Germany Market Profile - Treasury Management | DBS Corporate Banking

Corporate Treasury & Cash Management in Germany

At a glance

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, and is especially strong in the areas of automobiles, machinery, pharmaceuticals and electronics. Additionally, Germany is one of the world's largest exporters, with exports making up nearly half of Germany's gross domestic product (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. Although Germany has recently tightened its Foreign Direct Investment (FDI) rules, foreign investors are still granted access to all sectors and allowed 100% ownership of businesses, even in sectors such as telecommunications that are part of the public domain. All of these factors have contributed to Germany's attractiveness to foreign investors. 

Germany is centrally located in Europe, serving as a link between eastern and western Europe, with close proximity to several key European economies. Germany’s biggest export partners are the US, China and France.

Corporate Treasury in Germany 

As one of the founding members of the European Union (EU), Germany is the fourth-largest economy in the world and the biggest in Europe. In this section, we highlight some of the key factors relevant to treasury and cash management in Germany. 

Financial Market Development 

Frankfurt is ranked 9th in the 2021 Global Financial Centres Index by Z/Yen Group.
Germany has an excellent business infrastructure, a highly educated multilingual workforce and a sound legal environment. 
There are no foreign-exchange controls in Germany. 
Germany aims to become a global leader in sustainable finance. Under the Sustainable Finance Strategy, the government will increase its issuance of green bonds, reallocate EUR9 billion of pension and welfare funds to green investments, and create a traffic light system for investors.

Sophistication of Banking Systems 

There are more than 1,500 public, private and cooperative banks operating in Germany, including close to 200 domestic and foreign commercial banks. 
Germany's foreign-exchange market has an average daily turnover accounting for 1.5% of global turnover, according to the Bank for International Settlements.
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 USD4,287 billion at the end of December 2020. Yields on some German government bonds are currently negative.

Regulatory Bodies 

The banking industry is regulated by the Federal Financial Supervisory Authority (BaFin). As a eurozone country, it is also covered by the Single Supervisory Mechanism (SSM). The central bank is the Deutsche Bundesbank (Bundesbank).

Tax 

The corporate income tax (CIT) 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 earnings before interest, taxes, depreciation and amortisation (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 (VAT) is 19%, with certain goods and services qualifying for a lower rate of 7% and others VAT-exempt.
Capital gains on the disposal of business assets are treated as ordinary income. 
Withholding tax (WHT) is charged at 25% on dividends and 0% or 25% on interest for 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 a Certificate of Residence, rates range from 0% to 20% on dividends and from 0% to 25% on interest. 
Germany has tax treaties with more than 95 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 eurozone country with trading hours that overlap with Asia, Europe and North America.

Banking

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

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 SSM, while other 'less significant' banks are supervised by the national central bank, in this case, BaFin with the Bundesbank.
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.

Payments

The Payment Services Directive (PSD2), law across all EU Member States, provides 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

Elektronischer Massenzahlungsverkehr (EMZ)	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 (pan-European Automated Clearing House) through the Bundesbank. Can also be processed through EURO1. Cross-border payments can use Society for Worldwide Interbank Financial Telecommunications (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 Single Euro Payments Area (SEPA) credit transfers and direct debits through selected European payment and clearing systems. Final settlement is done through TARGET2.
SEPA Single Euro Payments Area	Pan-European payment infrastructure	Initiated by the European Payments Council (EPC). 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 EU member states and four European Free Trade Association member states (Iceland, Liechtenstein, Norway and Switzerland). A Europe-wide legal framework for payments, the Payment Services Directive Two (PSD2), provides security for electronic payments inside and outside of the European Economic Area (EEA). There are two SEPA payment instruments: SCT Inst and SDD (see below).
SEPA Instant Credit Transfers (SCT Inst)	Pan-European instant payments system	Operated by the EPC. 585 participants. 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.
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 business to business (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.
RT1	Pan-European real-time EUR credit transfer system	Operated by Euro Banking Association (EBA) Clearing, which also operates EURO1, STEP1, STEP2 and Italy's SIA Group (one of the STEP2 operators). 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 Financial Telecommunication (FIN) standard.
TARGET2-BBk (Trans-European Automated Real-time Gross Settlement Express Transfer system)	RTGS for the eurozone	Operates on behalf of the Eurosystem. Three Eurosystem central banks – Banca d’Italia, Banque de France and Deutsche Bundesbank – provide the 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 217 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. 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 (PE-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 within the same day or the 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, the most common, allows a payer to authorise a payee to debit his or her account. Abbuchungsauftrag allows a payer to authorise the bank to honour direct debit requests from a named payee.
SEPA direct debits are processed within the same or the next day through EMZ. Debits may also be processed between banks or through savings and cooperative banks' networks.

Card Payments

With cash still hugely popular in Germany, credit and debit card (Eurocheque-Karte) purchases make up about a quarter of the country’s overall point of sale (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, equating to only 0.6% of non-cash payment value and 28.7% of non-cash payment volume in Germany in 2020.
Nevertheless, recent years have seen a 5% annual increase in card usage.
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 Europay, MasterCard and Visa (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 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.
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.
Nevertheless, e-commerce (worth EUR73 billion) and mobile commerce (worth EUR19.7 billion) channels have seen a 10-15% increase in usage per year over the last few years.
Mobile banking technology only started rolling out recently, with the exception of Deutsche Bank which 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. From the beginning of 2020, cryptocurrency businesses have to apply for an operational license from BaFin, in accordance with new anti-money laundering regulations.
A national risk analysis on cryptocurrencies is currently ongoing.
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.

Cash, Cheques and Money Orders

Cash is still a very popular form of payment for low-value retail and commercial transactions. However, there has been an annual decline in cash use of 1-2% across all age groups in recent years, resulting in an increase in card and digital payments.
Cheque usage is in rapid decline, being quickly 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.

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Sources (Intro & Corporate Treasury):
IMF, World Economic Forum, PwC, Bank for International Settlements, Federal Financial Supervisory Authority, Deutsche Bundesbank, European Central Bank, OECD.

Sources (Banking & Payments):
DBS, Association for Financial Professionals, BaFin, European Central Bank, Finance Magnates, McKinsey & Company, J.P. Morgan, Reuters.