Germany

Introduction

 

About Germany

Germany has the largest economy in Europe and is consistently ranked amongst the five largest economies in the world. Germany also has the largest manufacturing sector in Europe, especially in the manufacturing sectors of automobiles, machinery, pharmaceuticals and electronics. Additionally, Germany is one of the world's largest exporters, with exports making up approximately half of Germany's GDP.

Low tariffs and low barriers to foreign investment both contribute to the openness of Germany's economy and its status as an export 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. According to the government’s Foreign Direct Investment (FDI) policy, foreign investors are granted the extra incentive of free access to investment in all sectors and 100% ownership of businesses, even in sectors such as telecommunications that are part of 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, with close proximity to several key European economies.

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

 

Germany Treasury Management Market Profile Infographic_Small

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 12th in the world for financial market development in The Global Competitiveness Report 2017-2018.
  • It ranks Germany 53rd in the world for the soundness of its banks. It rates it sixth for venture capital availability, eighth for financing through local equity markets and tenth for ease of access of loans.
  • 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 1,700 public, private and cooperative banks operating in Germany, including close to 200 domestic and foreign commercial banks. There are 58 representative offices of foreign banks in Germany.
  • Germany's foreign-exchange market has an average daily turnover of USD116 billion, 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. Outstanding debt securities were valued at USD3.712 trillion at the end of 2017. 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 15.825%.
  • Trade tax is charged at a base rate of 3.5% with a location-dependent municipal tax levied on top.
  • Resident companies are taxed on their worldwide income whilst non-resident companies are taxed on their German-sourced income. There is no branch profits remittance tax on the remittance of profits to the head office by the branch of a foreign company.
  • Interest income is included as part of taxable income and taxed at the corporate income tax rate. Interest expenses are tax-deductible at up to 30% of EBITDA for corporate income tax and trade tax purposes. There are some exceptions to the interest limitation rules and it should be noted that the limitation is currently being reviewed by the Constitutional Court.
  • The standard rate for Value Added Tax is 19% with certain goods and services qualifying for a lower rate of 7% and others VAT-exempt.
  • A real estate transfer tax is applicable on the consideration of conveyances of German properties and indirect transfers from the acquisition of at least 95% of shares in property-owning companies. The rates vary in accordance to the provinces (3.5% to 6.5%). There are some exceptions to the application of such taxes.
  • Withholding tax (WHT) is charged at 25% on dividends and 0% or 25% on interest payable to resident companies. For EU companies, WHT is set at either 0% or 25% on both dividends and interest. WHT at the rate of 25% on dividends and 0% or 25% on interest is charged for payments to non-residents if no tax treaty is in place. Where a tax treaty is in place and the non-resident can provide the Certificate of Residence, 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 more than 1,500 public, private and cooperative banks operating in Germany, including close to 200 domestic and foreign commercial banks. There are 58 representative offices of foreign banks in Germany.
  • Germany has the largest banking sector (in absolute terms) in the European Union and a substantial number of credit institutions (the largest network in Europe). Although consolidation has lowered the number of banks in recent years, Germany still supports more banks per person than any other developed country.
  • The banking system can be divided into three pillars: the first consists of around 200 private commercial banks; the second is made up of about 400 publicly-owned savings banks; and the third pillar comprises roughly 900 member-owned cooperative banks or credit unions.
  • Holding 40% of total assets, the private banking sector is the largest by assets and is dominated by four main banks: Deutsche Bank, Commerzbank, KfW Bankgruppe and DZBank. Deutsche Bank, however, is by far the biggest German bank, whose size and reach increased when it merged with its consumer banking unit Postbank. Operating in over 50 countries, Deutsche Bank continues to rank as one of the top 20 banks worldwide.

 

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 or 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), while 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 EUR10,000 to customs.

 

Payments

On 13 January 2018, the revised Payment Services Directive (PSD2) was scheduled to become law across all EU Member States. A revision of the initial PSD adopted in 2007, PSD2 updates and enhances the legal framework for payment systems across the European Economic Area (EEA) single market, to be supervised by the European Banking Authority. Supplemental regulatory technical standards are also being rolled out, from March 2018 to September 2019, to address issues of authentication, monitoring and API (application programming interface) standardisation.

The main objective of PSD2 is to provide enhanced consumer security in the developing financial technology (fintech) environment i.e. for electronic payments such as mobile payments, credit transfers, online payments and direct debits. 

Measures include:

  • Prohibition of surcharges on credit/debit card payments.
  • Imposition of strict security requirements including the protection of financial data.
  • Increased competition between European payment service providers.
  • Greater consumer rights such as ‘no questions asked’ refunds on direct debits in euros.

 

Payment Systems

EMZ

(Elektronischer Massenzahlungsverkehr)
Germany's gross settlement bulk payment 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 EURO credit transfers in Germany or 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 EUR6,000 are truncated into electronic images and cleared through the large value cheque collection (ISE) process on the online ExtraNet medium.

SEPA

Single Euro Payments Area
Pan-European payment infrastructure
  • Initiated by the EPC (European Payments Council).
  • Operates a common set of payment instruments, infrastructures, procedures and standards for euro transactions within Europe. 
  • Electronic retail payments within SEPA are regarded as domestic payments.
  • SEPA is not applicable to urgent, high-priority payments or cheques.
  • SEPA countries include 28 European Union (EU) member states and four European Free Trade Association member states (Iceland, Liechtenstein, Norway and Switzerland).
  • A Europe-wide legal framework for payments, PSD2, was launched in 2016, which essentially provides security for electronic payments inside and outside of the EEA.
  • There are two SEPA payment instruments: SCT Inst and SDD (see below).

SCT Inst

SEPA Instant Credit Transfers
Pan-European instant payments system
  • Operated by the EPC.
  • 585 participants
  • Launched in November 2017, this scheme provides EUR-denominated credit transfers up to a maximum of EUR 15,000 within 10 seconds. Available 24/7, year round.
  • Currently there are eight participating countries: Austria, Estonia, Germany, Italy, Latvia, Lithuania, the Netherlands and Spain. The network will progressively cover all 34 European countries with access to SEPA.
  • Corresponding national systems were phased out in 2016.

SDD

SEPA Direct Debits
Pan-European direct debit system
  • Operated by the EPC.
  • 585 participants.
  • There are two types of SDD: SDD Core for consumers and SDD B2B for businesses.
  • Operates whereby the payer has to give approval via a mandate provided by the biller electronically or on paper. Otherwise known as creditor-driven mandate flow.
  • Corresponding national systems were phased out in 2016.
RT1 Pan-European real-time EUR credit transfer system
  • Operated by EBA (Euro Banking Association) Clearing, which also operates EURO1, STEP1, STEP2 and Italy's SIA Group (one of the STEP2 operators).
  • Launched in 2017.
  • 28 participants.
  • A pan-European real-time infrastructure for EUR-denominated SEPA transactions.
  • Supports transactions compliant with SCT Inst scheme.
  • Messaging is in line with ISO 20022 or SWIFT FIN standard.

TARGET2-BBk

(Trans-European Automated Real-time Gross Settlement Express Transfer system)

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).
  • 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. 
  • 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 EBA Clearing.
  • Processes high-value (no maximum value threshold) and urgent euro-denominated domestic and cross-border payments.
  • Payments processed with immediate finality and are irrevocable.
  • Operates SWIFT messaging.
  • Germany has 14 participants.

STEP1

Pan-European net settlement system

  • Operated by EBA Clearing.
  • 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.
  • Operates SWIFT messaging.

STEP2

Pan-European Automated Clearing House (ACH)

  • Operated by EBA Clearing.
  • 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.

 

 

Payment Instruments

 

Credit Transfers

  • Credit transfers are automated in Germany and are becoming steadily more popular.
  • 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 over 4,500 payment service providers in the SEPA scheme.

 

Direct Debits (auto debits)

  • Direct debits (Lastschrift) are becoming more common and are used for low-value, regular payments such as utility bills. There are two types of direct debit: Einzugsermächtigung is the most common and allows a payer to authorize a payee to debit his or her account; and Abbuchungsauftrag where the payer authorizes the bank to honour direct debit requests from a named payee.
  • 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.

 

Card Payments

  • With cash still hugely popular, credit and debit card (Eurocheque-Karte) purchases make up about a quarter of the country’s overall POS transactions. Debit card usage, especially with contactless (tap and go) payment cards, is slowly on the increase, limited partly by the lack of a card payment infrastructure at the retail and small business level. Overall, however, card payments lag well behind the average of other EU countries.
  • The main payment card brands are Visa and MasterCard, although American Express and Diners Club credit cards also have a presence. The domestic debit cards (girocards) are the most common payment card. 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.

 

Online Payments

  • Germany does not have regulations applicable specifically to the financial technology (fintech) sector. Relevant licenses and requisite criteria vary according to the fintech product and the industry in which it intends to operate. However, BaFin supports innovation in the sector and has undertaken measures to provide guidance and supervision to fintech companies.
  • The EU launched an ‘action plan on Fintech’ in 2018 that broadly sets out its approach, to be rolled out gradually. The areas of focus are: to encourage innovative business models; to support technological development in blockchain, artificial intelligence and cloud services; and to increase cybersecurity and protect the integrity of the financial system.
  • Germany has been relatively slow to move over to electronic payments, especially compared to other European countries and given its strong economic position in the EU. The situation is due in part to the limited availability of an electronic payment infrastructure, as well as bureaucratic, historical and cultural factors that have hindered the move to a cashless society.
  • Mobile banking technology is only starting to roll out this year, with the exception of Deutsche Bank which now offers mobile payments through its app. Digital wallets such as Samsung Pay, Apple Pay and AliPay are available, but their use is limited, and those offered by German banks are likely to have greater appeal as the technology becomes more popular. 
  • Geldkarte is an e-money card system available through girocards, which are reloadable prepaid cards and can be used at Geldkarte e-money terminals. E-money payments are processed through EMZ.

 

Digital Currencies

  • Germany has an active market in cryptocurrencies. BaFin supervises the market in the absence of specific cryptocurrency regulation. The government requires German-based crypto traders to follow the same anti-money laundering regulations as other financial service providers.
  • An ongoing national risk analysis on cryptocurrencies is scheduled to be completed in 2019.
  • The EU’s overall view of bitcoin is that “no member state can introduce its own currency”. Cryptocurrency exchanges are legal, depending on the country, and should be under the Anti-Money Laundering Directive, according to the European Commission.
  • The German government is currently coordinating with France on a joint proposal to regulate the bitcoin cryptocurrency market (Reuters).

 

Cash, Cheques and Money Orders

  • Cash is still a very popular form of payment for low-value retail and commercial transactions, with 74% of transactions paid in cash in 2017, according to the Bundesbank.
  • Cheque usage is in rapid decline, 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 EUR6,000 are truncated into electronic images and cleared through the large value cheque collection (ISE) process on the online ExtraNet medium.
  • Traditional remittance services such as Western Union and MoneyGram are available for domestic and international transfers.

 

Demographics

Germany Treasury Management Market Profile_Infographic

 

1 (Main) reduced and zero-rated VAT for certain goods and services

2 (Progressive) max rate on incomes over EUR256,304 for single taxpayers

 

Recent developments

 

Consortium Pushes Mobile Payments

A new consortium has been formed in Germany to help drive take-up of mobile payments. The consortium, whose members include Google, Mastercard, Visa, Wirecard and consultancy firm the EHI Retail Institute, aims to help consumers understand mobile payments better and offer advice to businesses on best practice when offering the payment channel. Contactless cards currently account for just 10% of retail payments, with more than half of transactions in Germany still made in cash.

Read more about the development here

 

Online Retailers to Accept Digital Currencies

Up to 25,000 online retailers in Germany could accept digital currencies for payments from next year. German e-commerce solutions provider Gambio.de has established a partnership with Swiss startup UTRUST to enable online merchants to accept cyrptocurrencies as payment, while receiving fiat currencies in their bank accounts. UTRUST customers will also have access to digital wallets that allow them to make zero-fee transactions. The service is expected to make using digital currencies for online payments as easy and secure as using PayPal.

Read more about the development here.

 

Germany Emerges as Blockchain Hub

Germany is emerging as a major blockchain hub with a dynamic cryptocurrency community. Berlin now has 120 blockchain startups, according to data from consulting firm LSP Digital. Germany’s second largest stock exchange, Borse Stuttgart Group, is also set to launch a platform for initial coin offerings (ICO), as well as trading and storage facilities for cryptocurrencies. The move will help to standardise ICOs and make the process more transparent.

Read more about the development here

 

 

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Sources: IMF, World Economic Forum, PwC, Bank for International Settlements, Federal Financial Supervisory Authority, Deutsche Bundesbank, European Central Bank, OECD.

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Last updated on 14 Jan 2019