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Country Commercial Guides
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CHAPTER VII. INVESTMENT CLIMATE
The German government and industry actively encourage foreign investment in Germany. One measure of the openness of the German system is that the Chairman of Germany's most influential business organization, the Bundesverband der Deutschen Industrie (BDI), formerly headed the subsidiary of a major U.S. multinational. Foreign companies generally suffer the same or similar investment problems as do domestic firms, such as high marginal income tax rates, inflexible labor laws, and burdensome regulations. German law treats foreign firms in the same way as it does German firms.
The 1956 U.S.-FRG Treaty of Friendship, Commerce and Navigation affords U.S. investors national treatment. Germany subscribes to the OECD Committee on Investment and Multinational Enterprises' (CIME) National Treatment Instrument. Under German law, foreign-owned companies registered in the FRG as a GmbH (limited liability company) or an AG (joint stock company) are treated no differently from German companies. There are no special nationality requirements on directors or shareholders, nor do investors need to register investment intent with any government entity.
The 1956 Treaty also provides for the free movement of capital between the U.S. and Germany. Germany also subscribes to the OECD Code on Capital Movements and Invisible Transactions (CMIT). While Germany's foreign economic law contains a provision for the imposition of restrictions on private direct investment flows in either direction for reasons of foreign policy, foreign exchange, or national security, no such restrictions have ever been imposed. In such a theoretical case, the federal government would first consult with the Bundesbank and the governments of the federal states. There is no broad authority to screen or block foreign direct investment.
Excluding reinvested profits, net new Foreign Direct Investment (FDI) in Germany more than doubled in 1998 to DM 35.0 billion from 1997's DM 16.7 billion (which also represented a sharp jump from DM 8.4 in 1996). Some of this, however, represents portfolio shifting related to European Monetary Union (EMU). In 1998, the U.S. was the second largest investor in Germany (DM 5.4 billion or 15 percent of total) though far behind U.K. (at DM 13.8 billion or 40 percent). German investment abroad also more than doubled to DM 152.4 billion in 1998, or more than four times as high as foreign investment in Germany. The U.S. is the number one location for German business, which invested roughly DM 78 billion in the U.S. (or 51 percent of the total). France was the second most popular destination for German business (DM 16 billion or 10 percent) followed by the U.K. (DM 9 billion or 6 percent).
Conversion and Transfer Policies
The Deutsche Mark (DM) is a free currency with no restrictions on its transfer or conversion. As a result of EMU, the DM will be phased out in 2002 and replaced by the Euro, which will be similarly free, with no restrictions on its transfer or conversion. There is no difficulty in obtaining foreign exchange. There are also no restrictions on inflows and outflows of funds for remittances of profits or other purposes.
Expropriation and Compensation
German law provides that private property be expropriated for public purposes only, in a non-discriminatory manner, and in accordance with established principles of international law. There is due process and transparency of purpose, and investors and lenders to expropriated entities receive prompt, adequate, and effective compensation.
Dispute Settlement
We are unaware of any investment disputes concerning American or other foreign investors and Germany. Germany is a member of the International Center for the Settlement of Investment Disputes (ICSID), as well as a member of the New York Convention of 1958 on the Recognition and Enforcement of Foreign Arbitral Awards. German courts are fully available for foreign investors in the event of investment disputes. The government does not interfere in the court system and accepts binding arbitration. For more information on Germany's law on arbitration, reformed in 1997, see www.internationaladr.com/tc121htm.
Performance Requirements/Incentives
A comprehensive package of federal and state investment incentives is available to domestic and foreign investors. Germany is in compliance with its WTO TRIMS notification. The government has placed particular emphasis on investment promotion in the New States, but has reduced many of these incentives in recent years. More will expire in the coming years, especially as the federal budget comes under growing pressure. A broad lobby exists, particularly in the New States, to extend many of these programs through 2004, but the proposed 1999 budget reduces these programs. The incentives currently available include:
For the eastern German states and eastern Berlin:
Tax Incentives: Investment allowances, special depreciation allowance, Eastern Germany Equity Fund.
Investment Grants: Improvement of Regional Economic Structures Program, grants for research and development, consulting fee and training costs.
Credit Programs: Loans with below-market interest rates from the Equalization Funds Bank, Kreditanstalt fuer Wiederaufbau funds, Marshall Plan funds, EU programs, and loan guarantee and credit programs.
Programs for all of Germany:
Tax Incentives: Special depreciation allowance, capital reserve allowance.
Investment Grants: Improvement of Regional Economic Structures Program, grants for research and development, consulting fees and training costs.
Credit Programs: Loans with below-market interest rates from the Equalization Funds Bank, Reconstruction Funds Bank, Marshall Plan funds, European Union programs, loan guarantee programs and other programs for small technology firms and environmental demonstration projects.
U.S. and other foreign firms may also participate in government and/or subsidized research and development programs, provided that:
-- the company is legally established in Germany;
-- the activity is a long-term operation with significant R&D capacities;
-- the project engages in sponsored research that is entirely performed in Germany;
-- the firm can exploit intellectual property rights independent from a parent company;
-- the Federal Ministry of Education, Science, Research and Technology (BMBF) may exploit intellectual property rights from funded research;
-- any licensing of technology outside of the EU requires the written approval of BMBF;
-- preference is given to locating manufacturing facilities in Germany for any production resulting from the research (this criteria can be modified on a case by case basis.)American business representatives indicate that these formal requirements and the administration of the programs by German authorities do not constitute barriers for access to this R&D funding.
Right to Private Ownership and Establishment
Foreign and domestic entities have the right to establish and own business enterprises, engage in all forms of remunerative activity, and to acquire and dispose of interests in business enterprises.
The privatization of state-owned utilities is proceeding apace. In 1998, Germany began to deregulate and privatize its telecommunications sector. Scores of foreign and domestic companies have invested in that sector, although the government continues to hold a 66 percent stake in the former monopolist Deutsche Telekom (DT). Since then, DT has lost about 1/3 of the long-distance market to competitors, but competition is still very limited in local networks. Competition also came to the electricity markets in 1998, but foreign entrants have had major difficulties entering this sector, which is still dominated by the ex-regional monopolists. The Lufthansa privatization has made considerable progress, with many shares already in private hands, but the European Union (EU) requirement that the airline remain majority-owned by EU entities limits the extent of foreign investment. Government regulatory authorities are generally eager to address problems and settle complaints brought forward by some foreign market entrants and bidders.
Protection of Property Rights
The German Government adheres to a policy of national treatment, which considers property owned by foreigners as fully protected under German law. There is no discrimination against foreign investment and foreign acquisition, ownership, control or disposal of property or equity interests. In Germany, the concept of mortgages is subject to a recognized and reliable security. Secured interests in property, both chattel and real, are recognized and enforced.
Intellectual property is well protected in Germany. Germany is a member of the World Intellectual Property Organization (WIPO). Germany is also a party to the major international intellectual property protection agreements: the Bern Convention for the Protection of Literary and Artistic Works, the Paris Convention for the Protection of Industrial Property, the Universal Copyright Convention, the Geneva Phonograms Convention, the Patent Cooperation Treaty, the Brussels Satellite Convention, and the Treaty of Rome on Neighboring Rights.
U.S. citizens and firms are generally entitled to national treatment in Germany with only a few exceptions. The federal government's commitment under the intellectual property rights portion (TRIPS) of the Uruguay Round has further reduced concerns about the level of software piracy. Germany's 1993 implementation of the EU software copyright directive, as well as an educational campaign by the software industry, helped to address this problem.
National treatment is also granted to foreign copyright holders, including remuneration for private recordings. Under the TRIPS agreement, the federal government also grants legal protection for practicing U.S. artists against the commercial distribution of unauthorized live recordings in Germany.
Transparency of the Regulatory System
Germany has transparent and effective laws and policies to promote competition, including anti-trust and unfair competition laws. The German government recognizes that certain aspects of German tax, labor, health, environmental and safety regulations are overly burdensome and impede new investment. The coalition is attempting to address some of these problems with a program of spending, taxation, and regulatory reforms. After reversing some of the recent reforms of the previous government in January and April 1999, in June the cabinet introduced a reform plan focusing on pension and tax reform similar to that of the previous government. If it passes the Bundestag, it will take effect in 2000/2001. Though the program is controversial, some marginal progress is expected in easing some distortions.
The German economy is highly regulated with authority dispersed over the federal, state, and local levels. Many new investors consider bureaucracy excessive, which has prompted most state governments to establish investment promotion offices and investment banks to expedite the process. New rules have simplified bureaucratic requirements, but industry sometimes observes that more could be done.
Taxation of American firms within the FRG is governed by the 1989 "Convention for the Avoidance of Double Taxation with Respect to Taxes on Income." It has been in effect since 1989 (and since January 1, 1991 for area that comprised the former German Democratic Republic.) With respect to income taxes, both countries agree to grant credit to their respective federal income taxes for taxes paid on profits by enterprises located in each other's territory. The German system is more complex, but there are more similarities than differences between the German and American business tax systems.
Efficient Capital Markets and Portfolio Investment
Germany has a modern financial market sector but is often considered "overbanked." For example, it has twice as many bank branches per capita as does the United States. The banking system is sound and healthy. However, it is dominated by public sector financial institutions. The total assets of 3,404 financial institutions that reported in January 1999 were DM 10.5 trillion. The 323 reporting commercial banks accounted for DM 2.5 trillion of this amount. The three largest commercial banks (Deutsche Bank, Dresdner Bank and Commerzbank) accounted for roughly 40 percent of total commercial bank assets.
Credit is available at market-determined rates to both domestic and foreign investors and a variety of credit instruments are available. Legal, regulatory, and accounting systems are transparent and consistent with international banking norms, although the German accounting system is sometimes criticized for being more opaque than the U.S. system. Germany has a universal banking system that is effectively regulated by federal authorities. The Federal Office for Securities Oversight has been in operation since 1995. Germany has also implemented a series of laws to improve its securities trading system, including insider trading laws.
There are "cross-shareholding" and "stable shareholder" arrangements and other measures used by private firms to restrict hostile takeovers. They are directed at all such efforts and not used or designed specifically to discourage foreign investment.
By law, all companies in Germany must have a fluent German speaker on the managing board. Unnecessary red tape is a problem in the financial sector, but according to U.S. firms operating in the market, this problem affects both domestic and foreign firms.
Political Violence
Although in past years there were political acts of violence against both foreign and domestic business enterprises, such events are currently extremely rare. Isolated cases of violence directed at certain ethnic minorities and asylum seekers, have not affected U.S. investments or investors.
Corruption
Germany is among the least corruption-plagued countries of the industrialized world, according to Transparency International, the Berlin-based international "corruption watcher." However, the construction sector, the privatization of former East German enterprises, and the awarding of public contracts represent areas of some continued concern. The European-wide organized crime problem also plays a role in the incidence of corruption. Strict anti-corruption laws apply to domestic economic activity. U.S. firms have not identified corruption as an impediment to investment.
The government deserves credit for continuing its efforts to reduce domestic and foreign corruption. For example, the 1998 OECD Anti-Bribery Convention, which became German law in February 1999, criminalized bribery by German citizens and firms abroad. The Convention also increases penalties for bribery of German officials, for corrupt practices between companies, and, under the law against unfair competition, for price-fixing by companies competing for public contracts. Tax reform legislation that became law on March 31, 1999 de-legalized the tax write-off of bribes (in Germany and abroad), which had been a major, longstanding loophole. Most state governments have contact points for whistle blowing and provisions for rotating personnel in areas prone to corruption. The most active and effective agencies are in Hamburg and Frankfurt/Hessen. Government officials are forbidden from accepting gifts linked to their jobs.
Opinions, however, differ on how much effect these steps will have in practice. German industry opposes creation of a central, national-level register of companies that would be barred from bidding for public contracts. While the German government has successfully prosecuted hundreds of domestic corruption cases over the years, there have been no prosecutions involving the bribery of foreign government officials, politicians, etc. since the 1998 changes in German law.
Bilateral Investment Treaties
Germany has ratified treaties with 108 countries: Albania; Argentina; Azerbaijan, Bangladesh; Belarus; Benin; Bolivia; Bulgaria; Burundi; Cameroon; Cape Verde; Chile; Central African Republic; Cape Verde; Cameroon; Chad; China; Congo; Costa Rica; Croatia; Cuba; Czech Republic; Dominican Republic; Ecuador; Egypt; Estonia; Gabon; Georgia; Ghana; Greece; Guinea; Guyana; Haiti; Honduras; Hong Kong; Hungary; India; Indonesia; Iran; Ivory Coast; Jamaica; Jordan; Kazakhstan; Kirghizstan; Republic of Korea; Kuwait; Laos; Lebanon; Lesotho; Liberia; Lithuania; Macedonia; Madagascar; Malaysia; Mali; Malta; Mauritania; Mauritius; Moldova; Mongolia; Morocco; Namibia; Nepal; Niger; Oman; Pakistan; Panama; Papua New Guinea; Paraguay; Poland; Portugal; Qatar; Romania; Russia; Rwanda; Saudi Arabia; Senegal; Sierra Leone; Singapore; Slovak Republic; Slovenia; Somalia; South Africa; Sri Lanka; St. Lucia; St. Vincent and the Grenadines; Sudan; Swaziland; Syria; Tajikistan; Tanzania; Thailand; Togo; Tunisia; Turkey; Turkmenistan; Uganda; Ukraine; Uruguay; Uzbekistan; Yemen (Arab. Rep.); Yugoslavia; Venezuela; Vietnam; Zaire; and Zambia.
Germany has signed, but not yet ratified, a treaty with the following 20 countries:
Country Signed Temporarily Applicable Algeria 03/11/96 No Antigua and Barbuda 11/05/98 No Armenia 12/21/95 Yes Barbados 12/02/94 No Brazil 09/21/95 No Brunei 03/30/98 No Burkina Faso 10/22/96 Yes Cambodia 02/15/99 No El Salvador 12/11/97 No Gabon (new treaty) 09/15/98 Yes Israel 06/24/76 Yes Kirghizstan (new treaty) 02/15/99 No Mexico 08/25/89 No Barbados 12/02/94 No Zimbabwe 09/29/95 No Armenia 12/21/95 Yes Algeria 03/11/96 No Kenya 05/03/96 No Nicaragua 05/06/96 No United Arab Emirates 06/21/97 NoGermany has initialed, but not yet signed, treaties with Ethiopia (06/14/95); Sri Lanka, New Treaty (05/15/98); and Bosnia/Herzegovina (03/12/99).
OPIC and Other Investment Programs
OPIC programs were available for the New States of Germany following reunification for several years during the early 1990s, but were suspended following the extraordinary achievements in the economic and political transition.
Labor
While employers complain that German wages and fringe benefits are among the highest in the world and above the EU average, the labor force is generally highly skilled, well-educated, and disciplined. Germany's highly acclaimed system of combined on-the-job and academic training for apprentices produces many of the skills employers need, but the system has not kept up with the number of applicants and some say it needs to be made more flexible and responsive to the changing demands of the economy. High unemployment, however, remains the key economic problem in Germany. Legislation designed to protect workers limits the ability of employers to adapt to dynamic market conditions, which requires them to be able to shed redundant workers or modify their workforce makeup. The "Red/Green" coalition has been unwilling to loosen these laws, and has even rescinded small changes made by the former Christian Democratic/Liberal government that were intended to provide employers with somewhat more flexibility. (The former government had raised the threshold of companies covered by the strictest protection regulations from five employees to ten employees.) This change affects an estimated ten percent of the workforce, or 3-4 million people. The Red/Green coalition also rescinded a reduction of the employers' share to employees' sick leave benefits introduced by the former coalition.
Unionized labor (about 35 percent of the labor force) is organized in a few large umbrella unions largely grouped by sector. Labor has traditionally been able to agree with management with relatively few work stoppages. The law limits management recourse to lockouts while "co-determination" laws give the unions significant voting representation on the supervisory boards of large companies and participation rights in company decisions through a well-established network of "works councils." Severance compensation is generous and management latitude to alter its workforce is limited. In order to decrease unemployment, the government has been slowly moving toward a reduction in weekly working time. Weekly working times are the subject of collective bargaining agreements and differ by industry. There is also a discrepancy between the duration of the workweek in the eastern and western parts of Germany.
Foreign-Trade Zones/Free Ports
There are no free trade zones or free ports in Germany.
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[end of document] Note* International Copyright, United States Government, 1998 (or other year of first publication). All rights under foreign copyright laws are reserved. All portions of this publication are protected against any type or form of reproduction, communications to the public and the preparation of adaptations, arrangement and alterations outside the United States. U. S. copyright is not asserted under the U.S. Copyright Law, Title 17, United States Code.
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