In my practices I often have a situation in which people based abroad in a country outside the European internal market want to set up a GmbH in Germany and act at its managing directors from abroad. This constellation is problematic and may lead to refusal of the company’s registration at the commercial register if all managing directors have permanent residency abroad and are not entitled to permanent residence in Germany.
What are the requirements set by the German company law?
Section 8 Para. 3 of the German law for limited liability companies (GmbHG) requires that when registering the company for the commercial register, the managing directors have to assure that there are no circumstances that affect their appointment. German law assumes that the effective management takes place in Germany. If the management is not legally able to enter the company at any time to perform the management, then this is an obstacle that affects their appointment. In consequence, the requirements set by Section 3 GmbHG are not fulfilled and the commercial register may reject the company’s register application. Not concerned by this are directors which are just domiciled abroad but who are legally able to enter Germany and conduct management actions at any time. This often concerns persons with German citizenship or citizenship of another EU member country and persons with a valid title of residence.
Why and when do directors of a GmbH need to be present in Germany?
As said before, the German law requires that the effective management takes place in Germany. With regard to the German company law, the directors being present is essential for conducting corporate transactions, like selling shares, conducting a capital increase or just for updating the trade register on a change in the company’s articles of associations or a change of business address. Some of those issues can be solved via representation. On other occasions, for example notarization of a resolution on a capital increase, all directors need to be present in person. It can be critical if at such an occasion one director is not available or just not allowed to enter the country.
Approaches for solving Problem: Installing effective management in Germany or application on a residence permit
The usual ways to solve that problem, namely by ensuring that the effective management of the company is based in Germany or making sure, that all directors are entitled to enter the Germany at any time and to stay permanently. This is usually accomplished with a permit of residency, a blue card or a “golden visa”.
Tips from practice
Founders should ask themselves: Is it really necessary for effective management that a number of persons are appointed for director?
Having too many directors or complex rules of representation, which requires multiple to be involved in decision making, usually aggravates the problem. Therefore especially founding shareholders from abroad should critically reflect and potentially revise their intended structure of management for their German GmbH:
There is no doubt that there are good reasons for having more than one director. The common argument used to justify multiple managers is to maintain control and divide up the powers of representation. There are other ways to accomplish this, for example with managing director’s instructions, which oblige the managing director to obtain the shareholders consent prior to certain, previously defined cases and decisions.
The representation of abroad directors that are required for decision making with a power of representation is prone to errors and may lead to liability issues. It also leads to increases of the time required for decision making and comes with increased requirements for control and documentation. All of this does not meet the requirements for efficient management.