Nowadays, it is common for family-owned businesses to grow and expand beyond their own national borders. They exist in a wide variety of forms within the European market, which offers attractive opportunities for international development and market expansion. At the same time, cross-border activities inevitably give rise to legal and organisational challenges.

Importance of family-owned businesses

Family-owned businesses are a defining part of the EU economy. For example in Germany they account for roughly 86–90 % of all companies, employing more than 60 % of the workforce and contributing around 35 % of the national GDP. Another example: In Portugal, family enterprises also represent a meaningful proportion of the economy, estimated at 70–80 % of all companies, and they frequently remain under multi-generational leadership.

These figures highlight that family ownership is not only widespread but also strategically significant in both countries, underlining the importance of structured approaches to management, governance and succession.

When legal systems collide...

family businesses are required to obtain information about the new circumstances.

Differences arise not only regarding legal concepts and the application of law, but also in seemingly minor aspects such as formal requirements, limitation rules and statutes of limitations.  Although harmonised European law often simplifies international work, this is not the case where full harmonisation has not been implemented. In such situations, individual questions of interpretation can be of great importance. Moreover, these matters are often complex and not frequently encountered in practice, which may pose challenges even for experienced professionals.

Case Study - circumstances

For example, in the case of a businessman, Santiago (S), who has only Spanish citizenship. S owns multiple companies in Portugal and has his habitual residence in Portugal, too. His mother, however, is a German citizen. He has not taken on this nationality, nevertheless.

S comes to us with his concerns. On the one hand, he would like to expand his business to Germany. On the other hand, he would like advice on acquiring German citizenship.

Structure of the expanding company

When expanding, S has numerous options available for how he would like to structure his company in Germany. The main options would be to establish a daughter company, open a permanent establishment or a branch office.

Opening a daughter company in Germany would be equivalent to establishing an independent business. A commonly used approach is the family holding structure, in which a central holding company owns participations in various subsidiaries, including operating companies, real estate or financial investments. In this case only German regulations apply to business registration, incorporation, trade tax and entry in the commercial register. Accordingly, S would also have to decide which legal form he would like his company to take. Among the many options offered by German law, the decision often falls on the GmbH (limited liability company). It offers the advantage that liability is limited to the company's assets, meaning that the entrepreneur is not personally liable. Liability on the part of the parent company would also be excluded. Although a contribution of €25,000 is payable for the formation of the company, half of which is due upon formation, this does not pose a problem for our successful S. In other cases, however, German law offers alternatives, such as the “Mini-GmbH”, which requires only a €1 contribution and can be converted into a GmbH with sufficient capital.

The second common option would be to establish a permanent establishment. In contrast to the above, this is a dependent position that is subordinate to the mother company. It does not quite fit in with S's goals, as contracts and transactions would still be concluded with the mother company. However, as a Spanish EU citizen, S would have the bureaucratic advantage of not requiring a residence permit.

The last frequently used option is to establish a branch office. Unlike a permanent establishment, a branch office is economically independent. Apart from the economic aspect, unlike a daughter company, it remains dependent on the mother company. Therefore, it also falls under the same legal jurisdiction as the mother company. This ultimately entails various risks, for example, if the mother company is to be sold.

S's best option here would therefore be to establish a German daughter company. This would usually be followed by business registration, entry in the commercial register and other bureaucratic steps, which should not be underestimated in terms of the time they require. However, these solutions are not exhaustive. For example, S could also buy an existing company in the same industry and rename it as its daughter company. The details always depend on the individual case.

How S could obtain German citizenship

There are two main options available to S obtaining German citizenship: he is of German descent or he is naturalised.

As S's mother is German, he automatically acquires German citizenship at birth. However, this only applies to children born abroad before 1 January 2000. For children born abroad on or after 1 January 2000, an application must be submitted to the German birth register within one year of the child's birth. S is 25 years old and was born in January 2001. His mother completely forgot to submit an application at the time of his birth. Unfortunately, this means that S cannot be helped in this case.

However, S could apply for naturalisation. As a working or self-employed EU citizen, he is allowed to stay in Germany for longer than three months. Thanks to freedom of establishment, the same conditions apply to S as to Germans when it comes to becoming self-employed. After five years of permanent residence, S acquires a so-called permanent right of residence as a citizen of the European Union, which then applies regardless of employment status. If S now speaks German at least at B1 level and passes a naturalisation test, he can – provided he has secured his livelihood and that of his dependants, has no criminal record and there are no other reasons to the contrary – obtain German citizenship.

Unfortunately, it is not possible to speed up the application process due to the company relocation or economic strength. In the past, there was a so-called ‘turbo naturalisation’ process within three years for particularly well-integrated citizens. However, this has been abolished.

Another possibility that should be mentioned here for complete accuracy is marriage. In addition to the above requirements, if S marries the lovely Gertrud (G), who has a German citizenship, he could apply for German citizenship after just two years of marriage and three years of permanent residence.

In summary, it can be said that in most cases, patience will be required.

Outlook:  International succession planning

Effective succession planning is essential for the legally secure transfer of assets in family businesses. Questions of applicable law and compulsory shares must be considered at an early stage. Planning should therefore begin several years before the intended transfer.

If, in our example, S wishes to transfer the companies after 40 years of hard work, there are many aspects he must take into consideration. The estate — excluding the companies — can be regulated in Germany by means of a handwritten will. Under the EU Succession Regulation (EuErbVO) concerning the choice of law, he may choose the law of the state whose nationality he possesses. Accordingly, these would be Spanish law and now also German law. Portuguese law, however, could not be chosen. If he decides against making a choice of law, the applicable law is determined by his habitual residence. Therefore, if it were important to him that the law of a particular state apply, it would be advisable for him to transfer his habitual residence to that state in the final years of his life.

Summary

International corporate activities and family wealth structures necessitate forward-looking and carefully coordinated legal and tax planning, as matters of company law, nationality, and succession are closely intertwined and must be addressed in an integrated manner. We therefore recommend a holistic advisory approach across all relevant jurisdictions to ensure that entrepreneurial objectives and private wealth succession are aligned in a sustainable and legally secure way.