Germany is home to many skilled workers, with an economy that emphasizes technological, design and manufacturing expertise. If your company is looking to recruit remote workers in Germany, you may be considering hiring them as independent contractors as an efficient way to access local talent.
This is certainly an appealing option, especially for startups or smaller companies located abroad that are not ready to hire formal remote employees. When you hire a contractor, you have more flexibility with the workload, duration and compensation, however even as a non-German company, there are a few items to keep in mind, including payment, licensing and tax obligations.
How do I hire and pay remote contractors in Germany?
At first, hiring a contractor appears straightforward as a B2B transaction, with no employee-related obligations or compliance concerns. Both parties agree to contract terms and performance verification and then find a way to remit payment. But there are several options for the contracting and payment process in Germany that affect both you and your contractor.
Hire a freelancer
Many contractors are sole proprietors, working and operating alone as freelancers. They will negotiate the terms of the contract with you, establish compensation levels and confirm the work role parameters. Because they are self-employed, they handle their social contributions and tax withholding in Germany.
This option looks simple, but the problem with hiring freelancers is that a fair amount of goodwill is required on both sides to make sure that both payment and work product terms are met. One approach is to start with small performance and payment milestones until trust is established. There are also third-party escrow-type platforms that can facilitate payment in a secure format while you develop the relationship.
Hire contractors with a limited company
More experienced contractors may have their own German limited company, a legal entity that ‘leases’ the contractor out to clients. Your company would contract with the limited company and remit all payments to that entity, just like any business.
The limited company is accountable for any compliance in Germany. The contractor would also likely have local accounting and legal support to assist in transactions and obtain necessary licenses.
Hire remote contractors through an umbrella company
Either the contractor or the hiring client can suggest using an umbrella company to act as a third party in the relationship, ensuring full performance and prompt payment. This eliminates the uncertainty when hiring freelancers. The umbrella company will facilitate all payments and confirm if the work is completed. They will also act as an intermediary in case of conflict.
Your company would send payment to the umbrella company at agreed intervals, based on timesheets or project completion. In return, they would handle the contractor’s payment as well as tax withholding. There is a fee for the service, but that could be shared since there is a benefit for both parties.
If you want to hire a non-resident ex-pat in Germany, this is likely the only option due to the strict rules to qualify as an independent ‘self-employed’. The umbrella company can also sponsor a work permit for non-EU citizens.
What is an AUG license, and do I need it?
An AUG license is required in Germany where any local entity ‘leases’ out workers to a third party. This would be the case with both a limited company and an umbrella company, so you would want to confirm that either of these has its own AUG license, but your company does not need one.
What are my tax obligations when paying remote workers in Germany?
As a foreign entity with no business presence in Germany, you have no tax contribution obligations as long as you avoid misclassification problems where the worker claims to be your employee. However, depending on the contractor’s work activity, there is the possibility of permanent establishment (PE) which can lead to corporate tax on a foreign company.
PE requires some level of local revenue creation, so it might be triggered by sales agents that conclude contracts or create other German income streams. IT specialists, customer support and marketing personnel would not meet that revenue test for PE.
How do I avoid misclassification risk in Germany?
One risk of hiring contractors in any country is the increased attention given to misclassification. German law provides criteria for the difference between a contractor and an employee. If you treat the worker as an employee, they could be re-classified.
What this means for your foreign company, is that you would have to legally employ the worker with a German entity to retain their services. This risk is minimized by the use of an umbrella company since they are acting as a German ‘employer’ for all administrative purposes on your behalf.
If you choose to engage the contractor you will want to avoid the appearance of treating them like an employee. These appearances include making fixed, monthly payments that look like salary. You would also want to avoid paying for expenses or work equipment unless that is built into the contract as part of the compensation.
How does Contractor Taxation help with hiring remote workers in Germany?
Contractor Taxation has a network of partners and umbrella companies in Germany. They can help you hire and pay contractors with no worries about the new relationship. We make sure that our partners are licensed and ready to engage your contractors. They also are very experienced with working with foreign companies. Our expertise in international contracting takes all the guesswork out of hiring remote workers abroad.
If you are new to hiring, an umbrella company can help you access new talent and ensure quality work performance.
