In the context of the employment of employees in Germany by foreign companies that do not have a physical presence in Germany, the question arises again and again whether the companies are obliged to pay social security contributions and wage tax.
Generally speaking, if a foreign company hires employees in Germany (with the employees working in Germany) and maintains a permanent establishment in Germany, it is required to pay contributions to social security and wage tax for its employees according to German tax and social security legislation.
Wage Tax
An exception is if the foreign company is not considered a domestic employer. In this case, it is not the company that has to withhold the wage tax, but the employees have to declare it in their annual income tax declaration. However, the mere operation of a permanent establishment (AO §12) in Germany is sufficient to be classified as a domestic company from a tax perspective. As a consequence, the company is obliged to withhold wage tax every month. If a foreign company is classified as having a permanent establishment in Germany then there is considered probable that there are further tax obligations beyond the payment of the wage tax.
Social Security
In addition to wage tax, the employer must also pay social security contributions. Employees employed in Germany are subject to German social security law. This also applies if the employer is based abroad and does not have a branch office in Germany. There are two exceptions to the above-stated rule: an employee has been assigned to Germany by a foreign company or the employer has been granted an opt-out agreement on the continued application of foreign legislation.
If the two exceptions above do not apply, the foreign company must comply with the following obligations: Register the employee with the relevant health insurance company. Submit notifications and proof of contributions. Pay total social security contributions.
The foreign employer and the employee living and working in Germany may reach an agreement whereby the employee pays the social security contributions instead of the employer. The employer then reimburses these to the employee. In the European Community, this obligation is regulated by Article 21 paragraph 1 of Regulation (EC)987/09. If the employee, however, does not pay the social security contributions despite the agreement, the foreign employer can still be held liable.
Statutory Accident Insurance
Finally, employees living and working in Germany must be insured with the respective statutory accident insurance institutions. The registration and payment of the insurance premiums are carried out solely by the employer. There are two exceptions, employees employed in another European country and who are posted by their employer to work in Germany temporarily are not covered by the statutory accident insurance when the period spent in Germany is limited from the outset. The other one being your employee is employed in two or more European countries.