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Published January 20, 2020

Do I need a German company to hire employees?

This question is an all-time favourite of many foreign entrepreneurs planning to hire personnel in Germany. And you’ll be surprised to learn that the answer is: no!

There are a couple of options if you plan to expand your business to Germany and need to hire employees there. Each of them has its implications, therefore you should consider carefully which one is most suitable for your purposes.

Incorporating a company

Incorporating a company – and by that we mean limited liability or stock companies (i.e. GmbH & UG, AG, KGA) – means creating a completely new and completely German entity. No matter where the shareholders come from (they might be foreign or German natural or legal persons), the company is going to be just as any other German company: this means it can, inter alia, hire employees freely.

Of course, a company is much more than just a way to hire employees: it can close any kind of contract, may create revenue and get taxed independently, must be provided with an own capital, is subject to standard bookkeeping duties etc. etc.

Therefore, if you actually plan to extend your activity in Germany and/or Europe at least in a mid-term perspective, incorporating a company would mostly be the best choice. In particular, thanks to the limitation of liability, business done by the German entity in principle does not reflect on the shareholders. This means: if your expansion on the German market eventually fails and the German entity is indebted, those debts do not transfer to the foreign entity that might be the German company’s controlling shareholder.  

On the other hand, incorporating a company has some fixed costs and requires an investment in terms of share capital. Also, once you should decide to abandon the German market, you will need to go through a formal liquidation process to shut down the company.

Setting up an independent branch

This expression is kind of misleading: in fact, “independent” branches are not really independent. Instead, they serve as a German office of a foreign company. As such, they are listed in the German commercial registry and can hire employees or close any other type of contract.

Independent branches can be set up pretty easily and do not need a major investment, since they don’t have to be provided with a share capital. Similarly, they can be closed easily simply by applying for erasure from the commercial registry. In terms of bookkeeping and taxation, there is no huge difference between a branch and a company.

However, unlike a proper “company”, branches are no legal entity of their own: they are just an appendix of a foreign company. This means any kind of liabilities incurred by the branch directly reflects on the foreign company’s assets. Imagine your expansion in the German market proves harder than expected: any losses or damages resulting thereof will affect your foreign company directly.

Also: consider that setting up and maintaining an independent branch involves a considerable effort in terms of bureaucracy, especially regarding sworn translations of records and documents referring to the foreign “mother” entity.

Do “nothing”

Sometimes the effort of setting up a company or an independent branch seems simply exaggerated for your purposes. Imagine you only need to hire an employee working from remote, for instance a developer, who by coincidence is based in Germany. You certainly wouldn’t want to set up a company in Germany just to hire him – unless you plan to enter the German market in general.

In such cases, you could hire the employee as a foreign entity directly. To do this, you will basically register with the German Employment Agency. This scenario has some implications in terms of taxation since taxes and welfare contributions that usually get deducted directly from an employee’s salary by their German employers need to be charged on the employee. For this reason, you’ll have to pay the employee also those contribution and taxes.

Also, as soon as you hire an office or desk for this employee to work for you or a warehouse to store stock, you will be subjected to German taxation as a company (or as an employer, more in general), for the part of revenue created in Germany. This because German authorities will consider you to have a permanent establishment in Germany. If, instead, the employee would work from home or from any other place of his/her choice, things might look differently.

Need to learn more? Feel free to contact us!

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Vittorio De Vecchi