Founding a SaaS company in Germany – what you´ll need to be aware of
Every successfully expanding company goes through a development phase where it strives for new business areas, new target groups as well as prosperous markets in order to drive company growth and gain market share. The Federal Republic of Germany, with its 83 million residents and the world´s fourth largest business economy, is the most populous country in Europe and the first port of call for many companies when it comes to entering the European market.
Experience and statistics show that entrepreneurs from other countries are more likely to establish companies than Germans. Unfortunately, they also show that these business ventures are more likely to fail. Among other things, it is hard for these entrepreneurs to keep track in such a regulated and sometimes bureaucratic environment. Build a solid foundation for your business venture initially by carefully gathering information about the legal framework conditions, formal requirements, funding opportunities and special consulting offerings for self-employment (if needed). With this blog article - providing you with helpful tips and startup insights - we want to make it easier for international companies to prepare a successful start and encourage multinational businesses to build a solid foundation for your business venture in Germany.
In order to give your business the best possible starting point, you will need one important thing along with your motivation and your SaaS business expertise: knowledge - about the market, local competitors, best practices in marketing & sales, legal requirements and last but not least the right local contacts to help you prepare for founding and establishing your local business.
Founding a SaaS business in Germany - formal requirements for company founders
The Residence Act regulates the conditions under which you, as a foreign citizen in Germany, can found a company or perform a self-employed activity. The framework conditions for immigration, residence and self-employment depend on your country of citizenship as well as many other factors. Non-EU citizens in particular will need to be well prepared. Fundamentally, you will need a residence permit if you are not from a member state of the European Union (EU) or the European Economic Area (EEA) and are also not a Swiss citizen. Residence permits and formal requirements vary depending on whether you want to be self-employed in a trade or a freelance profession. If you want to establish a trade, you will need to apply for a residence permit as per § 21 Paragraph 2 AufenthG with the responsible German agency abroad in your home country (www.auswaertiges-amt.de). If you are an academic with a recognized college degree or a college degree comparable to a German college degree, there is another option. You can apply for a six-month visa to plan and exercise a self-employed activity in Germany as per § 18c AufenthG, with the responsible German agency abroad in your home country.
Founding a SaaS business in Germany - choosing the right legal form for your company
During the planning process, you encounter the question of the legal framework for your business activities in Germany. You can choose from many options. Do you want to start off with just a local sales and contact point under your foreign brand, or do you want to choose from several legally established company forms? If you choose to establish a local company, you will need to know that your choice of the legal form will have wide-reaching consequences – in terms of the costs for the company formation, your starting capital, to what extent you will be liable, how many heads have to be responsible and which registration formalities need to be completed. For some legal forms such as GmbH, OHG, UG and KG, the law requires articles of association, notary certification of the formation, or the publication of required facts and figures about certain business circumstances within the company (www. handelsregister.de). Sole proprietorships and GbRs (partnerships under the German Civil Code) do not need to be entered into the Commercial Register.
Good to know: If there are any changes in your business activities or the framework conditions (tax laws, etc.), the legal form can also be changed. However, this involves a great deal of effort and this process should be accompanied by a consultant or a legal advisor.
Founding a SaaS business in Germany - German tax authorities
As soon as you start your business, the tax authorities are involved: they will demand that you pay taxes. In order for your taxes to be calculated correctly, you must record your expenses and earnings carefully and disclose them in your annual financial statement. The submission is subject to deadlines, and its payment is subject to payment periods. Any delay may result in late fees and penalties. Operational expenditures reduce your taxes. That means, these expenditures are offset against your taxable earnings. Since you will incur significant costs especially in the startup phase, for instance for registration fees and permits, office rent, marketing costs, business trips, legal and tax consulting, you should keep all your invoices and receipts so you can submit them to the tax authorities. Above a certain limit, a certain percentage of commodity purchases can be written off of your taxes. That means they reduce your taxes over a period of multiple years of use. Be sure that all invoices you receive are in the proper format; otherwise, the tax authorities will not refund the value-added tax from your incoming invoices as input tax, and you will pay more taxes than necessary. Particularly in the starting phase, experience shows that you will initially have more expenditures than income. Among other things, your concrete tax obligations as an entrepreneur will depend on the chosen legal form and the amount of your income or profit. The law establishes who pays which type of taxes. In general, you may be subject to the following types of taxes:
• Income tax/corporate tax
• Trade tax
• Value added tax and
• Payroll tax.
Founding a SaaS business in Germany - Bookkeeping
Your bookkeeping is a chronological, seamless document of your business transactions, such as income, expenditures, wage and salary costs, and it tracks the development of your assets. On this basis, you can determine your profit and gain information about your liquidity (solvency). It gives the tax authorities the data they need to calculate your taxes (tax bases). Whether and to what extent you required to keep books depends on various prerequisites. The individual requirements are established in the German Commercial Code.
Fundamentally, your profit can be determined using a simple income/surplus calculation. If you have chosen the legal form of a GmbH, UG, AG, OHG or KG for your company or have voluntarily had it entered in the Commercial Register, you are obligated to use double-entry bookkeeping. You must also create an annual financial report with a profit and loss statement and a balance sheet. This regulation applies to companies, regardless of legal form, if they generate a sales volume of more than 500,000 euros during the calendar year or if their annual profit exceeds 50,000 euros.
Good to know: Banks will often ask you to submit balance sheets when granting loans, even if you are only legally obligated to create an income/surplus calculation.
A local consultant can take over a great deal of work for you, including payroll, advance VAT returns, financial and payroll accounting, the annual financial statement and your personal tax return, and can advise you on investments, questions about funding programs and startup grants as well as all tax questions. In addition, you will have more time to submit your annual income tax, trade tax and value added tax returns if you have them prepared by a tax consultant: the deadline is extended by seven months, and in justified cases even by nine months.
Good to know: Tax consulting costs are generally tax deductible.
Founding a SaaS business in Germany - employees and local labor laws
In most cases, you will start your company with just an essential local skeleton crew or freelancers for marketing and sales until you see some growth and reach a certain size. However, you should be familiar with the basics of employment law. You need to learn about concepts like working hours, breaks, vacation, termination periods and minimum wage before signing the first employment contract. The following brief explanations of the most important employment-law terms will make it easier for you to get started:
Working hours: In Germany, full-time employees work approximately eight hours a day. Fewer hours can be established for part-time work. Breaks are required, and employees can use time off to balance out any necessary extra work (overtime) during a certain time frame.
Salary and minimum wage: If your company is not subject to pay-scale provisions under labor law, you can freely negotiate wages and salaries. However, they cannot fall short of the mandatory minimum wage. Since January 2021, Germany has had a statutory minimum wage of 9.50 euros per hour, which is adjusted every half a year. This minimum wage also applies to people with “mini-jobs,” seasonal workers and interns; there are very few exceptions. The statutory minimum wage will be increased in three steps in 2021 and 2022: On 1 July 2021 to 9.60 Euros, on 1 January 2022 to 9.82 Euros and on 1 July 2022 to 10.45 Euros.
Vacation: Each employee is entitled to paid vacation of at least 24 business days per calendar year. In addition to vacation days, the employee also has Sundays and holidays off unless special regulations have been established.
Illness: If an employee is unable to work due to illness, he/she must legally receive 100 percent of the owed wages for up to six weeks, as long as the employment relationship existed at least four weeks before the illness. Information about the type of illness is subject to medical confidentiality obligations.
Termination: The Termination Protection Act protects employees from socially unjust and arbitrary terminations; in addition, there are regulations benefiting employees who require special protection, such as pregnant women and employees with severe disabilities. Terminations must be made in writing in order to be effective. The employee is entitled to find out the reason for termination.
Maternity leave: According to the Maternity Leave Act, mothers-to-be can only work during the six weeks before the birth if they have explicitly agreed to this. After the birth, they are not permitted to work for at least eight weeks.
Occupational health and safety: The Occupational Health and Safety Act helps guarantee and improve employees’ safety and health at work through workplace protection measures. Equal treatment: The Equal Treatment Act protects employees from discrimination on the basis of race, ethnic origin, gender or religion.
Registration: Your first duty as an employer, after concluding a written contract, is to register your new employee with the social security and accident insurance systems as well as for health insurance.
For international companies that have not yet developed business activities in Germany, these formal requirements are sometimes major challenges, especially in the start-up and development phase. Our consultants will be happy to accompany you on the way to setting up your company in Germany, so that you can fully concentrate on customer acquisition and business development.
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