Foreword by Andrew Chilvers
Despite these uncertain times, expanding overseas can be a key driver for future growth for an ambitious business. International expansion can breathe new life into a company, drive huge value and set it on a path of continued success.
Expanding a business overseas is a strategic opportunity that will help diversify revenue streams, revitalise product development and give high returns on investment. But expanding a business into different jurisdictions takes time – this is a long distance run, not a sudden sprint to the finish line. Furthermore, expanding operations into a new jurisdiction can be fraught with challenges and risks that need to be addressed long before the first boots are on the ground.
For any company turning up in a foreign country, a multitude of tax and legal issues need to be addressed. This can be a labyrinthine experience and not for the faint hearted – but then faint hearted businesspeople seldom set their sights on overseas expansion.
Tax and compliance have to be at the top of any board’s agenda, ensuring the correct steps are taken the moment the company representatives land in-country. It’s pivotal to learn these issues to avoid any costly mistakes from the start.
What are the main government incentives available in your jurisdiction to attract multi- nationals and FDI investment?
Direct investments in industrialized countries have been declining steadily for decades. Emerging and developing countries have become more attractive locations for foreign investment for most companies. Whereas in 1990 these countries accounted for around 17% of global investment flows, by 2018 the proportion had risen to 54%. The EU’s share of global FDI was only 21% in the same year. However, Germany is among the top 10 recipients of FDI worldwide and a study by Ernst & Young in 2019 on the attractiveness of the European Economic Area found that Germany takes first place as an investment destination. Germany owes this success to various efforts resulting in hard location factors such as political and social stability, legal certainty, infrastructure and employee qualification.
Direct investments can be distinguished between company start-ups and company participations/takeovers. Start-ups can be set up free from any restrictions in all company forms in Germany and are not subject to an investment examination according to the regulations of the Foreign Trade and Payments Ordinance (AWV), which is one of the top driving factors for FDI in the domestic market. In addition to these regulatory freedoms, Germany supports investment with three different promotional measures: direct grants, reduced-interest loans and public deficiency guarantees.
The amount of the subsidy in the case of direct grants depends on the project plan (company size, investment location and investment sum). It is important to note that the criteria are based on those set at the EU level. As a rule, small and medium-sized enterprises receive the highest support, while large companies receive less support. Additionally, operational business can benefit from measures to promote the labour market, development of the infrastructure or subsidies for research and development. The most prominent and latest example is probably the construction of the Tesla plant in Brandenburg, for which the US Company has been promised up to 280 million Euro in funding from the state.
What industries do you feel there are opportunities in for international investors/ businesses in your jurisdiction? What factors do you think contribute to inward investment?
In our opinion, all market segments are eligible for direct investment in Germany. There is actually no industry that would not find all of the prerequisites that they may need for their project. German infrastructure is in an excellent condition and directly connects not only local but also global markets. In addition to the international hub of Frankfurt Airport, there are many other major airports spread across German territory, and the sea connection is traditionally ideal, for example via the port of Hamburg.
In addition, Germany offers a large pool of qualified personnel. Many countries envy Germany for its traditional dual training path via practice and school that prepares for the daily work routine because students are being trained in the actual business, not just theoretically. The workforce possesses good and important language skills to be successful in international corporate groups.
The connection, especially to local markets, is highly reliable. Our home base in North Rhine-Westphalia offers companies 18 million consumers within a radius of only 100 km, and there are over 80 million potential customers throughout Germany. With a stable and growing economy over the last decade, Germany offers a high demand value and therefore is an ideal market for investments.
One aspect that has long been criticized by international investors is the insufficient digital infrastructure. Local politicians recognized this flaw a long time ago and are working continuously to become the leader in this area as well.
A large part of FDI is still concentrated on German industrial and high-tech companies. In our view, this trend will continue, as market saturation in this segment is far from being reached. German industry is traditionally one of the strongest in the world and will continue to offer enormous growth opportunities in the future while undergoing digital change.
Why is it important to hire a local firm to support international expansion? How can you help smooth the process for your clients and overcome common pitfalls?
Developing a foreign market presents investors with various challenges. In addi – tion to the legal framework regarding the decision between founding a company and taking over a business or parts of a business, another significant factor is the future tax implication of the investment. Local firms know the common pitfalls as well as the advantages of different set ups. To find the ideal strategy for an investment, the question of the desired result must be answered. It is only in the context of this question that the optimal decision can be made regarding the founding of a company (partnership or corporation) or the participation in an existing company. A possible exit plan and the associated taxation of profits should also not be neglected. In the case of foreign investments, these must be analyzed with regard to both income taxes and the Foreign Tax Act.
One of the deciding factors about the success of a business is arguably the performance of the (local) market. The assessment of market potential and the degree of saturation of the local economy is an essential part of business and investment planning. We pride ourselves in our knowledge about the conditions, chances and the current development of the German market in various business fields.
Furthermore, local firms usually have a longstanding network of partners in different areas of consultation of which the investor can take advantage during the initial investment process as well as during the ongoing business in the future, whether that is legal, economic or tax consultation. The subsidy regulations in Germany are complex, as responsibility is divided between the EU, federal and state levels. The requirements for individual subsidy programmes can vary greatly, while others can be claimed in parallel, which is why the investor’s partners need to be informed about the subtleties of local regulations to be able to assist in application procedures and develop an optimal strategy.