Introduction
An increasing number of Indian companies are investing directly in Germany, some by setting up subsidiaries in Germany and others by acquiring shares in established German enterprises. With intensified globalisation and new competitive challenges emerging therefrom, Germany is increasingly promoting inbound foreign direct investments in a variety of legal structures especially from Indian business houses. The universal agenda is: a successful, sustainable and stable economic structure. Not only do entire chains of suppliers often follow in the wake of large enterprises when they establish major production facilities or research centres; the related jobs have a significant impact on public infrastructure, education and training, trade and ultimately on the overall quality of life also. With this background, Germany has been focussing on facilitation of settlement of large industries, research facilities and logistics centres.

Therefore, public subsidies are provided by public institutions, states and regions in Germany in order to promote the creation, development and even the preservation of sustainable economic structures. This article provides an overview of the present public promotion of economic development in Germany.

Overview
The promotion of economic development in Germany is predominantly organised on a regional basis. In line with the federal structure of the Federal Republic of Germany, the powers to identify the objectives, the responsibility to administer the awards and the supervision of the use of public subsidies usually lies with the federal states. The federal states exercise these powers and execute the responsibilities through their Ministries of Economics or through development institutions specifically set up for this purpose

The level and the kind of public promotion of economic development thus depend on the region in which the investment is made and on the economic policy objectives pursued by the respective federal state (usually the development of a special economic structure, such as clustering or the promotion of high technology). In the Free State of Saxony, for example, even large manufacturing enterprises can obtain non-repayable grants of up to 30% of the investment volume.

In individual cases – in particular if national interest exists – economic development can also be promoted by the Federal Republic or by relevant federal government institutions (for example the Kreditanstalt für Wiederaufbau – KfW in many cases).

Small and medium-sized enterprises (“SMEs”) – a term defined by a recommendation of the European Commission (EU Journal L 124/36) – normally have access to special subsidy programs and higher funding rates. SMEs can obtain subsidies of up to 50% of the investment volume.

The common objective of the promotion of economic development by the federal government and the federal states is permanent job creation. This has two consequences: subsidies are only granted on the condition that a specific number of new jobs are created or - for example, when businesses threatened with closure are taken over - existing jobs are secured. In addition, commitment periods usually apply (3 to 5 years), during which the subsidised assets have to remain at the respective location and the jobs created or secured have to be maintained. If these commitment periods are not observed, there is the risk of facing a demand for repayment of the granted investment subsidies. These commitment periods should therefore be considered in investment planning from the outset.

Subsidy funding comes from various sources. This funding is in part provided by the European Union, essentially by the European Regional Development Fund – ERDF. Funds from the Federal Republic of Germany and the respective federal states are available as well. Naturally, it involves different procedural rules and supervision rights regarding the use of the funds. These rules are usually framed by the respective funding organisation.

The two most important types of promotion of economic development are:
– the promotion of direct investments; and
– subsidies for operational costs, in particular the promotion of technology.

Promotion of commercial investments
Subsidisation of investments can take various forms.
Public authorities as a rule grant direct subsidies as a percentage of a specific subsidy volume. The level of subsidy volume usually depends on whether or not investments in a particular sector shall be promoted pursuant to public policy. An additional important factor is the scope of permanent job creation. Subsidies are assessed on the basis of acquisition and manufacturing costs of investment goods, i.e. buildings, machines and operating equipment. Direct subsidies are granted either on a statutory basis (in Eastern Germany the 2010 Investment Allowances Act is currently in force) or they are granted at the discretion of the subsidy authorities at federal government or federal state level. The most important program in this context is the “Joint Task of the Improvement of Regional Economic Structures” (GRW investment grants), which is anchored in the Constitution of the Federal Republic of Germany.

Investments are also subsidised by granting public loans with relatively favourable conditions attached. These usually take the form of comparatively lower interest rates. There is also a possibility of significantly relaxing requirements with respect to securing loans.

With the involvement of the investing enterprise’s principal bank, public deficiency guarantees may be also granted. This subsidy instrument is becoming increasingly important. It enables in particular enterprises, which do not have sufficient security possibilities to finance their investment with conventional bank loans. Public guarantees are granted with the help of specialised guarantee banks.

The comprehensive subsidisation of investments has already in recent years led to the creation of industry clusters which form a solid basis for further investments. Excellent examples in the Free State of Saxony are the semiconductor industry (“Silicon Saxony” in the Dresden area) and the car industry (BMW, VW and Porsche in the greater Leipzig/Chemnitz areas).

Promotion of technology
Germany’s contribution to research and development in technology can hardly be overemphasized. Germany has been in the forefront in promoting technological advancement. Naturally, various subsidy instruments are also being used in this area.

The classic form of promoting technology is the subsidisation of projects for industrial research and experimental development. Depending on whether direct product development or basic research is involved, subsidies of up to 50 % may be available. Assessment is made on the basis of project costs, i.e. in particular personnel costs for a period of up to 2 years. The costs for equipment, material and premises are also eligible for subsidisation. If the company concerned collaborates with universities or other public research facilities, it is possible to obtain a higher level of subsidisation. SMEs engaged in technological research and development, can also obtain higher levels of subsidisation.

Public subsidisation can also be obtained for technology transfer, i.e. the acquisition of know-how including relevant advice. In addition, safeguarding the results of development activities, such as the registration of patents, is also eligible for subsidisation.

Finally, the subsidisation of on-the-job training in enterprises also plays an important role. Besides training costs, the personnel costs of the employees receiving the training may also be eligible for subsidisation.

Selection of appropriate subsidies
Although each subsidy program has standardised procedures for application and implementation, it is necessary to determine individually as to which of the subsidies are to be used for each investment project. This is particularly important because not all subsidy programs can be used in combination with one another. Depending on the size of the enterprise and the sector in which it operates, an overall cap for the amount of subsidies may apply.

Also, the enterprise should check precisely whether the terms and conditions of public subsidies are actually in line with the company’s objectives and strategy. The commitment periods for subsidised assets may, for example, considerably limit the flexibility of entrepreneurial action, since a sale or relocation of the business would result in an obligation to repay the subsidies. Similar considerations are involved in the field of technology promotion. To be eligible to receive these types of subsidies, it is a requirement to use the subsidised know-how in the federal state which provides this type of public subsidy. The subsidy may also have to be repaid if the know-how is transferred to a parent company that is, for example, located abroad.

Therefore, expert consultation at the stage of business planning is recommended if public subsidies are intended to be used for investment projects.

Special considerations for the acquisition of enterprises
If the investor plans to enter the German market by acquiring an existing German enterprise instead of setting up a new enterprise, it is very important to know which subsidies the target enterprise has received in the past and is currently receiving and whether or not it has complied with the conditions linked to such subsidies. Furthermore, due to commitment periods, the investor may be confronted with considerable restrictions with respect to the acquisition structure (for example, an asset deal unlikely to work as a means of acquiring the target enterprise) and in the worst case even with the demand to repay subsidies. Therefore, it necessarily needs to be determined during the due diligence review of the target enterprise whether past investments and the existing jobs are still subject to a commitment and to what extent repayment risks exist.

This equally applies in case of an acquisition involving promotion of technology. A close examination of whether the know-how of the enterprise is freely available or whether restrictions exist on the basis of a subsidy granted in the past is required.

Given these complexities involved in acquisitions or entries in the German market, the investor would inevitably need specialised expert advice in this regard.

www.noerr.com