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?
|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.
- 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.
- 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.
- 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.
- 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.
The Eurozone's Real-time Gross Settlement (RTGS) system
Pan-European RTGS-equivalent net settlement system
Pan-European net settlement system
Pan-European Automated Clearing House (ACH)
(Single Euro Payments Area)
EU integrated payment infrastructure
Germany's gross settlement system
- 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 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.
- 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.
- 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.
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.