Many investors manufacture outside the EU and want to sell in Germany and Europe. There are three basic models for this: direct sales from abroad, a branch in Germany or a dedicated German sales company. Each model has different consequences for tax, imports and liability. This article helps you decide.
The typical case
Suppose a Chinese industrial investor has taken over a German automotive supplier. How such a purchase works is described in our article Buying a Company Out of Insolvency. Part of the manufacturing is now to move to lower-cost sites abroad. Sales continue to customers in Germany and the EU, under the established brand. The example is a composite. But the questions are always the same: Who sells to the German customers? Who imports the goods? And which profit is taxed in which country?
Three models compared
| Direct sales from abroad | Branch (permanent establishment) | German sales GmbH | |
|---|---|---|---|
| Customers’ contracting party | The foreign company | The foreign company | A German company |
| Taxes in Germany | Generally no income taxes, as long as no permanent establishment arises | The branch’s profit is taxable in Germany | The GmbH is taxable on its entire income |
| Liability | The parent company is directly liable | The parent company is directly liable | Towards creditors, only the GmbH’s assets (§ 13 Abs. 2 GmbHG) |
| Effort | Low, but a tax risk | Medium; profit allocation to the parent required | Higher: incorporation, bookkeeping, annual financial statements |
A GmbH (Gesellschaft mit beschränkter Haftung, a limited liability company) is the standard German corporation. If its registered office or place of management is in Germany, it is subject to corporation tax here on its entire income (§ 1 KStG). How to set up a GmbH as a foreign investor is explained in the article Setting Up a GmbH as a Foreign Investor.
When direct sales become a permanent establishment
Many investors start with direct sales. That is legitimate, but it has a limit. German tax law defines a permanent establishment broadly:
“A permanent establishment is any fixed place of business or facility that serves the activity of an enterprise.”
§ 12 Satz 1 AO / gesetze-im-internet.de (unofficial translation)
The provision expressly lists, among other things, branches, offices, warehouses and purchasing or sales outlets (§ 12 AO). Tax liability can arise even without your own premises: through a permanent representative. This is a person who, on a sustained basis, concludes or negotiates contracts for the company, obtains orders, or maintains a stock of goods and delivers from it (§ 13 AO). A single sales employee in Germany can therefore be enough. A foreign company with a permanent establishment or a permanent representative earns German-source income and is therefore subject to limited tax liability in Germany (§ 2 KStG, § 49 Abs. 1 Nr. 2 Buchst. a EStG). Double taxation treaties (DBA) can restrict this taxing right; our partner tax firm TABAK Steuerberatung reviews this case by case.
Transfer pricing: the sales GmbH as a routine entity
When the German GmbH buys goods from the parent company, a price arises within the group. This transfer price must comply with the arm’s length principle: it must be what independent third parties would have agreed (§ 1 Abs. 1 AStG). What matters is who performs which functions, bears which risks and uses which assets. The law calls this a functional and risk analysis (§ 1 Abs. 3 AStG).
A sales GmbH with limited functions and risks can qualify as a so-called routine entity. The tax authorities describe it as follows:
“An enterprise which, as the result of a functional and risk analysis for the transaction in question, alone or together with other related parties, a. performs the routine functions, b. uses assets only to a limited extent and c. bears only limited risks.”
BMF, Administrative Principles on Transfer Pricing 2024, definition of “routine entity” (unofficial translation)
In practice, this means: an entity that performs only routine functions and bears hardly any risk can claim only limited remuneration, but must make a profit over the long term. Start-up losses are possible. However, if such an entity does not achieve an appropriate overall profit within five financial years, the tax authorities will generally assume that the transfer prices are wrong (para. 3.33 of the Administrative Principles). Persistent losses in Germany alongside profits abroad are therefore a classic trigger for a tax audit.
The GmbH must keep records of its business relationships with the parent (§ 90 Abs. 3 AO). Which documents this involves is explained in our article Transfer pricing: Documentation requirements. If manufacturing is moved from Germany to another country, this can also constitute a transfer of functions with its own valuation rules (§ 1 Abs. 3b AStG). This, too, needs to be on the table before the relocation.
The German sales GmbH earns a stable routine margin. The product’s upside and risks sit where development, decision-making and production take place. Contracts, prices and actual operations must be consistent with one another.
Imports: customs duty and import VAT in principle
Goods from a country outside the EU are subject to customs duty on import. In addition, import VAT is due (§ 1 Abs. 1 Nr. 4 UStG). It is assessed on the customs value of the goods, plus, among other things, customs duty and transport costs to the first destination in the EU (§ 11 UStG). The customs debt arises when the customs declaration is accepted; the declarant is the debtor (Art. 77 Union Customs Code).
This leads to three points for your decision:
- Customs duty remains customs duty. A German company does not avoid customs duty. But it makes the process more predictable, because it can file the declaration itself. To do so, it needs to register with the customs authorities and obtain an EORI number (Art. 9 Union Customs Code).
- Import VAT is usually not a cost factor. A business can deduct it as input VAT if the goods were imported for its business (§ 15 Abs. 1 Satz 1 Nr. 2 UStG).
- The importer has obligations in Germany. If the foreign parent delivers directly to German customers and owes the import VAT itself, its supply is treated as made in Germany (§ 3 Abs. 8 UStG). It must then deal with VAT here.
We clarify the details of tariff classification, customs value and procedures with customs specialists.
Origin, brand, product liability: a brief overview
A German contracting party does not turn a product into a German product. Under customs law, goods originate in the country where they underwent their last substantial processing or working (Art. 60 Abs. 2 Union Customs Code). In advertising, misleading statements about geographical origin are unfair commercial practices (§ 5 UWG). So be careful with “Made in Germany” if manufacturing takes place abroad.
A second point concerns product liability. Anyone who imports a product into the European Economic Area for distribution is treated as the manufacturer under liability law (§ 4 Abs. 2 ProdHaftG). The German sales GmbH can therefore be liable for defects that arose during manufacturing abroad. Clarify brand, liability and insurance with specialised lawyers before you launch; we coordinate this for you.
Systems: making the numbers add up
The model only works if the figures are traceable. The sales GmbH keeps its books in Germany, the parent company in its own ERP system. Both must show the same deliveries, prices and payments. Our team of experts sets up the German bookkeeping in DATEV and builds the interface to the parent company’s ERP system. That way, you can see every month whether the GmbH’s margin is within the agreed range. The goal: in 15 minutes, you understand what is happening in your German company. More on this in the article Understand Your German Subsidiary in 15 Minutes; ongoing reporting is explained in Real-Time BWA.
“Transfer pricing is not a year-end topic. When bookkeeping and the parent’s ERP are cleanly connected, you can see every month whether your model holds up.”
Fatma Tabak, tax advisor · TABAK Steuerberatung
We think in integrated concepts rather than individual services: TABAK Consulting coordinates structure, bookkeeping and IT; tax advice is provided by our partner tax firm TABAK Steuerberatung. For our clients’ home countries, we coordinate partner firms in more than 20 countries.
Frequently Asked Questions
Do I need a German GmbH to sell in Germany?
No. You can also sell directly from abroad. But a GmbH clearly separates liability and taxes and gives your customers a German contracting party. As sales grow and you build up your own staff on the ground, it is often the clearer solution.
When does a permanent establishment arise in Germany?
When you use a fixed place of business, such as an office, a warehouse or a sales outlet (§ 12 AO). A person who concludes or negotiates contracts for you on a sustained basis can also trigger tax liability as a permanent representative (§ 13 AO).
How much profit does the sales GmbH need to report?
There is no fixed figure. The margin must be at arm’s length and follow from the functional and risk analysis. If the GmbH does not achieve an appropriate overall profit over five years, the tax authorities presume that the transfer prices are inappropriate.
Does a German company save customs duty?
No. Customs duty arises when the goods are imported, regardless of where the buyer is based. However, a German company can file the import declaration itself and deduct the import VAT as input VAT.
Can I advertise goods manufactured abroad as “Made in Germany”?
Be careful. What matters is where the goods were made, not where the seller is based. Misleading statements of origin are unfair under § 5 UWG. Have the labelling reviewed by a lawyer.
Sources
- § 12 AO – permanent establishment
- § 13 AO – permanent representative
- § 1 AStG – arm’s length principle
- BMF circular of 12.12.2024 – Administrative Principles on Transfer Pricing 2024 (provided by IHK München)
- § 11 UStG – taxable amount for imports
- § 3 UStG – place of supply (Abs. 8)
- Regulation (EU) No 952/2013 – Union Customs Code
- § 4 ProdHaftG – manufacturer
- § 5 UWG – misleading commercial practices
More than 20 years advising entrepreneurs, investors and family businesses. Reserved tax services are provided by our partner tax firm, TABAK Steuerberatung.
Author profile →Setting up a sales model for Germany?
We plan the company, transfer pricing, bookkeeping and ERP integration as one concept – tax advice is provided by our partner tax firm TABAK Steuerberatung.