Investing in Germany
January 10, 2024
Andreas Katz, Senior Associate Partner at Kreston Bansbach shares his view of the market and key insights on investing in Germany in 2024.
Germany is regarded as the European powerhouse of innovation and industrial strength. The first half of the decade has challenged that long-held accolade, with sluggish growth over the last 3 years caused by a struggling manufacturing industry. However, as we step into 2024, the dynamics of doing business in Germany are shifting, marked by new challenges and opportunities.
From China to Europe
One of the key questions facing businesses today is whether to pivot away from China towards European suppliers to protect their value chain. Katz notes, “Our clients at Bansbach, mostly medium-sized groups…often contract with third-party suppliers within Europe to save on logistics costs. Subsidiaries of these medium-sized groups in Asian countries like China are often focused on sales activities and limited assembly work and not on production. While certain clients have pivoted away from certain countries like China within their supplier base now that political risks are more heavily weighted, this is not a major trend within our client base at Bansbach.”
This trend underscores a strategic shift towards localisation, leveraging the proximity and cost advantages within the European Union. However, Katz also clarifies, “While certain clients have pivoted away from countries like China…this is not a major trend within our client base at Bansbach.” This suggests that while some businesses are diversifying their supplier base, the shift isn’t widespread, emphasising a more nuanced approach to supply chain management.
Transfer pricing in Germany
A significant aspect of doing business across borders, Katz points out an increase in transfer pricing-related tax audit issues, stating, “We expect this trend to continue and that transfer pricing issues will often be the main focus in tax audits.” He warns of the financial risks associated with non-compliance, “In case the transfer pricing set-up of a group is not compliant with the applicable international and national standards and a group does not actively monitor its transfer pricing, findings in these tax audits can quickly amount to very significant amounts.”
Katz underscores the need for businesses to “actively monitor its transfer pricing.” His advice is clear – ensure compliance with international and national standards to mitigate the risk of significant financial repercussions.
The energy landscape has always been a cornerstone of industrial activity, and recent geopolitical events have brought this into sharp focus. Katz highlights the impact of the Russia-Ukraine war on energy prices, a challenge particularly for energy-intensive industries. He notes, “The loss of [cheap energy from Russian gas] is a major challenge that may very well be one of the defining issues for German industrial development for years to come.” This situation demands strategic foresight from businesses, particularly in planning for energy cost fluctuations and exploring sustainable alternatives.
Advice for investing in Germany in 2024
For businesses looking to expand into Germany, Katz offers a word of caution and guidance. “Ensure that they are compliant with transfer pricing regulations and actively manage their transfer prices,” he advises, “Given that it is not always possible to resolve resulting double taxation with all countries this may lead to final double taxation and therefore is a significant financial risk.”