Companies that want to hire international contractors in Germany will find that there are some intricate regulations to follow, or end up facing extra costs and penalties. It is straightforward for a German company to hire a German contractor, but if a company in the UK for example wants to hire the contractor, they will have to make sure the contractor is engaged correctly, either as a local or an expat in Germany.
The main risk for your company is that the contractor could end up classified as an employee under German rules, which would mean your company might have to meet German employer obligations.
How to Engage a Contractor in Germany
There are three primary ways to engage a contractor in Germany: 1) as a freelancer 2) as an AUG employee or 3) as a personal services company. The choice will probably depend on whether the contractor is German or an expat, and if they are working for a German branch office or are a skilled remote contractor.
This is the simplest (and most common) way to engage a contractor, provided that the freelancer meets Germany’s self-employment criteria. An experienced German contractor will probably be following those rules closely, but an expat relying on their home country rules and status might not be compliant.
The effect of this is that if the self-employment criteria are not met, you could find your contractor reclassified as an employee, and you will both be liable for social security registration and payments.
AUG License Requirements
This is another method that actually uses Germany’s AUG labor leasing scheme to hire the contractor through an AUG licensed entity in Germany. This is a third party that bills the company as the end-client, and steps into the shoes of the employer for the contractor.
If you decide to use an AUG license option, you need to make sure it is an umbrella company in Germany that has the license and experience employing this way. An AUG licensed route is probably preferable for expats, since neither your company or the contractor will have an entity in Germany to get the license.
Personal Services Company
If you contractor has their own personal services or limited company, they can be engaged directly B2B, as long as they meet all of the German requirements. Once again, this method is probably best for contractors that are German citizens and established as a limited company. An expat foreigner would have to register in Germany, run their own payroll and meet German tax obligations.
Local Tax Laws and Statutory Reporting in Germany
If you hire a legal contractor as a freelancer or limited company, you won’t have any tax or statutory reporting obligations. Only the contractor will need to meet those requirements for their self-employment or limited company.
If the foreign freelancer has adequate medical coverage, they won’t need to make any social contributions in Germany. The other options are to make a 15% ‘medical only’ social security contribution on taxable wages, or purchase German insurance for around 100 Euros per month.
As far as taxes, any international contractor will be taxed in Germany on all sources of the year’s income, if they are in Germany more than 183 days and a tax resident. So, if there was UK income before going to Germany that would be taxed as well.
All of these tax and statutory obligations may affect how much the contractor wants to charge you for services, as they are measuring their net compensation while in Germany.
Any EU contractors will not need work permits in Germany, but do need to register locally and with tax authorities.
Double Taxation in Germany
Because of the German rule for taxing tax residents on all sourced income, some contractors might face double taxation. If your contractor is from a country that has a double taxation treaty with Germany, they can get a credit for tax paid to one of the two countries (depending on the treaty).
Again, this does not affect the hiring company, but it pays to check with your contractor that they are meeting their German and home country tax obligations, to prevent any inquiry that might affect your business.