hiring, international, business-structure, contractorsI’m a US citizen living in Berlin, Germany and a full-time employee for a US-based technology startup. At this time, the company has a US corporation and no foreign entity in Germany or elsewhere. Even though we don’t have a subsidiary here, I was able to get a 4-year work/residence permit in Germany as a sort of representative of my company sent from the US to explore the market. So it’s worth noting that I am paid in USD by the US corp.
My employer makes a B2B software product used by mobile app developers, and my primary role is to develop the German and European market. That includes hosting and attending industry events, forming strategic partnerships, and speaking to potential clients.
It’s time for us to build a small team in Berlin, and we’re deciding whether in the near-term we’d like to:
a) set up a GmbH for the sake of hiring 2-3 employees
or
b) continue operating in Berlin with the US corp only and hire Berlin-based freelance employees (who have the right to work in Germany and would also be paid by the US corp in USD, same as I am)
I’ve spoken with a number of German lawyers and accountants, and I haven’t been able to get a clear answer on whether b) is something that’s allowed or if it’d potentially cause a problem with local authorities.
I have learned that it’s a hiring company’s legal burden to ensure that a freelance employee is truly a freelance employee, that is, has at least one additional client while working for us; otherwise, our company might be liable to pay a social insurance tax during the time the freelancer worked with us.
But as long as the employees we hire fulfill that ‘true freelancer’ requirement, are there potential legal or tax issues with hiring freelancers from our US corporation to work in Germany?
There are a couple reasons I want to be sure we get this right:
• I don’t want to be held personally liable for any actions the company takes that are in violation of German law or tax policy
• We expect we’ll need to set up a GmbH in the mid-to-long-term and wouldn’t want the parent US corp to be in bad standing when we start that process
From the sounds of your question you’ll likely be best off with a local branch, with a little wiggle room for a few contractors as you get things started.
For completeness, there are basically four ways to employ someone in a foreign country:
This is the “simplest” approach if the business intends to stay long-term.
The business incorporates a local branch, hires (or transfers) the employee, and calls it a day. It goes without saying that the local taxman will prefer this.
This is common for first hires. It presents the least hassle for the business and the most for the employee. The employee is basically in charge of their own local taxes and what have you.
It carries a risk for the company, in that scores of countries have employee protection laws that regularly re-qualify contractors that look and act like an employee as local employees, complete with back payments of taxes and benefits, and probably a big red flag that will land you regular audits in the aftermath.
It also carries a risk for the contractor, in that the paperwork is easy to get wrong. Particularly so when the contractor is an expat and not fluent in the local language. In countries with strong labor laws (like Germany) this risk can potentially extend to the business itself, in that they’re expected to ensure their contractors are complying with local tax obligations.
What qualifies as short-term depends on the country (a local accountant will know).
The typical use-case here is when you visit your foreign clients, suppliers, or colleagues in order to work onsite for a few weeks.
You remain an employee of your original country and, so long as you don’t stay too long in the country you’re doing the work in, you don’t pay local taxes - i.e. you continue to pay taxes in your country of origin.
Be sure to have local health insurance coverage and some form of repatriation insurance. It also goes without saying that you can’t do this on a Tourist Visa; you’ll need a Business Visa or some other option allows you to work locally.
This is technically legal, and I’m guessing based on your question that this is your current status.
It’s an extension of the latter case. It arises when you stay longer than whatever threshold applies. A typical use-case would be when you send people abroad for a lengthy timeframe with them eventually returning home. For instance when you send a team of engineers to help bootstrap a mining operation, or when you dispatch managers to run a factory for a few years in a developing country. The intent usually revolves around keeping things simple for employees come retirement time. (It can get messy when you have retirement contributions in multiple countries.)
You remain an employee of the remote company throughout the process, but as you do you’re also liable for local income tax, and possibly other contributions like health insurance. Depending on the countries involved there can be treaties in place to avoid taxing income more than once.
Companies that opt for this invariably work out the details and take care of the paperwork for their employees.
Much more rarely it’s used to hire someone in a remote country as an employee in the company’s country, with the employee detached in their local country. The end result is similar to the above - though with caveats if memory serves me well… namely, the employee might need to be able to work in both countries, and it likely isn’t sensible for the employee when it comes to retirement contributions.
(It’s worth adding that this form of remote employment has been abused in the past several years in the EU. It’s basically been legal for years to hire workers in low-wage countries and dispatch them on projects in high-wage countries. The EC in Brussels and EU member states are digging into how they can amend this to avoid wage dumping, so expect this to change somewhat.)
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