LEGAL ISSUES FOR U.S. INSTITUTION OPERATIONS AND ACTIVITIES IN EUROPEAN UNION COUNTRIES - GERMANY NACUA 2011 ANNUAL CONFERENCE

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1 LEGAL ISSUES FOR U.S. INSTITUTION OPERATIONS AND ACTIVITIES IN EUROPEAN UNION COUNTRIES - GERMANY NACUA 2011 ANNUAL CONFERENCE Thomas Duencheim Michael Leistikow Christian Reichmann Hogan Lovells International LLP Dusseldorf, Germany Elizabeth B. Meers Hogan Lovells US LLP Washington, D.C. 1. INTRODUCTION U.S. higher education institutions draw on a great variety of activities in European Union ( EU ) countries, for instance in Germany. The most common form of operating abroad is that a U.S. institution makes an arrangement with a local university which usually includes a student exchange program. Other institutions such as Stanford University run their own overseas campus in Germany. Sometimes U.S. institutions take a further step by establishing a subsidiary abroad which is also open to local applicants. Depending on the specific kind of activity, different legal key issues exist that should be carefully considered. 2. LEGAL PRESENCE AND CHOICE OF ENTITY In Germany, most universities and colleges are operated by the state. Therefore, the legal body used is usually that of a public entity. Private operators have no access to this kind of legal presence. They must revert to private law. For the establishment of a subsidiary or operation of a campus in Germany, there are different types of private legal entities an U.S. institution might consider. Private universities in Germany such as the Bucerius Law School in Hamburg or the Jacobs University in Bremen usually use the German limited liability company ("GmbH") as legal body. A few others appear either as German stock companies ("AG"), German registered associations ("e.v.") or German foundations ("Stiftung"). Generally, the supervision of universities is executed by the Minister of Science and Research of the relevant federal state (see section 3). This supervision does, however, not depend on the choice of legal form. Moreover, the inland revenue supervises the bodies on tax issues. Some of the entities have to be registered with the trade register. However, the register does not administer further supervision. 1

2 2.1 German limited liability company (GmbH) The GmbH is a limited liability company established under the German Limited Liability Companies Act ("GmbHG"). The GmbH is a legal body designed for business ventures with only few shareholders. Therefore, the articles of association need to contain only a few essential terms. For example, the share capital must amount to at least EUR 25,000. Besides, the content of the articles can be drafted according to the needs of this specific operation. Such flexibility is a great advantage compared to the German stock company ("AG") as well as the fact that the shareholders themselves are responsible for making the decisions on all questions concerning the company's management. Two steps are necessary to establish a GmbH. First the notarized articles of association must be contracted. Secondly the GmbH needs to be entered into the commercial register of the competent local court where the company has its seat. 2.2 German stock company (AG) Legal basis for the German stock company is the Stock Corporation Act ("AktG"). While the German limited liability company is designed for a small number of owners, the AG is constructed for public participation. To protect the owners, the Stock Corporation Act leaves almost no margin when drafting the deed of partnership. In addition, the shareholders have almost no influence on the management. The stocks can be easily alienated. To establish a German stock company, basically the same two steps as described before are necessary. 2.3 German registered association (e. V.) The purpose of the German registered association is to offer a legal entity to private subjects who pursue a special, non-profit purpose. To gain legal capacity, the German registered association needs to be entered into the register of associations. Competent office is the local court ("Amtsgericht"). To establish a German registered association seven founding-members are required. If the association runs an "economic business", legal validity can only be reached by governmental conferment. Legal basis are paragraphs 21 et seq. German Civil Code ("BGB"). 2.4 German foundation A German foundation requires governmental conferment. Sufficient capital is necessary to guarantee a long-lasting fulfilment of the foundation's purpose. Legal basis are paragraphs 80 et seq. German Civil Code. Most of the time, it is not necessary for U.S. higher education institutions to establish a German legal entity of their own. They cooperate with German universities to enable their students to study abroad. In this case there is no need for a legal presence in form of 2

3 a branch office or subsidiary in Germany. Various organizations use all kind of different contractual agreements. Therefore the specific terms of cooperation are different as well. The agreements usually deal with tuition fees, financial aid and the acceptance of credit points earned at the German institution. There is no difference if the institution is teaching German students. However, for German students it will be important that the degrees awarded by the U.S. University will be recognised in Germany. This will probably only be the case if the university is officially approved (see below) 3. REQUIRED AUTHORIZATIONS FOR EDUCATIONAL ACTIVITIES Due to the federalist structure in Germany, different statutes concerning universities and colleges apply. The Federal University Act ("Hochschulrahmengesetz") is a federal framework law which contains basic rules on the functions of universities, admission of students, personnel of universities and on gender equality (universities have to be conductive to gender equality, every federal state has to implement rules on "equal opportunity commissioners"). Besides, each federal state ("Bundesland") established its own statute in accordance with the federal frame. The state law is usually quite similar. There are a few differences though which need to be taken into consideration when operating an institution in Germany. The following description is based on the University Act of Northrhine- Westphalia ("Hochschulgesetz NRW"). The description focuses on basic requirements which are equivalent to those of other federal states. The rules below apply only to the operation of a university or college in German territory (regardless if operated by a domestic or by a US institution). Thus they do not apply for contractual arrangements between German and U.S. institutions or the operation of a campus in Germany, where no specific authorization for educational activities is required. Governmental authorisation will only be needed if the institution wants to label itself as "university" in Germany or if it seeks to award (German) degrees to its students (see below). 3.1 Requirement of official approval The University Act states that educational institutions which are not operated by the state are not allowed to label themselves as college, university, poly or any similar term which could be confused with the names above unless they have been approved by the state. 3

4 3.2 Conditions for official approval The University Act provides for the requirements a privately operated educational institution needs to meet, if it seeks approval by the state. Even if the listed requirements are fulfilled, the approval is still a matter of discretion. The following requirements must be met: (1) the institution must fulfil specific functions. Universities need to serve the purpose of gaining scientific knowledge as well as cultivating and developing science by research, education, study and they must support scientific young talents and the transfer of knowledge. Moreover, they need to prepare students for those professions in Germany or abroad which require application of scientific knowledge and methods. Colleges need to prepare their students by applicationoriented teaching and study for professions in Germany or abroad which require the application of scientific knowledge and methods. (2) studies must follow specific objectives. Accordingly, teaching and studies need to transfer the necessary scientific knowledge of the chosen subject. The institution must guarantee that the necessary classes and curriculum as recommendation for the students are provided. The applicable state statutes contain a more detailed description. (3) the institution offers a plural number of study courses either parallel or consecutively which have been successfully accredited. The offered courses of study need to be regulated by the institution's own rules and supervision. Competent offices who control whether the necessary accreditations are given are certain private institutions such as the "Akkreditierungs, Certifizierungs-, und Qualitätssicherungsinstitut" ("ACQUIN") which themselves have been accredited by the "Akkreditierungsrat", a federal public entity. (4) study and requirements for a degree have to be equivalent to those required for public state run institutions. (5) Students will have to fulfil the general qualifications for university entrance (Abitur or similar degree) as for public institutions. (6) teaching is predominantly done by fulltime professionals who fulfil the requirements for a "professor". The applicable state statutes list the specific requirements. Thus, requirements vary from federal state to federal state. Basically, a university degree, PhD, educational skills, and some research experience is needed. The remaining staff responsible for teaching will also have to fulfil the same requirements that comparable staff would have to fulfil at German state universities. These will basically be the same as the ones for a professor even though PhD will not always be required. 4

5 (7) only persons with a certain degree of experience are allowed to examine the students. (8) members of the institution (students and employees) are to a certain level involved in the structural organisation of the studies. Participation is similar to those of public institutions and set out in more detail in the applicable state statues. (9) the existence of the institution and its staff are legally and economically secured and the owner may not operate any other business. 3.3 Process of official approval Competent office for granting the approval in Northrhine-Westphalia (in other states comparable ministries) is the Ministry of Science and Research ("Ministerium für Wissenschaft und Forschung"). The application must be made in writing. The typical timeframe for review will vary from state to state. Probably, it will take several months, sometimes even years. The approval may contain certain restrictions. 3.4 Consequences of the official approval The official approval results in various consequences. In particular, a course of study completed at an approved institution is a study as defined under the applicable state statutes. Moreover, the institution is able to examine und to award university or college degrees (Bachelor, Master, Ph. D., Habilitation). The Ministry of Science and Research is authorized to demand information in order to fulfil its duty as supervisory authority. 4. EMPLOYMENT The major sources of German labor law are federal legislation, collective bargaining agreements ("Tarifverträge"), works council agreements ("Betriebsvereinbarungen") and case law, the latter playing an important role. There is not one consolidated Labor code, but minimum labour standards are laid down in separate acts on various labor related issues. Especially the German individual labor law is applicable for employment agreements entered between the institution and its employees. Besides the generally applicable laws concerning employment, there are a few special regulations for private educational institutions approved by the state. The Science Time Act ("Wissenschaftszeitvertragsgesetz") is applicable for temporary employment agreements with scientific staff (not including university teachers). Basically, the act allows temporary employment of up to 6 years (normally, the limit is two years and the employer has to have good reasons). If an employee overstays this period his contract 5

6 will be deemed to be concluded for an unlimited time period and the employee therefore would receive the full protection of German law. Moreover, recruitment as well as any changes to the employment agreements with the teaching staff need to be reported to the Ministry of Science and Research (or its equivalent in other federal states). A U.S. institution can employ Germans without establishing a German university. Written employment contracts are not required but highly recommended. If an individual can be treated as independent consultants rather than employees will depend on the actual execution of the contract. If a person is in fact not independent (e.g. working 40 hours/week for the university, has no other clients and no autonomy to organize his or her time) he or she will be treated by law as an employee, even if he is engaged as an "independent" consultant. The employer will have to provide salary, holiday entitlement and paid sick leave to its employees. It depends on the number of employees how easy a termination of an employment will be. If only less than 10 employees are employed on a regular basis, only the basic rules apply (no discrimination etc.). If more than 10 employees are employed on a regular basis, it is rather difficult to terminate the employment. When doing so, it is common to offer compensation (about 1/2 to 1 month salary for every year of employment). The applicability of German employment law to U.S. employees of U.S. institutions who teach in Germany will inter alia depend on the time period they will stay here and on the question whether the university will establish a branch office in Germany. 5. IMMIGRATION Legal basis for immigration to Germany is the Residence Act ("Aufenthaltsgesetz"). For teaching staff with U.S. citizenship there are no special requirements concerning immigration to and employment in Germany. All persons who seek employment in Germany need to obtain a residence permit in form of a visa. If the prerequisites are met und the work office consents, a work permit will be included in the visa issued for this purpose. Citizens of the United States may enter Germany prior to applying for a visa/work permission. The Aliens Office administers this law. The Work Office has to consent if a work permit is needed. The local entity is not required to sponsor the employee financially in this process. German consular services are available through its embassy in Washington and local consulates. The applicants will have to submit their visa/ work permission application in person. The processing time for visa applications takes up to 15 days (short stay up to 90 days) or up to several months (long term residence and work permission). After the application has been approved by the Aliens' Office and if applicable- by the Work Office, the Embassy / Consulate will issue a residence permit in the form of a visa, which will -if all prerequisites are met- include the authorization to work in Germany. Especially for business and tourist visa a health 6

7 insurance is required. Sometimes a bailout is required. The Aliens Office decision depends on the education of the applicants; when the applicant is higher educated it is easier to get a work permission. According to section 16 of the Aufenthaltsgesetz U.S. students can apply for visa easily if they are accepted as students at a university. The visa will be valid for one to two years. The students may even work up to a certain extend during their stay. 6. PROPERTY OWNERSHIP The above named legal entities are valid legal bodies and thus they are legal contractual partners and have the right to purchase property, which means they can rent or purchase the necessary facilities for their educational activities abroad. In Germany, there is, in principle, no restriction to foreigners to rent, purchase or own real estate. If a German landowner gives a U.S. university a gift of real property, there are no restrictions on the U.S. university s ability to dispose of the property, if this is not concluded in the contract between the German land owner and the university. If the U.S. university sells the property, the U.S. institution can repatriate the proceeds (taxes may apply). 7. TAXATION The applicable tax law depends on the chosen entity. If one of the above mentioned legal entities has been chosen, taxation is based on the Corporation Tax Act ("Körperschaftssteuergesetz"). According to this law, the entity is exempt from taxation if it pursues exclusively and directly purposes of benefit to the public. Educational institutions may be eligible for this exemption. Competent office for corporation tax is the tax office ("Finanzamt") of the county where the business management is located. There is a value-added tax in Germany. The tax rate is generally 19 percent. There is a reduced tax rate of seven percent for several goods and services eg books. Non-profit organizations can even be exempted from VAT at all. Taxation in Germany is a very complex matter. It depends inter alia on the type of entity chosen. When working in Germany, the employees who are residents in Germany will have to pay income tax. The tax rate varies from 14 to 42 percent depending on the income of the employee, several other social security contributions are to be paid as well. 8. DISPUTE RESOLUTION Educational institutions may incur legal liability in a variety of proceedings. First it seems possible that a dispute between the institution and the responsible state may arise concerning the official approval. This kind of litigation will be dealt with by the 7

8 administration court in the county where the institution has its place of business. The applicable procedure law contains the Administration Court Procedure Act ("VwGO"). In case of students, employees or others who may hold a claim against the institution, usually civil law proceedings take place. Depending on the amount in dispute either the district court or the local court is competent. In some cases it is also possible to take legal action to the administration court. Due to the fact that the institution is in some cases authorized to exercise official power, for example when awarding degrees, it is very likely that this conflict will be heard before the local administration court. As alternate forms of dispute resolution educational institutions seek arbitration, mediation or a campus ombudsman to channel disputes away from state courts. 8

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