Guide for recruiters placing candidates in Germany
Kevin Austin, managing director of Access Financial
When placing candidates in Germany, there are many legal and financial considerations to keep in mind. Germany is a very important contractor market and is estimated to have up to 400,000 independent contractors (Freiberufler) working there.
In this article, we will cover the three most common methods of working legally in Germany and the relative merits and demerits of each.
The most attractive and popular way to go is self-employment. This is the preferred choice for over 90% of contractors in Germany.
With self-employment there is no need for the management company to bill the German client. Provided the self-employed make no claims on the state they need pay no social charges in Germany.
Workers can apply to the authorities for a ruling so that their self-employed status as a contractor can be unchallenged for up to three years. To be a Freiberufler (independent contractor), the contractor must be educated to degree or diploma level. If not, then he or she is designated a sole-trader and is subject to a municipal tax of 7-17%, which is itself tax-deductible.
It is a legal requirement that everyone living in Germany is covered by what is considered adequate medical cover and this exceeds what is provided by most travel or international health policies. There are three ways to meet this requirement, but the best option is to obtain private medical insurance from an approved German provider and that meets the ‘adequate’ criteria. This can be had for some €100-110 a month or more, depending on the plan.
There are a few other facts that need to be known.
Registrations. Contractors must register at the commune where they live. They must also register for tax (and simultaneously VAT), which can be done online with the Finanzamt (the Tax Office).
There is also Kirchensteuer or Church tax. This runs at 8-9% and to be relieved of this you must inform the authorities that you are not an adherent to one of the principal churches in Germany.
If the agency or client is VAT registered, then the contractor must issue VAT invoices to them. Input tax on expenses incurred by the contractor for business purposes can be recovered. VAT returns must be submitted monthly even if they are zero returns.
A typical retention for a self-employed contractor on a rate of €500 a day for a year will be in the range of 65-72%, dependent on circumstances.
AüG or Arbeitnehmerüberlassung (Leased employee)
This is where an employer lends an individual to work under the control of someone who is not their legal employer. The rules include:
- The management company (economic employer) must invoice the using client in Germany directly
- The economic employer must employ the contractor directly and not via a third party
- The employer must deduct and withhold employer and employee social costs and direct tax.
The period under which an individual can be provided to a client has been reduced from 3 years to 18 months, after which time the role must cease or the person be offered direct employment by the client.
A typical retention for an AüG contractor on a rate of €500 a day for a year will be in the range of 41-52%, dependent on circumstances.
Personal Services Company (PSC)
If a contractor is not desirous of being self-employed (but could be) and if the assignment will exceed 18 months, then operating through a PSC could be the best approach. It is strongly recommended that contractors seek competent professional advice to be able to do this without breaching the law.
On returning home contractors will not be taxed twice on the same income, but they will end up paying tax at German rates or where they are normally resident, whichever are higher.
A typical retention for a UK-based PSC contractor on a rate of €500 a day for a year will be in the range of 64-75%, dependent on circumstances.
What about placing non-EU candidates?
If you are not an EU national, then you cannot automatically work in Germany. If a contractor is interested in obtaining a work permit for Germany, then the first port of call should be the website of the German Consular Office or Embassy in his or her home country.
Picture (top right) courtesy of Pixabay