Employing foreigners is fraught with pitfalls

last updated on 22 February 2022 | reading time approx. 6 minutes

Due to the current shortage of skilled workforce in Germany and in the context of internationalisation, it has become common for German companies to employ not only German but also other EU nationals. It is becoming increasingly common for the so-called third-country nationals, i.e. nationals of countries that are not members of the European Union or the European Economic Area, to be employed in Germany.

EU Blue Card and ICT Card to encourage specialists from third countries to work in Germany »
Employment of external staff in Germany »
Social security and tax liability risks »
Social security law in the EU/EEA/Switzerland »
Social security law and its applicability in the context of bilateral social security treaties »
Social security law in a foreign country with no signed treaty »
Tax law »
Risk of disguised employment »

Employing foreigners may involve special aspects to observe in certain areas and disregarding them could lead to nasty surprises. If a company decides to employ foreigners, special attention should be paid to residence, social security and tax law.

EU Blue Card and ICT Card to encourage specialists from third countries to work in Germany

Compared to the USA, for example, German residence law hardly changes much. Nevertheless, the introduction of the new Skilled Workers Immigration Act (Fachkräfteeinwanderungsgesetz) last year brought about changes in residence law. The changes introduced by virtue of the Skilled Workers Immigration Act were intended to facilitate the arrival of skilled workers from third countries. However, the complexity of the German Residence Act (Aufenthaltsgesetz) does not always make it easy for companies to employ third-country nationals. If third-country nationals are to be employed in Germany, they generally need a visa to enter the country and a corresponding residence permit to be able to work. Caution is also advised when employing British citizens. Until 31 December 2020, no residence permit was required for them, but as a result of Brexit they have now also become third-country nationals and therefore also require a residence permit for their stay and to be able to work in Germany.

For cross-border employee assignments, many companies can benefit from the relatively non-bureaucratic “European residence permits”:

With the EU Blue Card introduced in August 2012, the Federal Government has attempted to facilitate and promote the recruitment of skilled workers from abroad. An application for it can be filed for highly qualified foreigners who only have the nationality of the so-called third country. In particular, this should make it easier for “shortage occupations”, such as doctors, engineers and mathematicians, to come to work in Germany if special requirements are met. The Skilled Workers Immigration Act has not changed this.

Quite on the contrary: The Skilled Workers Immigration Act should also facilitate the immigration of IT specialists with practical work experience but without a formal diploma. Exceptionally, they do not have to undergo the degree validation procedure if they have at least three years of professional experience gained over the last seven years and a salary of at least 4,260 euros (as of 2021), whereas the salary threshold is adjusted annually.

The Skilled Workers Immigration Act did not bring about any changes as regards the ICT card, introduced only a few years ago on the basis of an EU directive. The new residence permits “ICT Card” and “Mobile ICT Card”, which were called into life in 2017, are intended to facilitate the internal transfer of managers, specialists or trainees within companies under easier conditions. In contrast to the EU Blue Card, which is intended to facilitate the permanent immigration of highly qualified workers to Germany, the ICT Card and the Mobile ICT Card are intended to enable the temporary transfer of third-country nationals within a company. As this is an EU residence permit, it is issued in all EU Member States, as long as the requirements are met – except for Denmark and Ireland. Third-country nationals who hold an ICT Card issued in another Member State, for example, may stay and work in Germany for up to 90 days within 180 days without needing an additional German residence permit. The introduction of the ICT Card has greatly facilitated short-term mobility within the EU.

Due to the multitude of possible residence permits, comprehensive advice should be sought in advance in all cases; otherwise the lack of action can be costly:

If third-country nationals are employed without the required residence permit or if they carry out work that is not permitted under the residence permit, this is an administrative offence. The employee will face a fine of up to 5,000 euros, the employer even up to 500,000 euros. In addition, any fine over 200 euros will be recorded in the central business register. Also, depending on the circumstances of the individual case, criminal provisions may come into play.

Employment of external staff in Germany

The EU’s labour market is generally freely accessible. This means that EU citizens who want to stay in Germany to work there or for vocational training do not need any visa to enter the country or any residence permit to stay.

However, also in the case of European nationals critical are situations when foreign companies with their own workforce are hired as subcontractors to implement projects. In addition to the question of whether their work is permitted under residence law for third-country nationals, there is also a question how the work will be carried out and what must be observed. This is because in this scenario it is often questionable whether a contract for work or services actually exists or whether the arrangement constitutes employee leasing, which is an illegal practice. In the case of an illegal employee leasing, the hiring company can face heavy fines and possibly even imprisonment.

Social security and tax liability risks

The consequences arising from social security and tax law ultimately depend on the country from which the assignment is placed, the country of origin of the employee and whether there are bilateral treaties with the respective country; as regards taxes, double taxation agreements should be taken into account. As regards social security, Regulation (EC) No 883/2004 or any social security treaties can apply.

Social security law in the EU/EEA/Switzerland

The applicable legal provisions relating to social security are determined within the EU, EEA and in Switzerland based on Regulation (EC) No 883/2004. The Regulation determines, among others, that social security contributions should always be made in one EU Member State, and coordinates the applicable social security law. Generally, the applicability of the social security law depends on the place where work is performed. There are, however, exceptions to this rule, e.g. when a worker is assigned or works in multiple countries. Therefore, in cross-border matters, employers should make sure to check which country’s social security law is applicable before the employee starts to work. For evidentiary purposes, an application for the so-called A1 certificate should then be filed. The A1 form bindingly certifies the applicable law relating to social security and evidences in which country social security contributions should be paid. The employee must carry this certificate along and present it to the authorities in case of a check.

If the applicable social security law was determined incorrectly and contributions are paid in the wrong country, this can involve liability risks under national law of the respective country. In addition, there were diverse ECJ judgments which should be taken into account in this regard. Before every cross-border employment it should therefore be checked in which country the social security contributions should be paid, otherwise, a wrong assessment can also quickly give rise to criminal liability.

Social security law and its applicability in the context of bilateral social security treaties

Germany signed social security treaties with several third countries. In these treaties, mostly only individual insurance areas are coordinated (e.g. USA – pension insurance). However, there are also social security treaties that coordinate almost all areas of social security, such as the treaty with Turkey (only long-term care insurance is not covered by the treaty). As regards inbound matters, it may also be necessary to consider further special aspects. For example, it is possible for an U.S. inpatriate posted for up to two years to remain liable for pension insurance in the USA and be exempt from paying contributions to German pension, health and long-term care insurance. If, additionally, the employee is deemed to have the inpatriate employee status in accordance with Article 5 of the Social Code IV (SGB), that inpatriate employee would also be exempt from paying unemployment insurance contributions in Germany.

Social security law in a foreign country with no signed treaty

There are also diverse third countries with which Germany does not have social security treaties in place. In this case, no coordination based on a bilateral agreement is possible. Because of the fact that in social security, the country of employment principle applies, this means that the social security law of the country in which the employee performs work is generally applicable. Special rules can however apply to expats under the respective national law. In inbound cases where an employee comes to Germany, it should be checked whether the provisions of Article 5 of the Social Code IV apply.

Tax law

Bilateral double taxation treaties assign the right of taxation to one or the other contracting state in cross-border situations and thus serve to eliminate double taxation. In addition, however, the national tax regulations must also be observed, which have priority when it comes to establishing a possible right of taxation. In such cases, it often turns out to be problematic that employees coming from abroad are not aware that the tax regulations in Germany may be very different from those applicable in their home country. This should be discussed with the employees in advance to avoid surprises as regards the amount of tax or the deductibility of expenses.

Risk of disguised employment

A great source of risk for companies is the hiring of freelancers. In many cases, such workers are actually not self-employed but employees of other companies. It is not a rare case in practice: A programmer from abroad is procured for an IT project through an agency. He has an office along with a company email address at the German client's company and possibly even submits hourly time sheets. In return, he is paid a fixed amount of money every month.

In this case, wage tax and social security contributions may have to be paid for this employee if he has only this one client.

If this is discovered by an external auditor, this may lead to considerable consequences – due to disguised employment and tax evasion. The employer bears sole liability and must retroactively pay both the employer's and the employee’s portion of social security contributions. In addition, there is the risk of penalties for late payment and fines or penal sanctions under tax law. The risk of this being discovered during external audits is not insignificant, because such cases are predestined for a more thorough examination of the facts.

Also, if there are disputes with the employee or if an occupational accident occurs, the authorities could quickly discern that the agreement with the employee is “tinted”.

As the presented examples show, employment in international situations can often be complicated and time-consuming. It is therefore essential to seek appropriate advice and examine the matter in advance.