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Germany's choice of law rules provide that the issue as to whether an entity has separate legal identity and legal capacity is determined with respect to the law at the entity's principal place of management, not with respect to that at its place of formation or incorporation. This means that a corporation formed in Country A having its principal place of management in Germany is, from a German perspective, subject to German corporate law, not to the law of Country A. If, however, the corporation has its principal place of management in another jurisdiction (Country B) which itself determines the applicable law with reference to the place of incorporation, Germany's conflict of law rules respect this referral onward and its courts would apply the law of Country A, because it is the law of choice in the jurisdiction where the place of management is located.

If a foreign corporation has its principal place of management in Germany, this conflict of laws approach can have dramatic consequences. Applying German law, a German court would conclude that a foreign corporation entity has no separate legal personality because it has not been formed in accordance with German law, in particular has not been entered in the German Commercial Register as a duly organized corporation. Re-incorporation in Germany is the only means of curing this defect. Even if this is intended, the entity generally cannot qualify as a corporation in the formation stage because its articles of incorporation will not meet the German requirements. The result is a denial of legal identity and consequent personal liability on the part of the shareholders and for the persons acting for the foreign entity.

It should be noted, however, that bilateral treaties often modify these consequences. Such a treaty has been concluded, for instance, with the United States. Furthermore, a draft EU treaty on the subject has been in existence since 1968 but not yet entered into force. Germany has ratified this treaty.

For tax purposes, however, the situation is somewhat different. Germany's corporation tax law provides that certain entities are subject to corporation tax on their worldwide income if either their legal seat (registered office) or their principal place of management is in Germany. Although German courts have had some difficulty in subsuming foreign corporations with their principal place of management in Germany under the catalogue of entities subject to corporation tax, recent decisions affirm the corporate tax liability of foreign corporate entities at least where the structure of the foreign entity under the law under which it was organized is similar to that of German corporations (Federal Tax Court judgements of 23 June 1993 - Spanish S.A.; 1 July 1992 - Swiss AG; and 23 June 1992 - Liechtenstein AG).

A recent decision of a civil intermediate Court of Appeals (OLG Hamm, 18 August 1994) adds an interesting aspect to the picture. A corporation formed under the law of Liechtenstein wished to register itself as owner of German real property in the German Land Records Office. In Germany, entry in the public register is necessary to acquire title to real estate. The Land Records Office refused to register the foreign corporation, arguing that it was a mailbox firm with its principal place of management in Germany, hence subject to German company law and, for the reasons set forth above, lacking in legal identity and legal capacity and unable to hold title to land. The Appeals Court agreed with the conflict of law principles espoused by the Land Records Office and the court below, but stated that, as a general matter, the Land Records Office lacked authority to investigate the factual question as to where a foreign entity had its principle place of management. Instead, it was to assume that a foreign company had its principal place of management in the country in which it was formed, because this - so said the Appeals Court - was generally true as a factual matter. Only in the event of "compelling doubt" could this presumption be rebutted. The fact that a foreign company had engaged in a single significant real estate transaction on the German market was, even in conjunction with the fact that it had no significant offices or personnel in its country of incorporation, insufficient in the view of the Appeals Court to constitute compelling doubt. The Appeals Court stated that any other approach to the problem would unreasonably complicate the real estate dealings of foreign corporations.

It must be emphasized that the decision relates only to entry of foreign corporations as owner of record of real estate and does not mean that the same approach would be taken to determining the principal place of management of a foreign corporation for other purposes.

Disclaimer and Copyright
This article treats the subjects covered in condensed form. It is intended to provide a general guide to the subject matter and should not be relied on as a basis for business decisions. Specialist advice must be sought with respect to your individual circumstances. We in particular insist that the tax law and other sources on which the article is based be consulted in the original, whether or not such sources are named in the article. Please note as well that later versions of this article or other articles on related topics may have since appeared on this database or elsewhere and should also be searched for and consulted. While our articles are carefully reviewed, we can accept no responsibility in the event of any inaccuracy or omission. Any claims nevertheless raised on the basis of this article are subject to German substantive law and, to the extent permissible thereunder, to the exclusive jurisdiction of the courts in Frankfurt am Main, Germany. This article is the intellectual property of KPMG Deutsche Treuhand-Gesellschaft AG (KPMG Germany). Distribution to third persons is prohibited without our express written consent in advance.