Outbound Investment Q&As Germany By Steve Zhao 2023-09-06


This note is a summary of discussions with a local German law firm, aims to provide preliminary guidance for Chinese investors to invest in or acquire companies incorporated in Germany.


1. General Environment



Q1: What is the general attitude of the Government, major political Parties and people towards Chinese investment in Germany? Besides industries relating to national defense, are there any industries that are more sensitive and difficult for Chinese investors to invest in?


Overall, EU countries such as Germany tend to encourage an international economic and trade system of free trade and investment. However, in recent years, economic security has increasingly become an issue of equal importance to free trade and investment. According to recent public opinion and political discourse, there is a growing inclination to adopt measures that safeguard German high-tech companies like semiconductor facilities against acquisition by foreign investors. In 2022, the German government intervened to block two transactions in which Chinese investors sought to acquire German semiconductor facilities.


But also in other areas, the German government has become much more conscious about foreign investments, such as infrastructure projects. For example, the investment of a state-owned company of China in a container terminal in Germany showed the German government's caution as long and exhausting discussions with the Federal Ministry for Economic Affairs delayed and intervened in an already closed deal. Nevertheless, it is worth noting that this transaction was finally approved lately.


Transactions in industries deemed less or non-sensitive, such as in automotive or classical industrial areas are not subjected to the same level of scrutiny, even when proposed by Chinese investors. Still, Chinese investors need to brace for a longer approval process.


In summary, while the FDI screening process in acquiring German entities has become much more onerous and time-consuming in the last years, the German market and authorities are still open to investments in non-sensitive areas.


Q2: From experience, what are the industries that are of specific interest to Chinese investors? Are there any emerging areas that can also be attractive to Chinese investors?


With the China’s shift towards innovation-driven economic growth and higher value-added production, Chinese investors have shown interest in Germany's robust industrial manufacturing, chemical, renewable energy, automotive and pharmaceutical sectors. These sectors offer attractive opportunities for Chinese companies to obtain sophisticated technologies, know-how, and intellectual property, enabling them to enhance their existing products.


Q3: Do the local owners generally prefer tenders or auctions, or private discussions with potential buyers? Do they have any special expectations from Chinese investors?


With the exception of the public takeover, which is very rare in the German market, a company acquisition is generally handled either by way of an auction procedure or through exclusive negotiations between two parties. The process of acquiring large to medium-sized companies often involves well-structured auction processes that are led by investment banks and adhere to international market standards. For smaller companies, it often comes to the involvement of M&A advisors for the contact finding between potential partners.


The main expectation M&A advisors have is that the Chinese bidder is well prepared and has a team of advisors and decision makers set up to bring the transaction to a quick closing.


Q4: Will there be any risk of expropriation by the government, and in the case of government expropriation or condemnation of land or other assets acquired by the foreign investor, what would be the compensation, if any?


Theoretically there are certain provisions in the law for specific areas and under strict conditions which allow expropriation by the government. However, there have not been expropriations in Germany since 1950.


From our perspective, once approved, investments of Chinese investors in Germany are secure and there will be basically no expropriation of any kind.


In addition, according to the Agreement between China and Germany on the Encouragement and Reciprocal Protection of Investments[1], the German government shall provide the same conditions for the protection of Chinese investments.


Q5: Will it affect the Chinese investor’s ability to invest in Germany if it is included in the Entity List of the Bureau of Industry and Security under the U.S. Department of Commerce? To be on the list means the Chinese investor is subject to U.S. export control.


It is our understanding that there is no direct relevance to these US sanctions lists for the German or EU domestic investment. The evaluation of a proposed transaction will be done based on German and EU laws which currently do not provide for comparable black list.


2. Regulatory Compliance



Q1: Is there a foreign investment approval regime in Germany? If there is, what are the procedures, requirements and timeline to obtain foreign investment approval assuming there are no substantive national security risks associated with the investment? Is there any difference between taking minority stake and acquiring all or majority shares in the target?


The German foreign investment screening regime consists of two distinct review systems. First of all, the sector-specific review is applicable to a purchase of companies involved in the production of weapons, military equipment, and IT security products. If an investor from outside the EU acquires interests in such companies, a mandatory filing obligation comes into effect.


Second, regarding the cross-sector review, the German law designates 27 specific sectors as "critical infrastructure". Acquisitions of companies in these sectors or companies developing software in such sectors require mandatory filings once the voting rights threshold of 10%, 20%, or 25% is reached. In all other cases, notification is voluntary. However, investors can seek government clearance of the transaction. Without such clearance, seller and buyer of a transaction run the risk that the ministry of economy will retroactively order the transaction to be unwound if it threatens the security interests of Germany.


For both cross-sector and sector-specific reviews, the authority has a 2-month window, starting from the date of the purchase agreement's conclusion, to approve the transaction or initiate a second-phase investigation. If the authority fails to initiate the investigation within this time frame, the transaction is deemed to be approved. In case the authority decides to initiate an investigation, it has 4 months to reach a final decision.


Q2: Are there any restrictions on Chinese investors to acquire land or real estate in Germany? Will it be different if the acquisition is made through a local subsidiary of the Chinese investor? If acquired, is there a limit of time to the title or ownership?


According to our knowledge, there are currently no legal limitations imposed on cross-border real estate investments in Germany.


Q3: Is there an anti-trust regime that applies to mergers, acquisitions or business concentration in Germany? What is the threshold for filing to such anti-trust authority?


The acquisition of shares in a German company may require clearance from the Federal Cartel Office (Bundeskartellamt) and/or the European Commission, as per the anti-trust laws of Germany and the EU. The driving point of such anti-trust clearance is to regulate the conduct and organization of businesses in order to promote competition and prevent unjustified monopolies.


In addition, considering the protection of competitive conditions in the EU single market, the EU has implemented the Foreign Subsidies Regulation and its implementing rules. In the process of anti-monopoly operator concentration declaration, if it may involve foreign subsidies that meet certain conditions, operators need to report the receipt of specific foreign subsidies in the anti-monopoly concentration declaration.


Q4: Are there any legal or regulatory restrictions on shareholding, payment schedule and payment method, governing law and venue of dispute resolution, or on other aspects of the acquisition?


No, there are currently no such restriction in force in Germany.


3. Foreign Exchange and Capital Flow



Q1: Is there a foreign exchange control regime in Germany? Are there any official exchange rate that is different from the market rate? Are there any quotas or other restrictions on foreign exchange?


With the exception of transactions that fall under sanctions or restrictive measures, or are governed by national legislation, Germany does not impose any limitations on the import or export of capital.


Q2: Will the Chinese investor be free to send money into Germany to invest in the project companies or to pay the sellers?


According to the German Foreign Trade and Payments Regulation (Außenwirtschaftsverordnung, AWV), incoming or outgoing payments above EUR 12,500 from abroad must be reported to the Deutsche Bundesbank, subject to some exceptions by law. Apart from that, there are no restrictions.


Q3: Will the Chinese investor be free to dividend the profit out of Germany or receive payment from Germany for sale of the project, after the payment of relevant taxes?


Yes, there are currently no limitations whatsoever on the repatriation of dividends.


4. Taxes



Q1: What are the main taxes on businesses, business owners and business managers in Germany?


Businesses that have a registered seat or place of management in Germany are obligated to pay Corporate Income Tax and Trade Tax (Körperschaftssteuer) and the municipal Trade Tax (Gewerbesteuer) on their global income.


For individuals, the main tax is Personal Income Tax, with Social Insurance contributions also applicable.


Q2: What are the taxes that will be levied upon investment in or acquisition of the target?


There are no direct taxes on any such transaction, except if the target owns real estate in Germany, then Real Estate Transfer Tax (Grunderwerbssteuer) is payable. Similar to a tax are the fees of the public notaries that is required to validly acquire shares in a German limited liability company (GmbH). The notarial fees are set out in a compulsory fee system.


Q3: Are there any tax haven jurisdictions with a favourable tax treaty with Germany that are often used for acquisition of targets? What would the tax rates be for the acquisition if such tax haven is used?


In recent years, the ability of investors to structure the acquisition through tax havens has been largely eliminated. The investor would need to prove to the German tax authorities that it has substantial operations in such tax havens, which is mostly not the case. Therefore, it is highly recommended to avoid complex tax structuring, as often times these structures will not work in practice.


5. Labour



Q1: Are there any requirement for local directors? Are there any requirement to hire local workers or restrictions on hiring foreign workers?


There are no requirements or restrictions in that regard. Still, it is highly recommended to only appoint managing directors to the German target company who have the ability and visa to enter the EU at any time.


Q2: How do labour unions function in Germany? How do they affect businesses and business owners?


Germany enjoys a rather successful system of co-determination of the work force.


On the operational level, many companies have works councils (Betriebsrat). The works council represents the interests of employees within a company, ensuring that applicable laws, occupational safety regulations, shop level agreements, and organizational-level agreements are to be observed by the employer.


The works council differs from the labor union (Gewerkschaft). The union negotiates general labor and collective bargaining agreements on a national or industry level, while works councils represent employees at a company level. Also, the unions are often represented on the Supervisory Board (Aufsichtsrat) of larger companies.


Q3: If the Chinese investor needs to send certain management employees, engineers, from China or other countries to Germany to manage the target. What types of visas do these employees need and how long will that entitle them to stay in Germany? Are there any difficulties in getting or renewing these visas?


For short-term business trips, a business visa allows for a maximum stay of 90 days or a total of 90 days within a 180-day period for general business activities such as attending meetings, events, and conferences, or undertaking short-term work assignments.


For longer periods of stay, national visa type “D” are available for those who require a residence permit for stays exceeding 90 days. Different types of applications are available depending on the circumstances: The Blue Card EU scheme is designed for highly skilled academic professionals who are employed in positions commensurate with their qualifications and have a gross salary of at least EUR 58,400 (in the year 2023). Senior executives, managing directors, and specialists may also apply for a residence permit for general employment. However, approval from the Federal Employment Agency (FEA) is required. The Intra-Corporate Transfer (ICT) and Personnel Exchange program allows businesses or undertakings outside the EU to send managers, specialists, and trainees to subsidiaries/branches within the EU for a maximum duration of three years.


Q4: Are there any mandatory requirements on working conditions or working hours or other aspects of the business that may significantly affect the costs of labour for a foreign investor?


The statutory maximum working time is 8 hours per day from Monday to Saturday. Working on Sundays and public holidays is generally forbidden. The statutory maximum weekly working time is 48 hours.



[1] Agreement between the People's Republic of China and the Federal Republic of Germany on the Encouragement and Reciprocal Protection of Investments