The formation and registration of a Limited Liability Company (Gesellschaft mit mit beschränkter haftung – GmbH), the standard business entity in Germany, is a tedious and and time-consuming endeavor compared with the formation procedures in other European countries. Estonia, for example, offers online company registration to be completed within a matter of days. Not so in Germany. However, new rules are on the horizon.
Commission proposes new EU Directive
On 25 April 2018, the European Commission presented the “Company Law Package” with the aim at digitizing company law. The measures contained in this proposal for an EU Directive are currently being discussed by the EU Council and the European Parliament.
One key element of the Company Law Package is to create the possibility of the online formation of companies in Europe across country borders and the corresponding establishment of local branches. Unlike in some European countries, in Germany and many other EU member states, the electronic formation of corporations is not yet available. The Commission wants this to change, at least for entities like the Limited Liability Company (GmbH and UG (haftungsbeschränkt)). Implementation of the Commission proposal will be optional for all other types of companies.
Online business registration in 5 days
One of the consequences of the planned online establishment of a company would be that the personal presence of the managing director at a notary would no longer be required for commercial register registrations. Instead, the necessary identification could be carried out using new online identification procedures, such as identification by new ID cards with “E-ID function” or by video conference on a smartphone and the use of blockchain technology.
According to the EU Commission, the member states should also implement new rules for the establishment and registration of companies on the national level. The aim is that online company formation should also be completed within five working days.
The Commission’s proposals for the online formation of companies, if implemented, are disruptive in nature for the traditional German company law, where the role of the notary has been pre-eminent. Issues remain, such as protection against digital abuse or the personal responsibility of managing directors and their concrete implementation by the EU and national legislators, but generally, these changes are highly welcome and, as in many other areas, it is about time that Europe strengthens its efforts to keep up with technological trends of the 21st century.
Notaries no longer involved?
However, and not surprisingly, the Commission proposal has been subject to strong criticism from certain interest groups in Germany and elsewhere. Therefore, in February 2019, the Council and Parliament agreed on an amendment to the Commission proposal and sent the amended version to the Committee of Permanent Representatives of the Member States for an opinion.
One of the changes to the original proposal, among other things, is the possibility for national legislation to implement rules that will include the involvement of notaries in the online filing process. Another one is to limit the availability of the expedited (5-day) registration only in cases where the new company is founded by natural persons (versus legal entities), and only if they use the pre-approved form articles of association envisioned by the Commission.
The Committee’s decision and the formal agreement of the Council and Parliament are still pending and it remains to be seen whether the final result will bring real improvements to the antiquated company formation system that exists in Germany and most European countries, and a step towards a more business-friendly environment that is much-needed in light of the ever-increasing competition from the United States and China.