Caution when setting up a business in another EU country
In the recent past, Estonia and Liechtenstein have surfaced as enticing locations for the initiation of companies, especially within the realm of innovative finance and cryptobusiness models. These nations lure entrepreneurs with their sophisticated digital infrastructure and the allure of granting licenses swiftly, effortlessly, and economically.
However, a closer look reveals that the decision against Germany is often not the best choice.
Regulatory obstacles and legal ambiguity due to diverse interpretation practices
Companies established in an EU or EEA state, intending to provide financial services or crypto-related businesses in Germany, are fundamentally subject to the identical EU-wide harmonized regulatory requirements as German companies. Nevertheless, conventional and divergent interpretation practices in member states pose numerous, often time-consuming and expensive challenges that German companies can evade.
Different national legal systems and supervisory practices may lead to complications, particularly when disputes occur. Therefore, seeking advice from lawyers specializing in German supervisory law is imperative.
Tax implications and substance requirements
Tax consequences form another significant consideration. Despite Estonia’s promotion of its low corporate taxes, income accrued in Germany typically falls under German income taxes. Consequently, establishing a company in a low-tax country does not necessarily result in an optimized tax rate.
Non-recognition of mailbox companies
Furthermore, both the BaFin and German tax authorities may treat a company with a foreign seat predominantly operating domestically as a domestic company. Mere mailbox companies in Liechtenstein or Estonia, which cannot prove sufficient economic substance in the founding country, are not recognized for supervisory and tax purposes. Recognition requires a sustainable economic activity in the founding country. This is indicated by the number of resident customers in relation to the total, and the need for actual office space and personnel in the founding country, escalating the overall effort and cost.
Absence of proximity to the German market
Lastly, a local presence in Germany often proves crucial for financial and crypto start-ups. Customers tend to trust a company in Germany with a German license more readily. Moreover, establishing a personal contact with customers, partners, and particularly authorities from a distance can be challenging.
Conversely, a licensing procedure in Germany offers many advantages:
- Legal certainty through the supremacy of the primary legal system
- Trust and communication advantage with financial supervisory and tax authorities
- Proximity to customers and business partners
- Consultation and support from specialized lawyers and tax advisors
- Funding and support for innovative start-ups
Cyprus, Malta, Lithuania
Countries such as Lithuania, Cyprus, Malta, or the Netherlands are often promoted as attractive locations for financial and crypto business models, boasting favorable regulatory conditions and low tax rates. For these countries too, the risk exists that companies with only minimal physical presence will not be recognized by German supervisory and tax authorities as genuine business establishments. This can result in unanticipated tax liabilities and additional regulatory obstacles.
In contrast, Germany provides a clear and stable legal situation that ensures long-term security and trust — a critical factor for sustainable success in the finance and crypto business.
Quality paves the path to success
While the authorization process in Germany may appear somewhat more complex, a German license proves beneficial in the long run for companies primarily targeting the German market. With the right guidance, financial and crypto business models can also be successfully and legally implemented in Germany.
How WINHELLER Can Assist You
We:
- Guide you in structuring your business idea from a supervisory and tax perspective and assist you in implementing your unique path
- Facilitate the formation of your company
- Support you during a licensing procedure and prepare the necessary documentation
- Advise and draft the required contract bases for you
- Handle communication with financial supervisory and tax authorities
- Advise and assist you in maintaining proper business organization
- Undertake the external compliance, money laundering, and/or data protection officer function
While Estonia or Liechtenstein might seem appealing at first glance, a closer look often reveals that the drawbacks frequently outweigh the benefits for German founders. If you want to tap into the German financial and crypto market in the long term, you are on the safe side by founding a company in Germany. Our team of specialized banking supervisory attorneys is prepared to guide you on this journey.
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