Entering German Market

During the last decade German economy is stagnating, or even decreasing. One of possible reasons is the lack of entrepreneurship in German companies. Old companies usually are too big and unwilling to change something inside, thus German government decided to support establishment of new small and medium enterprises. New agenda 2010 introduces the strategy for Germany to recover the economy and become even more competitive. In the article "Starting your business with subsidies" in Invest in Germany magazine is written that there are more than 3000 incentive programs available for investors. The program is financed by the federal government, the states and international organizations, including the European Union. The aid is available for business start-ups in a way of funding and consulting. Additional support is proposed to other investment, research and development, and training, as well as improve and protect the environment. The aid comes in the form of investment premiums, additional capital allowances, regional support and special credit programs.

Subsidies are the main form of support. Bigger subsidies are applied for new - Eastern states and for other incentive areas. Incentive areas mean that economy there should be encouraged, industry is not as developed and investors need additional incentives to choose these areas but not more developed ones. Distribution of these subsidies is generally subject to approval by the European Union.

One of the programs to finance investment is Joint Agreement program. Cash grants approved and paid to investors under this program during 1999 - 2001 were 8.6 billion euros, and the budget for 2002 - 2006 is 8.1 billion Euros (http://www.state.gov/e/eb/ifd/2005/42039.htm). All investors - local and foreign - are treated equally under the program, but financed sum depends on the region. The government has placed particular emphasis on investment promotion in the new states of the former East Germany and has offered a large number of incentives to promote economy in those areas. Business Guide in Invest in Germany (http://www.invest-in-germany.de/en/index.php?redirect=http://www.invest-in-germany.de/en/research/businessguide/index.php?topcat=20&cat=1063656685824246400&lang=en) lists those conditions as the most significant for cash grants under the Joint Agreement program:

- Funds from the Joint Agreement are granted at the authorities' discretion

- Applications must be filed before the start of the investment

- Investors must make a considerable contribution to the investment project from their own capital as proof of their commitment

- Cash grants are subject to taxation

- An investment period may take up to 36 months from the start of a project. Within this time-frame, all project-related investments must be completed and the permanent new jobs indicated in the application must have been created

- There is a binding period of 60 months immediately following the investment period. Within this period, the investor must secure existing as well as newly-created jobs. Equipment bought and subsidized with Joint Agreement funds must remain within the permanent establishment for the duration of the binding period (replacements are allowed under certain circumstances)

- Cash grants are only available for investments undertaken in regions designated as eligible for assistance (see map in appendix)

- An investment constitutes a special commitment to a permanent establishment. A special commitment is generally deemed to exist based on the amount of the total investment and the number of permanent jobs thereby created. Investments involving new permanent establishments automatically fulfill the criteria for special commitments

- The proportion of the total investment eligible for funding under the Joint Agreement depends on the number of jobs the project will create or secure

- All assets eligible for funding must be recorded as fixed or intangible assets in the investor's balance sheet

- Only new assets are funded under the Joint Agreement; used assets may not be included for funding. If used assets are replaced with new ones in the course of the planned investment, revenue resulting from the sale has to be deducted from the investment sum applied for to acquire new assets.

Investments in eastern Germany receive grants of 50% available to SME's (small and mid-size companies - defined by the EU as having fewer than 250 employees, a maximum turnover of 40 million Euro, or a balance sheet total of no more than 27 million Euro); larger firms receive grants of 35% of investment costs. The EU is reviewing this program and while there may be cuts for some regions, by and large the program and grant volumes are expected to remain relatively constant after 2005 (http://www.state.gov/e/eb/ifd/2005/42039.htm). Although there are no requirements for local sourcing, export percentage, or local national ownership, most cases include performance requirements such as maintaining a certain level of employment. Invest in Germany Business Guide (http://www.invest-in-germany.de/en/index.php?redirect=http://www.invest-in-germany.de/en/research/businessguide/index.php?topcat=20&cat=1063656685824246400&lang=en) mentions two models on which the subsidy amount can be based: the equipment-based model and the labor-based model. "If an investment project involves a large quantity of fixed tangible assets or intangible assets, it is generally better to use the equipment-based model. Labor-intensive investment projects involving a large number of employees may be better suited to the labor-based model. However, not all states allow labor-based models, thus investors should establish whether labor-based models exist for the region in which they wish to make an investment." "For equipment-based projects, the maximum subsidy is 50% of investment costs which are recorded as fixed tangible assets - e.g. plant, equipment - or intangible assets acquired from third parties. In states which allow laborbased subsidy models within the eligible areas, subsidy levels are based on the employees' salaries in the first two years of their employment within the first three years from the start of the investment. The maximum subsidy is also 50% of this amount. The labor-based model only applies to new jobs created through an investment."

"A second type of aid is low-interest loans or interest-subsidized loans for start-ups. The Kreditanstalt fuer Wiederaufbau accepts applications from private credit institutes for loans of 500,000 to Ђ 5 million with maturities of 10 to 20 years, for example. Under a similar form of