties
remunerate the commercial agent for the successful          also should not be underestimated. The principal
arrangement or conclusion of transactions. Remu-            has to support the fulfilment of the commercial agent’s
neration may consist of either a commission, being          obligations and has to refrain from doing anything
a success fee, a fixed remuneration or a combination        that might conflict with the commercial agent’s in-
thereof (a so-called guaranteed commission). Unless         terests, to a reasonable extent.
explicitly agreed otherwise, the commission is only
to be paid if a contract with a customer is eventual-       Tax problems regarding the commission to be paid
ly concluded and if the customer under the relevant         should always be considered in detail when an affili-
contract pays the purchase price. If the commercial         ated company of the principal performs the distribu-
agent is granted a guaranteed contractual territory         tion. In that case, the “arm’s length” doctrine requires
(Bezirksvertretung), the commission is due irrespec-        special tailoring for the relevant conditions.
tive of whether the contract with the customer was
actually concluded or arranged by the agent or not.         Ending the Contractual Relationship
It is in the principal’s interest to avoid this by way of   A contractual relationship which is entered into for
the relevant provisions in an agency contract. Where        a specific period ends upon expiry of the period.
there is a fixed commission, the commercial agent           An agreement of indefinite duration will usually be
is promised a minimum commission irrespective of            terminated following expiry of a statutory notice –
its business results. Since the principal here incurs       this will be based on the length of time which the
costs, irrespective of whether the commercial agent         agreement has been in force. The period ranges
is successful or not, it is more common to agree upon       from one month in the first year of the contract to a
a commission which depends on concrete business             maximum of six months from the fifth year onwards.
results. A guaranteed or fixed commission however           It may be extended by contractual agreement, but
may be suitable for a period during which business          not shortened. If the notice period is extended,
relations are being built up in new sales territories,      the agreement cannot provide that the notice pe-
for example.                                                riod for the commercial agent shall be longer than
                                                            that for the principal. It is also possible to enter
Special problems can arise regarding commissions            into a cancellation agreement, to which no notice
which are based on sales that have been arranged            period applies.
during the effective period of the agency agreement
Doing Business in Germany Distribution Law                                                                     94 | 95




The contractual relationship may also be terminated         the recurrent customers that were acquired, in-
for good cause at any time without observing a notice       tensified or reactivated by it. The calculation of the
period. In this case, it is crucial that the terminating    compensation is often very difficult. Furthermore,
party cannot reasonably be expected to continue             it is important to consider if there are any special
the contractual relationship until the end of the           circumstances which may reduce the claim in
aforementioned period. Typical examples of a situ-          good faith – here, in particular, the „bandwagon
ation where the relationship may be terminated for          effect of the brand“ is relevant. The claim is, how-
good cause would include the commercial agent               ever, limited and may not exceed the average
representing a competing company or the principal           annual commission based on the last five years of
repeatedly breaching its obligation to pay commissi-        the commercial agent’s activities. In practice, this
on. If the contractual relationship is terminated validly   cap usually determines the amount of the compen-
for good cause by the principal, because of a breach        sation claim to be paid.
of contract which is the responsibility of the agent,
the commercial agent will usually lose any claim it         Choice of Governing Law
might have to compensation (cf. below).                     If the commercial agent and the principal reside in
                                                            different countries, it is advisable for both parties to
Compensation Claims                                         agree on the law governing the agreement and the
The commercial agent is entitled to compensation            choice of forum in advance. Otherwise it is usually
following termination of the contractual relationship       the national law of the commercial agent’s seat or
in respect of recurrent new customers acquired by           headquarters which will apply.
it during the term of the contract, Sec. 89b HGB.
This also applies to those recurrent customers              Certain limits are, however, imposed on the choice of
with whom the agent has significantly developed             the applicable law. As with most other national laws,
an existing customer relationship. The purpose of           German law provides a number of regulations which
this provision is to remunerate the commercial agent        apply to contracts irrespective of the law chosen.
for the customer base which it has acquired for             This principle has been emphasised by a recent rul-
the benefit of the principal and to the extent that         ing of the European Court of Justice and restricts the
it is of lasting value to the latter. The claim for         effects of a choice of non-EU-laws. In particular, rules
compensation cannot be waived by the agent or               relating to the protection of the agent concerning, for
otherwise be contractually derogated, and is only           example, the commercial agent’s claim to remuner-
excluded in limited circumstances in particular if          ation or the claim for compensation along with the
the commercial agent terminated the agreement               minimum notice periods for termination all have to be
itself, other than for good cause, or if the principal      considered since these have now been harmonised
terminated it for good cause within the responsibility      throughout the EU.
of the agent.
                                                            A different approach is possible if the commercial
In such case, the commercial agent is entitled to           agent performs its activities solely outside the territory
receive as compensation such commissions that               of the European Union or the European Economic
he would have earned from future transactions with          Area. In this case, Sec. 92c HGB allows derogation
from mandatory regulations, e. g. the compensation            Distribution systems between non-competing com-
claims, shorter notice periods etc.                           panies are widely covered by the EU-Block Exemption
                                                              Regulation for Vertical Restraints (Vertikal-Gruppen-
                                                              freistellungsverordnung), which applies to products
Distributors                                                  and services in all industries except for motor vehicle
                                                              distribution and technology transfer, which are gov-
Distribution Agreement                                        erned by own special Block Exemption Regulations.
The distribution contract is defined as a framework           If the share of the supplier (for exclusive purchase
agreement under which the distributor is obliged to           agreements: of the buyer) in the relevant market does
sell the manufacturer’s goods in its own name and             not exceed 30 %, most of the vertical restraints of
for its own account, thereby integrated into the sales        competition are exempted by law from the general
organisation of the manufacturer. Again, such agree-          prohibition of restraints of trade. Some particularly
ment can be concluded informally, i. e. orally or tacitly.    restrictive clauses, however, are “blacklisted” and do
Compared to a commercial agent, the distributor is            not benefit from said exemption (e. g. minimum or
usually less restrained by instructions of the principal      fixed resale price maintenance, granting of exces-
but, on the other hand, he generally takes over more          sive territorial protection and certain other restraints
obligations i. e. maintaining a warehouse, a stock of         of inter-brand or intra-brand competition). Non-com-
spare parts or providing after-sales services.                petition clauses, which also include exclusive pur-
                                                              chasing agreements, may not exceed five years
Alongside rights to remuneration, which are typically         duration. Agreements that are not covered by the
granted by way of a dealer’s margin/dealer’s discount,        Block Exemption (e. g. because the market share
the contractual obligations of the principal are com-         threshold is exceeded) but are also not „blacklisted“
parable to those of the principal and a commercial            may still benefit from exemption, which needs, how-
agent where the distributor is equivalently integrated        ever, to be established for each individual case.
into the sales organisation of the principal.
                                                              German competition law, which applies as well to
A territorial protection or exclusivity clause is often in-   cases that are purely domestic, has been harmo-
cluded in distribution agreements, providing that only        nised with the European scheme recently. As a result,
the distributor may sell the manufacturer’s products          German competition law is now less restrictive than
in the contractual territory. Since such clauses prevent      in the past and the parties have more freedom in
a manufacturer from appointing other distributors in          forming their distribution contracts, e. g. on recom-
a certain territory or from concluding transactions           mended retail prices or most preferred customer
directly and therefore may impair competition, they           clauses.
often require exemption, regularly under European
competition law. Even if the parties agree on an ex-          At the time of publishing this Guide, the European
clusivity clause, it is not unusual for a manufacturer        Commission has not yet revealed in which way it will
to reserve the right to supply certain major customers        draft possible new regulations governing distribution
with whom business relations already existed before           systems. There are several options, i.e. also to extend
concluding the distribution agreement.                        the existing Block Exemptions beyond their expiry
Doing Business in Germany Distribution Law                                                                  96 | 97




date of May 31, 2010 which will be clarified in due       decisive question here is whether the distributor is
course.                                                   contractually obliged to disclose his customer base
                                                          to the principal.
Ending the Contractual Relationship
A distribution agreement concluded for a specific         The principles for the calculation of the compensa-
period ends upon expiry of the specified period.          tion are in most parts comparable with those appli-
An agreement not limited by time can be ended by          cable to a commercial agency agreement. However,
termination for good cause at any time, without           there is a difference concerning the basis of calcu-
observing a notice period. As a result of the lack of     lation. The claim for compensation of a commer-
codification of the law of distributorship, problems      cial agent is based on its commission. The dealer’s
often arise regarding the question of which noti-         margin, by contrast, also contains remuneration for
ce period applies when there is no good cause for         activities which are usually not taken over by a com-
the termination. German courts show a tendency            mercial agent, e. g. after-sales, financing of invento-
to decide that the period of notice for a distributor     ries etc. This part of the dealer’s margin does not have
contract needs to be longer than the one for an agen-     to be compensated for, i. e. the dealer’s margin has to
cy contract, because the distributor is often forced      be reduced to the level of an agent’s commission for
to undertake relatively high investments which would      the purpose of calculating the compensation claim.
be devalued by the possibility of a short notice pe-
riod. Therefore, a minimum notice period for termi-       For the calculation of the compensation the problem
nation of one year is considered reasonable in most       of the “bandwagon effect of the brand” is even more
cases (exclusive distributorship). Longer periods         acute than in an agency agreement. The success of
may be required depending on the industry and the         a product in the market does not solely depend on
duration of the contractual relationship. Two years       the dealer’s selling skills and efforts but also on the
may be required, for example, for the distribution of     customer’s general experience with products of the
motor vehicles based on the relevant EU Block Ex-         relevant brand and on centrally controlled advertis-
emption Regulation.                                       ing campaigns of the principal. This may result in a
                                                          mitigation of the compensation claims. In any case,
Claim for Compensation and Repurchase of                  if the distributor was committed to keep a minimum
Delivered Products                                        of products in stock during the term of the contract,
When ending a distribution agreement the key issue        the principal is obliged to repurchase the remaining
is whether, as with commercial agents, a distributor      goods in stock after the end of the contract.
can claim compensation in respect of the recurrent
customers it acquired during the term of the agree-       Choice of Law
ment. German courts have generally held this to be        Similar questions apply here as already pointed out
the case if the status of the distributor is equivalent   with regard to the commercial agent. There are, how-
to the relationship between a commercial agent and        ever, further uncertainties since the law of distributor-
its principal. Thereby, no claim for compensation         ship is not codified in Germany.
exists if the contractual relationship does not ex-
ceed a mere buyer/seller relationship. In practice, the
Franchise Agreements

Franchising is a contractual method for marketing
and distributing the goods and services of a com-
pany through a dedicated or restricted network of
distributors. Ideally, it is a contractual relationship
between a principal with a proven business system
and an ambitious “independent” distributor willing
to follow its system. It is most successful where
homogenous goods or services can be offered in
large quantities under a joint brand that penetrates
the consumer consciousness. The franchisee con-
stitutes an independent entity even if it appears to be
part of the franchisor and the same legal principles
are applicable as with commission agents and dis-
tributors. Because of this, it is the prevailing opin-
ion that under German law a franchisee may claim
compensation similar to that of a commercial agent
or a distributor after the end of the contractual
relationship – German courts, however, have not
finally decided on this matter.

The aforementioned Block Exemption Regulation for
vertical relationships also governs franchise agree-
ments in terms of anti-trust law. There remain, how-
ever, a number of issues of concern under this new
regulation including exclusivity and non-competition
clauses.



Volker Steimle
volker.steimle@luther-lawfirm.com
Telephone +49 (221) 9937 25769

Guido Dornieden
guido.dornieden@luther-lawfirm.com
Telephone +49 (221) 9937 14210
Doing Business in Germany   98 | 99
Doing Business in Germany Labor Law                                                                  100 | 101




Labor Law

Important parts of German labor law are defined by the judgment of the
Federal Labor Court rather than by statutes. This “case law” concerns
not only the validity of contractual provisions but also the relations with
the trade unions or the works council and the complex area of a trans-
fer of undertaking. Therefore, the knowledge of current judgments is as
crucial for compliance in this area of law as the knowledge of important
employment protection acts.




Industrial Relations                                    Labor relations operate within a legal framework
                                                        covered, for the most part, by the German Civil Code
In Germany, there are two national employer organi-     and several employee protection laws. Collective bar-
zations, the Confederation of German Employers          gaining is carried out on a national or industry-wide
(Bundesvereinigung der Deutschen Arbeitgeberver-        level as well as on a regional or local level. Said
bände, BDA) which deals with social policies, and the   agreements apply only to those employers and
Federation of German Industry (Bundesverband der        employees who are members of the respective em-
Deutschen Industrie, BDI), which deals with economic    ployer organisation or trade union, unless the agree-
and commercial affairs.                                 ment is declared to be generally binding by the
                                                        Federal Department for Labor and Social Affairs.
The German Trade Union Federation (Deutscher Ge-        Some 460 collective bargaining agreements, out
werkschaftsbund, DGB) is the major union federation     of a total of 64,300, are currently declared to be
with eight member unions covering workers in all        generally binding. The climate of labor relations in
major industries. The biggest single union is ver.di    Germany is generally calm and stable, with a high
with over 2.3 million members. Ver.di is a combina-     degree of cooperation existing between manage-
tion of five formerly independent unions, mainly re-    ment and trade unions.
presenting white-collar employees.
Works Councils and Co-Determination                        prior to August 10, 1994 and not family-owned, must
                                                           allow employees to elect one third of the members
Works councils, respectively committees of employee        on the supervisory board.
representatives, (Betriebsräte) must be formed in all
companies with five or more employees, upon the            The Co-determination Act 1976 requires that all
request of the employees. Members are elected              companies with more than 2,000 employees must
for four years and need not be union members.              give employees equal representation with share-
                                                           holders on the supervisory board. Employee repre-
The rights of the works council, as set forth in the       sentatives must include at least one management
Works Constitution Act (Betriebsverfassungsgesetz,         employee representative. The chairman (usually a
BetrVG), range from information rights to co-determi-      representative of the shareholders) has the casting
nation rights in relation to organisational, social and    vote in the event of a tie.
economic matters. In relation to social matters, the
employer is obligated to negotiate rules with the          Co-determination in a so-called “Societas Europaea”
works council on the allocation of working hours, va-      (SE) is covered by the Act regarding the Employee’s
cation schedules, grievances and safety and welfare        Participation in a European Company (SE-Beteili-
matters. The works council must be informed prior          gungsgesetz, SEBG). Co-determination after trans-
to the dismissal of any employee. The employer and         national mergers is covered by the European Directive
the works council must, under certain circumstances,       of Mergers (Directive 2005/56/EG) and the German
negotiate a reconciliation of interests (Interessenaus-    Act transacting the Provisions concerning Co-deter-
gleich) and a social compensation plan (Sozialplan)        mination after Transnational Mergers (MgVG). Both
in the case of mass redundancies or major restruc-         processes are identical in many ways. Representa-
turing, in order to compensate employees for the           tives of the employees and the involved companies
actual and financial disadvantages suffered as a re-       are initially required to arrange co-determination in a
sult of the restructuring.                                 respective agreement; however, obligatory standards
                                                           of process, form and content may be slightly different.
Co-determination was originally introduced in the iron,    If no agreement can be reached within a six or twelve
steel and coal industries in 1951 and provides for re-     month period, the co-determination process is set
presentation of workers on the supervisory board of        in law also bearing in mind the existing complexity
certain corporations. The most important co-determi-       of co-determination in the companies involved. The
nation laws are the Act on One-Third-Participation         rights of the works council are still set out under
(Drittelbeteiligungsgesetz, DrittelbG) and the Co-deter-   national law.
mination Act 1976 (Mitbestimmungsgesetz, MitbestG).
                                                           Deemed Employees
The Act on One-Third-Participation, which replaced         According to the rulings of the Federal Labor Court,
the former Works Constitution Act 1952, provides           a person who is personally dependent on an em-
that all GmbHs and AGs with more than 500 em-              ployer is regarded as an employee. Such personal
ployees, as well as all AGs, irrespective of their         dependence is deemed to exist, either in view of
work force, if registered in the Commercial Register       the integration of the employee into the employer’s
Doing Business in Germany Labor Law                                                                         102 | 103




operations or because the person is bound by the            are subject to the control of the General Terms and
employer’s directions as to time, place and type of         Conditions as set forth in Sec. 305 et seq. German
services performed. Where deemed employees may              Civil Code (Bürgerliches Gesetzbuch, BGB) consider-
exist, the (actual) employer will face additional liabil-   ing, however, the special aspects of labor law. A
ities in respect of tax (wage withholding and VAT) and      check must be performed if the contents of the con-
social security contributions.                              tractual stipulations might be considered to deviate
                                                            from the wording of the law to the disadvantage of
Supply of Temporary Workers                                 the employee. If a contractual clause proves to be
Employers who wish to commercially “lease out” em-          invalid as a result of the rules relating to the control
ployees (leased employees) to third parties (client)        of contents, the validity of the remaining contract will
for work, require a permit according to the Act             be unaffected.
Regulating the Supply of Temporary Workers (Arbeit-
nehmerüberlassungsgesetz, AÜG). An employee is              The parties may agree on a probationary period for
“leased” if he is completely integrated into the client’s   the employment agreement (which usually ranges
establishment and does not continue to work for his         from three to six months), pursuant to which the
employer alone. If the lessor does not have the per-        employment agreement may be terminated with-
mit required, an employment relationship between            out reason on short notice, which must be at least
the client and the leased employee will be formed           two weeks.
(by law) at the time at which the work is to com-
mence as set forth in the lease agreement.                  In order to prevent an employer from circumventing
                                                            employment protection provisions, fixed-term con-
Employment Contracts                                        tracts are only permitted if an objective reason for the
No requirement exists for employment contracts to           limitation of an employment term exists, or in case of
be in writing to be valid. The Law of Proof of Sub-         new hires, where the term of an employment contract
stantial Conditions Applicable to the Employment            does not exceed a maximum period of two years, or
Relationship (Nachweisgesetz, NachwG) provides,             is only extended within the said two year period up
however, that an employer must provide in writing           to three times. In the case of a newly established
the essential provisions of an employment relationship      business, the term for new hires within its first four
within one month after concluding an employment             years is up to four years.
agreement. This document must include the name
and address of the parties, the date of commence-           Wages, Salaries and Bonuses
ment, a job description including the place of work,        German law does not prescribe a minimum wage. Mini-
the salary including any additional payment, the            mum wages are, however, often fixed by collective
working hours, the vacation claim, notice periods           bargaining agreements in different industries. Equal
and reference to the applicable collective bargaining       pay legislation exists on a federal level providing equal
agreements and shop agreements.                             pay for men and women. Although not a legal re-
                                                            quirement, a thirteenth month salary/bonus is quite
Generally, all terms of the employment contract that        often paid at Christmas (or split between Christmas
the employer intends to use on multiple occasions           and vacation time).
Working Hours                                              Sick pay amounts to 100 % of normal salary and
The general legal maximum working hours are 48             is received until recovery, but not beyond a period
hours per week (based on a six-day working week),          of six weeks (for the particular illness) beyond which
which can be extended up to 60 hours provided,             time the employee, if eligible, receives benefits from
however, that within six months or 24 weeks the            the state health insurance plan.
average will not exceed 8 hours per day. Based on a
five-day working week the normal daily working time        Dismissal
could be up to 9.6 hours. Trade unions are lobbying        The employer’s right to issue a notice of termina-
for a 35-hour week and collective bargaining agree-        tion may be restricted by individual contracts, collec-
ments often provide for a shorter weekly working time      tive bargaining agreements or by statute such as the
(e. g. 38.5-hour week). Over-time is strongly opposed      Employment Protection Act (Kündigungsschutzge-
by unions.                                                 setz, KSchG).

Holidays and Vacation                                      The statutory period of notice for termination for an
All German states recognise the following public           employee during the first two years of employment
holidays: New Year’s Day (January 1), Good Friday,         with the same firm or plant is four weeks either up to
Easter Monday, May Day (May 1), Ascension Day,             the fifteenth or the end of a calendar month. If an em-
Whit Monday, German Unity Day (October 3), Christ-         ployee has worked for two or more years in the same
mas Day (December 25), and Boxing Day (Decem-              firm or plant, the period of notice to be observed by
ber 26). There are also certain religious holidays in      the employers is one month to the end of a calendar
addition to these which differ from state to state.        month. The longer the employment relationship lasts,
                                                           the longer the period of notice required (up to a maxi-
The minimum amount of vacation to which an em-             mum of seven months, if the employment lasts for
ployee is legally entitled is 20 working days per year     20 years or more). The statutory notice requirements
(based on a five-day working week) once they have          apply to the extent that no specific contractual no-
completed six months of employment. Collective             tice period exists, or said period is invalid, due to
bargaining agreements as well as individual em-            the fact that it does not meet the statutory minimum.
ployment contracts usually increase the number of          Notice of termination must be given in writing, and
vacation days (often up to 30 days or more per year)       requires an original signature. The same applies to
whilst state laws provide for leave for special pur-       the conclusion of settlement agreements. A notice of
poses (i. e. educational leave). An employee is entitled   termination sent by fax is therefore insufficient.
to receive vacation pay equal to his or her current
salary during vacation. Several collective bargaining      The employment relationship can be terminated for
agreements, as well as business practice, may also         cause, without notice, by either party for an important
provide for an extra vacation bonus.                       reason which makes it unacceptable for the other
                                                           party to continue the employment relationship until
Statutory Sick Pay                                         the expiry of the ordinary notice period. Termination
An employee is entitled to sick pay where sickness         due to an important reason is only possible within
stops the employee from performing his or her duties.      the first two weeks of obtaining such knowledge.
Doing Business in Germany Labor Law                                                                        104 | 105




The Employment Protection Act further provides that         seniority, maintenance obligation, severe disability) in
giving notice without an important reason to an em-         order to select those employees for dismissal first,
ployee who has worked in the same company for               and those who are the “least disadvantaged” by the
more than six months is only legally effective to the       redundancy. The employee has the right to challenge
extent it is socially justified. The Employment Protec-     said notice and to file a cause of action for re-em-
tion Act only applies, however, if the plant, firm or       ployment with the competent labor court within a
shop regularly employs more than ten individuals,           three-week period after receiving the notice. There is
based on full-time positions. Employees who were            no statutory obligation of the employer to provide
covered by the Employment Protection Act before             severance payment.
2004 are not affected by the raising of the threshold.
For new hires, however, the Employment Protection           The termination of an employment relationship under
Act only applies if the threshold of ten employees          the Employment Protection Act is usually complicated
is exceeded. Part-time positions are only counted           and often results in paying off the employee through
proportionally (up to 20 hours per week = 0.5; up to        a settlement agreement. As a general and rough rule,
30 hours per week = 0.75).                                  an average severance payment amounts to 50 % of
                                                            the monthly gross salary for each year of service (see
Social justification within the meaning of the Employ-      Sec. 1a para 2 Employment Protection Act).
ment Protection Act is limited to three principal areas.
                                                            Additional employment protection exists for works
Firstly, the termination of employment may be due to        council members, disabled employees, pregnant em-
the personal circumstances of the employee, such as         ployees and employees on educational leave; said
a series of short-term illnesses or a long-term illness.    employees may not be terminated except for cause.
                                                            Any termination, however, requires the prior consent
Secondly, the behaviour of the employee may con-            of the competent authorities.
stitute social justification for termination, i. e. being
absent from work without excuse despite repeated            Maternity Rights
warnings or refusal to work. Prior to issuing a notice      Any notice of termination issued during pregnancy
of termination in such cases, the employer has to           and up to four months after the birth of a child is null
give a warning to the employee with regard to his or        and void to the extent that the employer was informed
her shortcomings.                                           of the pregnancy within two weeks after issuing the
                                                            termination letter. If continued employment is harmful
Thirdly, a dismissal may be socially justified if based     to the health of the prospective mother or unborn
on operational reasons. In particular, this can be          baby as well as during the last six weeks of preg-
based on changes in the employer’s business orga-           nancy and for eight weeks after a birth, the mother
nisation resulting in the redundancy of the relevant        must not work. Additionally pregnant employees may
job due, for example, to a plant closing or reduction       not work overtime, nights, on Sundays, or on public
of the work force due to a shortage of orders. How-         holidays.
ever, the employer has to apply the so-called “social
factor method” and consider the social data (age,
Childcare Leave                                              wishes to take childcare leave within two years. The
Childcare leave is available for either parent or alterna-   employer may only deny such a request within four
tively for both parents working part-time and may be         weeks in writing for urgent operational reasons.
taken up to three years after a child is born. A parent
taking childcare leave may not be dismissed from             Transfer of Undertaking
employment during this period, but must give notice          Pursuant to the EU Directive on the transfer of under-
to the employer three months before the end of the           takings and respective national regulation, the trans-
leave regarding his/her intention to return or not to        fer of a business or parts of it results in the legal
return to work. Parents may alternate childcare leave        transfer of the transferring party’s employment rela-
up to three times during the three-year period.              tionships to the acquiring party. The same applies if
                                                             – after a share acquisition – the new owner decides
Requirement to Employ Disabled                               to move (change ownership) a business from one
Companies with more than 20 employees must have              subsidiary to another. There is the risk that the poten-
a workforce consisting of at least 5 % of individuals        tial closedown of an operation after a share purchase
who are at least 50 % disabled. Employers who do             may actually be deemed in law to be a transfer of
not meet these hiring requirements are subject to a          undertaking.
monthly charge of up to C260.00 per disabled em-
ployee not hired. Companies with more than five              The transfer of undertaking (change of ownership of
disabled employees may elect a disabled employees’           assets) results in the legal transfer of the existing em-
representative. Disabled workers are entitled to five        ployment agreements including all mutual rights and
additional days of leave annually and are entitled to        obligations. The rules in relation to pensions depend
special protection against dismissal.                        on the national laws implementing the directive. For
                                                             example, German Law (Sec. 613a BGB) provides for
Right of Reduction                                           the legal transfer of pensions rights/expectancies of
In addition, employees who have been employed for            active employees, whereas pensioners’ rights remain
more than six months are entitled to a reduction in          with the transferring party.
their working time and weekly allocation, provided
the request does not contradict with the legitimate          According to German Law the completion of the
operational interests of the employer (e. g. no suitable     next step depends on whether employees consent or
substitute employee is available). However, in order         object to the transfer of their employment contracts.
to avoid an automatic change of the working time             Since a termination of employment becomes null
and allocation, the employer has to reject an em-            and void if it is based on a transfer of undertaking,
ployer’s request in writing at the latest one month          the employees must be informed in writing about the
before the changes should become effective.                  intended transfer, the (planned) date of the transfer,
                                                             the legal, economic and social consequences of the
During childcare leave, the employee may work part-          transfer for the employees as well as any measures
time for a maximum of 30 hours per week. The em-             planned with respect to the employees. In this respect
ployee must request childcare leave in writing seven         the employee is entitled to object to the transfer, its
weeks before its start, stating the precise time he/she      reason and the consequences for the employees
Doing Business in Germany Labor Law                                                                          106 | 107




and their representatives within one month, after             Social Security
having obtained full written information of the trans-
fer. If the employee objects to the transfer of employ-       Germany has a compulsory social security system
ment, the employer may provide for ordinary notice            that covers five principle areas: health and nursing
(redundancy) based on the fact that the current posi-         care insurance, old-age benefits, unemployment be-
tion is transferred. With respect to these and other          nefits and workers’ compensation. Contributions to
terminations, the Employment Protection Act applies           the social security system are generally shared equally
to all operations with more than ten (formerly five)          between the employer and the employee. The em-
regular employees.                                            ployer withholds the employee’s share of the con-
                                                              tribution from the employee’s salary and pays this,
In collective labor law there is a distinction to be made     together with its own contribution, to the Federal
depending on whether the company is to be trans-              Insurance Agency.
ferred in its entirety or in part. If the entire company is
to be transferred, the company identity is maintained
and the old regulations remain valid. If the company          Health Insurance
identity is not maintained, however, the company
agreements are transformed into individual rights             Benefits from public health insurance include the
together with a one-year barrier to change. New com-          payment of medical and hospital expenses and
pany agreements are, however, possible. The mem-              compensation for loss of salary. Contributions to
bers of the works council lose their function when            the public health insurance system are only payable
the company (division) is transferred but retains             up to certain salary levels, which are usually increased
lasting protection against dismissal. However, for a          annually. As of January 1, 2009, only employees with
transitional period of six months, the former works           a gross salary not exceeding C48,600.00 annually
council remains competent and responsible for                 or C4,050.00 monthly (insurance threshold; Versi-
starting new elections in order to create a works             cherungspflichtgrenze) are obligated by law to make
council in the transferred part.                              contributions to the public health insurance system.
                                                              No compulsory health insurance exists beyond these
                                                              salary thresholds; employees exceeding said thres-
                                                              holds might therefore opt to maintain a private health
                                                              insurance, to continue the participation in the public
                                                              health insurance system or to have no health insur-
                                                              ance at all (which is rare). Employees, who were not
                                                              subject to compulsory health insurance in 2002 and
                                                              who have had a private health insurance since De-
                                                              cember 2002, are entitled to keep their private health
                                                              insurance, as long as their gross annual salary
                                                              amounts to at least the “Income Thresholds” below,
                                                              i. e. C44,100.00; otherwise they become subject
                                                              to compulsory health insurance.
As of January 1, 2009 the compulsory health fund           official average premium) to the employee’s private
came into force, which regulates the funding of public     nursing care insurance.
health insurance in Germany. Former different contri-
bution rates of the various public health insurance        Old-Age Benefits
companies are replaced by a uniform rate, which an-        Old-age contributions are currently levied at a rate
nually is subject to discretion of the German Federal      of 19.9 % of gross salary capped at C64,800.00
Government. The respective rate for 2009 is fixed          annually or C5,400.00 monthly (in the western part
at 15.5 % of gross salary, capped by the „Income           of Germany) and C54,600.00 annually or C4,550.00
Threshold“ (Beitragsbemessungsgrenze) amounting            monthly (in the eastern part of Germany).
to currently C44,100.00 annually or C3,675.00
monthly (see above). The rate of 15.5 % includes           Unemployment Benefits
0.9 %, which solely has to be borne by the em-             Unemployment insurance contributions amount to
ployee; the remaining 14.6 % is to be borne in equal       2.8 % (until June 30, 2010; as of July 1, 2010: 3.0 %) of
shares by the employer and employee. This results          gross salary capped as well at C64,800.00 annually
in a compulsory health insurance rate for the em-          or C5,400.00 monthly (respectively C54,600.00 an-
ployer of 7.3 % respectively and 8.2 % for the             nually/C4,550.00 monthly in the eastern part of
employee. As of July 1, 2009 the equivalent part of        Germany).
14.6 % shall be decreased to 14.0 % borne in equal
shares of 7.0 % each by employer and employee.             Workers’ Compensation
Additio-nally, 0.9 % still has to be borne solely by the   The workers’ compensation system is administered
employee. This results in a total rate of 14.9 %; 7.9 %    by associations (Berufsgenossenschaften) set up by
borne by the employee and 7.0% borne by the em-            all branches of trade and industry. Contributions to
ployer. If the employee is not subject to compulsory       the workers’ compensation system are made solely
health insurance, the employer must contribute up to       by the employer. The contribution amount is fixed by
C268.28 per month (50 % of the official average pre-       the various trade industry associations taking into
mium) to the employee’s private health insurance.          consideration the risk of a work accident occurring in
                                                           the particular branch, the record of work accidents
Employers who employ up to 20 employees may                during the previous business year, and the total
claim a refund for compensation paid to employees          annual pay of all employees affected.
for sick or maternity leave, of up to 80 %, from the
competent health insurance.                                Promotion of Job Creation
                                                           Under certain circumstances an employer might ap-
Nursing Care Insurance                                     ply for a promotion allowance at the competent labor
Contributions to the nursing care insurance plan           agency. The labor agency grants respective promoti-
amount to 1.95% of gross salary capped again at            on allowances especially for the following cases:
the income threshold of C44,100.00 annually or
C3,675.00 monthly. If the employee is not subject            hiring new, formerly unemployed employees where
to compulsory health insurance, the employer must            a new company is being formed;
contribute up to C35.83 per month (50 % of the               employment of employees in need of respective
Doing Business in Germany Labor Law                                                                         108 | 109




  allowances (i. e. disabled persons, elderly people,      C2,400.00 p. a.) expenses for “household employ-
  less qualified employees, long-term unemployed           ment” can also be deducted from the tax liability.
  persons);
  qualification allowance for younger employees;           A progressive regime for income between C400.01
  integration of unemployed persons over the age           and C800.00 has been introduced in order to re-
  of 50.                                                   move the so-called low wage threshold and the
                                                           sharp increase in social insurance contributions
Additionally, certain promotion programs operated          which it caused. The employee’s contribution varies
by the Federal States and municipalities exist un-         here from 4 % to 21 %, while the employer’s share
der which certain allowances for job creation can          remains unchanged. The income tax is determined
be granted.                                                on an individual basis. Several “insignificant employ-
                                                           ment” jobs are generally added together. In order
Insignificant Employment                                   to facilitate the payment procedure, the contribu-
The German government introduced legislation on            tions are all paid to a common collection point at
“Insignificant Employment” (positions with a salary        the Federal Miners’ Insurance (Bundesknappschaft)
of C400.00 or less) as of April 1, 2003 pursuant           in Cottbus.
to which employers must pay with effect as of
July 1, 2006 a 30 % lump-sum charge on income              Anti-Discrimination Act
of C 400.00 or less, which is tax-free for the             Germany is currently obliged to implement four Euro-
employee. The 30 % is divided into 15 % for the stat-      pean Directives which regulate protection against
utory pension system, 13 % for health insurance and        discrimination. These regulations concern several
2 % for a lump-sum tax (including church tax and           areas of the German legislation. The main focus is in
solidarity tax). The employee, however, is not actually    the area of employment law and civil law, the latter
entitled to either health insurance or statutory pension   involving relationships between private persons, es-
benefits. With regard to statutory pension benefits,       pecially purchase, service, insurance and rental ag-
an employee may opt for membership in which case           reements. The Anti-Discrimination Act (Allgemeines
the employee must contribute the difference between        Gleichbehandlungsgesetz, AGG) came into force as
the 15 % payment made by the employer and the              of August 18, 2006.
statutory pension insurance contribution payable
(currently 19.5 %) to the statutory pension system.        The main focus of the Anti-Discrimination Act is the
The employee does not have this option with regard         protection of discrimination for employed as well
to health insurance. In order to promote so-called         as self-employed personnel. The Anti-Discrimination
“household employment”, the lump-sum charge only           Act provides in Sec. 1 that no discrimination must
amounts to a total of 12 % for employment in private       take place with regard to race and ethic, sex, religion
households and is divided into 5 % each for the stat-      or world view, disability, age and sexual identity.
utory pension insurance scheme and health insur-           With respect to discrimination in view of the menti-
ance and 2 % for the lump-sum tax stated above.            oned criteria, it is furthermore important to distinguish
The above stated option regarding statutory pen-           between direct and indirect discrimination.
sion benefits also applies. To a certain extent (max.      Employees affected by discrimination are entitled to
raise a claim with a member of a competent posi-             tion of these institutions. Finally, discrimination can
tion (e. g. employer, supervisor or workers’ represen-       also be justified if it results in the balancing of already
tatives). Within this claim the employee has to explain      existing disadvantages, e. g. preference of elderly or
how he/she has been discriminated against. The               disabled persons.
claim may result in compensation in the form of
damages.                                                     The Anti-Discrimination Act further provides for co-
                                                             determination rights of so-called Anti-Discrimination
Any rights arising from the Anti-Discrimination Act          Organizations, which shall represent the interests of
may also give rise to individual employee claims             discriminated persons. Such Anti-Discrimination Or-
which can also be claimed in front of the competent          ganizations must provide for at least 75 members.
labor court. To do this the employee must raise a            Furthermore, under the EU-Regulation Germany also
claim within three months of becoming aware of the           has to provide for an Anti-Discrimination Authority.
discrimination. The labor court then has to consider         Such Anti-Discrimination Authority will be established
whether the employee’s claim is convincing, and              with the Federal Ministry for Family, Seniors, Women
whether, as a result, the employer is required to justi-     and Youth. The Anti-Discrimination Authority shall
fy the actions of which it is accused.                       provide for support of discriminated persons by in-
                                                             formation, consultation, mediation, evaluation and
Discrimination, however, will be considered to be            recommendation with regard to abolishment and
justified in certain circumstances, i. e. for a reason       prevention of the discrimination and enforcements
based on professional requirements, for reasons              of the individual rights.
based on religion or world view, or for reasons based
on age and in order to balance already existing disad-
vantages. With respect to professional requirements,         Visitors to Germany
discrimination shall be justified if the criteria repre-
sents an essential and decisive professional require-        Visa Requirements
ment and the purpose is therefore as legitimate as           A foreign citizen who plans to visit or take up resi-
the requirement is appropriate.                              dence and employment in Germany must comply
                                                             with certain immigration rules and regulations. Such
Discrimination due to age shall be justified if appropri-    rules and regulations as well as other relevant as-
ate and based on legitimate purposes as expressively         pects, such as social security rights and taxation,
set out in Sec. 10 of the Anti-Discrimination Act –          are discussed in this chapter.
this would include taking into consideration the age
of an employee when considering any social election          All foreigners entering Germany need a visa which
in connection with business related terminations.            grants a limited residence permit. Exempted from the
                                                             duty to obtain a visa are citizens of certain countries
Churches and religious communities continue to be            (source: www.auswaertigesamt.de), which include
entitled to select their employees by taking into con-       EU Member States and various other countries, such
sideration their religious or world view, as far as such     as the USA, Canada and Japan, provided that
is justified with respect to the right of self-determi-na-   their stay in Germany does not exceed three months
Doing Business in Germany Labor Law                                                                           110 | 111




and provided the foreign citizen is in possession of          eral, are responsible for issuing visas. In principle,
recognized travel documentation. Recognized travel            the Federal Foreign Office is not involved in decisions
documentation includes a national passport, a child’s         on individual visa applications, nor does it have any
travel certificate similar to a passport, an official iden-   knowledge of the status of individual applications
tity card which permits entrance without a visa based         being processed by the diplomatic missions. Visas
on a bilateral treaty, or other similar travel documenta-     are issued by the mission responsible for the area
tion. The foreign citizen must furthermore not intend         where the applicant has his/her ordinary residence
to take up gainful employment in Germany. In this             or domicile.
respect, special regulations apply to citizens of EU
Member States.                                                Visa application forms can be obtained from the
                                                              competent diplomatic mission free of charge (in the
Permitted Activities                                          local language). The visa application must be sub-
Business visitors to Germany may carry out all func-          mitted together with all the necessary documenta-
tions except those defined as gainful employment.             tion in person at the German mission responsible for
Gainful employment under the applicable provisions            the place of residence of the applicant. In order to
of the Residence Act includes gainful activities (i. e.       avoid time-consuming requests for additional in-
work for which remuneration has been agreed upon),            formation or documentation, it is recommendable to
work which requires a work permit or work which               contact the respective mission in advance of travel
requires permission to practice a profession.                 to inquire about any special local requirements re-
                                                              garding particular visa formalities.
Functions such as attending meetings, signing con-
tracts, installing, removing and supervising a booth          As a rule, diplomatic missions require between two
at trade fair or similar services are therefore not con-      and ten working days to decide on an application for
sidered as employment provided that the visitor is            a short stay visa. An application for a visa which en-
employed by a corporation located in a foreign coun-          titles the holder to a longer stay or to take up gainful
try and that the visitor’s residence remains in said          employment may take several months to process.
country. Such functions must not, however, continue
in Germany for more than three months.
                                                              Requirements for Short Stay Visas (Schengen)
Foreign employees who merely install industrial equip-
ment or machines from foreign companies in Ger-               Under the Convention Applying the Schengen Agree-
many or who supervise such installations (or provide          ment, these visas also entitle the holder to visits to
advice as consultants) are also not considered to be          Austria, Belgium, Denmark, Finland, France, Greece,
gainfully employed in Germany.                                Iceland, Italy, Luxembourg, the Netherlands, Norway,
                                                              Portugal, Spain and Sweden (Schengen Agreement).
Application Procedure
Under German law (Sec. 71 para. 2 of the Residence            In issuing visitors’ visas, diplomatic missions are
Act), the diplomatic missions of the Federal Republic         bound by the relevant provisions of Community law
of Germany, i. e. its embassies and consulates-gen-           and German aliens law (the Residence Act and its
implementing ordinances). The Residence Act does           coming to Germany is different from the one stated,
not grant the right to the entitlement of a visitor or     the application will likewise be refused.
tourist visa. A visa may be granted provided the
applicant’s presence does not prejudice or endanger        Pursuant to Sec. 77 para. 2 of the Residence Act and
the interests of the Federal Republic of Germany. The      to international practice, no reason need be given for
applicant must prove that he/she has adequate funds        refusing either a visa application or any information
for the intended stay and may not claim any public         provided on legal remedies. Pursuant to Sec. 83 of
funds in this connection. Should the applicant be          the Residence Act, the applicant may not appeal a
unable to finance the journey and stay from his/her        refusal of his/her application for a tourist visa.
own funds, a host resident in Germany may pledge
to cover all costs associated with the trip, including
the cost of any medical treatment. Under Sec. 66 et        Requirements for Extended Stays
seq. of the Residence Act, such a pledge should
normally be made to the aliens’ authority in the           As a rule, all foreigners require visas for stays of
host’s place of residence in Germany.                      more than three months or stays leading to the hold-
                                                           er taking up gainful employment. Not subject to
Following a European Council decision dated De-            this visa requirement are citizens of the EU, the EEA
cember 22, 2003, visa holders are as a rule required       countries and of Australia, Canada, Israel, Japan,
to have travel health insurance with a minimum             New Zealand, the Republic of Korea, Switzerland and
coverage of C30,000.00 that is valid for the entire        the United States of America, who may obtain any
Schengen area. If possible, this insurance should          residence permit that may be required after entering
be taken out in the applicant’s own country, but it can    Germany. Citizens of all other countries who intend
also be purchased by the host. Moreover, diplomatic        to come to Germany for such a stay must apply for
missions must be satisfied of the applicant’s willing-     visas at the competent mission before arriving in the
ness and ability to return to his/her own country. These   country. Visa applications must be approved by the
difficult and responsible discretionary decisions are      relevant aliens’ authority in Germany, i. e. the aliens’
always made in the light of the individual applicant       authority in the place where the applicant intends
and his/her personal circumstances. The mission            to take up residence. Visa application forms for a
bases its decision on its special knowledge of the         long-term stay (longer than three months) can be
country and person in question, also taking into           obtained free of charge from the relevant mission.
account the applicant’s own interests, any relevant
humanitarian and political concerns and the security       The approval procedure usually takes up to three
interests of Germany and the Schengen partners.            months, in some cases longer, since the aliens au-
Each application is therefore considered on its indi-      thority will normally consult with other authorities
vidual merits.                                             (e. g. the Federal Employment Agency). In cases
                                                           where visa applications must be approved by the
If the applicant does not fulfill the above-mentioned      relevant aliens’ authority, diplomatic missions may
criteria, the visa application will be refused. If such    only issue visas once they have obtained this ap-
consideration reveals the applicant’s true purpose in      proval. The aliens’ authorities are also the competent
Doing Business in Germany Labor Law                                                                      112 | 113




authorities with regard to measures and decisions         and Slovenia continue to require work permits in
pertaining to residence law for foreigners who already    Germany because of the transitional rules relating
reside in Germany. Aliens authorities are not subordi-    to freedom of movement. They should apply for an
nate agencies of the Federal Foreign Office, and the      EU work permit from their local German employ-
Federal Foreign Office cannot influence their deci-       ment office.
sions. They are in fact accountable to and operate
under the supervision of the respective interior minis-
tries and senates of the Federal States.                  Social Security

                                                          The German social security system generally applies
Working in Germany                                        to all employees in Germany on a mandatory basis.
                                                          However, based on national social security provisions
Access to the German Labor Market                         or on an applicable social security treaty concluded
Foreign nationals, other than European Union (EU),        between Germany and an individual’s home country,
European Economic Area (EEA) and Swiss nationals,         it may be possible to obtain an exemption from
may as a rule only reside in Germany for the purpose      German social security contributions for a limited
of taking up gainful employment if they have the          period of time.
requisite residence permit which allows gainful em-
ployment as well. They must not work without it.          Secondment
Australian, Canadian, Israeli, Japanese, South Kore-      An employee sent to Germany by his/her foreign
an, New Zealand and US citizens may acquire this          employer does generally not fall within the scope of
residence permit from the competent foreigners’ au-       the German social security system provided that
thority after their arrival in Germany. They may not      the employee remains employed by the foreign em-
however commence gainful employment until they            ployer, the foreign employer continues to pay the
have the permit. Nationals of all other states must       employee’s salary (and bear it tax wise) during the
apply for a work visa from their local German mission     secondment period and the period of employment
prior to entering Germany.                                in Germany is limited in time. The period of limitation
                                                          differs depending on the country. A secondment is
Access to the labor market for non-EU, non-EEA and        possible for a maximum period of 12 months with
non-Swiss nationals is strictly regulated by statutory    the possibility of an extension up to a maximum
instrument as a result of the 1973 ban on recruit-        period of another 12 months in EU / EEA Member
ment and the current high unemployment levels.            States, respectively Switzerland. For countries, which
Access is in principle limited to certain professional    entered into a social security treaty with Germany,
groups and requires the prior approval of the em-         the maximum secondment period varies between
ployment authorities.                                     12 and 60 months. However, even if there is not a
                                                          social security treaty, secondments up to 60 months
Notwithstanding their countries’ accession to the EU      have been accepted. In order to prove that the
on May 1, 2004, nationals of the Czech Republic,          foreign employee is exempted from social security
Estonia, Hungary, Latvia, Lithuania, Poland, Slovakia     as a result of a secondment, the employee or his or
her employer must obtain an exemption certificate       unless they already have sufficient old age expec-
(Entsendebescheinigung) from the relevant authorities   tancies etc. A general exemption from the German
stating that the employee is subject to compulsory      social security system is not possible.
social security coverage in the employee’s respec-
tive country.
                                                        Income Tax

Fixed Term Employment                                   General
                                                        Individuals who are German residents by virtue of a
With regard to foreign employees, who were not          permanent home or customary place of abode in
seconded to Germany but who directly work in            Germany are subject to German income tax plus
Germany within the scope of an existing contractual     solidarity surcharge and possibly church tax on their
relationship with an employer in a foreign country,     worldwide income (unlimited tax liability) without
the situation is as follows:                            reference to nationality. A permanent home will gen-
                                                        erally exist if an individual has accommodation in
In the case of an EU / EEA Member State or a Swiss      Germany at his or her exclusive disposal, this does
employee, the employee and his or her foreign em-       not require ownership. A customary place of abode
ployer may respectively apply for a certificate of      is given if an individual is present in Germany for a
coverage (e. g. E 101) as proof that the domestic       continuous period exceeding six months, whereby,
law remains applicable. The exemption may be            once the six month period has been exceeded, resi-
granted if the employee is subject to the social        dence is assumed retroactively from the first day of
security laws in his or her native country. A release   presence in Germany.
from the German social security system is possible
to the extent that the limitation of the employment     If an individual is not a resident of Germany, then
does not exceed five years (an extension might also     German source income only is potentially subject to
be possible).                                           German taxation (limited tax liability). If an individual
                                                        qualifies as a tax resident of more than one country, a
The same generally applies to employees who are         relevant tax treaty concluded between Germany and
citizens of a non-EU country which has entered into a   the other country of residence may apply to ascertain
social security treaty with Germany (such as Japan      the country of residence for treaty purposes. In all
and the USA). If such an exemption does not exist the   cases a tax treaty may apply to restrict Germany’s
employee in general may later claim repayment of        right to tax worldwide income under its national laws.
pension contributions paid into the German social
security system.                                        A non-German national who moves his/her home
                                                        to Germany will usually become liable to unlimited
For those countries without a social security treaty    German tax liability – subject to the provisions of an
with Germany, the foreign employee in general only      applicable tax treaty.
has the right to claim repayment of pension contri-
butions paid by the time he or she leaves Germany
Doing Business in Germany Labor Law                                                                        114 | 115




Taxable Income                                             45 % for taxable income in excess of C250,000.00
There are seven categories of taxable income:              per year (C500,000.00 for married couples filing
                                                           joint income tax returns), and various deductions and
  income from agriculture and forestry;                    allowances will be reduced or abolished.
  income from trading;
  income form professional and other independent           The Federal Government announced as part of the
  personal services;                                       German “Corporate Tax Reform 2008” (Unternehmen-
  income from employment;                                  steuerreform 2008) the introduction of a final with-
  income from investment;                                  holding tax on private investment income (Abgel-
  rental and royalty income;                               tungssteuer), which came into effect in January 2009.
  other income.                                            The various forms of private investment income in
                                                           Germany will be taxed at a uniform rate for the first
Taxable income is calculated on a calendar year basis      time. The capital gains compensation tax will estab-
and is gross income less deductions and allowances.        lish a standardised tax rate of 25 % plus a solidarity
Various deductions and allowances are permitted,           surcharge on all capital gains (interest, dividends, in-
such as personal allowances, income related expense        vestment, certificates) and proceeds from the sale of
deductions, special expense deductions and extra-          private capital assets (securities, investment shares,
ordinary allowances.                                       participations in corporations, and others, excepting
                                                           real estate).
Under the half-income system, only 50 % of dividends
distributed to a German individual shareholder by a        Income from Employment
corporation are subject to individual income tax at the    If an individual is a German resident, then all employ-
shareholder level. In exchange, expenses incurred in       ment income – whether relating to activities carried
connection with the shareholding are only 50 % de-         out in Germany or abroad – is in principle subject to
ductible for individual shareholders. The same applies     German income taxation. However, if Germany has
to taxable capital gains derived from the sale of shares   concluded a tax treaty with the country in which
in a corporation.                                          employment activities are physically carried out, then,
                                                           based on the provisions of that treaty, Germany may
Tax Rates                                                  exempt the portion of employment income relating
For a German tax resident, progressive income tax          to activities carried out abroad from German income
rates in a range from 15 % to 42 % apply in 2009           taxation. This exemption from German income tax-
(plus 5.5 % solidarity surcharge and possibly church       ation will usually only apply if certain conditions are
tax on the income tax liability). Church tax amounts       fulfilled. A so-called split-payroll concept is often
to 8 % or 9 % of the income tax, and is capped at          implemented to take advantage of this German tax
between 3 % and 4 % of the taxable income, depend-         exemption. Germany will take any tax-exempt in-
ing on the Federal State of residence of the taxpayer.     come into account in calculating the applicable
With effect from the tax year 2007, a so-called tax for    German income tax rate.
rich individuals (Reichensteuer) has been introduced
by increasing the maximum income tax rate of 3 % to
If an individual is not a German resident for tax        well as citizens of countries of the European econo-
purposes, then limited taxation will apply to tax        mic area (EEA = 25 EU member states + 3 EFTA
employment income in relation to employment ac-          states Iceland, Liechtenstein, Norway) who have
tivities carried out or utilized in Germany. Again, a    permanent residence in Germany may use their
relevant tax treaty may restrict Germany’s right to      foreign driver’s licence until the end of its period of
tax this income.                                         validity. Non-EU or EEA citizens having permanent
                                                         residence in Germany may use their national driver’s
Incentives and fringe benefits received by an em-        licence within Germany for a period of six months
ployee as a result of employment in Germany are          commencing from the date when entering Germany.
generally taxable in the same way as income from         After six months, every driver who has not obtained
employment and are subject to wage taxation at           a German driver’s licence will be deemed to be driv-
source. This applies in particular to the private use    ing without a licence. Every foreign driver, who
of a company car, to which special provisions apply      suspects that he or she will remain in Germany for
with regard to the calculation of the benefit in kind.   more than six months, should therefore apply in
Further, stock options granted to an employee in         time to get his or her foreign or international driver’s
relation to employment activities carried out in Ger-    licence recognised and transferred.
many during the German residence or possibly after
German residence has expired are treated as tax-         Application Procedure
able employment income. However, in most cases,          The holder of a foreign or international driver’s licence
the income first becomes taxable on exercise rather      must generally first obtain an official translation and
than on grant of the options.                            classification of the licence. This usually results in
                                                         costs of between C30.00 and C80.00. This may
Tax Returns                                              be done at the German Automobile Association
As a general rule, a German resident individual must     known as the ADAC (Allgemeiner Deutscher Auto-
file an annual income tax return declaring worldwide     mobil Club), the German equivalent of the AAA in
income. Married couples may file a joint return or opt   the USA. If the foreign driver still has not transferred
for separate filing. Income tax returns must be filed    the licence after three years residence in Germany,
by May 31 following the end of the calendar year in      he or she will be considered to be driving without a
question, whereby an automatic filing extension to       license and will have to undergo the usual written and
December 31 applies if the income tax return is          practical examinations in order to obtain a German
prepared by a tax consultant.                            driver’s license.

                                                         Transfer and Recognition of Foreign Driver’s Licenses
Driver’s Licence                                         German law regarding recognition of foreign licenses
                                                         is complicated and depends principally on the origin
General                                                  of the driver’s license. A number of countries (e. g.
EU citizens as well as non-EU citizens who do not        EU member states, Canada, Japan and various
have permanent residence in Germany may use their        States of the USA) enjoy reciprocity, with the result
national driver’s licence in Germany. EU citizens as     that holders of a driver’s license from said countries
Doing Business in Germany Labor Law                         116 | 117




are not subject to written and/or practical examina-
tions in order to transfer the license. Exact details and
an updated list of countries, which enjoy reciprocity
with regard to German driver’s licenses, can be ob-
tained from the local Driver’s License Office (Führer-
scheinstelle) or from the diplomatic missions of the
Federal Republic of Germany.

Even if a particular country enjoys full or partial reci-
procity and exemption from written or practical exam-
inations, a fee of approximately C40.00 must still
be paid in order to transcribe the driver’s original
license into a German driver’s license.



Hans-Christian Ackermann
hans-christian.ackermann@luther-lawfirm.com
Telephone +49 (211) 5660 18772
Doing Business in Germany Data Protection and Privacy                                                       118 | 119




Data Protection and
Privacy

In Germany, the collection, processing and use of personally identifiable
data is subject to the German Federal Data Protection Act which is comple-
mented by several specific acts regulating the protection of personal data
in particularly sensitive areas such as the telecommunications and media
sector, the healthcare sector and the criminal prosecution sector. The
Telemedia Act and the Telecommunications Act, for example, contain specific
legal requirements in relation to the electronic processing of personal data.




Collection, Processing and Use of                           on racial origin or health) for a party’s own business
Personal Data                                               purpose is only lawful without the data subject’s
                                                            consent if it is necessary in order to safeguard vital
Basically, any collection, processing or use of perso-      interests of the data subject or of a third party and if
nal data is lawful, provided that a statutory legal basis   the data subject is physically or legally incapable of
is available or the affected data subject has given his     giving his consent; if the data in question has clearly
or her explicit consent. Such personal data may be          been placed in the public domain by the data subject;
collected (a) for the contractual purposes for which        if it is necessary for the establishment, exercise or
the data has been provided, or (b) if the collecting        defense of legal claims and there are no grounds for
party has a justified interest in collecting, processing    believing that the data subject has an overriding legiti-
and using such data and the affected data subject           mate interest in excluding the collection, processing
does not have an overriding legitimate interest in          or use, or if it is necessary for conducting scientific
preventing such use. The collection, processing or use      research and the scientific interest in carrying out the
of special categories of personal data (such as data        research project substantially outweighs the data
subject’s interest in precluding collection and the pur-    Increasingly, binding corporate rules are being in-
pose of the research could not be achieved by other         troduced by multinational groups which have their
means without unreasonable effort or at all. If there       headquarters in Germany in order to facilitate the
is no applicable statutory provision in relation to the     group-wide transfer of data. Group-wide transfers can
collection, processing or use of personal data, the         result for example from the use of employee manage-
explicit consent, of the affected data subject is re-       ment software or customer relationship management
quired. In order to obtain a valid consent the data         programs. Due to the complex structure of the super-
subject has to be informed in detail about the pur-         visory authorities in Germany there has been no uni-
pose for which the data will be collected, processed        form approach, so far, to the evaluation of the binding
or used.                                                    corporate rules introduced. Whilst some authorities
                                                            consider such rules demonstrate an adequate stan-
                                                            dard of protection, others consider that an explicit
Transfer of Data Outside EEA                                authorization by the competent supervisory authority
                                                            is necessary for each transfer.
The transfer of personal data to entities located out-
side the European Economic Area (EEA) is permitted
only if the data subject does not have a legitimate in-     Notification Requirements
terest in excluding such transfer. A legitimate interest
in excluding a transfer will be recognized if it is clear   In principle, the responsible state authority has to be
that an adequate level of data protection cannot be         notified of all data processing activities in the private
guaranteed by the recipient. The adequacy of the            sector. However, such notification is generally not
afforded level of protection is to be assessed in the       required if the controller has appointed a data pro-
light of all circumstances relating to the data transfer.   tection officer (betrieblicher Datenschutzbeauftragter).
                                                            Only if the data processing activities bear a consider-
In certain cases, however, a data transfer may be           able risk of exposure, i. e. if personal data is stored in
permitted irrespective of an adequate level of data         a certain way for the purpose of transferring it or if it is
protection. This is primarily the case if the consent of    being provided in connection with an anonymous com-
the data subject has been given or if the transfer is       mercial transfer, will such activities need to be notified.
necessary for the performance of a contract. In addi-
tion, public interest, the establishment, exercise or
defense of legal claims or the protection of a vital        Data Protection Officer
interest of the data subject may justify a transfer,
regardless of the level of protection afforded by the       In contrast to other jurisdictions, in Germany private
recipient to which the data is transferred. In addition,    companies are automatically required to appoint a
the supervisory authorities may authorize a transfer of     data protection officer if they employ more than 10
personal data if an adequate standard of protection is      employees whose personal data they either collect,
confirmed under contract or by means of applicable          process or use. In the case of entities which process
binding corporate rules.                                    or use personal data in the course of their business, a
                                                            data protection officer has to be appointed irres-
Doing Business in Germany Data Protection and Privacy                                                     120 | 121




pective of the number of employees employed. The           New technologies, particularly, such as RFID, biome-
duties and functions of a data protection officer may      try, GPRS, tachographs and thinking cameras now
be performed by an employee of the respective              make it easy for companies to monitor every act of
company (a so-called “internal data protection offi-       an employee or to locate them easily without their
cer”) or by a third party engaged for such purpose         knowledge. In addition, DNA-analysis or drug tests
(a so-called “external data protection officer”).          can also be used by an employer to obtain a detailed
                                                           picture of the personality or state of health of a par-
                                                           ticular employee.
Sanctions
                                                           Generally, such activities can only take place with the
Offences against the data protection regulations may       specific and freely given consent of the employee.
attract a fine of up to C250,000.00 (from September        Only in exceptional cases might such consent be
2009: C300,000.000) or imprisonment of up to two           considered as dispensable, e. g. if the employee is
years. The affected data subjects may file a complaint     a driver of an armoured car and knowledge of the
with the supervisory authority and individuals may         location of the employee is crucial for his security or
also base a claim for damages if they can prove ac-        if monitoring is necessary to verify a well-founded
tual damage as a result of the unlawful processing         suspicion of criminal activities. However, although
of their personal data. In practice, the ability of com-   the law usually requires that the justified interests of
petitors to apply for an injunction based on the           the employer to process such data be assessed in
illegal collection, processing or use of personal data     each single case against the legitimate interests of
in connection with a violation of unfair competition       the employee who wishes to restrict the processing
law rules has become increasingly im-portant – the         of such data, there is a risk that such weighing of
unfair competition law rules impose additional re-         interests will not always be effected in practice in
strictions on the use of personal data in a number of      the manner required by the law. Besides, there is
cases and particularly where unsolicited communi-          always the risk that a supervisory authority will, hav-
cations are involved.                                      ing considered the facts, come to a different opinion
                                                           to that of the employer regarding the legitimacy of
Processing of Employee Data                                the activities.
Recently some companies in Germany have been
investigated by national prosecutors in relation to        The same applies to the control of e-mails, telephone
potential breaches of privacy, e. g. watching their        or internet usage of employees: monitoring of such
employees via a video-surveillance system, monitor-        usage may not only be considered a violation of data
ing phone calls or comparing employees’ data with          protection regulations, but a violation of the tele-
the data of suppliers in order to reveal incidences of     communications secrecy which is protected under
corruption and bribery. As a result, some companies        criminal law. If a company allows its employees such
have been fined by the supervisory authorities and         usage for private purposes, it is for example not
discussions about a specific Employees’ Data Pro-          allowed to monitor employees’ telephone connec-
tection Act taking the interests of employees into         tions without their explicit prior consent.
account have been revived.
As a consequence, companies processing employee           only be offered for employees to report concerns re-
data need to consider carefully what activities are       lating to specific issues including criminal offences,
permitted under the current data protection legislation   audit/accounting fraud, banking and bribery issues.
before starting any data processing in Germany. Fur-      Issues related to ethical standards of the company
thermore, if a works council exists, detailed advice      cannot be included. Anonymous whistleblower calls
should be obtained beforehand as the works council        are only allowed on an exceptional basis and gener-
may need to be informed or involved and/or a works        ally should be discouraged. Under certain specific
council agreement (Betriebsvereinbarung) may need         circumstances existence of the hotline will need to
to be drafted and agreed upon.                            be notified to the supervisory authority.

Whistleblowing-Hotlines and Ethical Codes                 Launching such a hotline as well as implementing an
Sec. 301 Sarbanes Oxley (SOX) requires audit-com-         ethical code requires detailed consideration of the
mittees at SOX-regulated companies to establish           mandates of SOX, the company’s needs and the
hotlines for the submission of employees’ concerns        German data protection law. The works council will
or complaints regarding questionable accounting or        also need to be involved.
auditing matters to their employer (so-called “Whis-
tleblowing-Hotlines”). The US Securities and Ex-          Processing of Data for Marketing Purposes
change Commission (SEC) as well as internationally        Incidents of misuse of consumer data have caused
operating SOX-regulated companies often assume            the German legislator to enact new regulations for
that such hotlines have been made available to all        the usage of consumer data for marketing purposes.
employees, including employees working in the sub-        Processing of data for such purposes will generally
sidiaries located outside the US, particularly as many    be restricted (and the consent of the data subject
non-SOX-regulated companies offer such hotlines to        will therefore need to be obtained in most cases).
their employees to implement anti-corruption pro-         The new regulations will come into force on Sep-
grams or ethical and behavioural codes.                   tember 1, 2009.

As part of such hotline, personal data about the          In addition, the use of data for scoring purposes in
notifying employee and the accused person is likely       relation to the granting of credit or the transfer of
to be processed. Even if such processing is required      consumer data to respective credit agencies will
and allowed in the US, in Germany – and in other          be restricted from September 1, 2009
European states in which such a hotline may be
offered by an employer – compliance with the re-          Data Processing Audit
spective data protection laws has to be ensured.          An increasingly important means to ensure compli-
Under German Law no specific binding regulations          ance with German data protection regulations is to
previously existed, although now the “Duesseldorfer       carry out an audit of the respective data processing
Kreis”, which is the national coordinating group of       activities and a bill has been passed by the legislator
the German data protection supervisory authorities,       in order to establish uniform guidelines for such audit-
has issued a written guidance (opinion of April 20,       ing (Data Processing Auditing Act). These provide that
2007). According to this guidance such hotline shall      carrying out an audit is optional but, where used it
Doing Business in Germany Data Protection and Privacy      122 | 123




shall be carried out by an official auditor. The Data
Processing Auditing Act also regulates the procedure
for the carrying out of such audit as well as the neces-
sary requirements for obtaining an official seal. The
law is expected to come into force in 2010.



Dr. Stefanie Hellmich, LL.M. (Madrid)
stefanie.hellmich@luther-lawfirm.com
Telephone +49 (6196) 592 24118

Silvia C. Bauer
silvia.c.bauer@luther-lawfirm.com
Telephone +49 (221) 9937 25789
Doing Business in Germany Information Technology                                                            124 | 125




Information Technology

In addition to the data protection issues which have been discussed
in the previous chapter, there are a number of other matters relating to
Information Technology (IT) that are of importance not only for the soft-
ware industry but for all entrepreneurs using IT in their business. All
companies doing business in Germany (not only those within the IT sector)
need to be aware of IT-related issues, particularly as the observance
of IT Compliance and IT Governance is an integral part of general
Corporate Compliance.




Protection of Software in Germany                         could be arguable whether such production means
                                                          that the IT provider has a right to distribute the spe-
The provenience for software protection can be found      cific piece of software to other third parties (cf. below).
in the German Copyright Act (Urhebergesetz, UrhG).
The UrhG, however, contains only a few specific           Supplemental protection for software can be obtained
provisions regarding software protection, in general      under the German Act against Unfair Competition
in Sects. 2 and 69a et seq. UrhG. Furthermore, the        (Gesetz gegen den Unlauteren Wettbewerb, UWG)
extent of copyright protection for software is not un-    and this may in certain circumstances protect soft-
limited as it does not provide sufficient protection      ware against copying and plagiarism (cf. the chapter
against the independent development of the same           about competition law). In some rare cases, software
software solution by a third party. Also, the UrhG does   may also enjoy protection under the German Patent
not protect the utilisation of the concept of the soft-   Act (Patentgesetz, PatG). However, under German
ware by third parties unless the identical source code    patent law a patent will only be granted for a com-
or object code is being used. This means that if a        puter-implemented invention if it involves a technical
software developer produces software which has            contribution. Furthermore, at present, the rulings and
been specifically developed for the ordering party, it    court decisions in Germany and Europe are not clear
regarding the extent of the technical contribution          be the right remedy (under the law) for the correction
which is required for such patent protection.               of any mistakes in the software.



Software License Agreements                                 Service Contracts and Service Level
                                                            Agreements
German law does not recognise a specific legal
category of agreements for software agreements or           As a result, the licensing of software is often accom-
license agreements. Rather, under German law, the           panied by a special service contract (a support and
provision of IT services and even the mere delivery         maintenance agreement), and the provision of IT
of software has to be classified within the long list of    services may often be further subject to compre-
existing categories of agreements set out under the         hensive Service Level Agreements (SLA) which de-
German Civil Code (Bürgerliches Gesetzbuch, BGB).           fine and modify the quality of the services to be
This very rudimentary classification then impacts the       provided and related remedy. SLA will usually set out
set of law which is applicable to certain parts of the      the penalties which will apply where there has been
agreement such as warranty, liability, acceptance,          a failure to discharge obligations under the contract,
partial payments, statute of limitations, the right of      but may also set out bonus credits which may be
elimination of defects by oneself, etc. In general, these   applicable in certain cases. However, even a SLA
stipulations do not really fit with the special require-    would also be judged according to the general rules
ments of IT-related contracts. A license agreement in       of the BGB and must therefore be drafted with due
relation to a piece of standard software may be, for        care in order to ensure that all the provisions of the
example, classified as a purchase agreement in terms        agreement are valid and enforceable and are not
of the BGB if the software is delivered “as is” without     effected by the operation of the law.
modifications for the buyer. However, if the (same)
software is being provided for a certain period of time     In essence this means that the drafting and inter-
with e.g. recurring payments or combined with some          pretation of software and IT-related contracts has to
sort of obligation on the part of the licensor to service   be carried out in light of the special rules and prin-
the software, the provisions for rental agreements          ciples that are not only laid down in statutory law but
may apply to both this software license and the appli-      also by the courts. This is also the case for de facto
cation services provided. The latter could mean that        standard license conditions which are delivered in
the licensor has permanent obligations to the licensee      connection with open source software and it is
in respect of the software during the entire term of the    therefore possible that even some of the well known
agreement, whereas a seller of software would only          provisions contained in the General Public License
have warranty obligations for a limited time period of      (GPL) could, for example, be considered void under
two years (which may in any event be further reduced        German law if they were put to the test.
to one year). This would mean that if any bugs in the
software were corrected by the customer rather than
by the licensor, this would not, for the purposes of the
law, absolve the licensor of any liability and would not
Doing Business in Germany Information Technology                                                             126 | 127




Software in an Insolvency                                    Such IT Compliance is not limited to the CEO’s re-
                                                             sponsibility for copyright issues (although it is indeed
Another important factor which should not be neg-            advisable to conduct internal audits from time to time
lected in connection with the business continuity            to verify if the number of install counts corresponds
demands of a company is the protection of usage              with the number of existing licence agreements for
rights for the software in the event that the IT pro-        the software). A license management is important
vider or the licensor becomes bankrupt. If the licensor      because software publishers may under German
becomes insolvent or an administrative receiver is           copyright law – directly or through third-party asso-
appointed in respect of the licensor’s assets, Sec. 103      ciations – conduct audits where there is little or almost
German Insolvency Code (Insolvenzordnung, InsO)              no evidence of non-compliance on the company’s
still basically stipulates that the receiver may terminate   part. In this case, businesses may simply receive
the license agreement that is in force. Therefore, any       a notice requesting them to prove compliance with
rights to use the software could be extinguished im-         the licenses granted, or law enforcement officers
mediately at the discretion of the receiver unless the       may appear unexpectedly. Experts predict that more
parties have entered into some form of escrow agree-         companies will continue to be subjected to external
ment which is entered into between the parties in            software audits by enforcement organizations and,
relation to their respective rights to the source code       where a company is found to be in breach of the
of the software in the event of insolvency. However,         relevant intellectual property rights, the business will
even an escrow agreement may not always provide              face a demand for back-payment of licence fees
for sufficient protection for the core systems because       at punitive levels plus additional damages.
such escrow agreements may also be subject to the
mandatory rights of the receiver under the insolvency        IT Compliance also includes the obligation for com-
code. To be on the safe side, it is therefore advisable      panies doing business in Germany to comply with
to add provisions into the software licence agree-           the archiving rules set out in Sec. 257 German Com-
ment about how the source code will be treated in            mercial Code (Handelsgesetzbuch, HGB) and the
such an event.                                               General Tax Code (Sects. 146, 147 Abgabenord-
                                                             nung, AO). This means that the CEO has to ensure
                                                             that the IT systems are operated in accordance with
IT Compliance and IT Governance                              the so-called “Generally Accepted Electronical and
                                                             Optical Storage Principles” (Grundsätze DV-gestützter
Finally, doing business in Germany does not only             Buchführungssysteme, GOBS) and the “Principles for
mean that companies have to comply with all the              Digital Tax Audits” (Grundsätze zum Datenzugriff und
general rules laid out in this Guide (so-called Corpo-       zur Prüfbarkeit digitaler Unterlagen, GDPdU) issued
rate Compliance, cf. above). Rather, companies also          by the Federal Ministry of Finance. As these guidelines
have to make sure that their Information Technology          for archiving, data retention and tax audits are also
(IT) is in full compliance with statutory law and further    basically applicable to business emails and attached
IT Governance requirements.                                  documentation, it is obligatory for companies to make
                                                             sure that all appropriate data retention policies are
                                                             in full force and effect. This is also important because
of e-discovery regulations in other jurisdictions (espe-     control procedures may be needed in order to satisfy
cially U.S.A. and U.K.) that may have an impact on           the control objective. This can be done by appointing
data recovery policies even for companies in Germa-          an Information Security Officer to coordinate activities
ny (even though there is no concept of e-discovery           in relation to the secure handling of data.
under German procedural law).

                                                             IT Standards
IT Governance and Risk Management
                                                             In view of the general rules outlined above, compa-
Although there are no specific law provisions (for           nies are well advised to establish an IT-supported risk
data protection requirements see above) requiring            and service management that will prevent, or at least
“good information technology practices” or a specific        minimise, the potential danger of incidents occurring.
set of measurements for IT Compliance, it is impor-          In order to comply, companies may rely on industry
tant that in order to avoid personal liability and also to   standards such as CobIT (Control Objectives IT),
comply with due care requirements, the management            service management rules like ITIL (IT Infrastructure
is required to install a monitoring and control system       Library), or the “IT Grundschutz Manuals” (IT-Grund-
that allows early detection of incidents or events that      schutz-Kataloge) issued by the Federal Agency for
could put the existence of the company at risk (ana-         IT-Security (Bundesamt für Sicherheit in der Informa-
logy to Sec. 91 para. 2 AktG, respectively Sec. 43           tionstechnik, BSI). Applying these IT standards can
para. 1 GmbHG). Therefore, a company must also               be a key indicator of IT Compliance and IT Gover-
comply with certain quality and security requirements        nance. However, under statutory law there are no
in relation to its information infrastructure. These         minimum standards or specific requirements. This
should also cover the prevention of risks resulting          means that any form of efficient IT risk management
from erroneous input and processing of data.                 (including an IT continuity plan to ensure availability of
                                                             relevant data) could be potentially compliant.
Without having a special law or regulation requiring a
certain level of IT Compliance, the management of a          The following principles may serve as a guideline for
company needs to make sure that efficient measures           the necessary control mechanisms:
are in place to ensure sufficient control over its IT sys-
tems in order to enable effective IT risk management.           controls related to the initiation, recording, process-
This means that the management must ensure the                  ing and reconciling of account balances, classes
existence of an internal (in case of a third party IT           of transactions, disclosures and related assertions
provider external) control system or framework to               included in the financial statements;
support the various business processes. Mostly,                 controls related to the initiation and processing of
those control objectives can be achieved by built-in            non-routine and non-systematic transactions; as
application control functionality. This functionality is        well as to the selection and application of ac-
commonly found in integrated ERP environments,                  counting policies;
such as SAP. In cases where this functionality is not           controls related to the prevention, identification
available, a combination of manual and automated                and detection of fraud;
Doing Business in Germany Information Technology                                                        128 | 129




  company-level controls, including the control en-          procedures to determine whether any compro-
  vironment and controls over the period-end finan-          mises of the assets, e. g. loss or modification of
  cial reporting process as well as controls over            data, has occurred;
  procedures used to enter transaction totals into           restrictions on copying and disclosing information;
  the general ledger and to record recurring and             access control regulations;
  non-recurring adjustments to the financial state-          establishment of an escalation process for problem
  ments (e. g. consolidating adjustments, report com-        resolution;
  binations and reclassifications).                          regulations regarding hardware and software in-
                                                             stallation and maintenance;
                                                             change management procedure;
Third Party Provider                                         reporting and notification of security incidents.

The implementation of policies and procedures as           Finally, companies should be aware that because
described before is also mandatory where IT services       of vast technical improvements the life-cycles of
are not provided in-house, but by a third party            IT systems are becoming shorter and therefore IT
IT supplier. A company therefore requires all third        compliance requirements are subject to continuous
parties providing IT services to comply with those         change. Still, IT Compliance and IT Governance
key elements. Arrangements which involve a third           should not be regarded as a burden. Rather, estab-
party who has access to the company’s information          lishing service-orientated structures within the IT
processing facilities must be based on a formal            systems and procedures (and therefore complying
contract containing, or referring to, all the security     with IT Governance requirements) can also tremen-
requirements above – this is to ensure compliance          dously contribute to the value of a company.
with the company’s security and information handling
policies and standards. When agreeing contractual
relations with third parties, the company must also        Dr. Markus Sengpiel
make sure that the standards implemented by the            markus.sengpiel@luther-lawfirm.com
service provider are at least equal to those imple-        Telephone +49 (221) 9937 25736
mented within the company. Additionally, the follow-
ing topics should be included into agreements with         Dr. Michael Rath
the company’s IT provider (or should be installed as       michael.rath@luther-lawfirm.com
in-house guidelines):                                      Telephone +49 (221) 9937 25745

  information security policy;
  Service Level Agreements (SLA) or policies for
  availability, reliability, performance, levels of sup-
  port, continuity planning, etc.;
  asset protection, including procedures to protect
  organisational assets, including information and
  software;
Doing Business in Germany Litigation, Arbitration and Mediation                                                   130 | 131




Litigation, Arbitration
and Mediation

There are different ways available for resolving disputes, including by
litigation before the competent public courts, by decision of a panel of
arbitrators either constituted ad hoc or under the rules of institutional
arbitration, or by mediated agreement of the parties.




Litigation                                                        constitutional issues. However, besides deciding on
                                                                  constitutional disputes, the court also reviews laws
The Court System                                                  and cases submitted to it by other courts, local or
Courts in Germany are divided into ordinary courts                federal parliaments and even individuals. Any person
(ordentliche Gerichte) and specialised courts (Fach-              feeling injured by a legal measure which can not be
gerichte). Ordinary courts exercise jurisdiction over             reviewed by the regular courts, can file a constitutional
all matters not allocated to any of the specialised               complaint with the Federal Constitutional Court re-
courts (administrative, tax, labor or social courts), i. e.       questing that it carries out a review of the measure.
civil and criminal law. The different branches have
been established to guarantee a versed judgment                   Civil Jurisdiction
even if very specific matters of law are involved.                The branch of the court system which might be of
Overall, the court system guarantees comprehensive                most importance for an investor is the civil section of
legal recourse for a party which considers that its               the ordinary courts. Within the ordinary courts, there
rights have been violated.                                        are a number of different hierarchy levels, which range
                                                                  from low to high: local courts (Amtsgerichte), regional
Not being part of these regular branches, the Federal             courts (Landgerichte), higher regional courts (Ober-
Constitutional Court (Bundesverfassungsgericht) is                landesgerichte) and the Federal Court of Justice
the relevant competent court for disputes in relation to          (Bundesgerichtshof).
In local courts, any civil case is tried in front of a sole   has to be based on alleged errors of law and is only
judge whereas in regional courts, if highly specific          permissible if it has been granted in the contested
branches of law (e. g. communications law, copyright          judgment, although a refusal of this grant may be
law, etc.) are involved and the case is particularly          rejected by the Federal Court of Justice.
complex and difficult, the case will be tried in front of
a chamber of three judges. In practice it is usual for a      Civil Procedure
case to be tried in front of a sole judge. The higher         The German Constitution (Grundgesetz, GG) guaran-
regional courts and the Federal Court of Justice gen-         tees all natural and legal persons the right of due
erally comprise a panel of either three or five judges        process. Due process includes, inter alia, the right
respectively. In order to ensure that any case is tried       to be present at the trial, to be heard in court, and to
in front of a competent judge, panels specialised in          a fair and public trial presided over by unprejudiced
specific areas of law (e. g. anti-trust law, corporate        and neutral judges.
law) have been established by many courts. Although
the courts are divided into state courts at the lower         The basic rule of German civil procedural law is the
levels and federal courts at the higher levels, all courts    principle of party disposition. The choice of whether a
apply the same law. Unlike in the United States,              lawsuit is raised, and which type, is at the disposition
for example, there are no parallel tiers of state and         of the plaintiff. The plaintiff may withdraw his com-
federal courts.                                               plaint entirely; the parties may settle the claim or the
                                                              defendant may acknowledge the claim partially or
Local courts have jurisdiction over claims worth up           entirely. A further consequence of the principle of
to C5,000.00, whereas claims with a value of more             party disposition is that the parties are responsible
than C5,000.00 are tried at regional courts. There            for stating full particulars of claim and defence and
are some exceptions to this rule (e. g. divorces, family      for supplying their cause with sufficient evidence. In
relations) which cannot be discussed extensively              order to do so, the parties cannot rely on a discovery
within this brief overview. At the request of one of          procedure, which is unfamiliar in German procedural
the parties, business related disputes under the              law. If the defendant fails to defend itself against
jurisdiction of regional courts can be delegated to           the claim or to appear at the oral hearing, the court
a chamber specialised in commercial matters and               can render a default judgment. If a lawsuit becomes
consisting of one judge and two expert laymen.                obsolete after it has been initiated, e. g. due to the
                                                              defendant fulfilling its obligation, the plaintiff can make
Jurisdiction and Appeal                                       a declaration of obsolescence, and the case will be
First instance judgments can be appealed (Berufung)           terminated by an order of the court for the costs.
on issues of fact and law if the amount in dispute
on appeal exceeds C600.00 or if the appeal                    Summary Proceedings for Order to Pay Debts
has been explicitly allowed in the judgment of first          Taking into account that many disputes over a right
instance. Appeals are brought before the next higher          to receive payment are quite uncomplicated from
court in the hierarchy. Judgments of the appellate            a legal point of view, there is a need for an efficient,
court can be brought for a second review at the               fast, and convenient procedure to recover overdue
Federal Court of Justice. This legal remedy (Revision)        outstanding debts. German law does provide such
Doing Business in Germany Litigation, Arbitration and Mediation                                                    132 | 133




an instrument by allowing creditors to file a motion              are common in cases concerning construction dis-
requesting that the court issue the debtor with an                putes or damage claims for personal injury, or where
order to pay. The motion is granted without reviewing             goods damaged are perishable. The evidence taken
the merits of the claim. The plaintiff just has to allege         in such proceedings can later be introduced into
that a certain amount of money is due for payment.                the lawsuit.
If the debtor identified in the court order does not
contest the claim within two weeks upon service                   Duration of Proceedings
of the order, the creditor can enforce the order. If              It is difficult to give an estimate on the general dura-
the debtor objects, the creditor has to decide whether            tion of civil trials in Germany, as the duration of a
or not to pursue his interests in a regular civil trial.          trial very much depends on the court with which the
                                                                  case is filed and its caseload. For an average claim
Provisional Measures                                              filed with a regional court, a civil trial may be finished
To secure the legal and factual position of a party               and a judgment enforced within six to eight months
before or during a lawsuit, German procedural law                 from the date of the filing.
offers the option of obtaining an interlocutory injunc-
tion (Einstweilige Verfügung) or attachment orders                Costs of a Lawsuit
(Arrest) against the other party. As a general rule,              The costs of a lawsuit will comprise court fees and
interlocutory injunctions may not pre-empt a final                extrajudicial costs such as the attorneys’ fees, which
decision by the courts. Thus, an interim payment or-              will both ultimately have to be paid by the party los-
der is only likely to be granted under very exceptional           ing the case. Court fees are calculated pursuant
circumstances. To secure claims for money, an order               to the Court Fees Act (Gerichtskostengesetz, GKG)
of attachment against the assets of the defendant                 and depend on the value of the claim/the amount in
can be obtained. If later on the provisional measure is           dispute, which corresponds to a statutory defined
held by a court to have been unjustified, compensa-               base fee. To start the proceedings, the claimant has
tion for damages must be paid.                                    to pay the court fees in advance.

Independent Proceedings for Taking of Evidence                    The attorneys’ fees are regulated by the Attorney Fees
Irrespective of whether a claim is already pending,               Act (Rechtsanwaltsvergütungsgesetz, RVG). While it
German procedural law gives parties the option to                 is increasingly common for fee agreements to be
take evidence in independent proceedings (Selbst-                 agreed between attorney and client, in litigation mat-
ständiges Beweisverfahren). As a prerequisite, there              ters it is not possible for the attorney/client to agree
must be cause for concern that evidence will be lost              on fees lower than those prescribed by statute. These
or deteriorate before the court officially decides to             fees are calculated pursuant to the value in dispute
take evidence. If no lawsuit is pending, such procee-             and finally depend on the status of the proceedings:
dings are also permissible if the party initiating the            raising the lawsuit, arguing the case during the oral
proceedings has an interest to have determined                    hearing and settling the case each entail a base fee
the condition of a person or an object, or of the                 defined by statute. Although it is possible to agree on
causes for damage or an injury, or of the necessary               higher fees or hourly rates, German law widely pro-
efforts to remedy a damage. Thus, such proceedings                hibits contingency fees, which may only be agreed
upon in special circumstances and if the client would       Legal Framework
otherwise be precluded from litigating. Furthermore, a      The German law on arbitration is found in the tenth
party winning the case will only be reimbursed with         section of the German Code of Civil Procedure (Zivil-
the statutory attorneys’ fees, even if it has agreed on     prozessordnung, ZPO). After having been thoroughly
higher rates.                                               modernised in 1998, the current law on arbitration is
                                                            based on the UNCITRAL Model Law on International
                                                            Commercial Arbitration and among the most modern
Arbitration                                                 in the world. Any claim with a monetary value can be
                                                            submitted to arbitration, and no difference is made
Differences Compared to Proceedings at Court                between national and international arbitration. Arbitra-
For numerous reasons, arbitration proceedings often         tion tribunals have the competence to issue tempo-
fit the parties’ interests better than a civil lawsuit,     rary injunctions, although these need to be declared
especially for disputes arising out of business rela-       enforceable by the competent courts. The compe-
tionships. In contrast to court proceedings, arbitration    tence for all court measures and actions relating to
is private in nature and confidential. There is no appeal   an arbitral award is assigned to the higher regional
against the award (except on certain points of law,         courts. German law does not offer the possibility of an
see below), which usually means that a faster solution      appeal against an arbitral award. In accordance with
to the parties’ dispute can be reached. Within the          international standards, however, it is possible to have
strict limits of certain mandatory rules, the procedure     the award reviewed for certain procedural errors or
followed is widely at the parties’ disposition and can      the violation of mandatory standards of German law.
be drafted according to their needs. The parties can        For the enforcement of foreign arbitral awards, the
select their own arbitrators and invite expert laymen       law refers to the New York Convention on the Rec-
to the tribunal, which can further the fast and effec-      ognition and Enforcement of Arbitral Awards.
tive resolution of the dispute.
                                                            Institutional Arbitration
                                                            Germany has two major arbitral institutions offering
                                                            full services. The German Institution for Arbitration
                                                            (Deutsche Institution für Schiedsgerichtsbarkeit, DIS)
                                                            is a registered association, with approx. 550 mem-
                                                            bers from Germany and abroad, with the aim of
                                                            promoting national and international arbitration. The
                                                            DIS offers an administered arbitral procedure under
                                                            the DIS Rules, currently from 1998. The German
                                                            Maritime Arbitration Association (GMAA) is active
                                                            in the field of international maritime and transport
                                                            law. It does not offer an administered procedure, but
                                                            has specialised rules of arbitration and a list of expert
                                                            arbitrators.
Doing Business in Germany Litigation, Arbitration and Mediation   134 | 135




Mediation

Whereas a judgement or an arbitral award is a legal
solution imposed by a judge or arbitrator, media-
tion tries to assist the parties in finding their own
consensual dissolution to a conflict. Mediation can
offer certain advantages in contrast to a lawsuit, es-
pecially where long-standing business relationships
are affected. As mediation is not a legal proceeding in
the strict sense, the parties are free to enter or leave
the mediation process at any time. To date, mediation
has not gained significant status as a means to settle
business disputes.



Dr. Dirk Kleveman
dirk.kleveman@luther-lawfirm.com
Telephone +49 (40) 18067 12913
Doing Business in Germany Real Estate and Construction Law                                                  136 | 137




Real Estate and
Construction Law

Investors seeking to put their money to work in Germany are confronted by
a wide array of rules and approval requirements from different areas of
public law, and particularly a wide range of provisions relating to planning
permission, building regulations and environmental laws.




Form and Registration of Property                              interest in it. Each co-owner may convey or en-
                                                               cumber his interest without the consent of the
Forms of Ownership in Germany                                  other co-owner(s).
Absolute ownership is the most common way that                 Joint ownership (Gesamthandseigentum): The
real estate is owned in Germany. It generally covers           ownership is held by two or more persons or
the totality of the legal rights, entitlements and obliga-     legal entities forming an alliance in this respect.
tions attached to property, but is subject to general          The individual joint owner cannot claim any share
restrictions imposed by law or rights of third parties         of the real property as his personal share. He may
(e.g. neighbors).                                              not sell or encumber his share of real property
                                                               but only his interest in the joint ownership. Frequent
There are three types of absolute ownership in                 examples are civil law partnerships (Gesellschaft
Germany:                                                       bürgerlichen Rechts) and communities of heirs
                                                               (Erbengemeinschaft).
   Sole ownership (Alleineigentum): The owner is one
   individual person or one legal entity.                    In addition, there are special forms of ownership like
   Co-ownership (Miteigentum nach Bruchteilen):              condominium (Wohnungseigentum) and part-owner-
   Several persons or companies share ownership              ship (Teileigentum) as well as the heritable building
   of a property, but each co-owner has an individual        right, HBR (Erbbaurecht). German law allows for the
division of a building into separate “part” ownership         Usufruct is an inalienable and non-inheritable right
which by consequence may be acquired as such.                 in rem and may be granted for the life of the holder
Thus, it is possible to enjoy condominium or flat             or a limited period of time. For the land owner, it
ownership where flats in a building are concerned,            provides the possibility to profit from the land on a
or part-ownership where the premises in question              long term basis without giving up the ownership,
are not used for residential purposes. Each part-             whereas for the other party it grants an ownership-
owner is entitled to the full use of his absolute unit        like position and confers more stability than a mere
ownership, e.g. to let, charge or sell it.                    lease agreement.

Furthermore, the ownership of a building, in general,         Land Register and Land Survey Register
is tied to the ownership of the land to which the             In Germany, the entire territory is surveyed in cadas-
building is firmly connected and on which it stands.          tral plots and recorded in two registers for different
In contrast, the alienable HBR – also referred to as          reasons and held by different authorities.
“leasehold” – differentiates between ownership of
the land and ownership of the building. It allows             With the exception of certain plots which serve a
the beneficiary to construct and own a building on            public purpose, all plots of land are recorded in
foreign land for a certain period of time, e. g. 20, 50       the land survey register which is kept by the com-
or 99 years or for the lifetime of the building. To           petent cadastral offices (Katasterämter) of the town-
compensate for the restriction of the landowner’s             ships and consists of the cadastral map including
rights, the HBR holder is usually obligated to pay            cadastral figures (Liegenschaftskarte/ Flurkarte) and
a ground rent (Erbbauzins), which is payable on a             the cadastral register (Liegenschaftsbuch). The land
regularly (mostly monthly or annual) basis. Upon              is divided into districts (Gemarkung), cadastral units
termination, all buildings erected become property            (Flure) and plots (Flurstücke). Details such as position
of the owner of the real estate who will have to com-         and size of land are entered into the cadastral
pensate the holder of the HBR with the time value             registry. There is a legal presumption that all facts
(unless agreed otherwise).                                    registered in the land survey register are accurate.

Moreover, real estate may be charged by an usufruct           In contrast to the land survey register, the purpose of
(Nießbrauch) giving the beneficiary – similar to owner-       the land register, which is kept by the land registry
ship in the above terms – the right to reap the fruits        at the local courts (Amtsgerichte), is to record the
of or to use something belonging to another owner.            legal interest in the land. Every land register file dis-
It allows – in contrast to other servitudes like ease-        closes one real estate property (possibly consisting
ments – not only for a certain use but for the use of         of several plots) and provides information on the
the plot of land in its entirety, i.e. including the acces-   composing plots (i. e. their names, character, e. g.
sories. At the same time, the holder of a usufruct            building, industry, agricultural land) in the inventory
normally is obligated to bear all costs relating to the       and in particular the legal ownership in division I.
real estate such as public charges, insurance costs           Existing encumbrances and restrictions like pre-
and usually the costs for repairs.                            emption rights or servitudes (Lasten und Beschrän-
                                                              kungen) are displayed in division II, and mortgages,
Doing Business in Germany Real Estate and Construction Law                                                 138 | 139




land charges or annuity charges (Hypotheken,                 in the USA, to protect against deficiencies in the
Grundschulden, Rentenschulden) in division III of            land records.
the land register.
                                                             A possible difference between the registered owner
All property transactions and encumbrances have              and the true owner may, in particular, result from
to be registered in the land register. In many parts         legal transactions or disposals which do not need
of Germany, there furthermore exists a register of           to be or have not yet been registered in the land reg-
public encumbrances. These encumbrances mainly               ister (e. g. if property is passed on to one’s heirs
refer to restrictions of use in relation to the building     or legal successors). Moreover, the registration of
rights like distances between neighboring buildings          a legal title may take months, depending on the
or the right to use a playground or parking lots on a        respective local land registry. Due to the sometimes
neighboring property.                                        significant period of time between the notarisation
                                                             of the property purchase agreement and the regis-
Condominium, part-ownership and the HBR are en-              tration of the new owner in the land register, the
tered in separate sheets of the land register. In addi-      purchaser needs to secure his rights by registering
tion, the creation of the HBR is registered in the           a so-called priority notice of conveyance (Auflas-
land register of the concerned real property as an           sungsvormerkung) in division II of the relevant land
encumbrance (in division II of the land register). A         register. This instrument protects against any trans-
separate land register sheet allows the condomini-           action or encumbrance of the said property i. e.
um/part-ownership and the HBR to be treated                  such transaction/encumbrances would not be valid
similarly to a real property and thus allows the owner       in respect of the conveyed purchaser. This priority
to register encumbrances and restrictions as well            notice may be registered relatively quickly (within one
as land charges, mortgages, etc.                             to four weeks), and thus secures the claim to obtain
                                                             the registration of full ownership. During the period
In contrast to other countries, in Germany there is a        between registration of the priority notice and regis-
legal presumption of the accuracy in relation to the         tration of the purchaser, the purchaser is protected.
registered rights and interests ad rem set out in the
land register. This means that registered rights are
presumed to exist and cancelled rights are presumed          Dr. Michael Fritzsche
not to exist. To impose legal certainty, this presumpt-      michael.fritzsche@luther-lawfirm.com
ion may only be rebutted by proving its inaccuracy.          Telephone +49 (211) 5660 18738
Thus, a person who by legal transaction acquires in
good faith from the registered owner a title is pro-                    c
                                                             Bojana Grbi´
tected by law even if the land register did not reflect      bojana.grbic@luther-lawfirm.com
the correct legal situation, i. e. the “book owner” was      Telephone +49 (211) 5660 16837
not the true owner. This ensures the greatest possible
transparency and reliability. The potential purchaser
of the real estate therefore needs no expensive in-
surance against title defects, as for example is usual
Doing Business in Germany Planning Law and Building Regulations                                             140 | 141




Planning Law and
Building Regulations

The public building law in Germany restricts the builder`s general freedom
of action for public benefits and forms the statutory framework for the free-
dom to build on property which results from Art. 2 and Art. 14 of the German
Constitution (Grundgesetz).




General                                                      regulation law is codified in the state building regula-
A building permit is required for the construction, alter-   tions of each German federal state (Bundesland) and
ation, demolition or change in use of a building, unless     sets out requirements for both design and construc-
it is a matter of residential buildings or buildings and     tion. A permit is granted if the project is admissible
structures that do not require a permit (regulated in        under planning law and is not opposed by any provi-
the state building regulations: Landesbauordnungen).         sions of building regulation law or by any other public
The admissibility and thus the approval of a building        law provisions which have to be considered by the
project is governed by planning law and building reg-        Building Supervisory Authority.
ulation law. Planning law is codified in the Federal
Regional Planning Act (Raumordnungsgesetz, ROG)              Planning Law
and the Federal Building Code (Baugesetzbuch,                The authority and responsibility of the federal states
BauGB) and regulates the use of land in one entire           to establish regional plans which then may be further
area (i. e. it sets out roads and building plots etc.).      specified by local plans is regulated by the Federal
Planning law therefore determines whether a building         Regional Planning Act. All requirements regarding
project fits into its surroundings. If this prerequisite     the safeguarding of public health, development of
is met, the project may be approved from a planning          infrastructure for traffic and other economic needs,
law perspective. The permit itself is governed by            promotion and reinforcement of economic activities,
the provisions of building regulation law. Building          etc. have to be taken into account and integrated as
far as possible. One important objective is environ-      Only those projects which do not conflict with the
mental protection which is a key future consideration     detailed local development plan and which ensure
as well as an issue which is subject to current regula-   that public services are not adversely affected, will
tion. A form of “horizontal” environmental protection     be approved. This includes ensuring that the prop-
is envisaged by planning law, i. e. including limits on   erty is satisfactorily connected to the public roads,
the use of natural resources (soil, land, water), safe-   electricity and the fresh/wastewater networks. If no
guarding areas for recreation and ecological pre-         detailed local development plan is available, the
servation, prevention and control of dangerous estab-     admissibility of the building project depends on
lishments/installations and in particular pollution       whether the building is to be constructed inside or
(hazardous substances in the air, soil, water, noise,     outside a developed area. In undeveloped outlying
waste etc), and implementing an accident preven-          areas only special projects, for example agricultural
tion and crisis management system. A process of           or forestry projects or projects destined to supply the
integrated spatial planning provides a mechanism          public with electricity and water etc., are allowed,
for balancing such conflicting objectives with the        whilst inside a developed area most building pro-
effective use of land and the social and environmen-      jects are allowed as long as they fit into the sur-
tal development of the area. Environmental impact         roundings as defined by other buildings.
assessments safeguard and ensure that the effects of
certain public and private projects are examined and      If no detailed local development plan is available for
assessed comprehensively and in plenty of time prior      a property on which a building is to be erected and
to an administrative decision (approval or disapproval)   the project is also not admissible under the general
regarding the project.                                    provisions of the Federal Building Code for areas
                                                          without a detailed local development plan, an inves-
The admissibility of building projects under planning     tor has the option of drafting a new plan itself for
law is regulated by the Federal Building Code. Dif-       the specific building project in consultation with the
ferent provisions apply depending on whether or not       community – this is done by preparing a so-called
a local zoning plan exists for the property which is to   project-related development plan. The investor then
be developed. Local zoning plans generated by each        concludes an agreement with the community in which
community for the area under its jurisdiction will        the investor undertakes to realize the project and
contain requirements for the development of the area      to carry out and to bear the costs of public services
concerned. Zoning is generally carried out in two         development. Once the aforementioned agreement
steps. First a land use plan and a preparatory and        has been concluded, the community can initiate the
rough local development plan are drawn up. These          local development planning procedure based upon
are then used to draft the detailed local develop-        the investor’s application and adopt the project-
ment plan which sets out the legally binding detailed     related development plan in the form of a bylaw. This
planning for the zoning area.                             plan constitutes binding planning law for the specific
                                                          project and has the same effect as a regular detailed
                                                          local development plan. The building permit for the
                                                          specific project can be granted on this basis. An in-
                                                          vestor does not, however, have a right to extend
Doing Business in Germany Planning Law and Building Regulations                                           142 | 143




the project-related development plan for other pur-         Provisions in the building regulations stipulate when
poses or to a greater area, in relation to which the        it is necessary to obtain a building permit and what
investor and community must instead reach a sepa-           conditions need to be met in order for the permit to
rate agreement.                                             be granted. A further building permit is not necessary
                                                            if a building permit has already been granted under
Building Regulations                                        other provisions, although some projects will always
As the primary objective of a State’s building regula-      need formal planning permission, such as waste
tion law is to prevent hazards, the regulations place       dumps or nuclear plants, for example.
special emphasis on the safety of buildings to ensure
that the inhabitants or visitors of such buildings do not
suffer injury from constructional defects. The building     Rüdiger Bonnmann
regulations also define requirements for social stan-       ruediger.bonnmann@luther-lawfirm.com
dards and environmental protection. Building regu-          Telephone +49 (221) 9937 25716
lation law also pursues architectural objectives, for
instance placing a prohibition on buildings that de-
tract from their surroundings or are an eyesore. In the
event that there is a significant contravention of the
Federal Building Code and the building regulations,
the building authority can stop the construction, order
the demolition of the building and/or prohibit its use.

To reduce the regulatory burden, an amendment to
several building regulations has waived the require-
ment of a prior building permit before construction
can start in certain areas of (well defined) local zon-
ing plans and more simple apartment buildings
of restricted volume. In these cases – after having
checked all requirements of the applicable building
regulations, and after having notified the building
authority accordingly, submitting all necessary tech-
nical plans etc. – the construction activity may be
started. In such instance, the building authority may
request that the normal building permit procedure is
initiated within one month after notification, although
only in cases of non-observance of legal require-
ments or if the project is particularly complex. In all
other cases the building authority must restrict its
interference to any later deviations or conflicts with
building regulations.
Doing Business in Germany Green Building                                                              144 | 145




Green Building

Where a building is developed or refurbished legal aspects concerning
energy and energy consumption have to be considered. The German Renew-
able Energies Act and the Energy Saving Regulation, which was revised
and will come into force in amended version in October 2009, are im-
plementing the EU guidelines to reduce the energy needs and support the
use of renewable energies. Those regulations have an impact on many
scopes of the real estate industry like Transactions, Construction Law or
Lease Agreements.




Legal Foundation                                        the nature of the source (e. g. 15 % solar or 50 %
                                                        biomass etc.). Alternatively, the owner may undertake
In Germany, there are inter alia two laws for climate   other compensating and climate friendly measures,
protection, namely the Renewable Energies Act (Er-      such as the use of a highly efficient combined heat
neuerbare-Energien-Wärmegesetz, EEWärmeG) and           and power plant (CHP) which would cover up to
the Energy Saving Regulation (Energieeinsparver-        50 % of the needed heat energy.
ordnung, EnEV).
                                                        Energy Saving Regulation
Renewable Energies Act                                  With the Energy Saving Regulation EnEV of 2007,
EEWärmeG came into force in January 2009. When          Germany transformed the EU Directive 2002/91/EC
developing a building or executing major refurbish-     of 16 December 2002 into German national law. EnEV
ment measures/extensions, the respective owner has      sets out certain construction regulations which ensure
to ensure that a certain percentage of the needed       the improvement of the energy efficiency of a building.
heat energy is obtained from renewable energy           In summary, it is intended to reduce the energy needs
sources. The individual percentage rate depends on      by an average of 30 % overall, and further support
the use of renewable energies. Moreover, it provides          ing of the required energy efficiency standards by an
for an Energy Certificate (Energiepass) either setting        average of 30 % is already under discussion.
out the actual energy needs of a building within
the last three years (Consumption Certificate; Ver-           Impact on Construction Law and Works Contract
brauchsausweis) or the extent of the energy typically         EEWärmeG and EnEV set out certain public law
needed (Necessity Certificate; Bedarfsausweis). The           construction regulations which are to be observed
Energy Certificate must be provided where: (i) a build-       when applying for a building permit. Hence, with
ing is newly developed or comprehensively refur-              regard to developments currently at the planning
bished, to the appropriate authorities on their de-           stage, though not in force so far, the more severe
mand, (ii) a building is sold or leased, to the prospective   requirements of EnEV 2009 need to be taken into
purchaser or tenant. If services are offered to the           account if the building application is expected to be
public in a building with more than 1,000 m² floor            filed with the authorities after the enactment date
space, the Energy Certificate needs to be displayed           on October 1, 2009.
in a visible position.
                                                              With regard to the works contract, the contractor
On March 18, 2009, German Legislature passed                  should be aware that the building, the refurbishment
the EnEV 2009. It will come into force on October 1,          or extension works respectively, must comply with
2009 and tightens the required energy efficiency              the laws in force at the date of final take over, includ-
standards under EnEV 2007 for new or comprehen-               ing EEWärmeG and EnEV. Otherwise, the contractual
sively refurbished buildings. The overall energy de-          works may be deemed to be defective. The employer
mand shall be reduced by a further average of                 might therefore claim bad workmanship. The con-
30 % and energy efficiency shall be increased by              tractor, therefore, is advised to consider the tighter
an average of 15 % compared to today’s levels.                requirements of EnEV 2009 or, dependent on the
Further, it sets out several obligations to refit old         expected date of final take over, even EnEV 2012,
buildings, for example: (i) certain heating and warm          when negotiating the works contract.
water pipelines need to be appropriately insulated, (ii)
from January 2020, off-peak-storage-heating installed         Impact on Real Estate Transactions
prior to 1990 must not be operated any more, (iii)            Where the respective building does not comply with
either the roof or not walkable but accessible top            the applicable building regulations set out in EE-
floor ceilings of heated rooms are to be appropriately        WärmeG and EnEV, this may constitute a defect of
insulated; from January 2012 this does also apply             the building. Subject to the provisions of the transac-
to any walkable top floor ceilings of heated rooms.           tion agreement, this defect may result in a warranty
                                                              claim against the vendor. The Energy Certificate is a
Where there is a violation of certain EnEV 2009 re-           rather formal requirement, which is just meant to
quirements an administrative offence may be com-              inform the purchaser (or tenant). The purchaser is
mitted, which may be penalised with a fine of up to           generally not entitled to claim for damages against
C15,000.00, concerning certain construction regu-             the vendor if the Certificate is not provided or con-
lations with a fine of up to C50,000.00. With EnEV            tains false information, unless otherwise agreed in
2012 (though not drafted so far), a further tighten-          the transaction agreement.
Doing Business in Germany Green Building                                                                146 | 147




Impact on Lease Agreements                                sustainability of a development. For the time being, it
In case of leases (or sub-leases) the landlord (or        may be awarded to new office and administration
the main tenant) is obliged to provide the Energy         buildings. In near future it will also be applicable to
Certificate to the potential (sub-) tenant for informa-   re-developed and refurbished buildings as well as to
tion without undue delay, on reasonable demand at         other types of developments, such as residential
the latest. However, due to the fact that it is simply    buildings and infrastructures. In order to achieve one
a notification, unless otherwise provided for in the      of the ratings (bronze, silver or gold), the respective
lease agreement, the (sub-) tenant may not claim for a    building has to fulfil a wide range of quality require-
defect of the lease object where the landlord does        ments (around 63 criteria), covering all main aspects
not provide the Certificate or the lease object does      of a building’s sustainability (environmental, economi-
not comply with the energy data set out therein.          cal, social cultural and functional, technical, process
                                                          and location/site quality).
The costs connected with the issuance of the Ener-
gy Certificate may generally not be allocated to the      Due to the wide range of the quality categories, the
tenant. The landlord may possibly claim a rent in-        Seal particularly certifies (beyond a construction in
crease if it is required to modernise the lease object,   compliance with environmental protection require-
in order to implement the measures recommended            ments) low life-cycle costs and a high comfort for its
in the Energy Certification to improve the energy         users (e. g. a healthy working environment), which
efficiency of the building.                               should increase the real estate’s market value and
                                                          marketability.
Impact on Protection of Historic Monuments
The requirements of EnEV may be departed from in          From the planning stage through to the final taking-
the case of historically important buildings and other    over of the building, the fulfilment of the require-
constructions which are considered to be worthy of        ments needs to be checked by an expert, who
preservation, if the execution of the requested mea-      monitors the necessary measures in a specification
sures causes damages to the monument’s structure          book (Pflichtenheft). On the basis of this book, a
or could result in unreasonably high expenses. It is to   preliminary seal may be granted which certifies the
be assessed by the respective building owner or the       future award of the Seal. This preliminary seal may
further responsible persons named by EnEV whether         be already used as a quality certificate when selling,
this exemption applies. Failure to accurately identify    leasing or otherwise utilising the real estate.
whether this exemption is applicable is at the risk of
the respective person. If incorrect, up to C50,000.00     The Seal was developed by the German Federal
may be fined.                                             Ministry of Transport, Construction and Urban De-
                                                          velopment (Bundesministerium für Verkehr, Bau und
German Seal of Quality for Sustained Development          Stadtentwicklung, BMVBS) in collaboration with
The German Seal of Quality for Sustained Develop-         Deutsche Gesellschaft für Nachhaltiges Bauen e. V.
ment (Deutsches Gütesiegel für Nachhaltiges Bauen,        (DGNB e. V.). The Seal is intended to achieve inter-
hereinafter: Seal) stands for the first comprehensive     national acceptance as “Made in Germany”. It shall
German certification system which assesses the            be applied internationally to very different types of
constructions. It will, however, compete with a number
of existing and internationally accepted certification
systems, such as the British BREEAM, American
LEED, French HQE, Japanese CASBEE and Austra-
lian Green Star.



Dr. Ulrike Freigang
ulrike.freigang@luther-lawfirm.com
Telephone +49 (211) 5660 10762
Doing Business in Germany   148 | 149
Doing Business in Germany Architectural and Construction Law                                                 150 | 151




Architectural and
Construction Law

The German Civil Code (BGB) does not provide adequate statutory require-
ments in respect to construction law. Therefore, the German construction
praxis is used to work with the VOB/B (Award and Construction Contract
Rules, Part B: General Contractual Conditions for the Execution of Building
Works), and contracts which are developed on that basis. For Architects and
Engineers the HOAI (Scale of Architects’ and Engineers’ Fees) is applicable.
The HOAI is not a contract, rather a sort of price regulation. It lays down
certain pricing rules for agreed contractual terms.




Architects and Engineers                                       Fees of September 1976, last amended in 1996 (Ho-
Under German building law, it is mandatory to use the          norarordnung für Architekten und Ingenieure, HOAI).
services of an architect to realize a building project. In     The HOAI divides an architect’s performance into
collaboration with the builder and with other spe-             descriptions and stages of performance. The HOAI
cialists (e. g. structural/construction engineers, con-        is not a contract, rather a sort of price regulation.
sulting engineers for technical systems, etc.), the            Hence, it does not govern the terms of the architect’s
architect develops the idea for the building project           contract, but lays down certain pricing rules for
and its realisation.                                           agreed contractual terms. That is why the parties are
                                                               not required to regulate all various stages for per-
Scope of Services and Fees                                     formance in a contract. However, to avoid ambigui-
The scope of services depends on the architect’s               ties, it is advisable to define each stipulated element
contract according to Sec. 631 seq. German Civil Code          of performance in accordance with the project re-
(BGB) and the Scale of Architects’ and Engineers’              quirements. Still, it remains questionable whether
the HOAI is also applicable if a foreign architect is        project supervision (supervising the implementa-
involved in a German construction project or a Ger-          tion of the project for compliance with building
man architect is involved in a foreign construction          approval or consent, etc.);
project – this question is not answered by law and           project supervision and documentation (physical
is highly disputed.                                          inspection of project to identify defects, etc.).

There are some additional rules that apply to fee         Timing
agreements. Fees can only be effectively fixed by the     The contract usually does not stipulate a deadline to
act of party when the contract is awarded. The mini-      be observed by the architect or engineer. This is
mum rates laid down in the HOAI may only be under-        considered to be one of the main obligations of the
cut in exceptional cases. If contractual fee arrange-     builder. If, for example, the architect fails to provide
ments are invalid because the requirements are            the works plan within a reasonable period of time and
not met, the minimum rates laid down in the HOAI          this leads to the postponement of the contractual
will apply.                                               deadline, the principal may successfully sue for da-
                                                          mages if it can prove that the delay was caused by
Organisation Phases                                       the architect’s actions.
The organisation of the planning stage follows indi-
rectly from the HOAI, according to which it is divided    Liabilities and Insurance
up into nine basic services (phases):                     The builder assumes liability in relation to third parties,
                                                          he is responsible to the authorities and other third
  basic calculations (clarification of requirements,      parties involved. In relations inter se, the liabilities are
   consultation on scope of entire project);              divided up among those involved with the planning,
  initial planning (analysis of basic situation, harmo-   who in turn are responsible to the builder under their
  nization of objectives, etc.);                          contracts for work and services. The architect, how-
  draft planning (detailed work on the planning con-      ever, bears chief responsibility for the planning and
  cept, step-by-step working out of the solution in       project supervision.
  draftsman’s terms, etc.);
  planning approval (preparation of documents for         The German Civil Code provides that the architect/
  submission as required by public law for obtaining      engineer shall accept liability for hidden or apparent
  approval, etc.);                                        defects within a 5 year period. This warranty period
  works plan (working out in detail the results of        commences on the day of acceptance of the services
  phases 3 and 4, etc.);                                  of the architect, this is usually after the project super-
  preparation of placement of order (calculation and      vision and documentation stage. In the event of liabi-
  collation of quantities as the basis for drawing up     lity for wilful default, the liability is subject to a 10 year
  a description of work, making use of the contri-        limitation period.
  butions of others involved in the planning, etc.);
  collaborating on the placement of order (collation      Mistakes made at the planning or project supervision
  of documents on conditions for all types of work,       stage are in most cases covered by the architect’s
  obtaining of quotations, etc.);                         liability insurance. As a rule, every architect has such
Doing Business in Germany Architectural and Construction Law                                                   152 | 153




a policy, as he is not otherwise authorized to submit          purpose in the absence of any express agreements
building particulars and plans.                                to that effect. In general, however, it is safe to say
                                                               that, if the architect has been entrusted with all the
Termination                                                    architectural work until completion of construction,
The contract usually includes special clauses which            he is not entitled to retain any such rights. Instead,
entitle both parties to ter minate the contract. In the        the architect may subsequently exercise his right to
absence of a contractual provision, both parties are           imitate his own work.
entitled to terminate the contract with good cause if
the other party is in breach of contractual obligations        Building Contracts in General
and/or endangers the success of the project.                   Building contracts in Germany are generally governed
                                                               by Sects. 631 to 651 of the German Civil Code (BGB).
The architectural or engineering contract may be               However, these provisions only deal with “contracts
terminated at any time by the principal without cause.         for work” in general and cover a wide range of con-
In this case, the principal has to pay damages to the          tractual agreements, not necessarily only classical
architect. Contracts drafted by the architect normally         building contracts. Therefore, very often the VOB/B
provide for a lump sum of 60 % of the fees relating            (Vergabe- und Vertragsordnung für Bauleistungen,
to the uncompleted services to be paid to the archi-           Teil B: Allgemeine Vertragsbedingungen für die Aus-
tect. As the Federal Appeal Court decided at the               führung von Bauleistungen – Award and Construc-
beginning of 1996 that these contractual clauses               tion Contract Rules, Part B: General Contractual
are not valid, the architect is now forced to explain          Conditions for the Execution of Building Works) is
and to prove the actual damage caused by the ter-              incorporated into a building contract. The VOB/B
mination of the contract.                                      contains provisions regarding the legal relationship
                                                               between the principal and the contractor and is
Intellectual Property Rights                                   “tailor-made” for building contracts. Since the pro-
As outlined before in the chapter about Copyrights,            visions of the VOB/B constitute general terms and
the UrhG protects artistic works, works of architec-           conditions, the content of every single provision can
ture and applied art and the plans for such works, and         be subject to the restrictions laid down in Sects.
illustrations of a scientific or technical nature, such as     305 to 310 BGB and these provisions could there-
drawings, plans, maps, sketches, tables and three-             fore be invalid. However, this is not the case if
dimensional representations. The sole criteria for this        the VOB/B is agreed “as a whole”, i. e. without any
is not the pursuit of artistic end, but whether a per-         essential changes.
sonal intellectual creation has been produced. Thus,
the planning and construction of buildings are, as a           There are different types of contractors, e. g. the
rule, protected by copyright.                                  general contractor (Generalunternehmer) who per-
                                                               forms all kinds of building work for a construction,
Whether in any particular case the architect has               but usually transfers substantial parts of his work
granted any rights to use his copyrighted material             to sub-contractors (Subunternehmer). If the general
(especially with regard to alterations, extensions, re-        contractor takes over the overall planning it is referred
novation of the building) depends on the contractual           to as total contractor (Totalunternehmer). A general
contractor who does not carry out any of the build-           muneration is based on the amount of time spent
ing work himself is called Generalübernehmer.                 by the contractor. This type of contract is very
                                                              rare and normally only used for smaller projects
Scope of the Building Work                                    or when agreeing on additional work occurring
The scope of the building work covered is defined             during the construction process.
in the building specification normally contained in an
attachment to the contract. Additional services which       According to Sec. 641 BGB, remuneration is due
are closely connected to the building work are in-          and payable upon acceptance of the work. A final
cluded within the contractual scope of the building         invoice (Schlußrechnung) is no condition precedent
work even if it is not explicitly stated (see for example   for the payment of the remuneration. According
Sec. 4.1 VOB/C).                                            to Sec. 632a BGB, part-payments on account (Ab-
                                                            schlagszahlungen) can be claimed by the contractor.
Change requests regarding the scope of the building         On the contrary, if the parties agreed on the VOB/B,
work owed are quite common. Therefore, supplement           the final payment (Schlußzahlung) is due after the
agreements (Nachträge) are usual and of significant         acceptance of the work, the submission of a verifi-
importance. At the time additional work and therefore       able final invoice and the check of the final invoice
a possible supplement is under consideration, the           by the principal (at the latest two months after receipt
principal will not normally be able to choose another       of the invoice). Part-payments on account can be
contractor because of the advanced construction             claimed by the contractor in advance.
process. This often results in high priced supple-
ments. Careful planning of the whole project in ad-         Passing of Risk
vance can help to avoid such expensive supplements          Until final acceptance of the building work, the con-
at this stage.                                              tractor bears the risk of accidental loss or destruction
                                                            and deterioration of the building work. Once the buil-
Remuneration                                                ding work has been finally accepted, the risk passes
There are various types of remuneration provisions,         to the principal.
for example:
                                                            Acceptance in terms of Sec. 640 BGB means that
  Unit-price contract (Einheitspreisvertrag): the re-       the principal accepts the building work as performed
  muneration for work is the product of the mea-            in accordance with the contractual provisions and
  sured quantity and the fixed unit price. However,         without substantial defects. Very often a so-called
  according to the VOB/B, the single unit price can         formal acceptance (förmliche Abnahme) is required.
  be dependent on the total quantity.
  Lump-sum contract (Pauschalvertrag): a total price
  is agreed on in advance for the entire scope of
  work to be exercised. As a consequence the re-
  muneration to be paid is in general independent of
  the actual work exercised.
  Hourly-rate contract (Stundenlohnvertrag): the re-
Doing Business in Germany Architectural and Construction Law   154 | 155




Liability for Defects
In case of defects the principal/customer may have
the following rights and remedies (partly dependent
on certain further preconditions):

  demand supplementary performance;
  remove the defect himself and demand reimburse-
  ment of the necessary expenditure;
  terminate the contract or reduce the remuneration;
  claim compensation or reimbursement of wasted
  expenditure.

If a defect is caused by several persons (e. g. con-
tractor and architect), they can be held jointly liable.

Delay
If the contractor fails to carry out the building work
owed within the agreed time limit, the principal can
– in general after setting an additional period of time
for performance – withdraw from the contract. Under
certain preconditions the principal also has a claim
for compensation. Very often a contractual penalty is
agreed on in the building contract.



Jutta Wittler
jutta.wittler@luther-lawfirm.com
Telephone +49 (221) 9937 25718

Friederike Sieberg, LL.M. Eur.
friederike.sieberg@luther-lawfirm.com
Telephone +49 (221) 9937 24892
Doing Business in Germany Commercial and Residential Lease Agreements                                    156 | 157




Commercial and
Residential Lease
Agreements

Before investing in real estate, some background knowledge about lease
agreements and the legal framework which applies to them is essential
to enable a potential purchaser to investigate and assess the value of a
property. Lease agreements in Germany are governed by the German
Civil Code, in particular Sects. 535 – 597 BGB. In general, the German Civil
Code distinguishes between residential and commercial lease agreements
and in Germany the law relating to landlord/tenant is often considered
to be “tenant friendly”.




Residential leases are fairly strictly regulated by sta-   Rental Term
tute and any deviation from the legislation is only        In general, residential leases are unlimited in time.
allowed in specific circumstances. The law in relation     A landlord may only terminate or restrict the lease
to commercial leases allows the parties greater free-      term for a limited number of permitted reasons, e. g.
dom of contract, but is equally regulated and many         if he wants to use the property for himself or his
of the same statutory rules relating to residential        family. Residential leases are generally terminable by
leases will also apply.                                    the tenant by giving not less than 3 months notice to
                                                           the landlord. The length of notice which a landlord is
                                                           required to give to their tenant increases the longer
                                                           the tenant has been a tenant at the property.
Commercial leases, which are expressed to be un-            payment of the agreed rent is automatically reduced
limited in time, are terminable by either party giving      by the operation of the law and in residential leases
the other not less than six months notice, unless           the tenant’s right to pay a reduced rent cannot be
otherwise agreed in the lease agreement. In com-            excluded or restricted by contract. In commercial
mercial lease agreements it is common for the lease         leases it is possible for the landlord and tenant to
term to be fixed for a certain period of time, and such     agree to exclude such statutory protections.
arrangements may also include an option by which
the term of the lease can be extended in the future.        Operating Costs
However, even a commercial lease with a fixed ren-          The general principle is that the rent payable by a
tal term can be terminated by either party giving the       tenant shall be inclusive of any operating costs relating
required statutory notice if the specific written form      to the property. The landlord is only entitled to charge
requirements relating to the content of the lease are       operating costs to the tenant if it is explicitly agreed
not fulfilled. Therefore, specific care needs to be taken   upon in the respective lease agreement. However,
to ensure that all commercial lease agreements meet         such agreements are quite common. Often tenants
such requirements.                                          are required to pay a monthly advance payment in
                                                            respect of operating costs and, in this case, a yearly
Increase of Rent                                            reconciliation of the sums paid by the tenant against
With residential leases the rent payable by the ten-        the actual costs must be made within 12 months of
ant may be increased at the request of the landlord         the end of the respective year. In some cases a lump
as long as certain conditions are met. In particular,       sum is agreed upon. The Operating Costs Regula-
the rent may not be increased more than once in             tion (Betriebskostenverordnung, BetrKV) lists the
any one year, may not be raised by more than 20 %           most important operating costs for buildings and
over a 3 year period and may not exceed the level           can be used by the parties when agreeing on which
of comparative rent customary in such an area.              operating costs shall be recoverable from the ten-
Alternatively, a stepped rent or an indexed rent may        ant. This list of operating costs is often extended,
be predetermined by the parties. In commercial lease        particularly in commercial lease agreements. The
agreements the parties will usually agree that, subject     most important operating costs are real property
to certain requirements, the rent will be increased on      taxes, insurances, electricity, heating, water/drainage,
an indexed basis. A stepped rent may also be agreed.        waste disposal, street cleaning, chimney cleaning,
                                                            caretaker, security, operation and maintenance of
Rent Reductions                                             air condition and ventilation, operation and main-
In a situation where the tenant’s use of the proper-        tenance of lift/elevator, operation, and maintenance
ty is adversely effected, the tenant is entitled to pay     and partly even repair (see below) of other technical
a reduced rent to the landlord. However, the defi-          installations.
ciency which impacts the tenant’s use of the property
must be material, cannot be based on the tenant’s           Maintenance and Repairs
fault, and the tenant may not even have known it at         The general principle is that the landlord must carry
the time of concluding the lease agreement. In such         out and bear the costs of all maintenance, repairs and
circumstances the landlord’s legal right to claim for       renovation works relating to the property, unless it is
Doing Business in Germany Commercial and Residential Lease Agreements                                     158 | 159




validly agreed that such costs will be borne by the        the tenant is also restricted to carrying out business
tenant. However, the passing on of such costs to the       in relation to a certain assortment of goods only.
tenant may often be deemed to be void, if the obli-
gations are incorporated in general terms and con-         Securing Tenant Usage Rights
ditions. In this case it is important that the statutory   Most commonly in commercial lease agreements,
provisions in Sects. 305 seq. BGB are observed to          the tenant often has an additional interest in relation
ensure that it is possible to require the tenant to pay    to his right of use of the premises. Limited person-
such costs.                                                al rights (beschränkte persönliche Dienstbarkeiten)
                                                           granted in favour of the respective tenant can be
It is also generally accepted that maintenance and         registered with the land register and may give the
repairs relating to the internal part of the leased pre-   tenant additional entitlement irrespective of the terms
mises will normally be carried out by the landlord but     set out in the lease agreement. Such rights might
charged to the tenant as ancillary (or operating) costs    prohibit a purchaser from acquiring the property
in addition to the rent. Alternatively, the tenant may     by way of a forced auction sale in the event of the
agree to take care of the interior of the leased pre-      insolvency of the landlord (Zwangsversteigerung), for
mises himself directly when this becomes necessary,        example, or from terminating the lease agreement in
especially by performing decorative repairs (Schön-        certain specific situations provided in the legislation.
heitsreparaturen) i. e. painting the walls or waxing the   Care should be taken as such rights may be consid-
floors. In a number of recent cases, many clauses          ered to reduce the value of the property, and may
which refer to the performance of decorative repairs       therefore affect the ability of a potential landlord to
have been found to be void, and particular care should     secure future financing.
therefore be taken in formulating such provisions.

The costs relating to major construction works i. e.       Ingo Erberich
work on structural parts, load-bearing walls, façades,     ingo.erberich@luther-lawfirm.com
roofs (Dach und Fach) etc. may only be allocated           Telephone +49 (221) 9937 25721
to the tenant where such arrangement has been in-
cluded in an individually negotiated lease agreement.      Dörthe Stalmann, LL.M. (Temple University)
                                                           doerthe.stalmann@luther-lawfirm.com
Competition Protection and Obligation                      Telephone +49 (211) 5660 15265
to Conduct Business
The landlord is required by law to protect the tenant
from any disruptive competition even though the
lease agreement may not provide for a specific clause
to this effect. Special competition clauses may be
agreed among the parties. However, in general terms
and conditions the combination of an exclusion of
competition protection and an obligation to conduct
business may be deemed to be invalid, particularly if
Doing Business in Germany Property Transactions                                                             160 | 161




Property Transactions

With regard to the acquisition of German real estate, the same rules apply
for German as well as for foreign citizens or companies. As outlined before,
all real estate is divided into districts, cadastral units and plots, which
have a specific name and code. Location, size, title holder, encumbrances
such as land charges, etc., are recorded in the land register which is
kept at the local court responsible for the formal proceedings concerning
entries and changes of the registered real estate. The land register entries
have not only formal, but material legal consequences since the title of
ownership passes to the buyer only, when the change of ownership is
entered into the land register. Moreover, the buyer who acquires land from
the registered owner in good faith becomes the legal owner even though
the registered owner may – in rare cases – have not been the true owner.




Acquisition of Real Estate                                    ownerships, civil-law partnerships, commercial law
                                                              partnerships as well as limited liability companies and
Investment Structures                                         stock corporations. The German Real Estate Invest-
Although a foreign citizen or entity is not hindered by       ment Trust (hereinafter:REIT) has only recently been
law to directly acquire German real estate, a foreign         introduced by enactment of the REIT Act (Gesetz zur
investor may choose to invest indirectly by interpo-          Schaffung deutscher Immobilien-Aktiengesellschaften
sing an investment vehicle for various reasons, e. g. in      mit börsennotierten Anteilen) in 2007. Similar to its
order to limit liability from the investment, to facilitate   US paragon, the German REIT is a listed stock com-
co-investment by other investors or for tax reasons.          pany which is subject to a distinctive taxation regime.
Any form of partnership or corporation may serve as           75 % of its equity must be invested into and 75 % of
a vehicle to acquire real estate in Germany, e. g. co-        the annual revenue needs to be generated by real
estate (either assets or shares of companies holding      tions. Formal Requirements may nevertheless follow
properties). The REIT itself is exempted from corpo-      from the specific statutory provisions for the particular
rate and trade tax but it needs to distribute 90 % of     corporation or partnership.
its annual revenue to its shareholders. REITs must
not invest into properties which serve residential pur-   Warranty
poses, unless they were constructed after 2006.           Statutory law provides for extensive warranties of
                                                          the seller. However, since not all statutory provisions
Substantial Terms of Acquisition                          are mandatory, the seller may exclude his statuto-
All covenants of an agreement providing for the           ry liability for any defects of the real estate, unless
obligation to sell or buy a given property located in     defects have been concealed by the seller. Warranties
Germany must be notarized in front of a German            for undeveloped real estate are subject to a statutory
notary. Non-compliance with this requirement will         period of limitation of two years upon takeover and
result in the whole transaction being void. This es-      five years for newly constructed buildings. Also the
pecially applies when the parties have concluded          limitation period is however, within certain limits, sub-
the real estate purchase agreement only under the         ject to the parties’ agreement. Depending, of course,
condition of the performance of a second agreement,       on the market situation and the amount of the offered
e. g. a building contract (which alone would require      purchase price, the seller will quite often succeed
no notarization) and thus linked both agreements          in excluding his liability in the purchase agreement.
legally into one. In these cases, if only one covenant    Although the purchaser is under no obligation to con-
belonging to such agreements is not notarized, all        duct a technical and/or legal due diligence, it is highly
agreements become invalid in total. This also applies     recommended that he does. However, even if such
in cases of negligence, if e. g. some covenants were      due diligence has been undertaken by the purchaser,
not regarded material by the parties and were             the purchaser may be able to negotiate that the seller
therefore stipulated in a separate document not nota-     agrees to give certain warranties or to make certain
rized. However, if both parties agree before a notary     declarations as, e. g. to the absence – unless sepa-
on the transfer of ownership title (Auflassung) and       rately disclosed – of rent and/or ground tax arrears,
apply for the registration of the change of owner-        pending disputes, outstanding objections of building
ship to the land register, the whole agreement – that     authorities as to the state of the building etc.
is, including the parts that were not notarized –
becomes valid upon registration of the buyer into the     Warranties with regard to the absence of contamina-
land register.                                            tions are usually only given to the best knowledge of
                                                          the seller. In case of site pollution or contamination,
It is possible to agree upon a foreign law to govern      also the former owner however remains liable towards
the obligations of the parties in the contract. How-      public authorities for any decontamination measure,
ever, the requirement of a notarized agreement and        therefore often the seller requires an indemnification
the transfer of ownership title have to be governed by    by the purchaser from such liabilities.
German law. The transfer of shares in a corporation
or partnership owning real estate is not subject to the   The seller is under an obligation to disclose material
notification requirement regarding real estate transac-   hidden defects which usually influence the decision to
Doing Business in Germany Property Transactions                                                             162 | 163




buy and of which he is aware. This obligation cannot         The sellers’ interests regarding the payment of the
be excluded by agreement.                                    purchase price may be secured by a bank guarantee
                                                             provided by the purchaser or by the assignment of
                                                             the loan payment claim of the purchaser towards its
Transfer of Title, Payment                                   financing bank, if applicable. The purchaser may also
                                                             agree to deposit the purchase price on a notary’s trust
As mentioned before, the transfer of ownership re-           account (which will incur substantial additional costs).
quires a notarized agreement between the parties
that the ownership shall pass from the seller to the
purchaser and, in addition, the entry of the purchaser       Transfer of Contracts Related to the Property
in the land register. The land register will effect the
entry only if the competent tax authority has issued         All lease contracts concluded by the owner with
a clearance certificate (Unbedenklichkeitsbeschei-           regard to the property pass automatically to the
nigung) which confirms that real estate transfer tax         purchaser pursuant to statutory law upon the time
has been paid. Furthermore, municipalities may have          of transfer of title. However, as the purchase price
pre-emption rights concerning real estate located            is usually paid before the registration of the new
within its boundaries, so a declaration of the muni-         owner, the parties agree that possession and use of
cipal administration is needed, that no pre-emption          the property are already transferred to the purchaser
right applies or that an existing pre-emption right          upon payment of the purchase price. This trans-
will not be executed.                                        fer of possession does also include the right of the
                                                             purchaser to draw the benefits from the existing lease
Since some time may pass between the conclusion              contracts. It is recommended to include specific co-
of the transfer agreement and the final entry of the         venants in the purchase agreement as to how the
purchaser in the land register, the purchaser nor-           tenants are informed about the change of possession
mally applies for registration of a priority notice (Auf-    and the assignment of all claims against tenants to
lassungsvormerkung). The priority notice entitles the        the purchaser. It is also advisable to closely examine
purchaser to demand the deletion of any further en-          the terms of any lease to ensure that they are valid and
cumbrances that may have been registered between             common in the relevant business sector (see chapter
registration of the priority notice and the registration     “Commercial and Private Lease Agreements”).
of the transfer of title to the purchaser in the land reg-
ister (but not in the register of public encumbrances).      Also, property related insurance contracts are sub-
                                                             rogated to the purchaser by law. However, the pur-
The parties will usually also agree that the purchase        chaser is entitled to terminate the insurance contract
price will only become due after the priority notice         (irrespective of the original term agreed between
has been registered, the municipality has issued the         seller and insurer) within one month after the trans-
above mentioned statement and all creditors of reg-          fer of title.
istered encumbrances that are not taken over by the
purchaser have consented to the deletion of such             Other property related contracts will not pass on au-
encumbrances.                                                tomatically to the purchaser, unless the obligations
of the owner under such agreement are secured                still 3.5 % of the purchase price for the real estate
by easements in the land register. This applies, e. g.       (in case of a transfer of shares its market value), only
to supply contracts. However, easements can only             in Berlin the tax rate amounts presently to 4,5 %.
secure contractual rights to use the property in cer-
tain aspects or to restrict certain conduct on the           Any real estate transfer is exempted from VAT. The
property. Some property related contracts, e. g.             seller, however, can chose to submit the transaction
management contracts, cannot be secured by ease-             to Value Added Tax (VAT) only if and insofar as the
ments. The parties may agree that the purchaser              property is used commercially and, in addition, the
has to continue these contracts (subject to the              transaction is not considered a transfer of business.
other party’s consent). Otherwise the seller has to
bear the consequences of these contracts.
                                                             Financing

Costs and Taxes                                              For the long-term financing of the real estate invest-
                                                             ment, the claim of the creditor is usually secured by
Transfer costs to be taken into account in connec-           mortgages or land charges. The purchase agree-
tion with the transfer of real estate are consultant (and    ment will usually provide for the purchaser’s right to
agent) fees, fees payable to the notary and to the land      encumber the property for the purposes of financing
register. The question of who is to bear the costs is        the purchase price, provided that the seller shall
subject to negotiation. Although under statutory law         not be personally liable for the encumbrance and
both parties of the transaction are liable for the fees      that the purchaser’s right of utilization of the loan is
payable to the notary and the land register as well as       assigned to the seller.
for the Real Estate Transfer Tax (Grunderwerbsteuer),
it is in practice generally agreed that said costs and       Land charges (Grundschlud) have a far greater sig-
taxes are borne by the purchaser, except for the costs       nificance in practice than mortgages (Hypotheken)
of releasing the real estate from encumbrances, which        because the latter are inextricably linked to the partic-
are usually assumed by the seller.                           ular loan claim for which they were originally issued
                                                             and therefore expire upon performance of the given
Pursuant to the Real Estate Transfer Tax Act (Grund-         loan claim, whereas the land charge may secure any
erwerbsteuergesetz, GrEStG), a transfer tax is levied        claim. However, usually the land charge is linked to a
on all transfers of the legal or actual ability to dispose   certain debt by a special covenant between creditor
of real estate or certain rights in real estate. Also the    and debtor. Moreover, in view of perceived abuses of
transfer of 95 % or more of the shares or the interest       buyers of so-called non-performing loans, the sta-
in a corporation owning real estate could be subject         tutory law was amended in 2008 by abrogating
to Real Estate Transfer Tax, as far as partnerships          the possibility to acquire a land charge in good faith
are concerned, even in case the transfer of interest         free from any defenses the debtor might have under
is done in steps within five years. Since 2006, the tax      such covenant.
rate may be determined independently in each part
of Germany. However, thus far, the general rate is
Doing Business in Germany Property Transactions             164 | 165




Mortgages and land charges are encumbrances to
be registered with the land register. Encumbrances
applied for entry are given chronological priority in
the land register and show the maximum amount and
the annual interest of the issued mortgage or land
charge. Upon application of the owner, the mortga-
ge or land charge may be securitized by a bill issued
by the land register. The bill will be handed over to the
creditor for the security to become final. The transfer
of a mortgage or land charge securitized by a bill is
effected by mutual agreement and handing over of
the bill; registration of the change of creditor into
the land register is – in this case – not mandatory. The
creation and the transfer agreement regarding both
mortgages and land charges require notarization.

Mortgages and land charges are enforced either by
forced sale (Zwangsversteigerung) or through judi-
cially enforced administration (Zwangsverwaltung).



Detlev Stoecker
detlev.stoecker@luther-lawfirm.com
Telephone +49 (30) 52133 21140

Carsten Brutschke, LL.M. (EHI)
carsten.brutschke@luther-lawfirm.com
Telephone +49 (30) 52133 21105
Doing Business in Germany Environmental Law                                                             166 | 167




Environmental Law

Environmental protection is one of the major goals for public authorities
in Germany. The term environmental protection includes all measures that
may be taken to safeguard the environment against harmful influences.
Environmental protection encompasses the protection of nature, countryside
conservation, water pollution control, imission control, radiation protection,
waste prevention and disposal, control of chemical substances, soil protec-
tion and climate protection.




Different levels of environmental protection legislation   has tried to streamline and harmonise the environ-
exist – they include European Law, Federal Law and         mental law in a consistent and integrated Environmen-
State Law. Article 20a of the German Constitution          tal Code (Umweltgesetzbuch, UGB). It was intended
(Grundgesetz, GG) also lists environmental protec-         that environmental legislation should be simplified
tion as a general state goal. Even though state goals      and codified in one new composite act. However,
are only general objective obligations and do not          the different opinions between the Ministry and the
constitute direct rights which would be enforceable        Federal States in particular about various licensing
by individuals, state goals nonetheless serve to focus     procedures have not been settled. Therefore, the
the obligations which are set out by public authorities.   attempt to transform and unify the laws in one
                                                           integrated environmental code seems, for the
Environmental law in Germany is currently not regu-        moment, to have failed.
lated by a single act. It rather encompasses regula-
tions and provisions in a large number of different        Until a new environmental Code comes into force,
laws which all serve to protect the environment. The       the following are the key national laws in the area
Federal Ministry for the Environment, Nature Conser-       of environmental protection: the Federal Imission
vation and Nuclear Safety (Bundesministerium für           Con-trol Act (Bundesimmissionsschutzgesetz, BIm-
Umwelt, Naturschutz und Reaktorsicherheit, BMU)            SchG), the Federal Nature Protection Act (Bundes-
naturschutzgesetz, BNatSchG), the Recycling Eco-            the soil, water and the atmosphere as well as other
nomy and Waste Act (Kreislaufwirtschafts- und               physical assets from harmful environmental impacts
Abfallgesetz, KrW-/AbfG), the Water Resources Act           – in particular air pollution and noise pollution. To a
(Wasserhaushaltsgesetz, WHG), the Federal Soil Pro-         large extent, the expression “harmful effects on the
tection Act (Bundesbodenschutzgesetz, BBodSchG),            environment” is synonymous with that of “harmful
the Federal Forest Law (Bundeswaldgesetz), the Plant        changes to the soil” within the meaning of the Federal
Protection Act (Pflanzenschutzgesetz, PflSchG), the         Soil Protection Act and covers emissions which, de-
Federal Building Act (Baugesetzbuch, BauGB), the            pending on type, extent or duration, are likely to cause
Gene Technology Act (Gentechnikgesetz, GenTG)               significant disadvantages or a considerable nuisance
and the Atomic Energy Law (Atomgesetz, AtG). Also           to the general public or a neighborhood. Neighbor-
worthy of mention are the Environmental Information         hood in the sense of the Immission Control Act has
Act (Umweltinformationsgesetz, UIG), which grants           a wide meaning and covers everybody who could
every individual free access to certain environmen-         be impaired by the harmful effects.
tal information from a government agency, and the
Environmental Impact Assessment Act (Gesetz über            The full scope of the law applies as soon as an in-
die Umweltverträglichkeitsprüfung, UVPG), which             stallation generates emissions in the form of air pol-
serves to monitor the environmental impact of cer-          lution, noise, heat, vibrations and similar emissions.
tain industrial facilities at an early stage and in a       The Federal Immission Control Act thus applies in
comprehensive manner. Recently the Environmental            cases involving emissions caused by an installation.
Damage Act (Umweltschadensgesetz, USchadG) also             This should not be confused with emissions caused
implemented the Directive of the European Parlia-           by the conduct of an operator of an installation,
ment and of the Council on Environmental Liability          whose conduct is subject to the administrative law
with Regard to the Prevention and Remedying of              of the respective Federal States.
Environmental Damage and this has therefore been
transformed into national law.                              Obligations of Operators of an Installation
                                                            With regard to the obligations of an installation’s
                                                            operators, a distinction must be made between
Immission Control and Air Pollution                         those installations requiring a permit and those in-
                                                            stallations not requiring a permit.
Emission control is primarily addressed in the Federal
Immission Control Act (Bundesimmissionsschutzge-            To the extent installations requiring a permit („instal-
setz, BImSchG) and by its affiliated implementation         lation licence“) are involved, protection is extended
ordinances and numerous administrative provisions           to cover hazards and considerable disadvantages
– in particular the Technical Instructions on Air Pollu-    and nuisances caused in other manners as well as
tion Control (TA Luft) and the Technical Instructions       the prevention of harmful effects on the environment.
on Noise Protection (TA Lärm). The statute is the           Facilities within the meaning of the statute include:
central piece of legislation for technical environmen-
tal protection and the technical safety of installations.     permanent establishments and other stationary
Its purpose is to protect people, animals, plants,            installations;
Doing Business in Germany Environmental Law                                                                  168 | 169




  machines, devices and other movable technical           to the extent it is subsequently revealed that the
  equipment; and                                          general public or a neighborhood is not sufficiently
  property on which substances are stored or de-          protected against harmful effects to the environment
  posited or work is performed which could cause          or other hazards. The authorities may even prohibit
  emissions (with the exception of public transpor-       the operation of a facility under certain conditions,
  tation routes).                                         such as when the operator fails to satisfy a plausi-
                                                          ble, retroactive order regarding the purpose or the
Installations requiring a permit include operational      installation’s operation. The authorities can also order
facilities that are extremely likely to cause harmful     an installation that was constructed, operated or sig-
effects to the environment or to cause considerable       nificantly altered without the required authorization to
disadvantages or nuisances or to be a hazard to the       be shut down or torn down. An installation can also
general public or a neighborhood as a result of their     be shut or torn down due to a lack of authorization
intended purpose of operation. Examples include           where the authorities had previously revoked such
production plants, energy facilities, and recycling ma-   authorization. The reasons for revocation comport
chinery. Installations of this type are to be designed    with the general reasons for revocation as defined in
and operated so that no harmful effects to the envi-      the Administrative Procedures Act.
ronment or other hazards, significant disadvantages
and considerable nuisances to the general public and      The obligations of operators of those installations
a neighborhood can result, so that harmful effects        not requiring a permit are regulated in detail by the
to the environment are prevented, and also so that        Federal Immission Control Act which provides that
waste is avoided to the extent possible. The instal-      an operator is obligated to erect and operate the in-
lations furthermore must be erected, operated and         stallation so that harmful effects to the environment
shut down so that no hazards, considerable disad-         are prevented, so that unavoidable harmful effects to
vantages, etc. to the general public and a neighbor-      the environment are kept to a minimum, and so that
hood can result even after the installations cease ope-   waste produced during the operation of the facility
ration or the installation property is no longer used.    can be disposed of in an orderly manner. A number
Where the prerequisites are given, there is a legal       of legal provisions furthermore exist, taking the form
obligation to grant the licence.                          of legal ordinances which set forth in greater detail the
                                                          requirements for installations not requiring a permit
The Federal Immission Control Act also contains reg-      as well as the obligations of the operators thereof.
ulations on the procedure to be followed for granting
a permit. These regulations are supplemented by spe-      The competent authorities may issue orders in indi-
cial provisions or subsequent orders which address        vidual cases to insure that obligations of operators are
the revocation of a permit as well as the prohibition     fulfilled and that legal ordinances are followed. Should
of, or closing down of an installation. Orders may        an operator fail to obey such a valid, official order,
in particular be passed retroactively after a permit      the authorities may prohibit further operation of the
has already been granted for the purpose of fulfil-       installation in full or in part until the order is satisfied.
ling obligations arising under the law. Governmental      Operators are obligated through this sanction to meet
authorities are in fact obligated to issue such orders    Immission Control Act requirements. The authorities
are furthermore required to prohibit the construction
or the operation of an installation in full or in part if   Stefan Hitter
the harmful effects on the environment caused by the        stefan.hitter@luther-lawfirm.com
facility endanger the lives of, or are hazardous to, the    Telephone +49 (211) 5660 15037
health of people or valuable assets for as long as the
general public or a neighborhood cannot be offered          Dr. Stefan Kobes
sufficient alternate protection. The stated provisions      stefan.kobes@luther-lawfirm.com
also protect neighbors. This means that a neighbor          Telephone +49 (30) 52133 21125
affected by installation emissions can invoke this
regulation before the authorities and demand inter-         Dr. Gernot-Rüdiger Engel
vention based on a violation of provisions within the       gernot-ruediger.engel@luther-lawfirm.com
context of the Federal Immission Control Act. The           Telephone +49 (40) 18067 16639
passing of regulatory orders falls under the discretion
of the authorities, however, such that a neighbor only
has a claim to obtain a decision free of discretionary
errors. The situation is completely different in cases
of neglect where the authorities are in fact obligated
to intervene when factual requirements exist; a neigh-
bor therefore always has to claim for official inter-
vention in such a case.

Consequences of an Order or of a Prohibitive Order
Orders issued by a federal authority become effective
upon notification of the operator. An order issued by
a competent authority always relates to a specific in-
stallation; the order thus transfers and applies to the
new operator in case an installation is subsequent-
ly sold. If an operator does not meet the obligations
imposed, the government agency may employ “ad-
ministrative coercion” against the operator, i. e. it is
able to execute the order by means of coercion (in
particular by imposing penalty payments) in accor-
dance with the enforcement laws of the respective
Federal States. An operator may make use of the
standard remedies available under administrative
law such as appeal or an action for rescission to
contest agency orders.
Doing Business in Germany   170 | 171
Doing Business in Germany Emission Trading                                                               172 | 173




Emission Trading


The national legal basis for emission trading comprise the Greenhouse Gas
Emission Trading Act, the Allocation Act and the Allocation Regulations.




A total of 1,665 plants are presently subject to emis-    the amount of C100. Payment of the penalty does
sion trading in Germany. These plants particularly in-    not release the operator from its obligation to file
clude large energy plants (i. e. plants with more than    the required allowances.
20 megawatts of combustion heat) as well as compa-
ratively large plants of the energy-intensive industry,   Plant operators can perform their obligation to submit
such as steelworks, refineries, cement plants, as well    allowances using allowance units from the European
as ceramics, glass and paper factories. The Green-        Union Emission Trading System (EUA), certified emis-
house Gas Emissions Trading Act stipulates the single     sion reductions (CER) and emission reduction units
activities and plants concerned.                          (ERU). ERUs and CERs cannot be used unrestricted-
                                                          ly, however. During the second trading period (2008
If a plant is subject to emission trading, this has two   to 2012), the number of ERUs and CERs permitted
material consequences: for one thing, the plant may       to be used for the fulfillment of the obligation to file
emit greenhouse gases (presently carbon dioxide) in       emission allowances for a plant is limited to a maxi-
the future only if it has an according permit (emission   mum of 22 % of the allowances allocated to an ope-
permit). Moreover, the plant operator is obligated to     rator free of charge for the entire trading period.
file no later than April 30, of each year an allowance
for each metric ton of carbon dioxide emitted during      There are various possible ways to obtain allowances.
the preceding calendar year (obligation to file allow-    In addition to the cost-free allocation of allowances
ances). If the plant operator fails to comply with its    by the Emission Trading Authority (Deutsche Emis-
obligation to file allowances, sanctions may be im-       sionshandelsstelle, DEHSt) of the Federal Environ-
posed. For each allowance not filed in due time,          ment Agency (Umweltbundesamt), allowances can
the plant operator must normally pay a penalty in         be purchased on the free market or via a certificate
exchange (e. g. EEX). Furthermore, from the year 2010     monitoring concepts before the end of this year, as
it will be possible to purchase allowances by auction.    they must monitor and report the carbon dioxide
                                                          emissions of their aircraft from the year 2010 on.
The cost-free allocation of emission allowances re-
quires the filing of an allocation application with the
Emission Trading Authority. This Authority determines     Dr. Stefan Kobes
by allocation notice the number of allowances to          stefan.kobes@luther-lawfirm.com
be allocated per plant and issues these allowances        Telephone +49 (30) 52133 21125
in portions to the plant operator by February 28, of
each year. The number of allowances to be issued          Dr. Gernot-Rüdiger Engel
to a single plant is determined in accordance with        gernot-ruediger.engel@luther-lawfirm.com
the provisions of the Allocation Act and the Allocation   Telephone +49 (40) 18067 16639
Regulations.

In order for it to be possible to determine the exact
number of allowances to be filed, the plant operator
is obligated to determine and report its carbon dio-
xide emissions annually. For this purpose, the plant
operator compiles a monitoring concept according
to the provisions of the Greenhouse Gas Emission
Trading Act and the Monitoring Guidelines issued by
the European Commission. This monitoring concept
must each year be fully approved by the competent
state authority. Based on the methods authorized
along with the monitoring concept, the operator mo-
nitors the carbon dioxide emissions of its plant and
prepares an annual emission report. This report must
be verified by an independent expert and must be
submitted to the Federal Environment Agency by
March 31, of the following year. The emission amount
stated in the report is decisive for the scope of the
obligation to file allowances.

From the year 2012, air traffic will be included in
emission trading. This concerns the operators of air-
craft whose planes take off from or land on airports
of the European Community. The preparations for
the allocation procedures have already started. In
particular, the operators concerned must compile
Doing Business in Germany   174 | 175
Doing Business in Germany Nature, Soil and Water Protection                                                      176 | 177




Nature, Soil and Water
Protection

Nature, Soil and Water Protection tries to refrain from causing avoidable
injuries as well as to provide compensation for unavoidable derogations.
Several Acts and regulations constitute this legal area. This chapter out-
lines the relevant codes according to the three scopes nature, soil and
water and it’s influence on other parts of German legislation.




Nature Protection                                             Act thus contains provisions on landscape planning
Of particular importance for site-related protection          protection, care and development measures in gen-
of the environment is the framework legislation pro-          eral and for certain categories requiring particular pro-
mulgated at federal level in the form of the Federal          tection, species conservation, recreation in the natural
Nature Protection Act (Bundesnaturschutzgesetz,               environment and landscape and the involvement of
BNatSchG). The objective of this Act is to protect,           citizens’ action groups. The framework Act requires
care for and develop the natural environment and              expansion by the nature conservation legislation of
the landscape in built-up and non-built-up areas in           the individual German Federal State (Bundesland).
such a way that the efficiency of the natural house-
hold, the usefulness of natural assets, the world of          Environmental protection measures must be balanc-
flora and fauna and the diversity, uniqueness and             ed against one another and against the requirements
beauty of the natural environment and the landscape           of the general public with respect to nature and coun-
are sustainably preserved as man’s natural founda-            tryside. In order to achieve this goal, the law estab-
tion of existence and as a prerequisite for human             lishes a set of principles that clarify its intent and offer
recreation. Nature is thus not protected for its own          a more precise definition of the law’s scope. These
sake but rather as a resource for human beings. The           principles serve as guidelines for planning but are
also relevant for individual measures. The principles      binding effect. Any investments impacting on nature
should at the same time not be followed systemat-          and countryside must observe the provisions of the
ically, but are much rather to be followed to the extent   Federal Nature Protection Act and the implementing
required, if possible, and are only appropriate for ap-    provisions of the German States thereto. Little room
plication in each individual case after considering all    for negotiation exists to the extent these laws are
prerequisites. The authorities must not only observe       triggered by an investment.
the goals of environmental protection but must also
support said activity. The law also provides for general   The Federal Nature Conservation Act is complement-
protection, conservation and development measures          ed by the Federal Forestry Act (Bundeswaldgesetz,
which apply to everyone. Accordingly, the individu-        BWaldG) which also contains environmental law pro-
al responsible for an encroachment on nature and           visions insofar as they relate to forests.
the countryside is obligated to refrain from causing
avoidable injuries as well as to provide compensation      The legal basis of nature protection law can also be
for unavoidable derogations insofar as it is necessary     found in EU Community law which focuses on spe-
to achieve the goals of nature protection and coun-        cies protection, but is developing more and more
tryside conservation.                                      into a comprehensive biotope protection law. In
                                                           particular the Directive 79/409/EWG on the conser-
Encroachments in this sense are defined as changes         vation of birds and the Directive 92/43/EWG on the
to the appearance or use of land that could have a         conservation of natural habitats as well as of animals
significant or sustainable negative effect on the effi-    and plants in the wild (Fauna-Flora-Habitat Directive)
ciency of the balance of nature or on the countryside.     provides for the establishment of a community-wide
The obligation to refrain or to compensate only exists     integrated biotope system for which purpose Mem-
for encroachments if other legal provisions require        ber States are to set-aside land as specially protected
official authorization or similar permission for the       areas. To the extent a project raises concerns that a
encroachment. An encroachment may be prohibited            protected area could suffer significant damage, Ger-
if derogations are unavoidable or cannot be compen-        many, as a Member State, must check compliance
sated to the extent required and nature protection         with the conservation targets established for said
concerns outweigh all other demands on nature and          area. The Directive is of vital importance for invest-
the countryside. With the exception of such passive        ments in outlying areas not yet included in a zoning
protective measures that address changes to a              or another type of plan to the extent a project im-
current condition, the Federal Nature Protection Act       pacts upon protected areas.
also includes active measures by protecting spe-
cific sections of nature and the countryside that are      Soil Protection
deemed particularly worthy of preservation. Such           The Federal Soil Protection Act (Bundesbodenschutz-
measures could include, for example, the declaration       gesetz, BBodSchG) is of vital importance to real es-
of an area as a nature protection area, a national park    tate investments. The purpose of this act is to protect
or a countryside cultivation area. Such a declaration      or restore the functions of the soil on a permanent
must be set forth in the form of an ordinance, a law       sustainable basis. These actions include prevention
or a decree (depending on state law) with legally          of harmful soil changes, rehabilitation of the soil, of
Doing Business in Germany Nature, Soil and Water Protection                                                   178 | 179




contaminated sites and of waters contaminated by              dangers for individuals or for the general public.
such sites and taking precautions against negative            The law also includes the term “suspected site” that
soil impacts.                                                 refers to land upon which harmful changes to the
                                                              soil are suspected.
To achieve this goal, detrimental changes in the soil,
disruptions of its natural functions and of its function      Obligations to Prevent Contamination
as an archive of natural and cultural history are to be       On the basis of the aforementioned key legal terms,
prevented as far as possible. The soil and residual           every individual whose actions impact upon soil is
pollution must be decontaminated and cleaned-up,              obligated to avoid harmful changes thereto. This ob-
and measures implemented to prevent harmful ef-               ligation begins with human behaviour that can be
fects on soil. The law has three objectives: damage           identified as having harmful effects. The obligation
prevention, decontamination and precautionary mea-            applies to everyone whose actions are likely to ex-
sures. The law applies to all detrimental changes to          ceed the minimum limit of risk. The landowner and
soil and to residual pollution to the extent that no          the person with actual control over the property are
standards are expressly designated which establish            furthermore obligated to implement measures to
independent rules regarding the effects on soil. The          prevent harmful changes to the soil on said property.
Soil Protection Act furthermore prevails over contra-         This obligation is not connected to human behav-
dicting state law.                                            iour, but rather to the condition of the property.

The term “detrimental changes to the soil” is the             Obligations to Decontaminate
principal codified criterion for the obligation to pre-       If a harmful change in the soil or residual pollution has
vent damage. Changes that harm the soil impair                already occurred, the polluter (and its successor), the
the function of the soil and are sufficient to pose a         landowner as well as the person with actual control
threat to, have considerable disadvantages for or             over the property have the joint and several respon-
significant detrimental effects on individuals or the         sibility to decontaminate the soil and to clean up the
general public. An initial suspicion of danger is there-      pollution as well as any groundwater contamination
fore sufficient. The danger need not actually have            caused by the detrimental change in the soil or residual
arisen, however, the possible disadvantages and               pollution. Such decontamination and clean-up must
harmful effects must be significant. Another key term         occur in such a way that no lasting hazard, significant
contained in the Soil Protection Act is that of “resid-       disadvantage or considerable nuisance remains for
ual pollution”. This term applies to all facilities which     individuals or for the general public. With regard to the
have been shut down as well as to other property              term decontamination, measures are to be applied:
on which hazardous materials and substances have
been treated, stored or deposited as well as to land            to eliminate or reduce pollutants (decontamination
on which shut-down facilities exist and other property          measures);
on which substances harmful to the environment have             to prevent or reduce the spread of contaminants
been handled (with the exception of plants pursuant             in the long term (safety measures); and
to the Atomic Energy Law) if such installations had             to eliminate or reduce harmful changes in the phy-
a detrimental effect on the soil or resulted in other           sical, chemical or biological properties of the soil.
Addressees of Obligation to Decontaminate                   A court decision of the European Court of Justice
Pursuant to the Federal Soil Protection Act, those          has significantly influenced the interpretation of the
individuals required to decontaminate the soil include      Federal Soil Protection Act. According to the Court,
not only the polluter, the landowner and the individual     contaminated soil is regarded as waste and has to
who actually controls the property as has traditionally     be decontaminated regardless of whether the soil
been the case in conformity with principles of police and   is excavated or not. In former decisions of German
regulatory law. The following individuals and/or entities   courts soil was regarded as waste only after exca-
might now also be obligated to take remedial action:        vation and the strict rules of the Waste Act obliging
                                                            the owner to decontaminate applied only to movable
  the polluter’s successor;                                 assets. Since the court decision has to be observed
  the former owner of the property who has given up         by German courts this could have a great economi-
  his or her ownership of the property or assigned          cal impact on the obligation to renovate and decon-
  same to a third party and who has knowledge (or           taminate soil polluted areas.
  lacks knowledge due to negligence) of the environ-
  mental pollution;                                         With the Environmental Damage Act, the protection
  an individual who for reasons of commercial law           of the soil has become one further target of EU-Law.
  represents a legal entity/company that owns pro-          According to the act, damages to the environment
  perty where evidence of a harmful change to the           are also contamination of the soil which contains
  soil or residual pollution exists to the extent said      the risk of an impairment to human health.
  entity/company is not capable of undertaking clean-
  up measures for financial reasons.                        Water Protection
                                                            The guideline legislation in the field of water protection
These regulations present a significant expansion of        is the Water Resources Act (Wasserhaushaltsgesetz,
the definition of persons required to undertake de-         WHG). In order to regulate water quality and water
contamination measures. Due to the fact that former         levels, water bodies are considered an integral part
owners can also be obligated to decontaminate, a            of the water balance and should be managed in
type of “perpetual liability” results. Even though this     such a way that they serve both the common good
liability can be excluded if the former owner purchased     and, in harmony with this, the use to which individ-
the property in good faith under the assumption that        uals put them and that no avoidable damage to
no harmful changes in the soil or residual pollution        its ecological functions takes place. Everyone is
existed, such good faith depends on the circum-             obliged, taking account of particular circumstances,
stances in each individual case.                            to exercise adequate care when carrying out mea-
                                                            sures which may have an impact on a water body
The Federal Soil Protection Act additionally includes a     so that water pollution or any other negative ef-
number of supplementary obligations and measures.           fect on the water is prevented; moreover, everyone
An example is the performance of cleanup checks or          is obliged to use water sparingly in line with the
the preparation of a cleanup schedule by the party in       needs of the water household as a whole. Surface
charge of decontamination.                                  waters and groundwater are, as public utilities, sub-
                                                            ject to an extraordinary public management and
Doing Business in Germany Nature, Soil and Water Protection                                                  180 | 181




utilisation code which leaves the allocation of users’        The legal basis of private environmental laws is in part
rights at official discretion.                                set forth in the BGB. Of greater significance, however,
                                                              is the Environmental Liability Law (Umwelthaftungs-
The Water Resources Act establishes the obligation            gesetz, UmweltHG) that establishes strict liability for
of an installation’s owner to pay damages regard-             polluters. The owner of a facility as defined in the
less of fault if, under certain conditions, substances        schedules to said law is liable for damages incurred
are released from the installation into a body of water       by another party if said party suffered damages as
resulting in harm to third parties.                           a result of the facility’s impact on the environment
                                                              either in the form of personal injury or property dam-
Additional Branches of Environmental Law                      age. Liability is capped at C85 million.
Numerous other laws can be designated as environ-
mental protection laws including spatial and regional         Criminal environmental law is regulated in the Criminal
planning set forth principally in the Spatial Planning        Code (Strafgesetzbuch, StGB). Respective provisions
Act, atomic energy and radiation protection provisions        contain criminal sanctions for the pollution of or en-
in the Atomic Energy Law, gene technology regulation          croachment on water, land or air.
in the Gene Technology Act, and hazardous materials
law set forth above all in the Toxic Substances Con-
trol Act. Some of these acts include special regula-          Stefan Hitter
tions for certain areas of environmental law (such as         stefan.hitter@luther-lawfirm.com
the Water Resources Act and the Gene Technology               Telephone +49 (211) 5660 15037
Act) or take environmental protection into account
in addition to their primary legislative intent (such as,
for example, the Spatial Planning Act, which codifies,
among others, the need to protect, conserve and de-
velop nature and the countryside including water and
forests as a principle of spatial planning). The struc-
ture of these acts is comparable to the laws described
in more detail above and contains special regulations
on authorization requirements and possible liability.
Like the Water Resources Act, the Gene Technolo-
gy Act and the Atomic Energy Law also establish the
obligation on an installation’s owner to pay damages
regardless of fault.

Apart from the above described public environ-
mental laws, parts of private and criminal laws also
protect individual citizens against the pollution of
the environment.
Doing Business in Germany Recycling Economy and Waste Act                                                   182 | 183




Recycling Economy and
Waste Act

The waste industry – with an annual turnover of more than E50 billion –
has become an important economic factor. The German waste legislation
consist mainly of the Recycling and Waste Management Act which is heavily
influenced by European Community Law. The basis of this legislation is that
recyclables should flow back to the economic cycle by separate collection,
sorting and re-use. Manufacturers are obliged to design their products in a
way that generates little waste and the subsequent emergence allowing an
environmentally compatible recovery of waste material.




The Recycling Economy and Waste Act (Kreislaufwirt-         compatible recovery and disposal of waste materials.
schafts- und Abfallgesetz, KrW-/AbfG) is the main act       Recyclables should flow back to the economic cycle
of German waste legislation. The intent behind this         by separate collection, sorting and re-use. This pro-
act is not only to regulate the disposal of waste in an     vides the basis of the Recycling and Waste Manage-
environmentally compatible manner but also the pro-         ment Act. To reach this aim, the Recycling Economy
motion of a so-called recycling economy. In German          and Waste Act also regulates the monitoring of waste
waste legislation, the political credo of waste hierarchy   streams and the approval of landfills. The Recycling
“Avoidance, Recovery, Disposal“ is being enforced.          Economy and Waste Act is backed by the Packaging
Product stewardship forms the centre of the waste           Ordinance (Verpackungsverordnung, VerpackV), which
management policy. Manufacturers and distributors           also aims at reducing the flood of waste. It introduced
are obliged to design their products in a way that ge-      the principle of producer responsibility, which obliges
nerates little waste in the production process and the      the economy to take back packages after usage and
subsequent emergence allowing an environmentally            to participate in their disposal. Therefore, a nationwide
system of collection and disposal, the Dual System
Germany (“Der Grüne Punkt”), was created and a
refund system for disposable bottles was introduced.

Recycling economy and waste law is codified in
the Recycling Economy and Waste Act, which is
heavily influenced by European Community Law and
has implemented numerous EU Directives. Provisions
relevant to waste law are also included in innumer-
able other laws, for example in the Federal Mining
Act (Bundesberggesetz, BBergG), the Act on the
Transportation of Hazardous Goods (Gefahrgutbe-
förderungsgesetz, GGBefG), the Atomic Energy Act
(Atomgesetz. AtG), as well as in the Water Resources
Act (Wasserhaushaltsgesetz, WHG). These acts regu-
late specific problems in relation to waste that do not
fall within the scope of the Recycling Economy and
Waste Act.

Currently, more than 250,000 people work in the
German waste industry. The sector generates an
annual turnover of more than C50 billion. These
figures clearly show that environmental protection
has become an important economic factor. The
environmental goal of the Federal Government is to
develop waste and recycling to a so-called “Stoff-
stromwirtschaft” in the coming years, meaning that
materials bound inside the waste be fully reutilised,
which consequently will render landfill superfluous.



Dr. Borris Richrath
borris.richrath@luther-lawfirm.com
Telephone +49 (211) 5660 24860
Doing Business in Germany   184 | 185
Doing Business in Germany Energy                                                                       186 | 187




Energy

Due to several law-making initiatives taken by the European Union, the elec-
tricity and natural gas markets in Germany are open to competition today.
The liberalization process started in the late 1990s, but the new Energy
Industry Act 2005 provided for a fundamental change of the legislative frame-
work, implementing two EU Acceleration Directives enacted in 2003. Today,
both the electricity and the gas sector are liberalized, but highly regulated by
the numerous provisions of the EnWG and several governmental ordinances.
Whereas the EnWG covers the general principles, the ordinances provide for
detailed rules on, for instance, access to the networks, network access fees,
concession fees, and metering services. In addition, there are ordinances on
the general terms and conditions of supply to household customers, on low
voltage and low pressure network connection and on network connection of
power generation plants. Finally, in order to promote climate protection there
are special laws establishing an emission trading system and encouraging
the production of energy from renewable resources.




Third Party Access (TPA)                                large scale in order to guarantee the functioning of
The Energy Industry Act provides for the opening        the system.
of electricity and gas networks to everyone. Thus,
every network operator must offer its network for       The conditions and methods which regulate TPA to
trans-mission and distribution of electricity and gas   the electricity grid are different from those in the gas
in an adequate, transparent, non-discriminatory man-    sector. Whereas TPA to the electricity grid is largely
ner and according to objective criteria. Network op-    based on the former, well-established system preced-
erators of all levels are obliged to co-operate on a    ing the 2005 reform, TPA in the gas sector underwent
a radical change. The new regime calls for a genuine       and gas network operators must offer connection to
entry-exit system, for the possibility to trade capacity   their networks to end customers and other networks
rights without restrictions, and for effective congesti-   in an adequate, transparent, non-discriminatory man-
on capacity management. The gas network operators          ner and according to objective criteria. The details of
agreed on a co-operation agreement (Kooperations-          how to connect end customers to the low voltage
vereinbarung) which provides for the details. Accord-      and low pressure networks and how the network
ingly, several networks form a single market area,         connection may be used by them are regulated by
each providing for only one virtual trading point. Ac-     two ordinances (NAV, NDAV). They cover, inter alia,
cess to the gas network must then be based on the          the liability of network operators for outage and in-
so-called two-contract model which requires only one       terruption of supply. In the recent past, industrial
contract regarding an entry capacity (from the import      customers and electricity network operators often
point of the market area to the virtual trading point)     argued about the precise voltage level at which the
and another contract regarding an exit capacity (from      customer may be connected to the grid. The details
the virtual trading point to the extraction point of the   of how to connect power generation plants to the
particular market area). There are currently around 10     electricity network are determined in an additional
market areas in Germany.                                   ordinance (KraftNAV).

Network Access Fees                                        Unbundling
Starting with the 2005 reform, network operators had       In order to enhance transparency and to enable the
to calculate their network access fees according           regulatory authorities to supervise the markets ef-
to the network access fee ordinances (StromNEV,            fectively, the Energy Industry Act requires electrici-
GasNEV). Up to the end of 2008, these ordinances           ty and gas network operators to act independently
required prior approval of the network access fees         from energy suppliers and energy generators affili-
from the regulatory authorities. In January 2009, an       ated with them. Thus, within a vertically integrated
incentive regulation ordinance (ARegV) came into           energy company, the network has to be operated
force. The new system imposes revenue caps on the          by a separate legal entity (however, not in separated
access fees which network operators are allowed            ownership), and the personnel of the network oper-
to charge. These revenue caps are determined by            ator has to be sufficiently separated from the other
calculating the costs incurred (capital expenditures,      entities of the group in order to avoid conflicts of
capex, and operating expenditures, opex) and the           interest (legal and management unbundling). These
results of an efficiency measurement of the respec-        rules do not apply to networks with less than 100,000
tive network operator. Many details of the calculation     customers. The statutory provisions on unbundling
of network fees and the level of revenue caps im-          of accounts and on informational unbundling, how-
posed on the individual operators are controversially      ever, need to be observed by all network operators.
discussed among network operators, regulatory au-
thorities and the courts.                                  Regulatory Authorities
                                                           In order to comply with the EU Acceleration Direc-
Network Connection                                         tives, the Energy Industry Act established energy
According to the new Energy Industry Act, electricity      regulatory authorities for the electricity and gas sec-
Doing Business in Germany Energy                                                                          188 | 189




tor on the federal level (Bundesnetzagentur, Federal       Terms and Conditions of Energy Supply Contracts
Network Agency) and on the federal state level             In principle, energy suppliers and their customers
(regulatory authorities of the German Länder), the         are free to negotiate the terms and conditions of
latter being responsible for networks with less than       electricity and gas supply contracts, in particular with
100,000 customers provided they do not extend              regard to the partner of the agreement and to the
beyond the borders of a federal state. The regulatory      price. However, some restrictions apply. In the recent
authorities are in charge of enforcing the Energy          past, price adjustment clauses have often been chal-
Industry Act including, for instance, electricity and      lenged by customers in court as they were allegedly
gas network access, incentive regulation of network        non-transparent. Supply contracts between produc-
access fees, unbundling, and network connection            ers, importers, or wholesalers with resellers are sub-
with regard to more than 900 electricity network oper-     ject to the guidelines of the Federal Cartel Office on
ators and more than 700 gas network operators. In          long-term energy supply contracts.
addition, the competition authorities on the federal
level (Bundeskartellamt, Federal Cartel Office) and        Finally, two ordinances (StromGVV, GasGVV) deter-
on the federal state level (competition authorities of     mine the relationship between energy suppliers and
the German Länder) enforce the anti-trust law rules        household customers. They cover the terms and
such as the prohibition to restrict competition, the       conditions, in particular conclusion, content and ter-
prohi-bition to abuse market dominance, and the            mination, of such energy supply contracts. These
merger control regime. With respect to the energy          ordinances automatically apply if (a) the utility is a
industry, the competition authorities, in the recent       so-called basic supplier (supplier of last resort) and
past, focused in particular on gas prices and long-        if (b) the end customer asks for a basic supply
term contracts for the supply of resellers. The Federal    contract or if the end customer consumes energy
Cartel Office is solely responsible for applying mergers   without having concluded a contract. They do not
control rules in the energy sector.                        automatically apply to energy supply contracts with
                                                           commercial and industrial customers. Some provi-
Concessions for Lines                                      sions of the ordinances are nevertheless sometimes
Municipalities are obligated to offer on a contrac-        referred to in those contracts.
tual and non-discriminatory basis the use of public
property for laying and operating lines for the direct     Energy Trading
supply of energy to end customers within the muni-         Germany has an efficient, liquid electricity trading
cipality. Energy companies must in return pay con-         market. In addition to the OTC trade, the European
cession fees for this right of way. The amount of          Energy Exchange in Leipzig (EEX) provides a market
fees per kilowatt-hour depends on the number of            platform for institutionalized trading of energy and
inhabitants of the municipality. The concession fees       related products. In the gas sector, however, trading
are invoiced together with the network access fees         activities are still being developed.
which network users have to pay to the network
operators. Details, in particular on the calculation of    Energy from Renewable Resources
concession fees, are regulated in an ordinance on          The Act regarding the Priority of Energy from Renew-
concession fees (KAV).                                     able Resources (Erneuerbare-Energien-Gesetz, EEG),
which has been renewed as of January 1, 2009, pro-          work of anti-trust law, in particular the merger
vides for the obligation of electricity network operators   control regime. Since liberalization of the energy
to connect facilities which produce electricity from        industry started in the late 1990ies, many foreign
renewable resources to their network and to purchase        energy companies and investors have entered the
such electricity. In Germany, wind power (onshore and       German market, either by establishing subsidiaries
offshore) is currently the most important renewables        or by acquiring existing German utilities. Due to
sector. The act guarantees that a certain minimum           the burden imposed by network regulation, many
price is paid to the generator of electricity from renew-   network operators and integrated utilities try to co-
able resources by the network operator depending on         operate in various ways.
the source of energy fed into the network (wind, solar
power, biomass, water, etc.).
                                                            Dr. Holger Stappert
The Act on Maintaining, Modernizing and Increasing          holger.stappert@luther-lawfirm.com
the Combined Use of Heat and Power (CHP) (KWK-              Telephone +49 (211) 5660 24843
ModG) came into effect on April 1, 2002 and will
remain in force until December 31, 2010. This act is        Franz-Rudolf Groß, LL.M. (London)
to promote the use of CHP stations in Germany. It           franz-rudolf.gross@luther-lawfirm.com
obligates network operators to connect CHP facilities       Telephone +49 (211) 5660 18722
to their network, to purchase the electricity generated
by these, and to pay a certain surcharge in addition to
the price agreed between the parties.

Emission Trading
In Germany, the European rules on the introduction of
an emission trading system have been implemented
by the Greenhouse Gas Emission Trading Law (TEHG)
which entered into force on July 15, 2004. According
to the TEHG, for each ton of carbon dioxide (CO2) a
plant operator emits into the atmosphere it is obliged
to present an emission certificate to the competent
authority, the German Emissions Trading Authority
(DEHSt). If an operator needs more certificates than it
holds, it has to buy additional ones. Failure to comply
with the obligation to present the certificates will lead
to severe sanctions.

Cooperation, Mergers & Acquisitions
Cooperation between energy companies and mer-
gers & acquisitions are possible within the frame-
Doing Business in Germany   190 | 191
Doing Business in Germany Regulatory Matters                                                              192 | 193




Regulatory Matters

Investors seeking to put their money to work in Germany are confronted
– in addition to the planning and building laws and regulations (see above)
and the environmental laws and regulations – by rules and approval requi-
rements, particularly in relation to business and trade, which are set out
in public law.




Business Regulations                                        Notification Duties
                                                            Any business is subject to a notification duty under
General                                                     Sec. 14 GewO (Gewerbeanmeldung), independent
The admissibility of a business is governed first and       from and in addition to any registration in the com-
foremost by the provisions of the Trade Code (Ge-           mercial register (Handelsregister). This duty requires
werbeordnung, GewO) and special legal regulations           that the commencement of a business (including a
such as those set out in the laws relating to foreigners,   branch office or a “permanent establishment”), the
skilled trades and other lines of business. The trade       relocation of the business, the change of business
law provisions are designed to ensure quality and           purpose or extension of its purpose to include addi-
thus, in the first instance, to protect consumers. Trade    tional or other activities, as well as the abandonment
law also serves the purposes of public safety law and       of a business is notified to the public authority re-
thus also protects the general public against poten-        sponsible for the specific location (e. g. the township
tial dangers arising from such businesses. Trade law        or county). This notification is required to allow the
underlines the principle of freedom of trade, which         authority to monitor the conduct of the business.
also extends to foreign business people, but only           Apart from the general notification duty of the Trade
where exceptions or restrictions are not set out in         Code, other special legal notification duties based
the Trade Code. Restrictions on the freedom of              on other laws also exist such as, for example, under
trade can arise in notification duties and duties to        laws applicable to restaurants, skilled trades, and
obtain permits.                                             (fire)arms.
Duties to Obtain Permits                                    During the planning permission procedure, legal
A permit must be obtained for special lines of busi-        relationships are established not only between the
ness such as security firms, real estate agencies,          investor and the authority, but also with all parties
commercial developers, and other businesses requi-          affected by the project.
ring special supervision. The permit is granted to
the business person and therefore constitutes a             In addition to the personal and installation licenses, a
personal license. To the extent a permit is not grant-      number of other notification and approval duties are
ed to a person, but for an installation, said permit is     required by various acts of legislation including the
referred to as an installation license. Depending on        Medical Product Act, the Pharmaceuticals Act, and
the purpose of the permit, a number of duties are           laws relating to food, drugs and labor regulation.
attached to obtaining a permit for the operation of an
installation. A permit must therefore be obtained for
the construction and operation of installations whose       Trade Regulations (Import / Export)
nature or operation potentially constitutes a serious
threat to the environment or endanger, substantially        Within the European Union (EU), by its constitutional
prejudice or cause material nuisance to the general         definition, no trade restrictions are allowed. However,
public or a neighborhood. Under this provision, for         this does not exclude some rare restrictions within
example, a permit is required for the construction          the EU, e. g. concerning weapons of mass destruc-
and operation of immobile waste disposal facilities for     tion (ABC-weapons) and goods which are intended
the storage or treatment of waste. As opposed to            for illegal re-export from the recipient EU-member
the notification duty, a business requiring a permit        country. Beyond the EU, though German enterpri-
may not be conducted until the permit has first been        ses principally enjoy freedom of foreign trade, certain
granted. A permit is furthermore not granted until          national laws and in particular EU-directives and
the public authority has examined the matter. The           regulations may impose special restrictions on sensi-
permit does not, however, release the business from         tive goods listed in an annex to the Foreign Trade Act
the notification duty under the Trade Code.                 (Außenwirtschaftsgesetz, AWG) and Military Weapon
                                                            Control Act (Kriegswaffenkontrollgesetz, KrWaffKon-
A special permit procedure exists where planning            trG), i. e. the export-list (Ausfuhrliste) and import-list
permission is mandatory for installations that have a       (Einfuhrliste). They mainly refer to sensitive goods like
particular impact on surrounding areas, nature and          weapons, military and nuclear equipment, or goods
the countryside. Nuclear plants, alterations to con-        that may also be used for prohibited purposes (“dual
structions on the banks of waterways and lakes,             use”), and also for purposes of specific protection,
and installations with especially high rates of emis-       e. g. on wildlife products of protected species. Such
sions, such as landfills, may, for example, require plan-   controls generally mean that approvals or licences
ning permission. During the permit procedure, the           are needed for exporting and/or importing (and
investor’s interests are weighed against the interests      transportation); in certain instances of products (e. g.
of those affected by the project, and these interests       mass destruction weapons as above), and in partic-
are reconciled by issuing collateral provisions and         ular with respect to specific countries (embargos),
requirements that must be met to obtain approval.           and it also means the absolute prohibition of trade.
Doing Business in Germany Regulatory Matters               194 | 195




Furthermore, there may be general requirements
(mostly imposed by EU-regulations) for security con-
trols (testing and certification), labelling, packaging,
trademarks, documentation etc.

Beyond the fact that EU member countries apply
a common external tariff to imports from outside
the EU, the European Commission has entered into
numerous preferential trade agreements with other
countries by which import duties are considerably
reduced or abolished, or quota established. Germany
is also a member of the World Trade Organisation
(WTO) and the Organisation for Economic Coopera-
tion and Development (OECD) which seek to restrict
and limit such trade barriers.



Exchange Controls

At present, no exchange control restrictions are in
force, although various reporting requirements are
in effect for tax purposes. The C is freely conver-
tible into foreign currencies. The federal Government
can impose, under certain conditions, restrictions on
foreign money or loan capital coming into Germany
by requiring a cash deposit with the Federal Central
Bank (Deutsche Bundesbank), if this is not prohi-
bited by existing EU regulations. At present there are
no such restrictions in force.



Dr. Michael Fritzsche
michael.fritzsche@luther-lawfirm.com
Telephone +49 (211) 5660 18738
Doing Business in Germany Product Liability                                                                   196 | 197




Product Liability

German law provides different legal concepts under which the manufacturer,
the seller, the importer, the supplier of components or other persons involved
in the supply chain may be liable for their products. These are in par-
ticular Sects. 433, 631 et seq. German Civil Code, law of torts, Sec. 823
et seq. BGB and the Product Liability Act.




Statutory Warranty for Defects of Quality                       only if the seller does not satisfy the buyer’s afore
                                                                mentioned claims within a reasonable time-limit
Overview                                                        set by the buyer, further rights or claims will arise.
The delivery of a product which is free from defects            At this stage the buyer can either withdraw from
is part of the seller’s obligation of due performance,          the contract (Rücktritt) or reduce the purchase
Sec. 433 BGB. The seller is liable for those defects            price (Minderung);
which the relevant product has at the moment the                also claims for damages (Schadensersatz) or com-
risk passes from the seller to the buyer. In such case,         pensation in respect of expenses incurred (Ersatz
German sales law provides for a system of claims                vergeblicher Aufwendungen) are possible. These
that are contingent upon each other, Sec. 437 BGB:              claims require, however, not only a defect of the
                                                                delivered product but also responsibility for said
   first of all, the buyer has to give the seller a second      defect to be assumed by the seller or for the seller’s
   opportunity for due performance. The buyer may               inability to remedy the deficiencies.
   then claim, at his option, rectification of the defect
   or the supply of another product free of defects.         The sold goods are defective in the sense of German
   The buyer is not allowed to directly rectify the de-      sales law if they do not correspond to the conditions
   fects at the seller’s cost. All ancillary costs related   agreed upon between the parties in the contract. So
   to the rectification (e. g. costs of transport, disman-   the starting point in this regard is not an objective view
   tling, re-fitting etc.) have to be borne by the seller;   as to whether the goods are acceptable according
to technical standards, “usual standards” etc. but the       of the buyer. So the buyer’s claim may for examp-
(individual) agreement between the parties (Beschaf-         le include the costs of the purchase of a substitute
fenheitsvereinbarung). For example, irrespective of          product, loss of profit or damages the buyer himself
technical performance, a blue car will be considered         has to pay to third parties. Also immaterial damage,
to be defective if the parties have agreed upon the          i. e. compensation for pain suffered (Schmerzens-
delivery of a red one. This explains the special em-         geld), can be claimed, Sec. 253 BGB. If the seller de-
phasis that should be laid on the proper establish-          lays in remedying any of the deficiencies, the buyer
ment of a detailed description of the sold/purchased         can also claim damages for the loss he suffers as a
goods and their requisite features, preferably by way        result of the delay (Verzugsschaden), Sec. 286 BGB.
of a detailed specification sheet (Lasten-/Pflichten-
heft). Only as far as the parties have not agreed upon       Instead of claiming damages, the buyer can demand
the specific details of the goods, the following criteria    compensation for expenses he has incurred relying
will be considered:                                          fairly upon the receipt of the benefit, Sec. 284 BGB.

   suitability for the contractually presumed use;           Exclusion of Claims
   suitability for the usual use; possession of the qua-     Buyer’s claims for defects are excluded where it
   lity that is standard for products of the same kind       can be shown that he knew or should have known
   and that the buyer may expect (which is also the          (i. e. gross negligence) of the defects at the time the
   fact, if the product diverges from the public state-      contract was concluded.
   ments of the seller, the manufacturer or his agents,
   particularly in sales promotions or in designations       Obligations of Buyer
   about special characteristics of the product, un-         Where there is a transaction between merchants,
   less the seller did not know and did not need to          i. e. B2B-contracts (Handelskauf), all warranty claims
   know these statements).                                   cease to exist if the buyer does not comply with
                                                             his duty to examine the products immediately after
In addition, a defect exists if assembly is not carried      delivery and, in case of defects, give notice of them
out properly by the seller or if installation instructions   without undue delay, Sec. 377 of the German Com-
are insufficient.                                            mercial Code (Handelsgesetzbuch, HGB). This obli-
                                                             gation to inspect all incoming products immediately
Claims for Damages and Extent of                             after delivery (even if by random examination) often
Seller’s Responsibility                                      results in the loss of substantial claims, since the re-
The seller is liable for both wilful action and negli-       quirements imposed by German courts for inspec-
gence, Sec. 276 BGB, and for the faults of his vica-         tions in compliance with the German Commercial
ri-ous agents, Sec. 278 BGB. In case the seller has          Code are often difficult to meet within the reality of
given guarantees for certain features of the products,       modern supplier systems. To avoid such loss it is
the seller is liable regardless of fault.                    therefore crucial to install proper quality assurance
The amount of compensation is not restricted in              agreements, delegating the responsibility for such
any way, e. g. to the defective product itself, but can      inspections from the buyer to the seller.
be in respect of damages to other goods or rights
Doing Business in Germany Product Liability                                                                198 | 199




Warranty Period                                              Sec. 475 para. 2 BGB;
The statutory warranty period for movable products           the seller may take recourse against his supplier
is two years starting with delivery. A five year warran-     for all costs incurred with respect to the fulfilment
ty period applies, however, when the delivered (and          of the seller’s obligations vis-à-vis the consumer
defective) goods have been used for a building and           under the same legal regime as it is available to
caused a defect to said building.                            the consumer. This may take up to five years from
                                                             delivery of the defective product or two months
Possibility of Deviating Contractual Regulations             from fulfilling the consumer’s claims, whichever
Implied warranties for defects can be excluded (by           is earlier.
way of individual agreement) or limited unless the
seller has given a guarantee for certain features of       Law on Works Contracts
the sold products, Sec. 444 BGB. Further restrictions      Where the seller has manufactured the products
apply to limitations of warranty in general terms and      specifically for the buyer the agreement between
conditions (Allgemeine Geschäftsbedingungen, AGB).         the parties is not a sales but a works contract, in
For example, it is not possible to exclude or limit        respect of which German law sets out special
the liability for gross negligence or for damage to life   provisions. An exception to this occurs where the
or health of human beings.                                 entrepreneur is obliged to manufacture and deliver
                                                           movable goods – in this case the law on sales agree-
The statutory warranty period can be shortened as well     ments is still applicable, Sec. 651 BGB. Most of the
as extended by way of agreement, Sec. 202 BGB;             supply agreements in a B2B-relationship are there-
although as part of the general terms and conditions       fore governed by sales law. In addition, many of the
it can only be shortened to one year – this is the         differences between the law on sales and the law
minimum warranty period for the sale of new goods.         on works contracts were removed in 2002 so the
                                                           liability of the supplier in a works contract is now
Special Provisions for Consumer Goods                      very similar to that of a sales contract.
Special provisions apply to a “consumer goods pur-
chase”, i. e. the purchase of a product by a consumer
from a merchant for private use, e. g.:                    Liability under Law of Torts

   deviations from the statutory warranty provisions       Where a manufacturer brings a defective product on-
   to the disadvantage of the buyer cannot be validly      to the market he may not only be contractually liable
   agreed in advance, Sec. 475 para. 1 BGB;                but could also be liable under the statutory law of torts
   if a defect appears within six months from the          (deliktische Haftung). The statutory liability under the
   passing of the risk, it is assumed that the product     law of torts for defective products, which may apply
   was already defective at the moment the risk was        in addition to contractual obligations between the
   passed, Sec. 476 BGB;                                   parties involved, is governed particularly in Sec. 823
   even by individual agreement the warranty period        para. 1 BGB (Produzentenhaftung).
   cannot be limited to less than two years for new
   goods, respectively one year for used goods,
Overview                                                     been manufactured by a third party. If the manu-
The product liability under Sec. 823 para. 1 BGB             facturer becomes aware of such risks, he is obliged
requires that the defective product has caused an            to issue warnings or even start a recall-campaign
infringement of so-called “absolute rights”, e. g. life,     to prevent the products from endangering the life
health, property etc. – a mere financial loss without        and health of human beings.
the infringement of said rights is not sufficient.
                                                           Persons Liable
Product liability is based on the general obligation to    Liability under the law of torts may not only apply to
avoid hazards to the public (allgemeine Verkehrssi-        the industrial manufacturer but e. g. also to the distri-
cherungspflicht). For manufacturers this means that        butor of products (in respect of specific distributor’s
they have to take all measures that are necessary to       duties as the duty of inspection, instruction or advice).
prevent their products from harming the life and health    This needs to be kept in mind as an entrepreneur who
or property of their customers or third parties. Here,     brings a product into the market under his own brand
the principle of commensurability applies: the bigger      that has been manufactured by a third party for him
the possible danger is, the greater the manufacturer’s     may also be liable hereunder (so-called “quasi manu-
duties to maintain safety.                                 facturer”). If there is more than one manufacturer in
                                                           the aforementioned sense who has contributed to
Manufacturer’s Obligations to Maintain Safety              the damage, they all are liable as joint and several
German jurisprudence has structured the obligations        debtors (Gesamtschuldner).
as follows:
                                                           Extent of Manufacturer’s Liability
  construction, sourcing and manufacturing of the          The manufacturer has to compensate the injured
  products have to comply with state of the art            party for all financial losses resulting from the in-
  science and technology. The same applies to the          fringement of the “absolute right”. This may also
  instruction of the user of the products;                 comprise loss of profit and compensation for pain
  the manufacturer has to organise its business in         and suffering (Schmerzensgeld).
  a way that the afore-said sources of faults are
  eliminated to the extent possible. If so, he is not      In principle, the buyer’s interest in the defective
  liable when a defect arises from a unique fault,         product itself is not covered here. The latter is only
  e. g. an employee’s malpractice or malfunction of        part of the contractual warranty for defects. This
  a machine (so-called “Ausreißer”).                       restricts the practical use of this legal concept for
  the manufacturer has to issue proper warnings            the purpose of taking recourse in the supply chain.
  about possible risks aligned with the product and        This situation may, however, be treated differently
  its use;                                                 if the defectiveness of the product is restricted to a
  after bringing the product onto the market, the          single part of it which affects other parts of the entire
  manufacturer has to observe whether the product          product (so-called “weiterfressender Mangel”).
  shows risks the manufacturer was not aware of
  before. This also comprises risks which result from
  accessories to the product, even where they have
Doing Business in Germany Product Liability                                                                  200 | 201




Statute of Limitation                                       million Sec. 10 ProdHG. The liability according to
What makes this legal concept particularly important        the ProdHG cannot be waived in advance, Sec. 14
is the fact that the statute of limitation is substanti-    ProdHG. Since 2004 the liability under the ProdHG
ally longer than the one under contractual liability. In    extends also to damages for pain and sufferings.
principle, claims for compensation based on Sec. 823
BGB become time-barred within three years from              Products in terms of the ProdHG are all kinds of
the end of the year in which the claim came into            movable objects, even if they are part of another
existence and the claimant became aware of the              object. Under the ProdHG a product is considered
damage and the person responsible for it, Sects. 195,       to be defective where it does not provide that level
199 para. 1 BGB.                                            of safety that the general public, particularly with
                                                            regard to the relevant purpose of use, may expect
The second subsection of Sec. 823 BGB covers a              at the time of bringing the product into the market.
further area of product liability. Here, the liability is   As a consequence of the aforesaid, there is no lia-
linked to the non-compliance of the manufacturer            bility according to the ProdHG if formerly unknown
with the requirements of special protective laws.           risks become known because of new insights after
There exist special regulations e. g. in connection         bringing the product into the market: there is only
with the production of food, pharmaceuticals (Arz-          an obligation to observe whether the products show
neimittelgesetz, AMG) and many others.                      risks that the manufacturer was not aware of before,
                                                            Sec. 823 para. 1 BGB.

Product Liability Act                                       Persons Liable
                                                            According to Sec. 4 ProdHG, the liability according to
Overview                                                    Sec. 1 ProdHG falls upon:
The Product Liability Act (Produkthaftungsgesetz,
ProdHG) operates on the basis of strict liability, i. e.      the manufacturer of the end-product;
there will be product liability regardless of whether         the suppliers (who manufacture parts for the end-
the manufacturer was responsible for the damages              products or raw materials);
caused by his products. Similar to Sec. 823 para. 1           the so-called “quasi manufacturer”;
BGB, a liability according to the ProdHG requires             the importer;
that the defective product has caused damage to               the distributor (if no other liability can be construed).
life, health of human beings or to property other than
the hazardous product itself. Damage to other objects       If there is more than one person liable who faces
is only covered in case they are intended for private       liability, they all considered to be liable as joint and
use, Sec. 1 ProdHG, and the damage exceeds a                several debtors (Gesamtschuldner).
deductible of C500.00, cf. Sec. 11 ProdHG. This is
the reason why claims under the ProdHG are of no            Statute of Limitation
use when considering take recourse for defective            Claims for compensation based on the ProdHG be-
products in the supply chain. The liability for perso-      come time-barred within three years from the moment
nal injuries is limited to a maximum amount of C85          when the claimant became aware or could have be-
come aware of the damage, defect and the person               the amounts of compensation for pain and suffering
responsible for the damage, Sec. 12 ProdHG. Claims            awarded by German courts have increased during
based on Sec. 1 ProdHG expire 10 years after the              recent years, they cannot be compared to the level
moment of bringing the product into the market, at            of some awards which have been made in the USA.
the latest.

Burden of Proof                                               Criminal Law Implications
Product liability claims are often particularly depen-
dent on whether difficult technical issues can be             Whether a manufacturer of hazardous products is
proven in court. German procedural law does not               obliged to recall its products – as opposed to giving
provide for a discovery procedure. The outcome of             a mere warning to users – depends on whether the
a law suit, therefore, often depends on the ques-             hazardous products only endanger other property or
tion, which of the parties bears the burden of proof.         whether they endanger life or health of human beings.
Generally, the claimant has to prove all requirements         If the latter is the case the relevant manufacturer or
of its claim, e. g. for contractual warranty as well as for   even distributor is obliged to recall the product. Ac-
claims under the law of torts or the Product Liability        cording to the landmark “Lederspray”-decision of the
Act, the defectiveness of the product or its inherent         German Federal High Court (Bundesgerichtshof, BGH)
hazards at the moment of passing of the risk.                 the manufacturer/distributor will not only be liable
                                                              for payment of damages to injured persons, but its
As the injured person typically is not able to see            management is also subject to criminal prosecution,
behind the curtain of the manufacturing process, the          if it does not comply with this statutory obligation to
burden of proof is shifted to some extent: in principle,      recall the products. In this case, all managing direc-
the injured person only has to prove that its dam-            tors of a manufacturing company were convicted
age has been caused by a defect of the product.               under criminal law – partly resulting in imprisonment
From then on it is presumed that the manufacturer             – for not properly addressing health risks emanat-
is responsible because of non-compliance with the             ing from the company’s products when these risks
aforementioned obligations. Under the law of torts            became known after bringing the products into
it is, therefore, up to the manufacturer to prove that        the market.
the suffered loss has other reasons and is not attri-
butable to him. Furthermore, in case of a consumer            However, it has to be noted that according to a re-
product purchase it is assumed that the product               cent decision of the German Federal High Court
was already defective at the moment of passing of             this does not necessarily entail an obligation to recall
the risk if a defect appears within six months from           the products, i. e. to replace the hazardous products
the passing of the risk (see above).                          by safe products for free, in cases where the war-
                                                              ranty period for the relevant product has expired. In
Amount of Claims for Damages                                  this case it may be sufficient to simply issue a clear
Contrary to the USA, for example, German law does             warning to the customers and users, even if the
not provide for punitive damages – only the concrete          hazardous products endanger life or health of the
and proven loss has to be compensated. Even though            users of these products.
Doing Business in Germany Product Liability              202 | 203




Product Safety Act

Based on the EU-directive 2001/95/EC, special regu-
lations apply for consumer products and work equip-
ment according to the Product Safety Act (Geräte-
und Produktsicherheitsgesetz, GPSG) since 2004.
The Product Safety Act confers additional powers on
the regulatory authorities such as ordering the recall
of unsafe products from the market. Furthermore, it
establishes a duty to notify the national authorities
when a product carries serious risks to consumers.
Besides, it strengthens the existing obligations of
manufacturers and distributors such as to carry out
sample testing of marketed products, maintain proper
screening of customer complaints and recall pro-
ducts to protect consumer health. What is more, it
entitles and encourages the relevant national author-
ities throughout the EU to actively exchange all in-
formation obtained from manufacturers with each
other and with the public, using modern information
technology.



Volker Steimle
volker.steimle@luther-lawfirm.com
Telephone +49 (221) 9937 25769

Guido Dornieden
guido.dornieden@luther-lawfirm.com
Telephone +49 (221) 9937 14210
Doing Business in Germany Public Private Partnership                                                        204 | 205




Public Private Partnership

The impacts of the financial crisis which we are currently undergoing are
complex and in most parts serious. That applies also and in particular for
the public sector. Due to the occurred and the expected massive losses of
the public authorities, the exigency to privatize or merge costly public in-
stitutions or publicly owned undertakings with a commercial partner will
increase. Therefore, the following article is of significant importance, in
particular once the German politics will get back their full freedom of
action after the elections for the Bundestag in September 2009.




General Aspects                                                areas in Germany. Key markets such as the electricity
                                                               and gas, telecommunications and water markets have
The still empty coffers of the public sector in Ger-           been deregulated. Other traditionally public services,
many are increasingly forcing federal, state and local         e. g. health services, local public transportation and
authorities to partly or fully sell their amenities and        sewage works, are being sold or run more efficiently
business operations or to transfer their functions of          with the support of private companies and investors.
state wholly or partially to the private sector under
other cooperation models. In terms of investment ac-           This situation offers immense business opportunities
tivities, it is the local municipalities in particular which   for private investors. The public enterprises that are
are facing the challenge of clearing the investment            up for sale frequently operate inefficiently compared
backlog to the tune of several hundred billion Euros           with private sector companies. Yet private investors
over the next five years. This is unlikely to be possible      can unleash considerable profit potential, by taking
without the engagement of the private sector.                  optimization and restructuring measures, improving
                                                               management structures, tapping into new business
The legal framework and general conditions for the             areas and markets which were off bounds to the
involvement of private investors are in place in many          public sector under public law and other synergy
effects. This especially applies to enterprises whose       Gesellschaft mit beschränkter Haftung (limited liabi-
potential the public sector was unable to realize for       lity company), Aktiengesellschaft (stock corporation),
legal and/or political reasons. Public authorities are      etc.) is known as formal privatization.
also often under considerable financial and political
(once privatization proceedings have been initiated)        Example: Deutsche Bundesbahn (federal railways),
pressure to sell.                                           a special asset of the federal government, was
                                                            reorganized into Deutsche Bahn Aktiengesellschaft
Foreign investors in particular often overestimate          (a stock corporation).
the resistance of the local population to privatization
and underestimate the legal and practical means of          Following formal privatization, the public authority
reducing personnel expenses. Performance-based              remains the sole owner/shareholder of the company
compensation, the conclusion of collective wage             reorganized into a private legal form.
agreements applicable only to the company in ques-
tion, reasonable periods during which notice of             The most important reasons for formal privatization are:
termination may not be given and withdrawal from
the public collective bargaining system (“BAT”) are            the expectation that the enterprise can be run
legally possible and increasingly (politically) accepted,      more efficiently in a private legal form, e. g. as a
a situation which employees are having to accept               result of the decrease in political influence;
more and more. Numerous privatizations in Germany              the creation of the possibility of (subsequent) in-
have been a great success for both the public sector           vestment in the company by private investors, as
and the private investor. The “wave of privatization”          public-law organizations and legal forms do not
and „privatization friendliness“ is set to grow in many        permit investment.
areas in the future, especially due to the current finan-
cial crisis also affecting the public sector.               Regular Privatization
                                                            The partial or full sale of a public enterprise by way of
                                                            an asset deal or the (partial) privatization of a private
“Privatization” and Forms of “Privatization”                company wholly owned by a public authority in an
                                                            asset or share deal is referred to as regular privatiza-
The term “privatization” is not used uniformly, nor is      tion or, simply, privatization.
it defined by law. A distinction can be made between
the following privatization forms:                          Example: The Federal Republic of Germany, the State
                                                            of Lower Saxony and DB Regio AG sold 82,96 % of
Formal Privatization                                        the shares in the railway company Osthannoversche
The reorganization of a public service or a public          Eisenbahnen Aktiengesellschaft to a private trans-
organization or legal form (e. g. public-law institution    portation company.
(Anstalt des öffentlichen Rechts), municipal enterprise
operated by an administrative agency (Regiebetrieb),        Contracting Out
owner-operated municipal enterprise (Eigenbetrieb),         Contracting out means subcontracting functions of
etc.) into a company with a private legal form (e. g.       state while retaining the responsibility for such services.
Doing Business in Germany Public Private Partnership                                                      206 | 207




Example: The City of Dresden, while remaining re-           Local Public Transportation
sponsible for performance of the service, transfered        The German local public transportation market has
the function of state of sewage disposal to Stadtent-       opened up during the last couple of years as a result
wässerung Dresden GmbH.                                     of public transportation companies being privatized
                                                            rather than local public transportation services being
Contracting out and regular privatization can be con-       put out for tender. Both public and private transporta-
ducted simultaneously.                                      tion service providers from Germany and abroad took
                                                            their chance in this competition. For the owner, stra-
Example: A private strategic partner acquired a             tegic partnerships of this kind offer a way of mitigat-
49.9 % participation in Stadtentwässerung Dres-             ing the increasing market risks. For the organization
den GmbH.                                                   responsible for the service, the separation of supply
                                                            and demand creates an organizational structure in line
                                                            with competition law, enabling transportation services
Market Assessment of Key Privatization Areas                to be put out to tender in the future without discrimi-
in Germany                                                  nation and without conflicts of interest under EU law.

The key public companies undergoing privatization           However, local municipalities can still preserve much
include in particular:                                      of their influence by retaining the majority of voting
                                                            and/or veto rights. Their objective is to fix the muni-
Public Utilities                                            cipal subsidies payable in long-term agreements and
Up until the end of the 1990s, there was a true wave        thereby limit the financial risks. This requires nego-
of privatization among public utilities companies. A lot    tiation of an employment package that includes
of German and foreign investors competed to invest          employees’ acquired rights in order to make the sale
in public utilities companies, which generally provided     of shares possible in the first place.
electricity, gas, district heating (sometimes including
electricity generation) and in some cases, water.           For international investors in particular, municipal
                                                            transportation companies make interesting acquisition
It remains commonplace for private investors to hold        targets due to their long-term operating licences.
minority interests (up to 49.9 % of shares), although       More municipalities are expected to decide on a sale,
the legal arrangements in the investment agree-             and the consolidation process in Germany is ex-
ments generally treat the private investor as if it held    pected to accelerate. Experts estimate that between
50 % of the shares. In many cases, the public seller        five and ten large operator companies will remain in
was also granted a put option enabling it to sell further   the medium term.
shares within a specific period of time at a price cal-
culated in accordance with an agreed formula. Only a        Hospitals
few individual investments in public utilities have been    The German hospital market has been undergoing
up for sale in Germany in the past one or two years.        fundamental change during the last few years. The
The market is largely consolidated.                         introduction of flat fees per case (Diagnosis Related
                                                            Groups, DRG), budget capping and the limitation of
subsidies from the states combined with an invest-         lish a municipal hospital group. In this case, several
ment backlog in particular lead to incalculable finan-     municipalities and sometimes also a private hospital
cial risks for municipal hospital operators. Especially    operator invest in a holding company that is the sole
during the last year, the hospital market in Germany       shareholder of several hospital companies and pro-
has had to cope with looming insolvencies affecting        vides central services for these companies.
small municipal as well as large county hospitals.
Moreover, after an action brought by a private hospital    Hospital privatization in whatever form offers the
operator, the European Court of Justice has to resolve     opportunity to pool expertise and exploit synergies,
whether the common practice among public hospitals         thus considerably improving efficiency in the hospi-
of having their accumulated operating losses funded        tal sector. During the last two years, these circum-
by tax revenues from their supporting public authority     stances have motivated many German states to think
represents aid that is not compatible with Art. 86 et      about putting forward privatizations of their large Uni-
seq. of the EU Treaty.                                     versity hospitals. These privatization processes are
                                                           quite complex and require not only high quality legal,
Against this background and to safeguard both the          tax and financial advice, but also the cooperation of
future and competitiveness of their hospitals while        the legislative body of the state, as several stately bills
avoiding future financing obligations, an increasing       need to be altered. The first privatization of a University
number of municipal hospital operators have decid-         hospital (Giessen and Marburg) in 2006, a role model
ed to sell their hospitals. As a result of this slowly     of a successful privatization, inspired many other Ger-
but steadily rising wave of privatization, the hospital    man states – there are still University hospitals all
market has been transformed into a buyer’s market,         over Germany that are on the brink of a privatiza-
in which buyers are increasingly able to influence the     tion. Quite often large private hospital operators can
terms of the transaction. Thus, for example, investors     trigger off such privatization processes by tailor-made
often want to acquire a majority shareholding in a         concepts guaranteeing better financial performance
hospital company or buy the hospital outright to           and a strong support of academic research.
ensure that they can exercise decisive influence
over the running of the hospital. Following privatiza-     Example: The state of Hessen sold 95 % of the shares
tion, municipalities only hold a “golden share”, i. e.     in Universitätsklinikum Giessen und Marburg GmbH
a nominal interest in the hospital company, if at          to a private hospital operator.
all. This gives them certain rights of codetermination
under corporate law.                                       Sewage Disposal
                                                           Current ecological, economic and political conditions
Large private hospital operators with activities nation-   call for a strategic realignment of municipal sewage
wide or medium-sized private hospital operators with       companies. In particular, the public sector is struggl-
regional activities have been the main parties inter-      ing with the high backlog of investments required in
ested to date in the privatization of German hospitals.    the sewerage system and sewage works. Recently
Surprisingly, foreign investors have yet to invest in      the private sector has made inroads into the sewage
German hospitals. One alternative to the full or partial   disposal market in Germany. The first significant
sale of a hospital to a private operator is to estab-      privatizations in the area of sewage disposal (Berli-
Doing Business in Germany Public Private Partnership                                                              208 | 209




ner Wasserbetriebe, Abwasserversorgungsbetriebe                private-law company to a private investor as a stra-
in Bremerhaven or Hansewasser) have only recently              tegic partner of the municipality) as well as the com-
gone ahead.                                                    pliance with the regulations governing the charges
                                                               for the services at hand. In Germany, sewage disposal
The reason why public sewage disposal companies                by multi-utility groups is still in its infancy. It is water
have jumped on the privatization bandwagon rela-               supply rather than sewage disposal that is current-
tively late in comparison to other utilities, is this area’s   ly the focus of attention. Global groups operating in
special link to the public sector. In Germany, sewage          the area of sewage disposal, especially from France,
disposal is defined by law as a “function of state”            are attempting to gain a further foothold in Germany.
incumbent on municipalities. This means that muni-             Thus, the German sewage disposal market still could
cipalities are unable to fully shed sewage disposal            be carved up and offers numerous opportunities for
services, unlike energy supply, for example. Although          private investors to take their share of the cake.
this does not prevent the privatization of municipal
sewage disposal facilities, it must be taken into con-         Example: The City of Dresden, while remaining re-
sideration in the legal structure of a privatization of        sponsible for the provision of sewage disposal, trans-
this kind. In this case, contracting out and regular           fered the corresponding function to Stadtentwässe-
privatization must be combined.                                rung Dresden GmbH, followed by a 49.9 % invest-
                                                               ment by a private strategic partner in Stadtentwäs-
If it has not already done so, the municipality whose          serung Dresden GmbH.
sewage disposal is carried out by an owner-operated
municipal enterprise or a municipal enterprise oper-           Municipal Housing
ated by an administrative agency, should found a               Only a comparatively small number of housing com-
private-law company, e. g. a limited liability company         panies have been privatized to date. It may be as-
(GmbH). Protected by an agreement with the muni-               sumed that larger portfolios will be put on the mar-
cipality, this private-law company then provides               ket in the coming years. There have only been a few
sewage disposal services for the municipality, while           examples of the privatization of public housing com-
the municipality retains responsibility for this function      panies since the sale of Deutschbau in 1997. However,
of state. A private investor can then have a stake in          a growing interest on the part of German (e. g. Viterra
the private-law company.                                       (E.On Group), IVG, etc.) and foreign investors – in par-
                                                               ticular financial investors – in former welfare housing
This “gradual” privatization requires the various in-          in Germany has since become evident. A number of
terests of all parties involved to be covered by a             investors (investor groups) have now appeared in a
complex agreement. Its content can be characterized            marketwhich, up until a few years ago, had not been
as the combination of an asset deal (transfer of the           concerned with the acquisition of housing portfolios.
assets required to conduct sewage disposal services            These investor groups have recognized that con-
to the private-law company and sometimes provision             siderable value-added potential can be exploited by
of the necessary specialist personnel from the owner-          increasing efficiency. Optimizing maintenance and
operated municipal enterprise to the private-law               modernization through economies of scale achieved
company) and a share deal (sale of an interest in the          by consolidating existing portfolios is leading to a
significant reduction in costs and an increase in value.     the public authority must always ensure that pri-
Investors are also benefiting from the margin that           vatization is more economical than the previous
can be generated through the individual sale of resi-        form of providing the service. The bidder must be
dential units to tenants.                                    able to demonstrate that this is the case when
                                                             preparing its determination of a purchase price for
This trend is being driven by the low interest rates         a company or the price of a service to be provided
which provide an attractive return on capital em-            for the public authority at a later date;
ployed for the acquirer as a result of low borrowing         due to the requirement to identify the most econo-
costs with a corresponding debt/equity ratio and             mical form of privatization, a competitive bidding pro-
also allow tenants to buy their apartments at favor-         cess is almost always carried out. The regulations
able conditions.                                             governing such processes are generally fairly identical;

A number of standards for mitigating the social              the closer the subject of privatization is to the core
impact have evolved in recent years in connection            functions of state, the more likely the investor will
with the privatization of public housing companies.          find itself subject to the de facto and/or legal con-
These standards comprise specific arrangements               trol of the public authority, even after the privatiza-
must be included in the purchase agreement with the          tion, due to laws, directives, etc. (which are often
acquirer to cushion the social impact of the change          only enacted in connection with the privatization).
in ownership, e. g. clauses to protect tenants, em-          Such control may relate to both the supervision of
ployees, the housing company as a going concern              casinos by law and inspections by the health au-
and the interests of minority shareholders. However,         thorities to ensure that patients are properly cared
the enforcement of such standards conflicts with             for. If there is any scope for contractual arrange-
the anticipated proceeds from the transaction.               ments, public-law agreements may be an approp-
                                                             riate complement to private law agreements. In this
Other Areas                                                  manner, the private investor can exercise a certain
The general budget constraints of the public sector          degree of influence over subsequent actions by
are also forcing federal, state and local authorities to     the authorities in relation to the investment.
examine all other areas in which services are perfor-
med for citizens to determine whether they can be          A detailed due diligence review remains the safest
transferred to private-law companies. Even functions       way for the investor to gain a clear understanding of
of state involving force (e. g. prisons) may be out-       the legal, tax and economic conditions of the invest-
sourced to private companies.                              ment and the associated risks. The investor has a right
                                                           to insist on adherence to private sector standards
These other areas cover a wide spectrum of eco-            even if a business has previously been publicly run.
nomic activities from cemetery maintenance, waste
disposal, housing of the mentally ill, detention of con-
victed criminals, certification and audit firms, to the
privatization of casinos. Without expanding on the
specific features of each area, the following applies:
Doing Business in Germany Public Private Partnership                                                       210 | 211




Regular Privatization (Tender Procedure)                  make a so-called binding offer, which is not actually
                                                          legally binding. By this time, the number of bidders
The sale of shares in a company by the public sec-        may have been reduced, and negotiations are held
tor is only subject to procurement law if construction,   until one or more bidders makes a legally binding
service or supply agreements subject to compulsory        offer. Often this “final offer” may not be subject to
tendering are concluded in connection with the sale       approval by the executive body of the bidder, although
of the shares.                                            it is subject to acceptance on the part of the seller and
                                                          approval by the seller’s supervisory authority.
Regular privatization is subject to the stringent and
extremely formal rules of procurement law, which
tends to be an overall hindrance to smooth priva-         Privatization Agreements
tization. This opens up a range of opportunities
for investors to have the procedure and decision          Privatization is a special form of a company sale, as is
reviewed by the responsible public procurement            reflected in the related agreements. The agreements
tri-bunals or by the courts. However, observance of       that are normally negotiated are the following:
the provisions of procurement law is not only im-
portant for the public sector. Frequently, dealing        Purchase Agreement
with this complex area is also relatively difficult for   An integral component of the purchase agreement
the private bidder. It may therefore be worthwhile        are the warranties provided by the municipality. The
for a private investor to consult a recognized expert     statutory warranty laws are normally contracted out
in procurement law.                                       in their entirety and replaced by a self-contained con-
                                                          tractual warranty system. For the municipality, it is im-
                                                          portant to limit the cases of liability as far as possible
Regular Privatization (Discretionary Sale)                and to cap the amount of liability. Ideally, from the
                                                          municipalities point of view this will be a mere frac-
If procurement law is not applicable, privatization is    tion of the purchase price. Quite apart from the purely
carried out by way of a discretionary sale, i. e. the     economic consideration that the municipality has no
procedure can be organized at the discretion of           interest in subsequently “repaying” the purchase price
the public seller. However, budgetary law provisions      due to warranties, unlimited liability on the part of the
require that the “best value” (not necessarily the        municipality is also problematic in terms of public law,
highest purchase price) be attained for the asset         since municipalities cannot assume unlimited liability
sold. Generally a fair and transparent bidding pro-       under the municipal charters of the federal states. In
cess is conducted by an investment bank. The inten-       order to identify potential liability risks to the munici-
tion to sell is announced publicly. Interested parties    palities at an early stage and to provide contractual
have the opportunity to submit an indicative offer        cover for such risks, a detailed due diligence review
on the basis of an information memorandum. The            by experienced lawyers and tax advisors is highly
best (normally some 4 to 6) bidders in this phase are     recommended, prior to privatization.
then allowed to conduct a due diligence review and,
on the basis of an agreement drafted by the seller, to
Redrafting of the Articles of Association                    called on to put forward ideas and suggestions on
As part of (partial) privatization of a municipal com-       how to secure and underpin the long-term success
pany, it will also be necessary to redraft the articles of   of the company. Since the “best partner” cannot just
association, since private partners will also demand         be identified on the basis of the bid price – and stra-
that they be granted appropriate shareholder rights.         tegy also plays a decisive role – this gives the pri-
                                                             vate-sector partner the opportunity to make its mark
Numerous federal states require that the municipality        and set itself apart from the competition. In this
has appropriate influence, in particular over the su-        context, the private-sector partner may be asked to
pervisory board or a relevant supervisory body. This         agree to contractual obligations to invest in specific
influence should also be ensured, for example, by            company projects. However, the municipality must
means of appropriate provisions in the articles of in-       ensure that these obligations are actually enforce-
corporation. The influence of the municipality should        able with penalties for failure to comply and are
ordinarily be determined according to the amount of          not merely declarations of intent. Special rights for
the investment in the capital stock and/or according to      the partners may also be stipulated in the syndi-
the voting rights. The appropriateness is determined         cate agreement to supplement the provisions of the
according to the purpose and amount of the invest-           company’s articles of incorporation, e. g. rights to
ment. A controlling influence is not required, such          appoint members to the management or supervisory
that a minority interest on the part of the public           board or rights to veto key shareholder resolutions.
authority is also permitted provided that appropriate
influence is otherwise ensured. It is not clearly regu-      An important aspect that is decisive for the political
lated how the public authority can ensure its influence      success of the privatization, is the labor law frame-
if a supervisory board or other supervisory body does        work, in particular the protection against dismissal,
not exist. In practice, however, this question hard-         vocational training support and continuing education.
ly ever arises because municipalities mostly call for        It is recommended that the long-term commitment
the creation of a supervisory board even if this is not      of the private-sector partner to the joint venture be
legally required, so as to create a means of influence       secured by means of suitable provisions, e. g. restric-
by establishing transactions requiring approval. In          tion on sale for a specific period.
the case of a facultative, i. e. voluntarily established
supervisory board, it is legally possible if required –      The private-sector partner may also be interested in
at least with a German limited liability company – to        acquiring additional shares in the joint venture at a
individually define the rights of the supervisory board      later date, in particular to become the majority share-
and thus to place considerable restrictions on it.           holder. In this case, the syndicate agreement may
                                                             provide for a put option, whereby the private-sector
Syndicate Agreement                                          partner offers to purchase additional shares from
In the syndicate agreement, the municipality and the         the municipality at a specific purchase price or at a
private-sector partner set out in particular the main        purchase price to be determined on the sale date and
business objectives and the future strategy of the           which the municipality may accept by an agreed date.
company through which these objectives are to be
attained. At this point, the private-sector partner is
Doing Business in Germany Public Private Partnership                                                    212 | 213




The content of all agreements must be coordinated         reliable contact partners – a success factor not to
and take account of the individual features of the        be underestimated. The authors have reported on a
specific case as well as do justice to the interests      few of their own projects in this chapter. They be-
of each partner. The above information can only pro-      long to a group of some 25 lawyers specialized in
vide a rough overview of the typical content of ag-       public-sector transactions in various areas.
reements without going into detail. The extremely
complex contractual framework of any privatization
is always unique.                                         PPP – an Investment Culture for the Future

                                                          A powerful infrastructure is more than just an impor-
Privatization Expertise                                   tant geographic advantage: it is a prerequisite for
                                                          an economy’s growth and efficiency. Due to the tig-
As discussed above, the privatization of public-sector    ht financial situation of public budgets, investments
enterprises has become an independent transaction         in German infrastructure have decreased since
market with relatively rigid ground rules, even though    1992 – resulting in an immense investment back-
each case is unique.                                      log. According to a study compiled by the German
                                                          Urban Development Institute (Deutsches Institut für
Foreign investors looking to acquire a formerly pub-      Urbanistik, Difu) in 2008, the greatest need for in-
licly run enterprise or to manage a company as            vestment exists in road construction (C162 billion),
a joint venture with public authorities in Germany        schools (C73 billion), and wastewater disposal (C58
would be well advised to seek professional sup-           billion). Other areas requiring massive investment are
port for this investment from the outset. This can be     the healthcare industry and general public building
assured by a multidisciplinary team of lawyers, tax       construction. Against this background, the coopera-
advisors and, if required, a corporate finance firm       tion of the public and private sectors (public private
well versed in the typical rules followed in a com-       partnership) has become increasingly more impor-
petitive bidding process. These advisors should           tant for the provision of public services. With a view
also have the proven competence in the relevant           to ensuring the efficient use of its scarce financial
industry sector that is indispensable to the success      means, the state is compelled to limit its activities
of the acquisition.                                       more and more to its core duties, having recourse
                                                          to private capital and know-how in the planning,
In many cases, the procedural rules are affected by       construction, financing, and operation of properties.
European competition law. The special features of
German budgetary law and the political implications       Fair Allocation of Risks and Long Term Cooperation
of the procedures must also be taken into account         PPP models are characterised by a partnership-
in the selection of an advisor. It is therefore recom-    based approach. The objective is to enhance effi-
mendable to work with law firms in Germany. Perso-        ciency by involving a private investor over the entire
nal references are crucial in the selection of advisors   lifecycle of the project. An assessment of 30 PPP
in order to demonstrate to the public authorities from    projects by the Difu, carried out on behalf of the
the outset that they are dealing with proven and          PPP task force of the Federal Ministry of Traffic,
Construction and Urban Development (Bundesmi-              Realized Projects
nisterium für Verkehr, Bau und Stadtentwicklung,           The number of PPP projects carried out in Ger-
BMVBS) in 2008, has shown that the PPP procure-            many has risen continuously in the past years and
ment channel was between 3 % and 19 % – accord-            numerous successful models have been imple-
ing to the responsible Parliamentary State Secretary       mented. In autumn 2008, the contracts for the 100th
at the Federal Ministry, on average 16 % – more            and 101st building construction projects within
efficient than the traditional realisation by the public   the framework of a public private partnership were
sector. In such projects, the public sector acts with      signed during a ceremony organised at the Federal
a view to obtaining the relevant service either at the     Ministry of Traffic, Construction and Urban Develop-
same cost with an increase in quality or at a lower        ment. Some 90 projects with an investment volume
cost with constant quality as compared to traditional      of approximately C1.4 billion have been completed
realisation. PPPs are therefore long-term, contractu-      in the area of building construction. Luther Rechts-
ally agreed forms of cooperation over the lifecycle of     anwaltsgesellschaft mbH has been, and still is, in-
a property (normally between 15 and 25 years). The         volved in a large number of PPP projects, particularly
projects generally comprise the stages of planning,        pilot projects, and has provided material advice.
constructing or rehabilitating, financing and operating    Among these projects are, for example, the biggest
as well as maintaining a property. As a consequence,       German PPP project so far in the health-care sector,
the state ceases to be a producer and provider of          the proton radiation centre Westdeutsches Proto-
public infrastructure, becoming instead a purchaser        nentherapiezentrum in Essen (WPE), which has an
of complex services. The long-term nature of the con-      investment volume of C140 million and is scheduled
tractual relationships opens up reliable and profitable    to be opened at the end of the year, and the first
fields of work to private companies.                       penitentiary established in Germany in the form of a
                                                           PPP (JVA Burg, Sachsen-Anhalt) with an investment
Widespread Applications                                    volume of approximately 100 million Euro.
A restriction on PPP projects to particular sectors
or industries does not generally exist, so the realisa-    Facilitation and Acceleration Through
tion of public private partnerships is conceivable in      New General Framework
all areas of infrastructure. The possible fields of ap-    Based on a state initiative, the “Partnerschaften
plication comprise:                                        Deutschland AG”, a federal PPP competence centre,
                                                           was established in 2008 and took up work at the
  public building construction (inter alia, in adminis-    beginning of 2009. By the end of the subscription
  tration, health care and education);                     period, 10 federal states, 82 municipalities and
  traffic industry (construction of roads, railways and    33 other public sponsors had signed a framework
  waterways, harbours);                                    agreement. Private-sector companies (finance, con-
  public utility infrastructure (water and waste in-       struction, service providers as well as advisors and
  dustries);                                               planners) may also acquire shares – Luther will also
  defence sector; and                                      actively participate in the company. The purpose
science, research, IT projects.                            of the “Partnerschaften Deutschland” is to provide
                                                           specific project-related advice to the public sector
Doing Business in Germany Public Private Partnership                                                    214 | 215




at an early stage, as well as advice on the basic work    approximately C10 billion annually, until 2012.
required to improve the general conditions for PPPs       Moreover, there still is a clearly noticeable need to
(e. g. standardisation of contracts, transfer of know-    develop the new federal states. While 6 % of the
how, etc.). Now that a clear political intention can be   need for investment in the Western part of Germa-
observed to realize PPP projects on a larger scale        ny results from an investment backlog, the figure is
where this offers economic advantages, the plan is        24 % in the Eastern part of Germany. The invest-
for PPP models to become even more established.           ment promotion resolved within the framework of
The immediate target the state wishes to achieve          the current “2nd Economic Stimulus Package” by
with its initiative is to triple the PPP share in pub-    the German government and current reforms in pub-
lic building construction, which means a rise from        lic procurement law offer further incentives for more
presently 4.5 % to about 15 %.                            investment especially by medium-sized businesses.
                                                          According to a Difu study, medium-sized businesses
Important steps have already been taken to achieve        are currently involved in the realisation of up to 80 %
this target, for example, the adoption of the “Law        of the PPP projects in building construction. The
regarding the acceleration of the implementation of       Federal Ministry of Construction states that the in-
PPPs” to remove fiscal disadvantages with respect         vestment volume of the ongoing projects is C3.5
to real-estate tax and real-estate transfer tax and to    billion, while another 120 projects with an invest-
clarify certain ambiguities in public procurement law.    ment volume of approximately C6 billion are being
The Federal States of North Rhine-Westphalia and          prepared. These figures suggest that PPPs have
Hessen, too, have struck new paths in PPP projects        established themselves as an alternative to classic
in the hospital sector: Hessen makes it possible for      public procurement.
construction work carried out within the framework
of public private partnerships to be subsidised by
the Federal State of Hessen after economic efficien-      Dr. Hans-Georg Hahn
cy has been proven. In the Federal State of North         hans-georg.hahn@luther-lawfirm.com
Rhine-Westphalia, the new University Medicine Act         Telephone +49 (511) 5458 17647
stipulates an obligation with regard to projects having
an investment volume of more than C15 million to          Achim Meier
examine whether their realisation through a PPP           achim.meier@luther-lawfirm.com
is more economical than traditional realisation by        Telephone +49 (201) 9220 21421
the public sector itself.
                                                          Dr. Oliver Kairies
Great Potential for Future Projects                       oliver.kairies@luther-lawfirm.com
About 60 % of public investment in construction is        Telephone +49 (511) 5458 17643
generated in the area of municipal infrastructure
under the responsibility of towns and municipalities.
The Difu predicts a need for investment in the amount
of C 704 billion until the year 2020. Traffic invest-
ments planned by the German state amount to
Doing Business in Germany Public Subsidies and State Aid Control                                            216 | 217




Public Subsidies and
State Aid Control

Many private and public companies benefit from public subsidies granted
by EU member states such as Germany. Both national laws and a complex
set of EU state aid rules apply. Therefore, undertakings wishing to receive
subsidies or to attack aid granted to competitors should seek legal advice.




Benefits Available to Investors                              subsidies, provides for certain rules of procedure
                                                             and the consequences of a misuse of public grants,
Investments in Germany are promoted by many                  while European law establishes a system of con-
regional, federal and European Union schemes. In             trol: Those subsidies (and this includes any kinds of
2008 approximately C21.5 billion were account-               benefits!) which have not been approved of by the
ed for in German state budgets – for example tax             European Commission are considered illegal and
holidays or financial aids. Other material benefits          the beneficiary has to return these (including interest)
for investors – for example a municipality transfers a       to the member state.
piece of real estate to an investor and agrees a con-
sideration below market value – are not officially ac-
counted for, yet are not uncommon forms of state aid.        Typical Questions

In Germany there is neither a central government             Apart from the question under which conditions
body responsible for controlling the legality of public      and up to which amount an investor may claim
grants nor are there coherent rules. Rather, various         subsidies, there are usually two scenarios in which
different legal regimes with different objectives apply.     state aid law becomes an issue. First, it has to be
By and large one may say that German law sets forth          questioned whether a recipient of subsidies can be
the conditions under which the state may grant               sure that he may keep the aid. This becomes equally
relevant when setting up own operations and when         General Rule: State Aid is Prohibited
investing in an already existing company. When ac-
quiring a company the investor – in the course of        The EU competition policy aims at promoting the
its due diligence investigations – has to determine      common market and establishing a system of un-
whether or not the target company will be able to        distorted competition where every undertaking shall
retain public moneys it obtained in the past. Second,    be able to operate on an equal basis. The state aid
can a company use state aid law as a weapon against      rules intend to avoid discrimination and unfair subsidy
its competitors? For example: Will it be possible to     races amongst member states. While the objectives
challenge subsidies granted to the beneficiary? Can      of state aid control are straightforward and simp-
one avoid state owned or financed companies en-          le, the detailed rules are not. State aid regulations,
tering into competition with private companies? It       block exemptions, guidelines, communications, no-
should also be mentioned that EC state aid rules may     tices, frameworks etc. cover more than a thousand
also help in tax claims. For example, if a competitor    pages. And the body of case law both by national
is exempted from a tax burden this might prove to        courts and the European Court of Justice grows
be prohibited state aid which might render illegal not   day by day.
only the legal basis for the exemption but perhaps
also of the imposition of that tax.                      The fundamental rule is contained in Article 87 (1)
                                                         EC Treaty: the general prohibition of state aid. The
                                                         concept of state aid is very broad and applies to
National Authorities and European Commission             measures which satisfy all of the following criteria:

Both national authorities and the European Com-            There must be an economic advantage that the
mission are involved when state aid is to be granted.      undertaking concerned would not have had under
Furthermore, both sets of rules are to be applied:         normal market economy conditions: examples of
The European state aid law and the national laws.          potential state aid include investment grants, state
Under German law the investor usually only has to          guarantees, tax relief, loans at reduced rates of
make sure that he uses the subsidies in the way as         interest, the provision of goods and services on
agreed when they were granted to him. Under EU law         preferential terms and capital injections.
the investor has to ascertain moreover that the state      The advantage has to be granted by a member
aid rules are complied with by the member state.           state or through state resources: this comprises
Otherwise the investor faces drastic economic con-         advantages which are granted directly by the state
sequences: First of all, he has to return any payments     and advantages granted by a public or private
or any other benefits received. Contracts that violate     body designated or established by the state.
the prohibition of state aid are void. Companies may       The advantage has to favour certain undertakings
also be confronted with recovery claims after having       or the production of certain goods which means
acquired an undertaking which received unlawful            that general measures which apply without distinc-
aid. Finally companies may consider to sue for dam-        tion to all companies are not regarded as state aid.
ages or recovery of aid granted to their competitors.      The advantage must distort competition and affect
                                                           inter-state trade. The Commission takes the view
Doing Business in Germany Public Subsidies and State Aid Control                                            218 | 219




   that small amounts of aid, i. e. aid not exceeding        Existing Aid vs. New Aid
   a ceiling of C200,000.00 over any period of
   three years (for undertakings in the transport sec-       The EC Treaty distinguishes between existing and
   tor the threshold is set at C100,000.00) do not           new aid. For the beneficiary the difference between
   affect trade between member states and do                 existing and new aid is crucial: Commission deci-
   not distort competition (de minimis aid). Due to the      sions on existing aid can only have effect in the
   current financial crisis the threshold for de mini-       future; thus a beneficiary does not have to return
   mis-aid granted on the basis of state programs            what he received in the past. Rather he has some
   temporarily has been increased to C500,000.00.            time to adopt his position to meet the future re-
                                                             quirements. A new aid on the other hand which is
                                                             declared incompatible with the Common market
Exception: Aid Compatible With the                           means that the beneficiary´s past position is in danger.
Common Market                                                One example of an existing aid scheme which has
                                                             been considered incompatible with the EC state aid
State intervention is sometimes seen as a necessity,         rules by the Commission is the preferential tax regime
for example to ensure social and regional cohesion           for Luxembourg Holdings. The scheme was granted
or to improve public services. Therefore, although           under a Luxembourg law from 1929. The Commission
in principle incompatible with the common market,            decided that the preferential tax regime violates state
the EC Treaty contains a list of circumstances in which      aid rules and required the scheme to be repealed
aid may be granted.                                          by the end of 2006, while its effects for the existing
                                                             holdings must be definitively eliminated only by the
There are three kinds of aid where the Commissi-             end of 2010.
on has no discretion and must approve the notified
aid: This includes aid having a social character, aid        In practice, however, the focus is on new aid. For
granted in the event of natural disasters and aid            this the EC Treaty provides an ex ante control through
granted to certain areas of Germany affected by              a notification procedure. In principle any plans to
the former division of the country. For other kinds of       grant new aid must be notified by the member state
aid the Commission has broad discretion to assess            to the Commission prior to the implementation. The
whether to permit it or not. This includes inter alia        notification obligation, however, does not apply to
aid for developing disadvantaged regions, aid pro-           aid which falls under one of the block exemptions.
moting research and development and aid promoting            To date block exemptions exist for training aid, de
culture and heritage conservation. The Commission            minimis-aid, SME aid and employment aid.
also has wide discretion when assessing aid deter-
mined to “remedy a serious disturbance of a mem-             In a first step of the procedure, the Commission will
ber state’s economy” – so far all support schemes            examine whether an aid notified by a member state
for credit institutions introduced as a reaction to          is compatible with the EC Treaty. Where the Com-
the global financial crisis in 2008/2009 have been           mission does not take a decision within two months
accepted for that reason.                                    after receipt of the notification the member state as
                                                             a rule may put into effect the aid.
Where, after the preliminary examination, the Com-         Judicial Review
mission finds that the notified measure raises doubts
as to its compatibility with the common market, it         The prohibition to put aid into effect without the
will initiate formal investigation proceedings. The        prior approval of the Commission has direct effect,
formal investigation procedure is concluded by issu-       i. e. that undertakings can rely on this provision when
ing either a:                                              contesting e. g. a Commission decision. There are
                                                           a lot of constellations where beneficiaries of state
  positive decision, stating that the notified measure     aid, their competitors or the Commission and the
  does not constitute state aid or is compatible with      member states may ask for a judicial review of a
  the common market;                                       decision. However, a lot of legal issues are open.
  a conditional decision, i. e. attaching to a positive    Court actions can be pursued in front of the Euro-
  decision certain conditions;                             pean and the national Courts. Procedures in front
  or a negative decision, stating that the notified mea-   of the national courts are especially interesting for
  sure is not compatible with the common market.           competitors since the national courts are responsible
                                                           for the protection of rights and the enforcement of
                                                           duties. However, the Commission keeps the exclusive
Prohibition to Implement a Measure                         power to decide on the compatibility of aid with the
                                                           common market.
Any new aid which a member state puts into effect
before the Commission’s approval is unlawful. The          Protecting the Beneficiary
Commission may, until it has taken a decision, require     In general, the recipient of aid can attack a negative
the member state to provisionally recover any aid. In      decision of the Commission which deprives it of an
the event that the Commission finds that the aid is        expected aid. The beneficiary can seek the annulment
incompatible with the common market, and if the aid        of the Commission’s decision in front of the Court of
has already been paid, the Commission will decide          First Instance. In the event that the Commission does
that the member state shall recover the aid from           not act in the formal investigation proceedings the
the beneficiary with interest. Interest shall be pay-      beneficiary could bring an action for failure to act in
able from the date on which the unlawful aid was           front of the European Courts. The beneficiary can also
at the disposal of the beneficiary.                        bring an action before a national court against reco-
                                                           very procedures conducted by that member state.
For the beneficiary of state aid it is crucial to ascer-
tain that the aid it received has been properly notified   Attacking the Aid
to and approved by the Commission since even the           When the Commission issues a positive decision
principle of German law, that legitimate expectations      declaring the aid compatible with the common mar-
are protected, will usually not serve as a means to        ket, competitors could seek the annulment of this
prevent recovery.                                          decision. However, it should be noted that in order
                                                           to bring an action for annulment in front of the Court
                                                           of First Instance, just being a competitor is not
                                                           sufficient. Rather the competitor has to show that
Doing Business in Germany Public Subsidies and State Aid Control   220 | 221




it is directly and individually concerned, which can
be very difficult to demonstrate. In addition, or in the
alternative, it might be possible to prevent the Ger-
man administration from granting the aid. However,
there is currently very little case law on this point.

If aid is unlawful, but not recovered by the German
administration, a competitor may seek recourse to the
German courts with the aim to force the administra-
tion to recover the aid from the beneficiary. The appli-
cation of the law is not straightforward in recovery
cases. Finally, actions for damages – both against
the public authority which has failed to notify the
aid to the Commission and the beneficiary – are
conceivable, although so far only in theory.



Dr. Helmut Janssen, LL.M. (London)
helmut.janssen@luther-lawfirm.com
Telephone +32 (2) 6277 763

Dr. Thomas Kapp, LL.M. (UCLA)
thomas.kapp@luther-lawfirm.com
Telephone +49 (711) 9338 21145
Doing Business in Germany Public Procurement                                                             222 | 223




Public Procurement

German public procurement law contains comprehensive regulations gover-
ning the legal relationship between public authorities and private entrepre-
neurs in relation to the provision of works, goods and services. The intention
of public procurement law is to achieve a balance between economically
reasonable procurement by public authorities on the one hand and the legal
protection of private entrepreneurs on the other.




Introduction                                               in 1998, which involved the incorporation of most of
                                                           the European Directives on the coordination of the
Pursuant to the federal, state and local public bud-       procedures for the award of public contracts into
get laws and the German Act Against Restraints of          the legislation. However, the incomplete implemen-
Competition (Gesetz gegen Wettbewerbsbeschrän-             tation of the European Directives unfortunately makes
kungen, GWB), all public procurement contracts must        it necessary to carefully check both the national re-
generally be put out to tender. The Ordinance on           gulations and the European Directives.
Awards of Public Orders (Vergabeverordnung, VgV)
and three other bylaws (VOB/A for works, VOL/A for         In 2004 the EU procurement regime was updated with
deliveries and services and VOF for special services       two new Directives, one for contracts awarded by
such as services from architects, auditors or consul-      public-sector bodies (Directive 2004/18/EC) and an-
tants) constitute the legal framework for the award of     other one for contracts awarded by utilities (Directive
public contracts in addition to the GWB. Since the         2004/17/EC) to replace the existing Works, Supply
federal, state and local budget laws, to the extent they   and Services Directive. The directives introduced
apply to public procurement, are somewhat vague            important new obligations for purchasers, for ex-
and do not provide legal protection for the tender         ample in relation to drafting award criteria, disclos-
er, public procurement law underwent a significant         ing selection criteria and electronic tendering, and
change at the time of the amendment of the GWB             explicit rules on areas not otherwise mentioned in
the directives such as framework agreements and           lic works concessions are also governed by the same
electronic auctions. Also, the directives offered new     rules as those contracts for a direct pecuniary in-
opportunities for more flexible purchasing including,     terest, although no legislation has yet been passed
through the new “competitive dialogue” procedure,         with regard to service concessions.
dynamic purchasing systems and the use of central
purchasing bodies. Member states were given until         Contracting Authority
January 31, 2006 to implement the directives. The         Contracting authorities set forth in the GWB are:
national legislator implemented a small part of the
directives, especially the new award procedure “com-        the Federal Government, State, regional and local
petitive dialogue” in the so-called “ÖPP-Beschleuni-        authorities, as well as special funds of each, re-
gungsgesetz” in September 2005. In 2007 the EU              spectively;
procurement regime was updated with Directive               other legal entities under public or private law
2007/66/EC which related to the improvement of the          which were established for the specific purpose
effectiveness of review procedures for the award of         of meeting the general interest, which do not have
public contracts. The national legislator implemented       an industrial or commercial character, and which
this Directive and further regulations of the 2004-         are for the most part financed or controlled by
Directives in the so-called “Gesetz zur Moderni-            public authorities;
sierung des Vergaberechts” in February 2009.                associations of public authorities governed by
                                                            public law; and
                                                            natural or legal entities under private law which
Thresholds                                                  operate in the fields of drinking water, energy,
                                                            transportation or telecommunications if such ac-
Chapter IV of the GWB regulates the award of pu-            tivities are exercised on the basis of special or
blic contracts that exceed certain thresholds which         exclusive rights granted by a public authority.
are fixed by public ordinances. These are C5.15
million for works and C206,000.00 for goods and
services. A threshold of C412,000.00 applies to the       General Principles
utilities sector. Contracts on goods and services
concluded by the Ministries of the Federal Govern-        If a contract is concluded by a contracting authori-
ment are also included within the scope of the GWB        ty and if said contract exceeds the applicable thres-
to the extent they exceed C133,000.00.                    hold, the authority must follow the general principles
                                                          on award procedures set out in the GWB. These
                                                          provide for transparency, economic efficiency, the
Public Contracts                                          tenderer’s right to compliance with the rules, and
                                                          equal treatment of all bids submitted. Equal treat-
A public contract is defined as a contract for pecu-      ment particularly means that local tenderers cannot
niary interest concluded between a supplier and a         be given preference over non-local tenderers (prin-
contracting authority, the subject matter of which is     ciple of non-discrimination).
supplies, works or services. Contracts relating to pub-
Doing Business in Germany Public Procurement                                                                224 | 225




One of the most significant general principles in rela-     Restricted Procedure
tion to the decision to awarding a public contract          Restricted procedures involve a public invitation to
is the principle that the most economically advan-          participate. A limited number of selected undertak-
tageous bid shall be accepted. This can constitute          ings are then invited to submit a tender. The rest of
either the lowest price or, if so published in the prior    the restricted procedure follows the same rules as
information notice, various other criteria relevant to      the open procedure.
the contract such as quality, period for completion or
delivery date, other running costs, profitability, after-   Negotiated Procedure
sale service, technical merit, etc.                         Negotiated procedures involve a public invitation to
                                                            participate. A limited number of selected undertak-
                                                            ings are then invited to submit a tender. There are
Types of Procedures                                         no further rules set out regarding the regulation of
                                                            the rest of the negotiated procedure. Nevertheless
Public supply, works and service contracts are              the contracting authorities are obliged to follow the
awarded through one of four different types of pro-         general principles as the “principle of competition,”
cedures, namely: (i) an open procedure, (ii) a restrict-    the “principle of transparency” and the „principle of
ed procedure, (iii) a negotiated procedure and (iv)         non-discrimination“ as laid down in Sec. 97 GWB.
a “competitive dialogue” procedure. The open pro-
cedure has priority over the restricted procedure,          Competitive Dialogue Procedure
the negotiated procedure and the “competitive dia-          The new “competitive dialogue” is an attractive alter-
logue” procedure.                                           native to the negotiated procedure for certain particu-
                                                            larly complex projects. The objective of the procedure
Although stricter than provided by the underlying EU        is to provide a flexible procedure which preserves not
directives, the restricted procedure generally ranks        only competition between economic operators but
above a negotiated procedure. Only those contrac-           also the need for the contracting authorities to dis-
ting authorities which operate in the fields of drinking    cuss all aspects of the contract with each candidate.
water, energy, transportation or telecommunications
may freely choose from the four procedures provided
by the GWB.                                                 Individual Rights of the Tenderer and
                                                            Legal Protection
Open Procedure
Open procedures are those procedures in which               One of the great achievements of the comprehen-
an unlimited number of undertakings are invited to          sive 1998 amendment of the German law on public
submit a tender following a public announcement.            procurement was the establishment of basic legal
The rules on the time limit for the receipt of tenders      rules to protect the individual rights of tenderers. This
are strict. The tenders cannot be negotiated after          amendment was included to harmonize German pub-
their submission.                                           lic procurement law with standards established in
                                                            European law. The GWB provides that undertakings
                                                            have a right to bring a claim to ensure that the provi-
sions concerning award procedures are complied             The contracting authority has to inform the unsuc-
with by the contracting entity.                            cessful tenderers about the outcome of the selection
                                                           14 days (according to the amendment in 2009: in
                                                           principle 15 days) before giving the award to the ten-
Structure of the Jurisdiction                              derer with the best offer. The unsuccessful tenderers
                                                           have to be informed about the name of the successful
Public procurement awards are subject to review            tenderer and the reasons why their tenders have not
by Public Procurement Tribunals upon application by        been selected. If the contracting authority does not
a tenderer. These tribunals, which have been estab-        inform the tenderers as prescribed or gives the award
lished both by the Federal Government as well as           before the end of the 14 days period, any contract
by State authorities, may also institute preliminary       with the preferred tenderer would be void. German
remedies if certain of the applicant’s rights are jeo-     jurisprudence has extended this provision in favour of
pardized during the award procedure. Decisions of          the tenderers to state that any public contract which
a Public Procurement Tribunal can be sent to the           is concluded contrary to any public procurement
Court of Appeal which has jurisdiction over the rele-      procedure is generally regarded as void.
vant Public Procurement Tribunal.
                                                           The unsuccessful tenderer then has to file his claim
                                                           at the latest within the 14-day prior-notice-period.
Legal Remedies to get the Award                            Otherwise the contracting authority could conclude
                                                           the procurement procedure, giving the award to the
While the EU directives on public procurement do           selected tenderer. Any contract concluded after the
not prescribe any structure for legal remedies, the        14-day-period cannot be revoked by any later court
German public procurement law has developed an             decision. However, if a claim has been filed with
effective and detailed system of legal remedies in         the competent court the contracting authority may
favor for applicants as also for tenderers.                (with limited exceptions) be restricted from finalizing
                                                           the contract with its preferred bidder during court pro-
Each legal remedy is conditional upon a complaint          ceedings. Any legal transaction carried out contrary
having been made by the applicant or the tenderer.         to this prohibition is automatically deemed to be void.
This complaint has to be filed to the contracting
authority instantly after a mistake is identified in the
tender documents or following the misconduct of            Legal Remedies to Receive Compensation
the contracting authority. “Instantly” means normal-
ly “within three days”. However, if the applicant or       If the contracting authority has accepted the tender
tenderer needs legal advice in order to recognize the      and concluded the contract with the tenderer before
fault, the limit may be extended up to 14 days. If the     the competitor has filed his or her complaint before
applicant/tenderer fails to comply with the obliga-        the Public Procurement Tribunal, and this complaint
tion to immediately file a formal complaint, he will be    was served on to the contracting authority, neither
barred from filing a later complaint in respect of the     said tribunal nor the Court of Appeal can revoke
alleged infringement.                                      the contract.
Doing Business in Germany Public Procurement                                                             226 | 227




A tenderer may subsequently demand compensa-             and also the GWB, a “public contract” involves the
tion in a second proceeding before a civil court for     delivery of works, goods and services. The law does
the costs of preparing its tender or of its participa-   not refer to the sale of public enterprises. However,
tion to the extent the contracting entity violates a     where the public enterprises deliver works, goods
provision intended to protect undertakings, provided     or services to any contracting authority, the deal can
the applicant would have had a realistic chance of       be governed by the public procurement law. In the
being awarded the contract. If the tenderer can sub-     leading case the contracting authority established an
mit evidence that his tender was the most economi-       enterprise, awarded this enterprise with the municipal
cally advantageous and that the contracting authority    waste disposal and sold all shares of this enterprise
would have been obligated to conclude a contract         to a private company directly afterwards. The Public
with him, the tenderer can demand compensation           Procurement Tribunal examined the case from an
for the profit he would have earned upon acceptance      economic perspective and decided that the sale of
of the tender.                                           the shares of this public enterprise had to be regarded
                                                         as an award of a public contract.

Current Developments                                     As an exception to the so-called “in-house privilege”,
                                                         the Directive coordinating procedures for the award
Legislation                                              of public supply contracts and also the GWB are not
The German Government has decided to imple-              applicable provided that the local authority exercises
ment the EU directives in the “old” complex system       over the institution concerned (and to which it wishes
of GWB, VgV and the existing three bylaws (VOB/A,        to award a contract) a degree of control similar to
VOL/A and VOF) within the so-called “Gesetz zur          that which it exercises over its own departments
Modernisierung des Vergaberechts” in February            and, at the same time, that institution carries out
2009. An all-embracing reform with the objective to      the essential part of its activities with the controlling
reduce the complexity of the German public procure-      local authority or authorities (ECJ, Case C-107/98 –
ment law by unifying the provisions of the existing      Teckal). The participation however, even as a minority,
three bylaws to one single body of regulations has       of a private undertaking in the capital of a company in
been postponed for the time being.                       which the contacting public authority is also a parti-
                                                         cipant excludes in any event the possibility of such
Privatization                                            aforementioned public control over the institution
The growing trend of privatization of public functions   (ECJ, Case C-26/03 – Stadt Halle). It can be regarded
by selling public enterprises (esp. public transport     as a rule that the sale of public enterprises is govern-
companies and public utilities) or subcontracting        ed by strict procurement laws in relation to when the
public services to private companies (recently esp.      deal is intended, to avoid a regular public procure-
planning, establishing and running public buildings      ment procedure. As described above, unsuccessful
for a long period) is reflected in numerous law suits    or companies simply not properly informed by the
which have been brought by discriminated tenderers.      public institution can claim that such a privatization
The court decisions have changed the previous pat-       is void and has to be done again. Furthermore, the
terns of privatization. According to the EU directives   privatization (esp. of public transport companies)
could be regarded as an unlawful subsidy if the
contracting authority has disregarded the public pro-
curement laws. This is also important for the success-
ful bidder as in such situation he could be forced to
pay back the “economic advantage” received from
the transaction.



Ulf-Dieter Pape
ulf-dieter.pape@luther-lawfirm.com
Telephone +49 (511) 5458 17627

Achim Meier
achim.meier@luther-lawfirm.com
Telephone +49 (201) 9220 21421
Doing Business in Germany   228 | 229
Doing Business in Germany Banking, Finance and Capital Markets                                                230 | 231




Banking, Finance and
Capital Markets

The German banking sector is amongst the largest in the world, with big in-
ternational banks such as Deutsche Bank and Commerzbank. However, the
German banking system, which consists of private, public and co-operative
banks, is unusual inasmuch as the market share of private banks is rather
small as compared to the market share of public and co-operative banks.




The competent German regulatory authority is the Fe-        ness, the discount business, the broking business,
deral Financial Supervisory Authority (Bundesanstalt        the safe custody business, the guarantee business,
für Finanzdienstleistungsaufsicht, BaFin), which mo-        the giro business, the underwriting business and the
nitors banks and financial institutions and is respon-      e-money business.
sible for issuing banking licenses. The basic German
banking law is the Banking Act (Kreditwesengesetz,
KWG), which contains, inter alia, key definitions which     Structure of the German Banking & Finance
are used throughout the legislation.                        System

According to Sec. 1 German Banking Act a compa-             German banks offer a wide variety of banking services
ny is classified as a credit institution if it engages in   and are usually not specialised or restricted to cer-
banking business either commercially or on a scale          tain activitieas. Typically, German banks will offer assis-
requiring a commercially organised business under-          tance with virtually every type of banking transaction,
taking. The banking business, as defined in the Ger-        regardless of their legal form, size, organisation and
man Banking Act, comprises, inter alia, the deposit         business structure. Large parts of the banking sector
business, the “Pfandbrief” business, the lending busi-      are publicly owned or controlled, or are co-operatives.
These banks play an important role in the develop-           The European Central Bank
ment of local communities.
                                                             The European Central Bank (ECB) was established
                                                             in 1998 through the Treaty establishing the European
The German Central Bank                                      Union. It is based in Frankfurt/Main. It manages the
                                                             C, the single currency of the EU, and ensures price
The central bank of the Federal Republic of Ger-             stability for more than two thirds of the citizens of the
many is Deutsche Bundesbank with its Central Office          EU who use the C as their currency. Additionally, the
in Frankfurt/Main. The German central bank has a             ECB is responsible for determining and implementing
significant role. A key area for which it has respon-        the economic and currency policy of the EU.
sibility is the monetary policy of the C-system.
Particularly, the German central bank has the prin-
cipal duty, as stipulated in the Treaty establishing         The German Promotional Bank
the European Community, of ensuring price stability          (Kreditanstalt für Wiederaufbau, KfW)
in the C-zone. The German central bank also helps
to prevent national and international financial crises.      The KfW acts on behalf of the German government,
With banking supervision, which is a further key area,       promoting medium-sized businesses and business
the German central bank assists with the important           start-ups, granting investment loans to small and me-
operative task of securing a financially sound credit        dium-sized companies, financing infrastructure and
system and, hence, ensuring a stable financial sys-          residential building projects, financing energy-saving
tem. The supervisory activities, along with other            technologies and municipal infrastructure.
central-bank functions, enable the bank to gain a
valuable insight into the banking system, particularly       The KfW is owned by the Federal Republic of Ger-
as a result of its involvement in the money, capital         many (80 %) and the federal states (20 %). The
and currency markets and in the refinancing of cre-          Federal Republic of Germany is liable for all liabilities
dit institutions – this helps the bank to ensure stability   and loans of the KfW. This guarantee, which is given
in the financial markets (Art. 105 Sec. 5 EC Treaty).        by the Federal Republic of Germany, is based on
As part of its cooperation with the BaFin, the German        Sec. 1a KfW Act.
central bank is also responsible for examining approx-
imately 2,300 credit institutions in Germany in order
to assess their solvency, liquidity and risk manage-         German Banks
ment systems, which includes, inter alia, carrying out
inspections of the banking business, e.g. in relation to     In Germany, an extensive network of around 2,300
matters such as compliance with the Basel II Rules,          banking institutions with approx. 44,000 branches
giving supervisory talks and carrying out an ongoing         offer the full range of banking services. The finance
assessment of notifications and audit reports.               market is supplemented by banks that specialise
                                                             in particular functions (e. g. mortgage banks and
                                                             home loan banks). Although most banks conduct
                                                             both corporate and private customer business, big
Doing Business in Germany Banking, Finance and Capital Markets                                           232 | 233




corporations are increasingly being handled by the          Savings and Loan Banks
major banks, whereas small and medium-sized com-
panies are handled by smaller banks that tend to            Savings and loan banks (Sparkassen) are mostly
operate regionally (e. g., savings and loan banks,          municipal and regional banks. They are coordinat-
credit cooperatives for trade, and agricultural credit      ed through central institutions and serve as regional
cooperatives). Over recent years, financial services        clearinghouses. Savings and loan banks may also
have also, increasingly, been offered by non-banking        be engaged in commercial banking activities.
firms such as insurers, department stores, mail-order
firms, and car manufacturers. The financial service
provided by these companies will often correspond           Credit Co-Operatives
to their original business so that a manufacturing
company may offer loans to their customers to enable        Credit co-operatives for trade (Volksbanken) and for
customers to purchase their products, for example.          agriculture (Raiffeisenbanken) generally extend lines
                                                            of credit and long-term loans to their members only.
The German banking sector has in recent years seen          Thus, they serve typically smaller businesses, and
mergers between many financial institutions. This has       individuals. Regional and federal central institutions
led to consolidation within the German banking sec-         serve as clearinghouses and sources of refinancing.
tor. Although such takeovers have led to a reduction
in the size of the banking branch network in Germany,
the country still boasts a density of around one bank-      Mortgage Banks
ing outlet per 1,766 inhabitants (including post office
savings banks), which is one of the best in Europe.         Mortgage banks (Hypothekenbanken) specialise in
                                                            long-term mortgage loans and long-term loans to
                                                            federal, state, and local governments. They issue
Commercial Banks                                            bonds secured by mortgage loans and loans to
                                                            public authorities.
Commercial banks, which are responsible for the
largest percentage of banking business, engage in           In addition, a number of private and public banks
most types of banking operations. They grant short-         provide highly specialised services and special forms
term loans, lines of credit, and medium and long-term       of financing. Insurance banks and leasing compa-
loans; they also place issues and trade in securities       nies also play an important role in the financing of
for customers and on their own account. They may            industrial business.
also be shareholders in companies operating in other
industries or participate in a business venture. The
range of services offered by banks is becoming in-          Banking Regulations of the Federal
creasingly diversified and includes new activities such     Financial Supervisory Authority
as online banking and investment banking. More-
over, there has also been an increase in the number         Banks, financial services institutions, and insurance
of direct banks with no branch network.                     enterprises in Germany are monitored by the Federal
Financial Supervisory Authority (Bundesanstalt für        The Role of the EU
Finanzdienstleistungsaufsicht, BaFin), which reports
to the German Federal Ministry of Finance (Bundes-        Since 1974, when the Basel Committee on Banking
ministerium der Finanzen, BMF). Following the adop-       Supervision was founded, the banking sector in the
tion of the Act on Integrated Financial Services          EU, and amongst G10 nations, has been working
Supervision, the former offices for banking super-        along increasingly similar lines. EU and G10 nations
vision, insurance supervision, and securities super-      work together on this committee to develop an in-
vision were combined to form the BaFin in 2002.           ternational supervisory code and network to im-
                                                          prove the quality of banking supervision, and the
The BaFin’s main task is to ensure the functioning,       committee’s consultative paper on the New Basel
stability and integrity of the German financial system.   Capital Accord (Basel II) of 2004, last updated in
It has many specific duties: it regulates banks by        July 2006, will have wide reaching effects in the
enforcing standards of professional conduct and           international banking sector.
monitors banks to ensure that they comply with the
capital adequacy requirements and to ensure that          The purpose of Basel II is to create an internatio-
they maintain sufficient liquid funds. It also ensures    nal standard that banking regulators can use when
that the banks comply with statutory risk limits and      drafting regulations which set out how much capital
demands bad debt provisions that are in line with the     needs to be put aside to guard against the types
banks risk exposure. Thus, banks, financial services      of financial and operational risks that banks face.
institutions and insurance undertakings are reminded      Basel II was designed to help protect the interna-
that they need to ensure that they control their busi-    tional financial system from the types of problems
ness dealings in such a way that they are always able     that might arise in case a major bank or a series of
to meet their payment obligations.                        banks collapses. In practice, Basel II attempts to ac-
                                                          complish this by setting up rigorous risk and capital
The BaFin directorate for Insurance Supervision           management requirements designed to ensure that
grants the regulatory authorization required by enter-    a bank holds capital reserves which are appropriate
prises in order to carry out insurance.                   for the levels of risk to which the bank exposes itself
                                                          through its lending and investment practices.
Together with the BaFin, the German central bank
participates in the ongoing supervision of the bank-      The European Union has implemented Basel II via
ing system. Its participation is governed by Sec. 7 of    the EU Capital Requirements Directive, which con-
the Banking Act. Amongst other things, the German         sists of Directive 2006/48/EC (Banking Directive) and
central bank analyses the reports and returns that        Directive 2006/49/EC (Capital Adequacy Directive),
institutions have to submit on a regular basis and        published on June 30, 2006.
assesses whether their capital and risk management
procedures are adequate.                                  Germany implemented the relevant parts of the
                                                          Capital Requirements Directive on January 1, 2007.
                                                          Major laws, regulations and rules in this context in
                                                          Germany are:
Doing Business in Germany Banking, Finance and Capital Markets                                                     234 | 235




   Banking Act (Kreditwesengesetz, KWG);                            shareholder structure more transparent and to oblige
   Solvency Regulation (Solvabilitätsverordnung, SolvV);            larger investors to disclose their strategic objectives.
   Regulation governing Large Exposures and Loans
   (Großkredit- und Millionenkreditverordnung, GroMiKV);
   Minimum Requirements for Risk Management                         Stock Exchanges
   (Mindestanforderungen an das Risikomanage-
   ment, MaRisk).                                                   The most important stock exchange in Germany is
                                                                    the Frankfurt Stock Exchange (Frankfurter Wertpa-
On January 1, 2004, the Investment Modernisation                    pierbörse, FWB). The institution operating FWB is
Act (Investmentmodernisierungsgesetz, InvModG),                     Deutsche Börse AG. In addition, there are stock ex-
which transposed directives 2001/107/EC and                         changes in Berlin, Düsseldorf, Hamburg, Hanover,
2001/108/EC of January 21, 2002 (UCITS III) into                    Munich, and Stuttgart. The German Exchange Super-
German law, came into force. This Act has several                   visory Authority, an institution of the German federal
consequences: firstly, it broadly overhauls and con-                states (Bundesländer), monitors the setting up, clos-
solidates the investment-related fiscal regulations                 ing down, and operations of stock exchanges, and
which were previously contained in the German Ca-                   ensures that trading is properly conducted.
pital Investment Companies Act (Gesetz über Kapi-
talanlagegesellschaften – KAGG) and the German                      The Frankfurt Stock Exchange offers a wide range
Foreign Investment Funds Act (Auslandsinvestment-                   of services, providing access to both the equity and
gesetz, AuslInvestmG). Furthermore, it integrates                   derivatives markets for companies as well as inves-
hedge funds into the range of regulated investment                  tors, in particular access to the electronic trading
funds capable of being marketed in Germany. These                   platform Xetra – one of the leading electronic trad-
provisions were incorporated into an Investment Act                 ing platforms in the world. After the London Stock
(Investmentgesetz, InvG) and a corresponding Invest-                Exchange, FWB is the most important market for
ment Tax Act (Investmentsteuergesetz, InvStG). One                  securities and derivatives in Europe.
key feature of the legislation is that, for the first time, it is
possible to establish domestic hedge funds as invest-               At the beginning of 2003 FWB introduced a new
ment funds managed by an investment management                      segment of the equity market. The goal was the
company (Sondervermögen einer Kapitalanlagege-                      division of the market into two separate segments
sellschaft) or as investment companies (Kapitalanla-                with different standards of transparency as well as a
gegesellschaft). Therefore, hedge funds are obliged to              new concept of sector indices. The legal basis for the
meet the same requirements as investment funds, e. g.               new segment is the 4th Financial Market Promotion
in respect of sales prospectuses, contractual terms and             Act (Viertes Finanzmarkt-Förderungsgesetz), which
conditions (articles of association), and accounting.               resulted in a comprehensive reform of the law gov-
                                                                    erning stock exchange transactions. The stock
In June 2008 the Bundestag passed the “Risk Lim-                    exchange admission segments distinguish between
itation Act” (Risikobegrenzungsgesetz, RBG). The                    the General Standard with statutory minimum trans-
main goal of this act is to prevent undesirable activities          parency requirements and the Prime Standard with
by financial investors. This is supposed to make the                high international transparency criteria. Admission
to the Prime Standard requires quarterly reporting,       help of financial intermediaries. Such capital markets
the application of international accounting standards     include stock exchanges, other organised markets
(IAS/IFRS, U.S. GAAP), publication of a financial ca-     and OTC markets.
lendar, staging of at least one analyst conference
per year, and ad hoc disclosures also in English.         The term “capital market” should be distinguished
                                                          from money, primary, secondary, domestic, foreign
The shares in the Prime Standard are quoted in the        and international markets, all of which have slightly
Xetra trading system. Only Prime Standard issuers         different meanings, as illustrated below.
qualify for all FWB indices. The largest companies
by market capitalisation and sales are included in        Money Markets vs. Capital Markets
the DAX (the German Share Index). Smaller and mid-        Money and capital markets can usually be distin-
sized companies are included in MDAX and SDAX,            guished by reference to the maturity of the instru-
if they operate in the classic industry sectors, and      ments issued. “Money market” instruments rarely
in TecDAX if they operate in the technology sector.       exceed a maturity of two years, whilst “capital mar-
                                                          ket” instruments usually have a maturity of between
The admission of a security to the Frankfurt Stock        two and 30 years.
Exchange is determined by the Listing Board for the
Official Market or the Listing Committee for the Reg-     Domestic Markets vs. Foreign Markets and
ulated Market. The admission criteria vary according      International Markets
to the market segment. All issuers must prepare           Whereas money markets and capital markets are
an offering prospectus containing the information         distinguished by reference to the maturity of the in-
needed to evaluate the securities. Admission to the       struments traded, domestic, foreign and international
General Standard requires no further involvement          markets are distinguished by reference to the place
from the issuer. However, if admission is sought to       where the funds to be invested and the borrowing
the Prime Standard, an application must be made by        requirements meet. Where securities are offered
the issuer, with admission being contingent on the        only in an issuer’s home market, this is known as a
company’s compliance with the transparency criteria.      “domestic market” or a domestic offering. Securities
                                                          offered in a “foreign market” are those offered in a
                                                          country other than an issuer’s domestic market. An
Capital Markets                                           “international market” or a “Euromarket” is a market
                                                          where securities are offered by foreign borrowers to
No legal definition of the term “capital market” exists   foreign investors in various countries in a currency that
in European or in German law. It is generally accept-     is not the currency of the respective financial centre.
ed that a capital market is not necessarily a physical
market place with a trading floor. Instead, the term      Primary Markets vs. Secondary Markets
“capital market” refers to the notional place where       Referring to the parties involved in transactions, the
funds from investors (retail investors, professional      capital market can be divided into “issue markets”
investors, etc.) and the borrowing requirements of        or “primary markets”, where issuers and investors
companies seeking external financing meet with the        meet, and “circulation markets” or “secondary mar-
Doing Business in Germany Banking, Finance and Capital Markets                                                236 | 237




kets”, where offering and buying investors meet. Ca-            The most important acts are:
pital market titles are initially placed on the primary           Securities Trading Act (Wertpapierhandelsgesetz,
market where initial purchasers and initial suppliers             WpHG);
meet. While the focus in the primary market is on in-             Exchange Act (Börsengesetz, BörsG);
formation about the new capital market title and the              Investment Act (Investmentgesetz, InvG);
issuer, it is on the execution of the securities trading          Banking Act (Kreditwesengesetz, KWG);
in the secondary market. As secondary market trans-               Sales Prospectus Act (Verkauftsprospektgesetz,
actions involve the sale of securities to further inves-          VerkProspG);
tors after their initial placement by initial investors, this     Securities Prospectus Act (Wertpapierprospekt-
requires a liquid market, as well as transferable and             gesetz, WpPG);
marketable securities.                                            Safe Custody Act (Depotgesetz, DepotG);
                                                                  Financial Supervision Act (Finanzdienstleistungs-
“Regulated” vs. “Unregulated” Capital Markets                     aufsichtsgesetz, FinDAG);
Finally, it is possible to distinguish between “reg-              Investor Model Proceedings Act (Kapitalanleger-
ulated” or so-called “white” capital markets and                  Musterverfahrensgesetz, KapMuG).
“unregulated” or so-called “grey” capital markets.
Unregulated capital markets, which are not subject              Other Laws
to special state monitoring, are the trading place for          Other laws contain the odd provision which is of
closed-end funds and products characterised by                  relevance for capital market law or which is direct-
high risks. As a typical secondary market does not              ly and technically related to capital market law. The
normally exist for the products traded on the unreg-            Banking Act covers not only banks, but also financial
ulated market, the marketability found by investors             service providers, i. e. investment firms which cannot
on the regulated market does not exist on the un-               be classified as a credit institution. A company cov-
regulated market.                                               ered by the Banking Act must obtain a licence from
                                                                the BaFin, is subject to supervision by the BaFin
Legal Sources of Capital Market Law                             and must have a capital endowment which corre-
Capital market law comprises all norms and prin-                sponds to the risks involved in the company’s business.
ciples which are relevant for the capital market and
govern the issue and trading of fungible assets and             The Money Laundering Act (Geldwäschegesetz, GwG)
regulate both the protection of individual investors            stipulates a duty for banks and financial service
and the protection of the functions of capital markets          providers to establish the identity of any person
and business purposes. Capital market law is a con-             depositing or withdrawing amounts of money or
glomerate of statutory provisions from different acts           securities with a value of more than C15,000.00
and legal areas such as corporate law, securities law           and if a suspicion of money laundering – as defined
and stock exchange law, investment law, civil law and           in Sec. 261 German Criminal Code (Strafgesetz-
commercial law, among others.                                   buch, StGB) – exists, to notify the facts of the case
                                                                to the law enforcement authorities. An example of a
                                                                capital-market-oriented penal provision is Sec. 264a
                                                                German Criminal Code (investment fraud).
The provisions of the Securities Acquisition and Take-     formationsblatt) or “letters to the management”
over Act (Wertpapiererwerbs- und Übernahmegesetz,          (Schreiben an die Vorstände).
WpÜG) are often considered to form part of capital
market law. They relate to takeover bids submitted         The general terms and conditions used by credit
to shareholders of listed companies.                       institutions are of importance in legal transactions.
                                                           They include the general terms and conditions of the
The Deposit Guarantee and Investor Compensation            banks, the special conditions for securities trans-
Act offers customers of financial services and credit      actions and the special conditions for time bargains.
providers a certain degree of protection in the event
of insolvency. Investors have a claim against the          Stock exchange dealings are based on a large
compensation fund to be instituted by the compa-           variety of rules; at the Frankfurt Stock Exchange
ny; in the event of insolvency, the fund reimburses        the most important of these rules are the Terms
90 % of the deposits and of the liabilities arising from   and Conditions of the Frankfurt Stock Exchange and
securities transactions, up to a maximum amount of         the Open Market Guidelines. Similar arrangements
C20,000.00.                                                can be found on the derivatives exchange Eurex
                                                           and when executed transactions are handled via
Regulations and Notices Issued by the BaFin;               Clearstream Banking AG.
Bylaws and Other Sets of Rules
The BaFin and the Bundesbank have the authority            Functions of Capital Market Law
to enact non-legislative rules, an option that they        The primary objective of capital market law is to
have made use of in the past. A legal particularity        enable the existence of an efficient market for secu-
is that the regulations issued by the BaFin, which         rities. It serves to maintain the international com-
are of particular relevance in practice, are only ad-      petitiveness of national economies and to secure
ministrative rules which interpret statutory provisions    private old-age provision as well as the financing
and therefore are only binding for the BaFin internally,   requirements of the public sector. The protection of
and do not have any external effect from a legal point     the single functions of the capital market, which
of view. Examples of such regulations are the Good         includeallocation, operational efficiency and institu-
Conduct Regulation (Wohlverhaltensrichtlinie) and          tional efficiency, therefore requires a set of rules and
the Compliance Regulation (Compliance-Richtlinie),         conditions, albeit basic.
which specify the conduct-related duties of invest-
ment service providers and their organisational duties.
The so-called Issuers’ Guideline (Emittentenleitfaden),    Claudia Leyendecker, M.C.J. (New York)
issued by the BaFin on July 15, 2005, which specifies,     claudia.leyendecker@luther-lawfirm.com
inter alia, the new insider provisions of the Securities   Telephone +49 (6196) 592 24660
Trading Act, is also quite important. The regulatory
authorities additionally use general decrees, admin-
istrative measures and informal measures. The
authorities call their official statements “announce-
ments” (Bekanntmachung), “information leaflets” (In-
Doing Business in Germany   238 | 239
Doing Business in Germany Restructuring and Insolvency Law                                                          240 | 241




Restructuring and
Insolvency Law

The German insolvency law significantly restricts a creditor’s options and
course of action shortly before and during the insolvency/bankruptcy of the
debtor. Therefore, it is essential to focus also on German insolvency law,
in order to avoid risks and to agree on contracts, loans and other invest-
ments in Germany in such a way that they will be excluded from becoming an
estate in the case of bankruptcy. The following legal remarks concentrate
on the options available to ensure investments are protected against insol-
vency risks, including how to reduce losses in case of insolvency of a debtor,
what are the legal obligations which apply on the insolvency of a company
and how insolvency proceedings operate.




Obligation to File for Insolvency                                 proceedings immediately after becoming aware of
                                                                  the over-indebtedness/illiquidity he will be personally
The company’s representative or even its sharehol-                liable for all further obligations of the company and
ders are obliged to file for insolvency if a reason for           may, in addition, be prosecuted.
filing occurs: a limited company has to file for insol-
vency proceedings immediately (not later than three               Where the company no longer has a legal represen-
weeks) after occurrence of over-indebtedness (1) or               tative, the shareholders/stockholders are liable in the
the inability to pay its due liabilities (illiquidity) (2). The   second degree to file the insolvency petition, Sec. 15
petition for insolvency must be filed, first of all, by the       para. 3 InsO. This subsidiary liability is excluded only if
company’s legal representative(s) (executive direc-               the shareholders/stockholders did not have knowledge
tor, directors). If the director fails to file for insolvency     of the company’s over-indebtedness or inability to pay.
It is important to emphasise that the German Insol-         Illiquidity
vency Code is applicable to all kinds of companies,         Usually the majority of insolvency petitions in Ger-
including foreign companies (e. g. Ltd.) that have an       many arise because of illiquidity. A company is ob-
administrative seat in Germany.                             liged to file for insolvency proceedings, if it is illiquid
                                                            e. g. if it is unable to honour payment obligations when
Over-indebtedness                                           they are due (Sec. 17 InsO). Not every non-payment
According to Sec. 19 para. 2 InsO a company is              leads to illiquidity in this sense. Illiquidity as ruled in
over-indebted if the debtor’s assets no longer cover        Sec. 17 InsO occurs if the debtor cannot pay more
its existing liabilities, unless the continuation of the    than 90 % of the due liabilities within 21 days (sta-
company is likely in the circumstances (so-called           tutory definition for illiquidity). Despite this, illiquidity
“positive continuation prognosis” – positive Fortfüh-       can be excluded if the closure of the liquidity gap is
rungsprognose). In principle, the continuation pro-         considered to be with the utmost probability.
gnosis constitutes a liquidity prognosis and has to
be assessed by a liquidity plan, which should cover         In contrast, where impending illiquidity occurs a
the current and the subsequent fiscal year.                 company can (but is not obliged to) file insolvency
                                                            proceedings (Sec. 18 InsO). Impending illiquidity is
If there is a positive continuation prognosis, the debtor   deemed to have occurred if it can be presumed that
is not facing over-indebtedness and consequently is         the debtor will not be able to honour existing pay-
not obliged to file an insolvency petition.                 ment obligations when they become due. As stated
                                                            above, an impending illiquidity indicates a negative
Usually, an impending illiquidity (Sec. 18 InsO, see        continuation prognosis and therefore probably an
below) indicates a negative continuation prognosis.         obligation to file for insolvency proceedings.

If there is a negative continuation prognosis, over-
indebtedness has to be determined by a special              Commencement Proceedings
“status of over-indebtedness” (Überschuldungssta-
tus). Therein, assets must be stated at liquidation va-     Upon receipt of the petition for insolvency proceedi-
lue (net asset value). A shareholder’s loan, given to       ngs, the court will (usually within one day) appoint an
its company under condition of subsequent ranking           interim insolvency administrator/expert and will order
(Sec. 39 para. 2 InsO), must not be included in the         interim measures to avoid any further reductions of
status of over-indebtedness (Sec. 19 para. 2 InsO).         the insolvency’s estate by the debtor. Normally, all
                                                            subsequent transfers by the debtor will only be effec-
Furthermore, the status of over-indebtedness must           tive with the consent of the interim administrator (after
consider accounting rules as applicable under insol-        his appointment). Nevertheless, any contract partner
vency law, which only comply in part with account-          will remain contractually bound to the company and
ing rules under commercial and tax law. If the result       not the interim administrator.
shows that the debtor’s assets do not cover its exist-
ing liabilities, over-indebtedness has occurred.            If it seems that the debtor’s assets will be sufficient
                                                            to cover the costs of the insolvency proceedings
Doing Business in Germany Restructuring and Insolvency Law                                                  242 | 243




(for court and administration) the insolvency court          Insolvency Plan
will commence insolvency proceedings and appoint
a (final) insolvency administrator. As a result of the       This is a special insolvency proceeding, comparable
commencement of the insolvency proceedings, the              with Chapter 11 of the U.S. Insolvency Act. Despite
right of the debtor to manage and transfer assets that       liquidation or asset stripping, the debtor is given the
constitute part of the insolvency estate shall pass to       chance to restructure his company. Therefore, he (or
the insolvency administrator. Until this order of com-       the insolvency administrator) is entitled to prepare and
mencement, the debtor may withdraw its petition              file an insolvency plan with the insolvency court. The
without any reason. In the order of commencement,            plan contains a description and a creative part. The
the court shall set dates for:                               creative part sets out the options for the creditors in
                                                             order to receive satisfaction of their outstanding debts
  the first creditor’s assembly; not less than six           and a plan as to how the position of the company can
  weeks and not more than three months after the             be changed. The creditors have to give their consent
  order of commencement;                                     and the insolvency plan needs to be authorized by a
  a creditors assembly in which registered claims            resolution of the creditors and by the insolvency court.
  shall be examined;                                         If an insolvency plan can be implemented in that way,
  application for debtor in possession (self-admi-           the insolvency administration will be suspended.
  nistration).

After commencement of the insolvency proceedings the         “Acquisition out of Bankruptcy” and
administrator has three possible ways for further action:    “Transferring Restructuring”

  liquidation of the company by selling out all of the       The restructuring of an insolvent company is wide-
  company’s assets and terminating its business;             spread and common in practice. This involves a part
  insolvency plan (shown below);                             or all of the assets being transferred to a new com-
  a so-called “transferring restructuring”. A part or all    pany (the administrator gets an equivalent purchase
  of the assets will be transferred to a new company         price). The rest of the company will be liquidated.
  (the administrator gets an equivalent purchase             Transferring restructuring has several advantages:
  price). The rest of the company will be liquidated.        trade and business of the insolvent company can be
                                                             continued, creditors are satisfied on a higher quota
                                                             than by insolvency, and the involvement of the in-
                                                             solvency administrator can be reduced.

                                                             There are no special insolvency-related implications
                                                             for an acquisition out of bankruptcy. It should be em-
                                                             phasised, however – with reference to the voidability
                                                             rules of German Insolvency Law – that any vendee
                                                             involved with an asset deal or an acquisition before
                                                             insolvency (during the companies crisis) should await
the commencement of the insolvency proceedings.            debtor which has not been agreed upon like this
The purchase of a business-critical company (or a          before (e. g. the payment of a purchase price has
part of it) is risky, especially if only some assets are   been agreed, but an asset or an real estate is given)
sold whilst the remaining company is filing for insol-     can be contested if this had taken place up to three
vency: this is because any insolvency administrator        months before the petition for insolvency. In this case,
will be entitled to contest an asset deal which took       if the creditor had knowledge of the debtor’s illiquidity,
place a few months before filing for insolvency. To        any payment or satisfying act in favour of this creditor
avoid this risk, an acquisition out of a bankruptcy is     made within a three month prior to the filing for insol-
usually preferable.                                        vency will be contestable. Contestation in the latter
                                                           case is excluded if the satisfying act was an imme-
                                                           diate counter performance to the creditor’s goods or
Voidability Rules of German Insolvency Law                 services. Therefore, ordinary cash transaction or pay-
                                                           ments for services or goods within up to two weeks
Due to the fact that Insolvency Law seeks to ensure        are privileged and not contestable.
an equal treatment of creditors in case of insolvency
of a debtor, some legal acts of the debtor and the
creditors before and after the petition of insolven-       Shareholder’s Loans
cy can be contested and may be rescinded by the
insolvency administrator. Such avoidable legal acts        Where a shareholder loans money to the compa-
are (but not limited to) any return of loans given by      ny on terms which mean that the credit/loan is of
shareholders of the debtor within one year before          subsequent ranking and the company subsequently
the insolvency petition had been filed; and any pay-       falls into insolvency (Sec. 39 para. 1 no. 5 InsO), it
ment which was given by the debtor to one creditor         is likely that the lending shareholder will get very little
deliberately to discriminate other creditors if the fa-    of the loan back, if anything. Furthermore, loans by
voured creditor has had knowledge of the discrimi-         third persons which are secured by a shareholder’s
nation and of the impending illiquidity. The latter is     guarantee will be treated in the same way as direct
contestable for up to ten years – in practice adminis-     shareholder loans (Sec. 44a InsO).
trators can only contest discriminating satisfactions
of one creditor if the above mentioned knowledge of        In addition, every repayment of a loan within a pe-
the creditor about the illiquidity of the debtor can be    riod of up to one year before the date of filing for
proved. So consequently this depends largely upon          insolvency can be contested and rescinded by the
the reporting/documentation policy of the relevant         insolvency administrator. Even worse, security which
business. Business partners should therefore pay           has been granted for a loan can be contested and
close attention to the communication which they            nullified by the administrator if given up to ten years
have with affiliated business-critical companies.          before the date of insolvency petition. The German
                                                           Insolvency Law states that there are two excep-
Next to these main long-term contestation rules,           tions to this rule: loans to “small stakeholders” (small
there are some (more or less) “short-term” contest-        stakeholder’s privilege, Kleinbeteiligungsprivileg) (I) or
able legal acts: any satisfaction of claims by the         “privileged restructuring loans” (Sanierungsprivileg) (II).
Doing Business in Germany Restructuring and Insolvency Law                                                 244 | 245




I If a shareholder’s stake is less than 10 % and he          Strategies to Ensure Investments
  is not participating in the management of the              Against Insolvency Risks and Possibilities of
  company, his loans or the return of a loan cannot          Financial Reorganization
  be contested by the insolvency administrator
  (Sec. 35 para. 5 InsO, small stakeholder’s privilege).     Foreign investors can realize high profits from invest-
                                                             ments in companies which are temporarily in the
II Where a creditor provides an insolvent company            middle of a financial reorganisation. However, it is
   with a loan as part of the restructuring of the com-      important to take legal advice regarding the efficiency
   pany, the creditor’s claims or returns of those           of the financial reorganisation and potentially higher
   loans are free from the risk of becoming part             insolvency risk. Secondly, investors must secure their
   of the insolvency’s estate (Sec. 39 para. 4 InsO),        investments against insolvency risks. This is relevant
   as long as he or she takes a share in the compa-          for every investment in Germany. As from October
   ny at the same time.                                      2008, the German insolvency law and the Compa-
                                                             ny Code have been reformed (the so-called German
                                                             Act to Modernize the Law Governing Private Limited
Cash-Pooling                                                 companies and to Combat Abuses, MoMiG). Advan-
                                                             tageously for investments, this reform sets its focus
Substantial progress has been made by the latest             on increasing the protection of creditors. At the same
legislative reform, which now gives cash-pooling an          time, the risk of shareholder’s investments becom-
official legal basis which has been absent until now.        ing an estate of bankruptcy of an affiliated German
Nevertheless, cash-pooling loans and accounting              company has also been increased.
(upstream loans as well as downstream loans) still
face a high risk of being included in an insolvency’s        Investments can be protected against insolvency
estates, because every return of a shareholder’s loan        risk by collateral securities which provide in the
during the last year before filing for insolvency can        case of the debtor’s or affiliated company’s bank-
be contested by the insolvency administrator. Due to         ruptcy prior rights for segregation (Aussonderungs-
the fact that cash-pooling accountings (in the custo-        recht) or pre-ferential rights (Absonderungsrecht) to
mary way of zero or conditional balancing) are legally       the creditor.
defined as shareholder loans, no cash-pooling agree-
ment with a German subsidiary should be contracted           A right for segregation means that the creditor has a
under German Civil Law without specific legal advice.        property right in relation to a movable good or claim
Only by considering these insolvency risks and the           which he is able to separate from the insolvency’s
individual structure of a planned cash-pooling the           estate in case of bankruptcy. In case of insolvency
financial responsibilities of a foreign investor in the      of the business partner, property rights will entitle
bankruptcy of a German subsidiary can be avoided or          the owner to claim his assets directly back without
at least reduced. To avoid extensive liability in relation   participating in the insolvency proceedings. There-
to a cash-pool created as a result of participation in a     fore, investments in business-assets should not be
German subsidiary, legal advice concerning the com-          implemented by pure loans or payments but always
pany’s structure and the basic agreements is essential.      in connection with collaterals and property rights.
Furthermore, an investment alternative is a (financial)       Agreements regarding chattel mortgages do not give
leasing agreement – this is because the investor will         rise to a right for segregation, only preferential rights
stay the owner of the leased assets and has a right           of the creditors in relation to the realisation’s revenue
for prior segregation in case of bankruptcy of his            (Sec. 51 no. 1 German Insolvency Code = Insolvenz-
business partner. Another right for segregation is            ordnung = InsO). The same preferential rights without
created by assignment of claims, especially found in          a right for segregation apply to pledges (Sec. 50 InsO)
factoring agreements.                                         and rights in immovable goods (Sec. 49 InsO, real
                                                              estates, mortgage, land charge).
It must be highlighted that a specific characteristic of
German civil law means that a payment itself will not         The best approach in order to avoid insolvency risks
lead to a change of ownership. Under German law,              for German subsidiaries or to protect general invest-
change of ownership (only) takes place with an effec-         ments in risky companies is to implement an “early
tive transfer of goods and an agreement to do this.           warning and reporting system” and/or a “crisis-avoid-
Therefore, in order to avoid the loss of rights in the        ance system” within a group of affiliated companies
case of insolvency of a business partner (e. g. pur-          or within the supply chain. Furthermore, Managing
chaser), contracts should be prepared with a reten-           Directors are permanently obliged to keep control
tion of title in relation to the sold assets. The retention   of the company’s cash-flow development, reporting
of title gives the vendor “privileged property-rights”        of negative development (e. g. the loss of half of the
(right for segregation) in the assets if the insolvency       company’s registered capital) and discuss possibilities
administrator should decide against fulfillment of the        of restructuring. Options that can be taken in order
contract. If the insolvency administrator decides that        to avoid the status of insolvency can be: factoring;
following the execution of the contract the inves-            selling of inventories; an increase of the (basic) ca-
tor has no right for segregation, the investor can            pital; restructuring reduction of capital (Sec. 58a –
still claim full payment of the purchase price prior to       f GmbHG); the admission of a personally liable share-
other creditors.                                              holder or a dormant shareholder; a “strong” letter of
                                                              comfort; and/or a letter/statement of subordination
Problems can occur if the investor financing the (non-        of creditors who have a claim against the insolvent
current) assets is also a shareholder in the company          company; etc.
in which he had made the investments. Although the
shareholder has a right for segregation, the insol-
vency administrator can refuse the return of the asset        Reinhard Willemsen
within a period of one year following the commence-           reinhard.willemsen@luther-lawfirm.com
ment of insolvency proceedings. This is justified by          Telephone +49 (89) 23714 25792
the interests of the insolvent company in continuing
production and trade. However, if the administrator
decides to use the goods during this period he is
obliged to pay the rental, which was paid during the
last year prior to the filing for insolvency proceedings.
Doing Business in Germany   246 | 247
Doing Business in Germany Insurance Law                                                                 248 | 249




Insurance Law

The first insurance company of the world was founded 1676 in Hamburg,
Germany. Today, after 333 years, over 600 German and more than 1000
foreign insurance companies are conducting insurance business in Germa-
ny. The German insurance sector is a specially regulated market supervised
by the Federal Financial Supervisory Authority (Bundesanstalt für Finanz-
dienstleistungsaufsicht, BaFin). In recent years the regulatory framework of
the insurance business underwent permanent and fundamental changes,
such as several amendments of the German Insurance Supervision Act
(Versicherungsaufsichtsgesetz), a profound reform of the German Insurance
Contract Act (Versicherungsvertragsgesetz) in 2007 and the creation of the
first set of rules for insurance intermediaries in 2006.




Direct Insurance Business                                   state may establish a branch in Germany.
                                                            Insurance undertakings located in a EU/EEA state
There are different ways to built up a direct insurance     outside Germany may conduct insurance business
business in Germany:                                        in Germany on the freedom of establishment basis,
                                                            i. e. via a branch (Niederlassungsfreiheit) or on the
  A person or company located in a state outside            freedom of services basis (Dienstleistungsfreiheit).
  Germany may establish a German stock corpo-
  ration (Aktiengesellschaft, AG), European company       Establishment of a Company in Germany
  (Europäische Gesellschaft, SE) or a mutual insur-       Besides the general incorporation rules that apply to
  ance company (Versicherungsverein auf Gegen-            the formation of a company (for the AG see page 27,
  seitigkeit, VVaG).                                      for the SE see page 34 of this guide, for a VVaG spe-
  Insurance undertakings located in a non-EU/EEA          cial requirements are stipulated in Sec. 15 et seqq.
German Insurance Supervision Act), there are addi-         guarantee fund and the composition of those funds.
tional rules that apply to the establishment of an in-     In addition, estimates have to be submitted for the first
surance undertaking. These rules are stipulated in         three financial years with respect to the expenses for
the German Insurance Supervision Act (Versiche-            commissions and other current operating expenses,
rungsaufsichtsgesetz, VAG).                                the expected premiums, the expected expenses for
                                                           claims incurred and the expected liquidity situation. It
According to Sec. 5 para. 1 VAG the company re-            has to be stated what financial means are expected to
quires a license granted by the competent super-           be available to meet the liabilities under the insurance
visory authority in order to be allowed to carry out       contracts and the requirements with respect to the
the insurance business in Germany. The competent           financial resources (Sec. 5 para. 4 VAG).
authority for a company that is acting not only local-
ly but nationwide in Germany or internationally is the     In addition, the following information has to be sub-
Federal Financial Supervisory Authority (Bundesan-         mitted (Sec. 5 para. 5 VAG):
stalt für Finanzdienstleistungsaufsicht, BaFin).
                                                             in the case of substitutive health insurance (sub-
In order to obtain the licence the company has to file       stitutive Krankenversicherung) and compulsory
an application with a business plan (Geschäftsplan)          insurances (Pflichtversicherungen) the General
attached (Sec. 5 para. 2 VAG). The business plan             Terms and Conditions of insurance;
has to contain a description of the purpose and orga-        in the case of substitutive health insurance (sub-
nisation of the company, the area of the intended            stitutive Krankenversicherung) the principles for
business operations and in particular has to state           the calculation of the premiums and mathematical
clearly the conditions which shall ensure that the futu-     provisions including the calculation bases, mathe-
re liabilities of the company can permanently be met.        matical formulas, imputed derivations and statis-
                                                             tical evidence used;
Furthermore, the business plan has to contain the            information about the intended reinsurance ar-
following (Sec. 5 para. 3 VAG):                              rangements;
                                                             an estimate of the expenses for setting up the
  the articles of association in so far as they do not       administrative services and the organisation for
  refer to General Terms and Conditions of insurance;        intermediaries as well as a proof that the necessary
  information about the classes of insurance that            funds for this purpose (Organisationsfonds) are
  are intended to be carried out and which risks of a        available;
  class of insurance are intended to be covered;             the information necessary to assess the reliability
  affiliation agreements (Unternehmensverträge) as           and qualification of the managers and directors
  specified under Sects. 291 and 292 of the Ger-             (detailed requirements are stipulated in Sec. 7a
  man Stock Corporation Act (Aktiengesetz, AktG)             para. 1 VAG);
  as well as outsourcing agreements.                         information about holders of 10 % of the capital or
                                                             voting rights in the company (detailed requirements
The business plan shall also give evidence of the            are stipulated in Sec. 7a para. 2 VAG) and about
existence of own funds in the amount of the minimum          any other close relationship between the com-
Doing Business in Germany Insurance Law                                                                    250 | 251




  pany and another natural or legal person (enge           Business of an Insurer Located in a
  Verbindung, a definition is given in Sec. 8 para. 1      Non-EU/EEA State
  no. 4 VAG);                                              Insurance undertakings located in a non-EU/EEA
  data required for assessing the good repute and          state that do not establish a German insurance com-
  professional qualification of the responsible actuary    pany (see above) have to establish a German branch
  (Verantwortlicher Aktuar) for life insurances, acci-     instead in order to carry out the insurance business in
  dent insurances, liability insurances and substi-        Germany, except where only home-foreign insurance
  tutive health insurances (substitutive Krankenver-       business (Korrespondenzversicherung) is conducted.
  sicherung);
  in case of automobile liability insurance, the name      Besides the general rules that apply to the establish-
  and address of the claims settlement agent (Scha-        ment of a branch in Germany (see page 18), in prin-
  densregulierungsbeauftragter, detailed requirements      ciple, the same rules of the VAG apply as with regard
  are stipulated in Sec. 7b VAG).                          to the establishment of a German insurance com-
                                                           pany (see above). However, some special rules are
The head office of the company must be located in          stipulated in Sec. 105 – 110 VAG:
Germany (Sec. 7 para. 1a VAG).
                                                           According to Sec. 105 para. 2, 106b para. 1 VAG,
Besides the insurance business, the company is             an insurance undertaking located in a non-EU/EEA
not permitted to carry out another business that is not    state requires a licence to operate via a German
directly related with the insurance business (Verbot       branch. The licence is granted by the Ministry of
des Betreibens versicherungsfremder Geschäfte);            Finance (Bundesministerium der Finanzen, BMF).

On the basis of this information the competent super-      In order to obtain the licence the insurance under-
visory authority decides whether the licence will be       taking has to file an application with a business plan
granted – wholly or only for some classes of insurance     (Geschäftsplan) attached and has to submit the infor-
or on conditions – or refused. If the company is a         mation according to Sec. 5 para. 5 VAG (see above).
subsidiary or sister company of an insurance com-          In addition the following information has to be submit-
pany or bank that is located in an EU/EEA state the        ted (Sec. 106b para. 1 VAG):
German supervisory authority has to ask the compe-
tent authority in this EU/EEA state for a statement.         the articles of association of the insurance under-
                                                             taking;
If the license is granted, it will be granted separately     the name of the members of the management and
for each class of insurance applied for. If the licence      the supervisory board of the insurance undertaking;
to carry out life insurance is granted the company           a certificate of the competent supervisory authority
is not allowed to carry out any other class of insur-        in the home state of the insurance undertaking
ance; the same applies if the company is granted             which states (i) that the insurance undertaking can,
the licence to carry out substitutive health insurance       in its home country, under its own name, acquire
(substitutive Krankenversicherung), Sec. 8 para. 1a          rights and incur liabilities, sue and be sued in court,
VAG (Spartentrennungsgebot).                                 and (ii) which classes of insurance the insurance
  undertaking is allowed to carry out and which             granted in Germany for life insurance business. The
  types of risks it actually covers;                        same applies if the insurance undertaking is operating
  the balance sheet and the profit and loss account         substitutive health insurance (substitutive Krankenver-
  for each of the past three financial years.               sicherung) together with other classes of insurance
                                                            (Sec. 106c VAG).

With regard to the capitalisation of the insurance          If the license is granted the insurance undertak-
undertaking, the following applies: the financial resour-   ing has to conduct business via its German branch
ces have to be sufficient in a way that the interests of    only and is not allowed to operate via the home-
the insured are adequately safeguarded and it can be        foreign insurance business (Korrespondenzversiche-
deemed that the liabilities under the insurance con-        rung, Sec. 107 VAG).
tracts will be permanently fulfilled (Sec. 106b para. 2
VAG which contains more detailed requirements).             Business of an Insurer Located in a EU/EEA State
                                                            Insurance undertakings located in a EU/EEA state
According to Sec. 106 para. 3 VAG, an authorized            outside Germany that do not establish a German
agent (Hauptbevollmächtigter) has to be appointed           insurance company (see above) may, according to
for the German branch who has to have his domi-             Sec. 110a et seqq. VAG, conduct insurance business
cile and permanent residence in Germany. He shall           in Germany either on the freedom of establishment
meet the same obligations and personal requirements         basis, i. e. via a branch (Niederlassungsfreiheit) or
the VAG requires for the board of directors of an Ger-      on the freedom of services basis (Dienstleistungs-
man insurance company (i. e. the requirements under         freiheit). The rules of Sec. 110a et seqq. VAG do not
Sec. 7a para. 1 VAG, see above). He is deemed to            apply if the insurance undertaking only carries out
have the power of representation for the insurance          the home-foreign insurance business (Korrespon-
undertaking. The authorized agent has to be filed for       denzversicherung).
registration with the German commercial register.
                                                            If the insurance undertaking intends to operate via
On the basis of this information, the Ministry of Fi-       a German branch the general German rules for the
nance (Bundesministerium der Finanzen, BMF) de-             establishment of a branch apply. In addition, the
cides whether the licence will be granted – wholly or       insurance undertaking has to notify the competent
only for some classes of insurance or on conditions         supervisory authority of its home state – according
– or refused.                                               to the rules of this state – about the intention to
                                                            conduct insurance business via a branch in Germany.
If the licence is granted it will be granted separately
for each class of insurance applied for. The Sparten-       According to Sec. 110a para. 2 VAG, the super-
trennungsgebot (Sec. 8 para. 1a VAG, see above)             visory authority of the home state has to forward
also applies here and is extended in view of the in-        certain information about the insurance undertaking
surance undertaking’s business, i. e. if the insurance      (according to Art. 32 of the Directive 92/49/EC and
undertaking is operating life insurance together with       Art. 40 para. 2 and 3 subpara. 2 of the Directive
other classes of insurance the license will not be          2002/83/EC) to the BaFin and has to notify the insu-
Doing Business in Germany Insurance Law                                                                 252 | 253




rance undertaking accordingly. The branch is allowed     General Terms and Conditions have to contain full
to start business after a period of two months from      information about:
the date of notification, unless the BaFin informs the
insurance undertaking of an earlier date. In case          the events which trigger the insurers obligation to
of substitutive health insurance (substitutive Kran-       pay benefits and the special cases where this obli-
kenversicherung) the insurance undertaking has to          gation is excluded or suspended;
submit the General Terms and Conditions of insur-          the nature and size of the benefits of the insurer
ance before the start of business is allowed (Sec.         and when they become due;
110a para. 2b VAG).                                        the date when the premium becomes due and the
                                                           legal consequences of a delay in premium payment;
The insurance undertaking has to appoint an autho-         the policyholder’s and the insurer’s unilateral rights
rized agent (Hauptbevollmächtigter) for the German         to influence the content of the insurance contract
branch who has to be filed for registration with the       (e.g. revocation, rescission and termination rights)
German commercial register.                                as well as the conditions (Obliegenheiten) and
                                                           duties to give notice before and after the insured
If the insurance undertaking intends to operate on         event has occurred (Anzeigepflichten);
the freedom of services basis the insurance under-         the forfeiture of an insurance claim in the event of
taking has to notify the competent supervisory au-         failure to observe time limits;
thority of its home state – according to the rules of      the domestic places of venue;
this state – about the intention to conduct insurance      the principles and standards of profit participation
business via a branch in Germany.                          (Überschussbeteiligung), if applicable.

According to Sec. 110a para. 2a VAG the insur-           Sec. 10 VAG does not apply to “large risks” in terms
ance, undertaking is allowed to start business when      of Sec. 10 para. 1 s. 2 Introduction Act to the Ger-
the supervisory authority of the home state has          man Insurance Contract Act (Einführungsgesetz
forwarded certain information about the insurance        zum Versicherungsvertragsgesetz).
undertaking (according to Art. 35 and 36 of the Di-
rective 92/49/EC and Art. 42 para. 1 or 43 of the        Information and Advice
Directive 2002/83/EC) to the BaFin and has notified      According to Sec. 6 of the German Insurance Con-
the insurance undertaking accordingly. In case of        tract Act (Versicherungsvertragsgesetz, VVG), the
substitutive health insurance (substitutive Kranken-     insurance undertaking is obliged to specify, in par-
versicherung) the insurance undertaking has to sub-      ticular on the basis of information provided by the
mit the General Terms and Conditions of insurance        customer, the demands and the needs of that custo-
before the start of business is allowed (Sec. 110a       mer as well as the underlying reasons for any advice
para. 2b VAG).                                           given to the customer on a given insurance product.

General Terms and Conditions                             The insurance undertaking has to produce a record
Regardless of how the direct insurance business in       on this according to the complexity of the insurance
Germany is operated the insurance undertaking’s          contract being proposed and has to provide the cu-
stomer with this record in textual form (textform, i. e.   Sec. 6 of the German Insurance Contract Act (Ver-
on paper or on any other durable medium available          sicherungsvertragsgesetz) does not apply to “large
and accessible to the customer) prior to the conclu-       risks” in terms of Sec. 10 para. 1 s. 2 Introduction
sion of any specific contract. However, the customer       Act to the German Insurance Contract Act (Ein-
may waive his right to receive the record by signing a     führungsgesetz zum Versicherungsvertragsgesetz).
separate waiver, provided that he has been informed
by the insurance undertaking that the waiver may           Reinsurance Business
be disadvantageous for the customer if he wants to
claim compensation in case of a violation of duties        The special rules stipulated in Sec. 119 et seqq. VAG
by the insurance undertaking. The insurance un-            apply to the reinsurance business of reinsurance
dertaking may delegate these duties to its insurance       undertakings (for more information on this topic
agent (see below).                                         please ask our reinsurance law experts).

The aforementioned duties do not apply where:              The rules of the German Insurance Contract Act
                                                           (Versicherungsvertragsgesetz, VVG) do not apply to
  the insurance contract is mediated by an insurance       reinsurance contracts.
  broker (Versicherungsmakler, see below); or
  the insurance contract is concluded via distant
  selling (Fernabsatz); or                                 Insurance Intermediary Business
  the insurance contract covers only “large risks” in
  terms of Sec. 10 para. 1 s. 2 Introduction Act to        Since 22 May 2007 the insurance mediation busi-
  the German Insurance Contract Act (Einführungs           ness in Germany has been regulated in accordance
  gesetz zum Versicherungsvertragsgesetz).                 with the Insurance Mediation Directive 2002/92/EC.
                                                           The Directive has been implemented into German
According to Sec. 7 of the German Insurance Con-           law in the German Trade, Commerce and Industry
tract Act (Versicherungsvertragsgesetz), the insur-        Regulation Act (Gewerbeordnung, GewO), the Ger-
ance undertaking has to provide the customer with          man Insurance Contract Act (Versicherungsvertrags-
the policy provisions including the General Terms and      gesetz, VVG) and a bylaw (Versicherungsvermitt-
Conditions and further information in textual form         lungsverordnung, VersVermV). The rules apply to all
(textform, i. e. on paper or on any other durable medi-    persons and companies that want to carry out the
um available and accessible to the customer) before        insurance mediation business in Germany.
the customer has applied for the insurance.
                                                           The regulatory requirements for carrying out the in-
The details about what further information the in-         surance intermediary business and the obligations
surance undertaking has to provide to the customer         for insurance intermediaries in Germany are as follows:
are contained in a by law to the German Insurance
Contract Act which is the Versicherungsvertrags-           License
gesetz-Informationspflichtenverordnung, VVG-InfoV.         According to Sec. 34d para. 1 GewO, the interme-
                                                           diary has to obtain a licence from the Chamber of
Doing Business in Germany Insurance Law                                                                254 | 255




Commerce and Industry (Industrie- und Handels-            zessorischer Vermittler). However, certain require-
kammer, IHK) in order to be allowed to carry out          ments also apply to this agent (e. g. he has to take
the insurance intermediary business in Germany.           out a professional indemnity insurance, see above).
To obtain the license the intermediary has to meet        Sec. 34d para. 4 GewO: an insurance agent does
the following requirements:                               not need a licence if he works for only one insurer
                                                          exclusively or for several insurers, provided that
  Knowledge and abilities: the intermediary must          their insurance products do not compete with
  pass a test to prove that he possesses appropriate      each other (gebundener Vermittler or Ausschließ-
  knowledge and ability to conduct insurance medi-        lichkeitsvertreter) and at least one of the insurers
  ation. Persons who have acted as intermediaries         assumes full responsibility for the agent’s actions.
  continuously since 31 August 2000 or who have           Sec. 34d para. 5 GewO: no licence is required if
  already passed an equivalent test, e. g. insurance/     the intermediary is located (or has a branch) in a
  financial salesman (Versicherungskaufmann/Fach-         EU/EEA state and is registered in a register that
  wirt für Finanzberatung), are exempted from             has been established in accordance with the rules
  this test.                                              of the Insurance Mediation Directive 2002/92/EC.
  Good repute/reliability (Zuverlässigkeit): the inter-   Usually – according to the rules in the EU/EEA state
  mediary must have a clean police record with            where he is located – the intermediary has to in-
  regard to any crimes and offences against proper-       form his regulator that he wants to carry out the
  ty within the last five years prior to application.     insurance intermediary business in Germany.
  Proper financial circumstances: the intermediary        Sec. 34d para. 9 GewO: the licence requirements
  must have proper financial circumstances, i. e.         do not apply to persons
  must not have become bankrupt.                          no. 1: if all the following conditions are met:
  Professional indemnity insurance: the intermediary      - the principal professional activity of the person is
  must have professional indemnity insurance. The            other than insurance mediation;
  insurance must be taken out from an insurer that        - the person exclusively mediates insurance con-
  is allowed to carry out the insurance business in          tracts that only require knowledge of the in-
  Germany.                                                   surance cover that is provided;
  The insurance has to cover the EU/EEA area              - the person does not mediate life assurance
  and the insurance sums must amount to at least             contracts or insurance contracts that cover lia-
  C1.13 million per claim and C1.7 million in ag-            bility risks;
  gregate per year.                                       - the insurance is complementary to the product
                                                             or service supplied by any provider, where such
Exceptions from the license requirement are made             insurance covers the risk of breakdown, loss of
in the following cases:                                      or damage to goods supplied by that provider;
                                                             or damage to or loss of baggage and other risks
  Sec. 34d para. 3 GewO: an insurance agent can              linked to the travel booked with the person, in-
  apply for an exemption from the licence require-           cluding accident and liability insurance, provided
  ment if the insurance mediation is a supplemen-            that the cover is ancillary to the main cover for
  tary business to his main business (produktak-             the risks linked to that travel;
  - the amount of the annual premium does not             Information and Advice
    exceed the amount of C500.00; and                     Sec. 11 VersVermV
  - the total duration of the insurance contract, in-
    cluding any renewals, does not exceed five years.     The intermediary has to provide the customer with the
  no. 2: who mediates insurances in connection with       following information at the first business contact:
  building loan agreements.
  no. 3: who mediates creditor insurances for loans         his name, company name and address;
  that finance a good/service the intermediary has          his status, i. e. broker (Versicherungsmakler) or
  sold/rendered to the policyholder.                        agent (Versicherungsvertreter) acc. to Sec. 34d
                                                            para. 1, 3 or 4 GewO) and the register in which he
Employees (Sec. 34d para 6 GewO)                            has been included and the means of verifying that
                                                            he has been registered;
Intermediaries according to Sec. 34d para. 1, 3 or          the address, telephone number and internet
4 GewO (see above) are obliged to ensure that their         address of the German Chamber of Commerce
employees who are involved in the intermediary busi-        and Industry (Deutscher Industrie- und Handels-
ness are reliable and adequately qualified (which           kammertag e. V., DIHK) which is the body that
can be achieved from regular training, a formal test is     administers the intermediary register;
not required).                                              any direct or indirect holding of more than 10 %
                                                            the intermediary holds in an insurance company or
Registration                                                an insurance company holds in the intermediary;
Intermediaries according to Sec. 34d para. 1, 3 or 4        the address of the German Ombudsmanservice
GewO (see above) must be registered in the electro-         (Versicherungsombudsmann e. V.) which is the
nic intermediary register (www.vermittlerregister.info)     competent arbitration board a policyholder can
with the competent IHK.                                     turn to in case of disputes with the intermediary.

No registration is required in case of Sec. 34d para. 5   The information has to be provided in textual form
and 9 GewO (see above).                                   (textform, i. e. on paper or on any other durable medi-
                                                          um available and accessible to the customer). Many
In general, the application for registration has to be    intermediaries print the information on the back of
filed by the intermediaries, however, in case of an       their business cards.
intermediary according to 34d para. 4 GewO (see
above) the insurer that assumes unrestricted liabi-       Sec. 60, 62 VVG
lity for the intermediary’s business is responsible for
the application.                                            An insurance agent (i. e. an intermediary who is
                                                            under a contractual obligation to conduct insur-
                                                            ance mediation business with insurance under-
                                                            takings, Versicherungsvertreter) has to inform the
                                                            customer on which market and information basis
                                                            he conducts the mediation services. In addition
Doing Business in Germany Insurance Law                                                                 256 | 257




  the intermediary has to provide the customer with       The intermediary has to produce a record on this
  the names of the insurers he mediates insurances        according to the complexity of the insurance con-
  for and has to inform the customer in case he me-       tract being proposed and has to provide the cus-
  diates insurances for one insurer exclusively.          tomer with this record in textual form (textform, i. e.
  An insurance broker (i. e. an intermediary who is       on paper or on any other durable medium available
  not under a contractual obligation to conduct           and accessible to the customer) prior to the conclu-
  insurance mediation business with insurance un-         sion of any specific contract. However, the customer
  dertakings, Versicherungsmakler) is obliged to give     may waive his right to receive the record by signing
  advice on the basis of an analysis of a sufficiently    a separate waiver, provided that he has been in-
  large number of insurance contracts available on        formed by the intermediary that the waiver may be
  the market, to enable him to make a recommen-           disadvantageous for the customer if he wants to
  dation, in accordance with professional criteria,       claim compensation in case of a violation of duties
  regarding which insurance contract would be ade         by the intermediary.
  quate to meet the customer’s needs (“fair analy-
  sis”).This obligation does not apply if the broker      The aforementioned requirements of Sec. 11 et seqq.
  informs the customer that he does not give advice       VersVermV and Sec. 60 - 62 VVG are not applicable
  on the basis of a fair analysis. In this case has to    if and as far as:
  inform the customer on which market and infor-
  mation basis he conducts the mediation services           the intermediary mediates reinsurance contracts
  and provide the names of the insurers he bases            (Sec. 17 VersVermV and Sec. 209 VVG);
  his advice on.                                            the intermediary mediates “large risks” in terms
  The aforementioned information have to be pro-            of Sec. 10 para. 1 s. 2 Introduction Act to VVG
  vided in textual form (textform, i. e. on paper or on     (Einführungsgesetz zum VVG) (Sec. 17 VersVermV
  any other durable medium available and accessible         and Sec. 65 VVG);
  to the customer) before the customer has applied          Sec. 34d para. 9 no. 1 GewO applies (see above)
  for the insurance. However, the customer may              (Sec. 66 VVG).
  waive his right to receive the aforementioned in-
  formation by signing a separate waiver.                 Protection of monies (Sec. 64, 69 para. 2 VVG Sec.
                                                          12 et seqq. VersVermV)
Sec. 61, 62 VVG
                                                          The intermediary is deemed to be authorized for
The insurance intermediary is obliged to specify, in      the receipt of payments by the policyholder on be-
particular on the basis of information provided by        half of the insurer, unless the policyholder knows
the customer, the demands and the needs of that           or does grossly negligent not know that the insurer
customer as well as the underlying reasons for any        did not authorise the intermediary for the receipt
advice given to the customer on a given insurance         of payments.
product.
                                                          Where the intermediary is not (deemed to be) aut-
                                                          horized to receive payments from the policyhol-
der on behalf of the insurer, he must only receive           kind and amount of monies the intermediary has
payments from policyholders if he has provided               received from the policyholder for transfer to the
sufficient security (e. g. via bank guarantee) or has        insurer;
taken out a sufficient insurance for those pay-              kind, amount and scope of security/insurance that
ments (4 % of the premiums collected annually, mini-         has to be taken out by the intermediary, name of
mum C17,000.00).                                             the security/insurance provider;
                                                             assignment of the policyholder’s monies.
The intermediary is not authorized to receive pay-
ments by the insurer on behalf of the policyholder         However, no record has to be produced in case the
unless he has been authorized by the policyholder          intermediary has to fulfil a comparable duty due to
in writing.                                                bookkeeping regulations.

In case the intermediary is not authorized by the          The aforementioned provisions are not applicable if
policyholder he must only receive payments by the          and as far as:
insurer if he has provided sufficient security (e. g.
via bank guarantee) or has taken out a sufficient in-        the intermediary mediates reinsurance contracts
surance for those payments (4 % of the premiums              (Sec. 17 VersVermV and Sec. 209 VVG);
collected annually, minimum C17,000.00).                     the intermediary mediates “large risks” in terms
                                                             of Sec. 10 para. 1 s. 2 Introduction Act to VVG
If the intermediary is located in another EU/EEA state       (Einführungsgesetz zum VVG) (Sec. 17 VersVermV
he is exempted from the aforementioned obligations           and Sec. 65 VVG);
to provide security or take out insurance if the protec-     Sec. 34d para. 9 no. 1 GewO applies (see above)
tion of monies is secured according to art. 4 para. 4 of     (Sec. 66 VVG).
the Insurance Mediation Directive 2002/92/EC.

In case the intermediary is obliged to provide securi-     Dr. Alexander Mönnig, LL.M. (Manchester),
ty or take out insurance he has to prove it to the         E.M.L.E.
policyholder on request and has to keep a copy in          alexander.moennig@luther-lawfirm.com
his files.                                                 Telephone +49 (040) 18067 15453

The intermediary has to record any payments he
has received in connection with insurance contracts.
The records must contain the following information
(if applicable):

  name and address of the policyholder;
  if and to what extent the intermediary is autho-
  rized to receive payments from the policyholder
  and the insurer;
Doing Business in Germany   258 | 259
Doing Business in Germany Media & Broadcasting Law                                                         260 | 261




Media & Broadcasting Law

As an industry in constant transition, especially due to the implementation
of new technologies and changing consumer habits, Media and Broadcast-
ing is a highly challanging market. The digitalization of traditional media and
press as well as the expansion of bandwidth accelerates the convergeance
of traditional and new media. Businesses in this field have to develop inno-
vative and future oriented portfolios and business solutions under a con-
stantly changing legal framework.




Definition of Broadcasting                                Sources of Law
From a German law perspective the term “broad-            The German Constitution guarantees the freedom of
casting” covers all kind of television and radio ser-     broadcasting. Further, the Constitution stipulates that
vices. “Broadcasting” in general is defined as follows:   sole responsibility for broadcasting rests with the Fed-
„Broadcasting is the provision and transmission for       eral States as part of their “cultural sovereignty”. Thus,
the general public of presentations of all kinds of       the Federal States were entitled and obliged to create
speech, sound and picture, using electromagne-            a legal framework that complies with constitutional
tic oscillations without junction lines or along or by    law. Due to the fact that the Constitution contains
means of a conductor”.                                    rudimental statements concerning broad-casting is-
                                                          sues, the jurisdiction of the German Federal Constitu-
This definition includes presentations transmitted in     tional Court had to clarify constitutional demands on
encoded form or receivable for a special payment, as      the creation of a broadcasting system. Therefore, the
well as videotext or other comparable data services.      Federal Constitutional Court made a series of deci-
As a matter of fact, all kinds of providing radio and     sions, which are especially known as “broadcasting
television services fall within the meaning of “broad-    judgments”.
casting,” no matter if such transmission is analog
or digital or is made by terrestrial or mobile devices,   With the advent of cable and satellite, all Federal
via satellite or through cable networks.                  States drafted media laws in the 1980s. These laws
specifically regulate the electronic media outside the       pilot project in Ludwigshafen (Sat1). Meanwhile, a
conventional public corporations, mainly by granting         huge range of full service and special interest
commercial radio and television licences and decid-          channels are licenced and distributed as analog and
ing what programs may be fed into cable networks.            digital Free-TV. Most of those channels are broad-
For this purpose media regulatory authorities were           casted by companies which belong either to the
created. A national framework of regulations is laid         RTL- or the ProSieben-Sat1-Group. Nevertheless, an
down in an almost yearly amended treaty between              increasing number of international and independent
all Federal States. In addition, 14 different media          broadcasters have also started to provide new offers.
laws and media authorities exist, almost one in each
Federal State.                                               As mentioned above, television services in Germa-
                                                             ny have to comply with the regulations set out in the
Dual Broadcasting System                                     treaty between all Federal States and the particular
Beginning in the early Eighties, each Federal State          media laws. In any case in Germany a licence (con-
decided to implement a “dual broadcasting system”.           cession) from a media authority or a comparable
This means, that private broadcasters were able to           foreign authority is required for broadcasting tele-
provide their services alongside the public-broad-           vision services which are located in Germany. Due
casting corporations.                                        to the small capacity of analog cable networks, it
                                                             is easier to apply for a satellite licence. With ana-
The public service broadcaster is an independent             log cable distribution, a licence sometimes can only
and non-commercial organisation, financed primarily          be applied for if the media authority has put licences
by audience fees. The typical public service broad-          out to tender.
casting organisation provides a region, usually a Fe-
deral State, with public service radio and television        The private service has to observe the existing broad-
(such as WDR in North Rhine-Westphalia or BR in              casting rules in relation to licensing, financing, adver-
Bavaria). All regional corporations joined together to       tising, youth protection, and ownership. Any applicant
found the ARD (Arbeitsgemeinschaften der Rundfunk-           or licence holder has to comply with several mate-
anstalten Deutschlands) and contribute to the main TV        rial provisions. Although European legislation has a
channel according to their size. The Second German           strong influence on the German legal framework,
Television ZDF (Zweites Deutsches Fernsehen) is based        there still are some differences with national regulation.
on a treaty of all Federal States (ZDF-Staatsvertrag).
Both ARD and ZDF are active in digital television. ARD       The treaty between the Federal States also contains
and ZDF offer a whole range of freely accessible             rules for digital television. In short, the legal frame-
digital channels. They are also involved in different pro-   work makes it easier to apply for a licence to provide
jects to test and develop distribution via the Internet.     a digital service and further gives more freedom of
                                                             decision to network operators concerning the selec-
However, private competition has also started to             tion of programs to be distributed.
challenge the public system. Two commercial tele-
vision channels have started operation, one from             Nevertheless, due to the ongoing importance of ana-
Luxembourg (RTL), and the other as part of a cable           log television transmission via cable networks, such
Doing Business in Germany Media & Broadcasting Law                                                        262 | 263




distribution is still economically essential for private   In contrast, private services have to finance them-
television services. According to German broadcast-        selves by commercials, sponsorship or other forms
ing and media law, the responsible media authority         of advertising. Recently, several television services
decides whether a channel has to be distributed in         started to present so-called “Call-In” shows in order
an analog cable network or not. In the last few years      to create revenues by incoming phone calls. Further,
several media laws have started to grant more free-        several teleshopping channels are now said to have
dom of decision to cable network operators concern-        reached break even.
ing analog distribution. A diligent network manage-
ment and a consistent network policy agreed with           The controversial distinction between paid pro-
media authorities and network operators therefore          gramming, product placement and pure sponsoring
remain essential for a program’s chance to reach its       has also been recently discussed.
targeted audience. Increasingly, the same applies
for any digital transmission or in connection with any     Digitalization and Pay-TV
other platform regulation.                                 In Germany, analog transmission of television servi-
                                                           ces still has particular importance. Due to the unique
Ownership Restrictions and Media Concentration             variety of Free-TV services offered in Germany, digital
Almost from the start of the implementation of the         and Pay-TV services have only had a small chance
dual broadcasting system, there has been a lively          of succeeding in the past. Nevertheless, since 1990,
discussion regarding the topic of media concentra-         Premiere has offered a digital Pay-TV platform. As
tion. As the Federal Constitutional Court had ruled,       a matter of fact, currently more and more television
the purpose of concentration control was to safe-          service providers are applying for a digital television
guard plurality and diversity by preventing dominant       licence, mainly for the purposes of introducing spe-
opinion-forming positions. A private television provider   cial interest channels. Those programs often become
nowadays in general can broadcast as many services         part of the bundles promoted by Premiere or by
as he wishes to. Nevertheless, one broadcaster can-        cable network operators such as Kabel Deutschland
not control more than a certain percent share of           or Unity. In the last few years, terrestrial digital vi-
the general television audience. Recently leading          deo broadcasting (DVB-T) covering both private and
German media houses had to learn that related              public TV has been implemented in Germany. Discus-
markets also have to be considered. In any case,           sions are also continuing regarding the legal frame-
media authorities are allowed to take measures in          work of IP-TV offers and digital video broadcasting
order to protect “variety”.                                via handhelds (DVB-H).

Financing Public and Private TV
One main distinction between public and private            Marcus M. Hotze
television services is the different funding systems. As   marcus.hotze@luther-lawfirm.com
described above, public television is mainly financed      Telephone +49 (30) 52133 12757
by a fee that has to be paid by every owner of a tele-
vision set. Besides that, public broadcasters are al-
lowed to broadcast advertisements to a certain extent.
Doing Business in Germany Sports and Events                                                            264 | 265




Sports and Events

Sports and sport events are very popular and form an integral part of German
life. Private sports clubs are part of a long and well established tradition in
Germany, for both professional and popular sports, with more than 27 million
people being members of over 90,000 sports clubs. There are many unique
aspects which mean that sports are not regulated by one particular statute
in Germany, but are affected and governed by many different fields of law.




Besides tennis, boxing, winter sports and cycling,       provide the best prerequisites to practice sports. For
the most popular and most established sports are         almost each kind of sport, there is a main associa-
team sports like football (soccer), handball, hockey     tion. These local, regional, national and international
and basketball and – last but not least – motorsports.   associations provide the rules for competition. Sports
Race winning cars, teams and successful drivers          clubs and associations are autonomous and have
have all come from Germany. Football, with the           the privilege of being permitted to set their own
professional German Football League – the Ger-           bylaws. These bylaws have to be consistent with
man DFL – is the most popular sport, not only since      the legal framework of the State and be coherent with
the World Cup 2006 in Germany. With more than            its laws, especially private law, commercial law and
6.3 million official members, the German Football        labor law. This is particularly important as disputes
Association DFB is the largest sports organisation       between the association and the club or the club
of its kind worldwide.                                   and a member will often be settled in an arbitration
                                                         proceeding, involving arbitrators who are experts in
Sports clubs as legal entities are protected under       their field.
the constitutionally guaranteed freedom of assemb-
ly. Therefore, the clubs have an internal democra-       Professional sports organizations, which often have
tic structure and are self regulating within the legal   complex financial systems and requirements, need
framework of the governing corporate laws. The clubs     professional structures and marketing. Aside from
membership fees and the income from ticket sales for         Creating professional structures in accordance with
events, successful professional clubs mainly generate        the surrounding legal framework requires particu-
income by selling rights for television and radio broad-     lar knowledge of and experience in the sports and
casting. Apart from that, advertising, merchandising         entertainment industry. Only the professional mana-
and sponsoring gains are essential sources of income         gement of contractual and other legal issues can
for clubs and associations. Further, for instance the        guarantee the successful commercialisation of sports
German Football Association DFB is currently con-            businesses/future concepts and the generation of
sidering whether private investors should be allowed         additional revenue.
to acquire more than 49 percent of the shares of
professional football clubs.
                                                             Ingo Erberich
Modern sports facilities, often owned by clubs, cities       ingo.erberich@luther-lawfirm.com
or club owners, enable the clubs to address new              Telephone +49 (221) 9937 25721
target audiences, to improve marketing and to safe-
guard the economic power of professional sports.             Marcus M. Hotze
                                                             marcus.hotze@luther-lawfirm.com
Modern German pro-sport has enormous economic                Telephone +49 (30) 52133 12757
significance. It is an essential part of the entertainment
industry in a highly specialised media environment.
Rising expenses, sporting and economic pressure
to succeed and the need for professional market-
ing create increasing challenges for athletes, clubs,
federations, organisers and the media equally.

All market players need reliable contracts with their
business partners to promote their professional
standing and develop revenue sources. Advertising
and media companies are closely connected with
sports and offer them the opportunity to appeal to a
broader market: TV- and radio hosts, traders in rights
and licenses, production companies and agencies.
Broadcasting, sponsorship and advertising are all
high pressure industries, particularly as a result of a
convergence of power with a number of key opera-
tors as well as the internationalisation of the broad-
casting market. All players have to deal with sustain-
able licensing and regulatory challenges.
Doing Business in Germany   266 | 267
Doing Business in Germany Health Sciences and Pharma                                                  268 | 269




Health Sciences
and Pharma

The health market covers many different areas determined by a variety of
different legal provisions of health law, including medical law, physician law,
statutory health insurance law, pharmaceutical law and medical devices law,
as well as hospital law and the regulations of the federal law on epidemics.
Due to the difficult economic situation, revenue problems and the general
spending trend in statutory health insurance, the health market is subject to
substantial and frequent changes, particularly in the legal and political envi-
ronment. These changes lead to a more liberal relationship between physi-
cians, hospitals and the health industry on the one hand but also restrictions
on the economic possibilities within the health sector on the other. However,
the health sciences industry, especially the pharmaceuticals industry and
the field of medical technology, is still of particular interest to investors as
it is still a very lucrative industry with significant future potential. It is also a
particularly competitive market, which is likely to keep growing.




The sale of medicinal products and medical devices       to registration and sale, including the supervision
is regulated by strict laws that are mainly influenced   of such sale and the import and export of the pro-
by European directives and serve primarily to pro-       ducts. The following legal overview therefore focuses
tect the health of patients and consumers. The law       on the marketing of medicinal products and medical
on medicinal products and medical devices sets out       devices in Germany.
detailed regulations for everything from production
Compulsory Authorization of Medicinal Products            essary to carry out tests again in certain cases, but
In Germany, as in the EU as a whole, ready-pre-           sufficient for the applicant to refer to available scien-
pared medicinal products must be authorized –             tific research material instead.
these are products that have been manufactured
and packaged for the consumer before being placed         This happens if:
on the market. Magisterial medicinal products do not         the effects of the medicinal product have been
have to be authorized. A ready-prepared medicinal            established and are apparent from scientific re
product may only be placed on the market in Ger-             search material (known as “well established use”
many once a pharmaceutical business has acquired             procedure);
a product related authorization to do so. Authoriza-         the medicinal product, in its combination of consti-
tion under the law on medicinal products is the              tuents, is comparable to a known medicinal pro-
legal prerequisite for this permit. Exceptions to the        duct (known as the “essentially similar” procedure);
rule include, for example, medicinal products des-           the medicinal product is a new combination of
tined for human clinical trials. Homeopathic pharma-         known constituents. In this case, the reference is
ceuticals do not require a compulsory authorization,         valid for these constituents.
but do have to be registered with the respective
federal authority.                                        In cases where a medicinal product is registered
                                                          by referring to established information, the interests
Prior to the authorization, a medicinal product may       of the party who originally registered the drug have
only be provided to patients if they suffer from a        to be taken into account. This is commonly a large
serious or life-threatening disease which cannot be       pharmaceutical company carrying out research,
treated with an already authorized medicinal pro-         which is referred to in the documentation on the
duct (compassionate use).                                 pharmatoxicological tests and clinical trials for one of
                                                          its products for the purpose of registering imitations
Conditions of Authorization                               as an infringement of its proprietary rights. Hence,
The pharmaceutical entrepreneur, i. e. the party          the law on medicinal products stipulates a ten-
placing the drug on the market under its name, has        year period of protection for documentation on new
to apply for authorization. This party must have its      medicinal products. This gives the original applicant
seat in a member state of the EU. For medicinal           sufficient time to reap the financial rewards of its
products for human use, applications have to be filed     authorization for the medicinal product concerned,
with the Federal Institute for Medicinal and Medical      before a subsequent applicant may enter the market
Products (Bundesinstitut für Arzneimittel und Medizin-    relying on the same documentation. In accordance
produkte, BfArM) and the Paul Ehrlich Institute (PEI)     with the objective of this law, only documentation on
as Federal Agency for Sera and Vaccines. Information      innovative developments is protected. The ten-year
in the German language on the usage, effect, dosage       protection period starts from the time a medicinal
etc. of the medicinal product has to be submitted         product is first registered in a member state of the
with the application. The results of analytical, phar-    EU. It is therefore possible that, when a new medicinal
macotoxicological tests and clinical trials must also     product is first registered in Germany, the protection
be presented. With the latter two tests, it is not nec-   period might have expired because the drug has
Doing Business in Germany Health Sciences and Pharma                                                     270 | 271




already been registered in another EU member state        the mutual recognition procedure and request the
for more than ten years. The exploitation of docu-        preparation of an assessment report. The reference
mentation protected under this law may only be            member state shall prepare such assessment report
made with the written permission of the party who         within 90 days of receipt of the request. In addition
first registered the drug.                                the holder of the initial marketing authorization has to
                                                          submit an application to the competent authorities
Granting Authorization                                    of the additional member state and has to testify that
Once a medicinal product is authorized, an author-        the dossier is identical to the one previously accepted
ization number is assigned to it. Different pharma-       or whether there are any additions or amendments
ceutical forms of the same medicinal product or           to be made. According to the mutual recognition
different concentrations of a medicinal product in        procedure the additional member state has to recog-
the same pharmaceutical form are all issued with          nise the marketing authorization within 90 days of
the same authorization number. A medicinal pro-           receipt of the application and the assessment report.
duct may only be placed on the market after receipt
of confirmation of its authorization. It is possible to   Certain biotechnological or innovative medicinal pro-
appeal against an authorization granted with restric-     ducts have to be assessed via a centralised proce-
tions or against the refusal of a registration, and to    dure with the European Agency for the Evaluation
then take legal action. The pharmaceutical entrepre-      of Medicinal Products (EMEA). Medicinal products
neur is liable for any medicinal product he places on     that have been approved in accordance with such a
the market under civil and criminal laws, regardless of   procedure are issued a marketing authorization that
the product’s authorization.                              is valid throughout the EU. Furthermore the EMEA
                                                          is responsible for applications with regard to the de-
European Admission Procedures                             velopment of medicinal products for rare diseases,
Besides the admission procedure operated by        the    so-called “orphan” drugs. These are products for the
national authorities, in each member state of      the    diagnosis, prevention or treatment of life-threatening
European Union there exist two procedures           for   or very serious conditions that are rare and affect
authorising medicinal products in Europe, i. e.    the    not more than 5 in 10,000 persons in the European
mutual recognition procedure and a centralised     ad-    Union. To promote the development of such orphan
mission procedure.                                        medicinal products, the European Union provides
                                                          incentives, which include the right to market ex-
The “mutual recognition” procedure is applicable          clusively for ten years, the provision of scientific
to the majority of conventional medicinal products        advice by the EMEA, the access to the centralised
and offers the possibility of a simplified procedure      admission procedure and the granting of reduced
to apply for a marketing authorization in different       fees e. g. regarding the application for marketing
member states if there is already an approval in          authorization.
another member state. The holder of a marketing
authorization issued by a member state for this           Sale of Medicinal Products
purpose has to inform the reference member state          Unlike other products, such as groceries, medicinal
that an application is to be made in accordance with      products must not be made freely available to con-
sumers in unlimited amounts. Their sale requires             The pharmaceutical entrepreneur, i. e. in principle the
particular competence, and should be connected               holder of the marketing authorization, places the me-
with specialist advice. By law, only qualified perso-        dicinal product on the market under its name and
ns and establishments may sell medicinal products.           has full liability for it. Its name must be displayed
The law also specifies the channels through which            on the medicinal product’s packaging, package leaf-
different categories of medicinal products may be            lets or inserts and information material on the pro-
sold, and sets out the conditions under which they           duct. Granting another company co-distribution rights
may be passed to patients. A medicinal product’s             is also possible under certain conditions. In this case
risk category can make a considerable difference.            the co-distributor also has to be indicated as a phar-
For example, a medicinal product can be sold free-           maceutical entrepreneur on the packaging.
ly, i. e. in a pharmacy or elsewhere, be limited to sale
through pharmacies, be subject to prescription or            Import of Medicinal Products
even be subject to special permits and supervision           Safety considerations and the unbiased treatment
under the law on anesthetics.                                of domestic and imported medicinal products mean
                                                             that the import of medicinal products is only possible
Pharmacies likewise are subject to strict regulation         in certain situations. Under the law on medicinal pro-
set down in the Act on Pharmacies (Apothekenge-              ducts, imports from EU member states are treated
setz, ApoG). According to this regulation a pharmacy         as domestic products, while the import of medicinal
may only be operated by the pharmacist itself, who           products from other countries is subject to additional
is in the possession of the license to operate a phar-       conditions. When applying for German authorization
macy. Foreign ownership of pharmacies is prohibited,         for a medicinal product manufactured abroad, proof
which means that neither pharmaceutical companies            that the manufacturer is permitted to manufacture
nor financial investors may participate directly or indi-    medicinal products under the laws of its country must
rectly in pharmacies. The European Court of Justice          be presented. The permit granting the right to place
recently has confirmed that these restrictions of            the medicinal product on the market in the land of
the right to operate a pharmacy are compatible with          manufacture also has to be submitted. To import
European law.                                                ready-prepared medicinal products from a non-EU or
                                                             non-EEA country, an import permit from the relevant
It is possible for a pharmacy to distribute medicinal pro-   authority has to be produced. In certain exceptional
ducts via mail order if the competent authority grants       cases conclusively listed in the law, no import restric-
permission. This also applies to the distribution via        tions apply. The lack of restrictions in these cases
electronic commerce. However, to ensure the safety           serves the interests of travel and trade as well as
of the patients, the mail order distribution is only al-     good diplomatic, bureaucratic and scientific contacts.
lowed under strict requirements. Therefore, the mail-        Medicinal products freed from import restrictions in-
order pharmacy has to prove its quality and reli-            clude those carried as part of personal travel needs or
ability, the customers have to be provided with a            those required by a pharmaceutical entrepreneur as
qualified pharmacological and medical advice and the         samples or for the purposes of analytical comparison.
delivery has to be carried out in a fast and safe way.
Doing Business in Germany Health Sciences and Pharma                                                     272 | 273




Apart from a few exceptions, the medicinal pro-           Unlike pharmaceuticals, medical devices are not
ducts must also be approved for sale in their country     subject to an official authorization, but the manuf-
of origin and be passed to the individual in the course   acturer is responsible for the conformity of the pro-
of a pharmacy’s normal business, i. e. the products       ducts with the essential requirements for medical
may only be handed over on the pharmacy’s premises        devices in the applicable classification. The compe-
or delivered by post or courier. Stockpiling a supply     tent federal authority may decide upon the request
at pharmacies by means of such special orders is          of a competent authority or manufacturer about the
not permitted. In the case of medicinal products from     classification of medical devices and the demarca-
non-EU or non-EEA countries, a doctor’s prescription      tion of medical devices from other products. Such
is also required.                                         demarcation especially can cause difficulties where
                                                          medical devices are combined with pharmaceutical
Medical Devices                                           ingredients.
Besides pharmaceuticals, the market for medical
devices shows a significant growth and there has          With the exception of some medical devices, such
been a significant increase particularly in medical       as custom-made devices or devices intended for
technology innovations.                                   clinical investigations or in-vitro-diagnostics, medical
                                                          devices may only be placed on the market or put
Medical devices are also subject to extensive legal       into service if they bear a CE marking, which estab-
requirements determined by the Medical Devices            lishes that the manufacturer’s product conforms to
Act (Medizinproduktegesetz, MPG) based on various         all applicable legal requirements. This has to be
European Directives. The next legislation amendment       proven in a conformity assessment procedure to
of the Medical Devices Act is planed for 2010.            ensure the safety, the therapeutic or diagnostic
                                                          benefit, and to confirm the clinical or diagnostic
The law defines medical devices as any instrument,        evaluation of the medical device and the monito-
apparatus, appliance, software, material or other         ring of the medical device and its manufacturer. The
article, whether used alone or in combination, in-        CE marking must appear in a clearly visible, legible
cluding the software intended by its manufacturer to      and indelible form on the medical device and, where
be used specifically for diagnostic and/or therapeutic    applicable, on the sales packaging and instructions
purposes and necessary for its proper application,        for use. To ensure that, where a manufacturer does
which are intended by the manufacturer to be used         not have a registered place of business in the Euro-
for human beings for the purpose of diagnosis,            pean Union, authorities have a single individual
prevention, monitoring, treatment and alleviation of      person authorized by the manufacturer whom they
diseases or as compensation for an injury or han-         can address in matters relating to the compliance
dicap. The term applies to any device used for            of the devices with the Directives, it is necessary
the investigation, replacement or modification of the     for such manufacturers to designate an authorized
anatomy. Also included are physiological processes,       representative for each device.
including contraception testing, as well as in-vitro
diagnostics which may be carried out in a laboratory      Medical devices are classified in four risk potential
or at home.                                               classes. Depending on the product’s risk level, a
conformity assessment procedure has to be carried
out and, if the device has not only a low risk level of
a Class I medical device, a Notified Body must be
employed. The Notified Body’s identification number
accompanies the CE marking. Once a Medical De-
vice has passed the conformity assessment proce-
dure in a member state of the EU, the marketing and
commercialising is allowed throughout the European
Economic Area.

Due to technical innovation and the development of
initiatives at an international level, the regulations on
clinical investigations are to be adapted in the light of
the Medicinal Product Act (Arzneimittelgesetz, AMG).
Evidence of the suitability of all medical devices for
the specified intended purpose will be provided
through a clinical evaluation based on clinical data
unless, in exceptional cases with good reason, other
data are sufficient. For implantable devices and de-
vices in Class III, clinical investigations need to be
performed unless there is good justification for rely-
ing on existing clinical data.



Dr. Markus Sengpiel
markus.sengpiel@luther-lawfirm.com
Telefon +49 (221) 9937 25736

Thomas Henßler
thomas.henssler@luther-lawfirm.com
Telefon +49 40 18067 12185
Doing Business in Germany   274 | 275
Doing Business in Germany Contacts                                                                                                  276 | 277




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