Germany

Introduction

 

About Germany

Germany has the largest economy in Europe and is consistently ranked amongst the top five largest economies in the world. Germany also has the largest manufacturing sector in Europe, especially in the manufacture of automobile, machineries, pharmaceuticals and electronics. Additionally, Germany is one of the world's largest exporters, with exports taking up 86% of Germany's GDP.

Low tariffs and low barriers to foreign investment both contribute to the openness of Germany's economy, attributing to Germany's status as an exporting leader.

Germany offers competitive wages, keeping production costs relatively low, and it has a highly skilled workforce. Germany also has a large domestic market with relatively high purchasing power. The German government offers foreign investors free access to investment in all sectors and 100% ownership of business in recognised sectors even if they are in the public domain. All these factors have contributed to Germany's attractiveness to foreign investors.

Germany is located in the middle of Europe, serving as a link between eastern and western Europe and at the same time, providing leverage by accessing markets in several European economies because of its proximity to them.

Currently, Germany is the second largest European investor in China and is China's biggest trading partner in Europe. 

What solutions are available in Germany?

Solution Description
Interest Optimisation Maximise your interest yield from for your balances held with the bank.
Notional Pooling Cash balances in different accounts are notionally offset to derive the net balance, which is then used to calculate interest.
Sweeping/ Zero Balance Account (ZBA) ZBA are checking accounts with zero balances where funds are physically swept to eliminate excess balances and maintain greater control over disbursements.
In-house Banks (IHB) In-house banks provide corporate treasurers with another method of centralising and consolidating their business.
Intercompany loans Similar to bank loans, intercompany loans refer to lending between entities within the same group.

Corporate Treasury in Germany

Germany is the fourth-largest economy in the world and the biggest in Europe. It was one of the founding members of the European Union. Here, we highlight some of the key benefits relevant to treasury and cash management in Germany.

 

Financial market development:

  • The World Economic Forum ranks Germany 18th in the world for financial market development in The Global Competitiveness Report 2015-2016.
  • It ranks Germany 46th in the world for the soundness of its banks. It rates it reasonably highly for capital availability and financing through local equity markets.
  • Germany has excellent business infrastructure, a highly educated multilingual workforce and a sound legal environment.
  • There are no foreign-exchange controls in Germany.

 

Sophistication of banking systems:

  • There are more than 185 banks operating in Germany, of which 103 are branches of foreign banks. There are 54 representative offices of foreign banks in Germany.
  • Germany's foreign-exchange market has an average daily turnover of USD116bn, accounting for 1.8% of global turnover (Bank for International Settlements triennial global survey 2016).
  • Germany's sovereign debt market is one of the largest and most liquid in the world. Corporate bonds are also widely available and account for the majority of bond trading in Germany. Yields on some German government bonds are currently negative.

 

Regulatory bodies:

  • The banking industry is regulated by the Federal Financial Supervisory Authority. As a Eurozone country it is also covered by the Single Supervisory Mechanism. The central bank is the Deutsche Bundesbank.

 

Tax:

  • The Corporate Income Tax rate is 15%, with a surcharge of 5.5% payable on the tax, giving a total CIT rate of 15.82%.
  • Trade tax is charged at a base rate of 3.5% and a municipal tax rate is between 12.6% and 19.25% depending on location. The total tax burden on corporate profits is around 30.2% in Berlin and 33% in Munich.
  • Resident companies pay tax on their worldwide income. Non-resident companies are taxed on German-sourced income.
  • VAT is charged at a standard rate of 19%. Certain goods and services qualify for a lower rate of 7% or are VAT-exempt.
  • Interest income is taxed as corporate income. Interest expenses are tax-deductible at up to 30% of EBITDA. There are some exceptions and the limitation is currently being reviewed by the Constitutional Court.
  • A foreign tax credit is available for foreign tax that has been paid and is not otherwise recoverable.
  • Withholding tax is charged at 25% on dividends and 0% or 25% on interest for resident companies. EU corporations pay WHT at either 0% or 25% on both interest and dividends. Non-resident companies pay a rate of 25% on dividends and 0% or 25% on interest if no tax treaty is in place. Where a tax treaty is in place rates range from 0% to 25% on dividends and interest.
  • Germany has tax treaties with more than 90 countries and territories.
  • Germany is a signatory to the Organisation for Economic Co-operation and Development’s Multilateral Competent Authority Agreement, through which information is exchanged between tax administrations, to provide a single, global picture on some key indicators of economic activity within multinational enterprises.

 

Benefits for regional treasury centres:

  • Germany has a stable economy, with a highly skilled workforce and access to some of the most liquid debt markets in the world.  
  • Cash concentration is available in Germany on both a domestic and cross-border basis. Different legal entities can participate in the same cash-concentration structure.
  • Notional pooling is allowed in Germany on both a domestic and cross-border basis. However, it is less common than cash concentration as banks are not allowed to offset debit and credit balances for regulatory purposes.
  • Germany is a member of the pan-European TARGET2 real-time gross settlement system.
  • It has an extensive tax treaty network.
  • Germany is a Eurozone country with trading hours that overlap with Asia, Europe and North America.

 

Banking

Banking System

  • There are 1,888 credit institutions in Germany, of which 381 are commercial banks (including foreign banks) and 110 are branches of foreign banks.
  • Germany has the largest banking sector (in absolute terms) in the European Union (EU) and a comparatively large number of banks.
  • The German banking sector is dominated by four big banks: Deutsche Bank, Commerzbank, KfW Bankgruppe and DZBank. Deutsche Bank, however, is by far the largest German bank, despite suffering badly in the global financial crisis, with EUR 1.7 trillion in assets (2016). The bank is also a leading international bank; although it has dropped in ranking in recent years, it continues to be in the top 10 banks globally.

 

Bank Accounts

  • Residents may hold foreign exchange and domestic currency accounts both domestically and overseas, whereby domestic currency accounts are freely convertible into foreign currency.
  • Non-residents may hold foreign and domestic currency accounts, whereby domestic currency accounts may be held overseas and are freely convertible into foreign currency.
  • Interest is available on current and savings accounts.

 

Legal and Regulatory

  • Deutsche Bundesbank (Bundesbank) is an autonomous institution and a member of the European System of Central Banks (ESCB).
  • The Federal Financial Supervisory Authority (Bundesanstalt Finanzdienstleistungsaufsicht) (known as BaFin) oversees the banking sector.
  • The European Central Bank (ECB) supervises banks within the Eurozone that are regarded as 'significant' through the Single Supervisory Mechanism (SSM), and other 'less significant' banks are supervised by the national central bank, in this case, BaFin with the Bundesbank.
  • There are no foreign-exchange controls in place.
  • Germany is one of the founding members of the EU.
  • A company is resident if it is registered (as a corporation or branch) in Germany or is headquartered in Germany.
  • Germany has anti-money laundering and counter terrorism financing legislation in place, and follows EU anti-money laundering directives.
  • Germany has set up a financial intelligence unit, the Zentralstelle  Verdachtsanzeigen, which operates within the Federal Criminal Police Office (Bundeskriminalamt), and is a member of the Egmont Group.
  • Individuals entering or leaving the EU are required to declare currency of EUR 10,000 to customs.

 

Payments

 

Payment Systems

TARGET2

The Eurozone's Real-time Gross Settlement (RTGS) system

  • Operates on behalf of the Eurosystem.
  • Three Eurosystem central banks - Banca d'Italia, Banque de France and Deutsche Bundesbank, provide the Single Shared Platform (SSP) of TARGET2.
  • Processes high-value and urgent EUR-denominated domestic and cross-border credit transfers.
  • Activates final settlement of participants' net balances from STEP2 (pan-European Automated Clearing House)(see below).
  • Settles transactions in real time and with immediate finality.
  • Transactions are processed electronically using SWIFT.
  • Final settlement is done across participant banks' correspondent accounts held at the SSP.
  • Domestic transfers can be facilitated by Bundesbank's KTO2 home account module, which activates final settlement of participants' net balances from the EMZ (see below).  
  • Germany has 212 direct participants. Banks are not permitted to participate in TARGET2 indirectly through the Bundesbank.

 

EURO1

Pan-European RTGS-equivalent net settlement system

  • Operated by Euro Banking Authority (EBA) Clearings.
  • Processes high-value (no maximum value threshold) and urgent Euro-denominated domestic and cross-border payments.
  • Payments processed with immediate finality and are irrevocable.
  • Germany has 14 participant banks.

STEP1

Pan-European net settlement system

  • Operated by EBA Clearings.
  • Processes low-value (no minimum value threshold) and non-urgent Euro-denominated commercial payments.
  • STEP1 is open to all banks in the EU and has access to EURO1 platform.

 

STEP2

Pan-European Automated Clearing House (ACH)

  • Operated by the EBA Clearings.
  • Processes low-value, non-urgent and bulk Euro-denominated retail payments.
  • Provides straight-through processing for interbank transactions.
  • Settlement done same or next day, depending on time of submission.
  • A pan-European real-time infrastructure for EUR-denominated transactions is under development by EBA Clearing and Italy's SIA Group (one of the operators of STEP2).
  • Cross-border transactions can be processed through SWIFT and overseas correspondent banks.
  • Germany has six participant banks.

SEPA

(Single Euro Payments Area)

EU integrated payment infrastructure 

  • Pan-EU standardised electronic payment system, set up for settlement of EUR-denominated credit transfers and direct debits.
  • Not applicable to urgent, high-priority transactions. There is no value threshold.
  • Jurisdictional scope of SEPA is the 28 EU member states plus Iceland, Norway, Liechtenstein, Switzerland, Monaco and San Marino.

 

EMZ

(Elektronischer Massenzahlungsverkehr)

Germany's gross settlement system

  • Owned and operated by the Bundesbank.
  • Proprietary clearing systems are operated by Deutsche Postbank, savings banks and cooperative banks.
  • EMZ processes cross-border EUR-denominated payments, which is linked to STEP2 through the Bundesbank. Also can be processed through EURO1.
  • Cross-border payments can use SWIFT messaging and settle through accounts with correspondent banks overseas.
  • Also interoperable with other countries' retail payment systems, allowing participants to clear payments directly.
  • EMZ participants can clear SEPA credit transfers and direct debits through selected European payment and clearing systems.
  • Final settlement is done through TARGET2.
  • Cross-border EUR-denominated payments and foreign currency can be processed through the Bundesbank's Customer Access Mechanism (CAM).
  • CAM provides access to the Bundesbank's banking network of over 100 countries.
  • CAM-Individual processes same-day EUR credit transfers in Germany or European Economic Area (EEA) member-states and third countries, and foreign currency credit transfers in EEA member states and third countries.
  • CAM-SEPA processes domestic and cross-border SEPA credit transfers and SEPA direct debits for account holders without a bank sort code.
  • CAM-IMPay processes EUR credit transfers from public administrations and private legal entities initiated in EEA member-states and third countries.
  • There are approximately 175 direct participants.
  • Domestic and cross-border low-value, non-urgent and bulk EUR-denominated electronic payments (credit and debit transfers and truncated cheques) can be processed through EMZ. There are no value thresholds.
  • Orders using SWIFT or DTA electronic formats are sent through the SWIFTNet FileAct communication protocol or domestic FTAM and OFTP data telecommunication protocols.
  • XML-based payments in SEPA message formats are sent through the Electronic Banking Internet Communication Standard (EBICS) protocol.
  • Cheques above EUR 6,000 are truncated into electronic images and cleared through the large value cheque collection (ISE) process on the online ExtraNet medium.

 

 

 

Payment Instruments

 

Credit transfers:

  • Credit transfers are automated in Germany.
  • Credit transfers made up 30.5% of total cashless payments (2015).
  • High-value and urgent credit transfers are settled through TARGET2 in real time.
  • Low-value and non-urgent SEPA credit transfers are processed through EMZ, between banks or through savings and cooperative banks' networks.
  • Low-value credit transfers are used for payroll, supplier and third-party payments.
  • The SEPA Credit Transfers (SCT) scheme is used for retail transactions and is available for urgent and high-priority payments (no maximum threshold) within the SEPA.  There are approximately 1,690 participant banks in the scheme in Germany.

 

Direct debits:

  • Direct debits are used for low-value, regular payments such as utility bills.
  • Direct debits made up 50.6% of total cashless payments (2015).
  • SEPA direct debits are processed same or next day through EMZ. They may also be processed between banks or through savings and cooperative banks' networks.

 

Cheques:

  • Cheque usage is in rapid decline (comprised 0.1% of total cashless payments in 2015), being fast-outpaced by electronic transactions.
  • Cheques are truncated into electronic images through the paperless cheque collection (BSE) process and then cleared through EMZ.
  • Cheques above EUR 6000 are truncated into electronic images and cleared through the large value cheque collection (ISE) process on the online ExtraNet medium.

 

Card payments:

  • Payment cards are becoming increasingly popular, especially debit cards.
  • Payment cards made up 18.6% of total cashless payments and there were 139 million payment cards in circulation (2015).
  • The main payment card brands are Visa and MasterCard, although American Express and Diners Club credit cards also have a presence. All payment cards are SEPA- and EMV-compliant.
  • Debit card payments are processed through EMZ and credit card payments through their own international card schemes.
  • There are 85,890 ATMs in Germany which are EMV-compliant. 

 

Other payment schemes:

  • Cash is still a very popular form of payment for low-value retail and commercial transactions.
  • There are many electronic money and ewallet schemes. Geldkarte is an emoney card system available through girocards, which are reloadable prepaid cards and can be used at Geldkarte emoney terminals. Emoney payments are processed through EMZ. There are 93.6 million Geldkarte cards in circulation and 491,050 terminals.
  • Mobile phone payments are quite new in Germany and have only recently been introduced by Deutsche Bank.

 

Demographics

Recent developments

 

German stock exchange mulls Bitcoin futures

Deutsche Boerse is reported to be considering offering its own Bitcoin futures contracts. The move would make Germany the first European country to provide futures for the cryptocurrency. Meanwhile, Germany has joined other European governments in pushing for global Bitcoin regulation. The country’s Finance Ministry said it welcomed a proposal by France to ask G20 countries to consider joint regulation of the cryptocurrency.

Read more about this development here

 

WeChat Pay launched at airport

China’s WeChat Pay is set to be accepted at Munich Airport following a tie up between technology company Wirecard and Eurotrade, which operates 70 shops at the airport. The move will see Eurotade become the first company in Germany to accept WeChat Pay. WeChat Pay is part of Chinese internet company Tencent. It has more than 600 million active users each month and a 40% market share in terms of payment volume in China.

Read more about this development here

 

German consumers favour cash

Consumers in Germany are continuing to show a strong preference for cash. They used cash for transactions worth approximately EUR649.6bn in 2016, amounting to 20.7% of GDP, according to PYMNTS Global Cash Index. The proportion was the sixth highest for countries in Western Europe, and significantly above the 7% for neighbouring France and 7.1% for the Netherlands. But as younger consumers adopt alternative payment methods, the proportion of cash transactions has fallen slightly as a percentage of GDP, dropping by an average of 2.1% a year between 2007 and 2016.

Read more about this development here

 

 

This Market Profile is brought to you by DBS. Get in touch with us for further insights on doing treasury in Germany and take advantage of our innovative solutions to empower your business. Click here to find out more.

 

 

Sources: IMF World Economic Outlook database, October 2016; CIA World Factbook; Trading Economics; PwC

Please note that the information contained in this document, assembled based on information available and accurate as at July 2017, is of a general nature only and is subject to change whether for economic, political, social or other reasons.

 

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Last updated on 22 Feb 2018