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Germany, formally the Federal Republic of Germany, is a Central European nation. It is Europe's second most populated nation, behind Russia, and the European Union's most populous member state. Germany is located between the Baltic and North Seas to the north and the Alps to the south; it has a land area of 357,022 square kilometers (137,847 square miles) and a population of more than 83 million people divided among its 16 component states. Germany is bordered to the north by Denmark, to the east by Poland and the Czech Republic, to the south by Austria and Switzerland, and to the west by France, Luxembourg, Belgium, and the Netherlands. The nation's capital and biggest city is Berlin, and its financial center is Frankfurt; the Ruhr is the largest metropolitan region.
Since ancient antiquity, many Germanic tribes have occupied the northern areas of contemporary Germany. Before the year 100, there existed an area known as Germania. German regions were an important element of the Holy Roman Empire in the 10th century. Northern German territories were the Protestant Reformation's epicenter throughout the 16th century. The German Confederation was created in 1815, after the Napoleonic Wars and the breakup of the Holy Roman Empire in 1806. Germany became a nation-state in 1871 when the majority of German states merged to form the Prussian-dominated German Empire. The Empire was superseded by the semi-presidential Weimar Republic after World War I and the German Revolution of 1918–1919.
The Nazi takeover of power in 1933 resulted in a totalitarian government, World War II, and the Holocaust. Following the conclusion of World War II in Europe and a period of Allied occupation, Germany was split into the Federal Republic of Germany, often referred to as West Germany, and the German Democratic Republic commonly referred to as East Germany. The German Democratic Republic was a communist Eastern Bloc state and Warsaw Pact member, whereas the Federal Republic of Germany was a founding member of the European Economic Community and the European Union. Following the collapse of communism, the former East German states joined the Federal Republic of Germany on 3 October 1990, becoming a federal parliamentary republic.
Germany is a major power with a robust economy; it is Europe's biggest economy, the world's fourth-largest economy by nominal GDP, and the fifth-largest by PPP. It is the world's third-largest exporter and importer of products, as well as a worldwide leader in various industrial, scientific, and technical fields. As a developed nation with a high Human Development Index score, it provides social security and a universal health care system, as well as environmental safeguards and tuition-free university education. Germany is a member of the United Nations, NATO, the Group of Seven, the Group of Twenty, and the Organization for Economic Cooperation and Development. It is home to the third-most UNESCO World Heritage Sites.
At least 20 working days are needed (with respect to a 5-day working week) in Germany. Most employees, under their employer of record, have 25-30 days a year. In most cases, the employee is required to use his or her sick days during the fiscal year. Vacation days may be rolled forward to March 31st of the next calendar year unless the employer specifies otherwise. If an employee has any accrued sick days at the time of retirement, the company will pay the employee for those days on behalf of the employer.
The holidays in Germany vary by province. There are, however, nine national holidays observed by all nations. The employer of record is responsible for ensuring these days are respected.
In Germany, the first six weeks of sick leave are provided by the company and are paid at 100% of the normal wage. Any extra payments will be covered by the health insurer after 6 weeks (the amount will not be the full salary and will be determined according to personal criteria). When an employee takes sick leave, they must contact their employer of record and send a doctor's statement if the leave is more than three days.
In Germany, mothers are entitled to 6 weeks of paid leave due to the birth of their child and 8 weeks of paid leave following the birth of their child. With the birth of a premature or multiple child, the employee is entitled to 12 weeks of paid leave. The employer will have to pay the employee's wages after the maternity leave, and the health care provider will repay the employer in full. The employment contract with the employer of record usually stipulates these conditions.
In Germany, parental leave includes paternity leave. The employer of record must be aware of this regulation.
Parental leave in Germany is 36 months long and should be shared equally between the parents. This leave includes the eight weeks of maternity leave (following delivery). When it comes to mothers, the parental leave begins after maternity leave ends. Parents will work part-time for up to 30 hours a week while on parental leave with the approval of their employer of record. In the first three years of birth, at least 12 months of parental leave must be taken; the remaining 24 months will be taken before the infant hits the age of eight. Parental leave does not begin automatically; it must be demanded in writing or forwarded to the employer at least seven weeks ahead of time.
After the first six months of employment, all employees are protected by the German Termination Protection Act. Employers of record in Germany must have a specific basis for dismissing an employee, and there are several types of reasons (connected to the employee's personal condition, to the employee's behavior, or to the employer's business). A written notice of dismissal must be signed by the employer of record's authorized representative. In general, ending employment without the employee's consent is a complicated process in Germany, which is why many terminations occur through mutual agreement.
The notice period in Germany, as dictated by the employment contract, shall be at least 4 weeks long, with the length of service increasing as follows. There will be a month's notice after at least two years of employment. A two-month notice period is given after two to five years of work. A three-month notice period is granted for employees who have worked for 5-8 years. There will be a four-month notice period after eight to ten years of employment. The notice period is 5 months for employees who have worked for 10-12 years. The notice period is 6 months for employees with 12-15 years of experience. Finally, there will be a 7-month notice period after 15-20 years of employment. All these are administered by the employer of record.
The probation period in the employment contract is up to 6 months and is subject to mutual agreement between both parties, the employee and the employer of record in Germany.
Severance pay in Germany is not required if the termination is justified and adequate notice is given by the employer of record. However, if a position is terminated due to operational changes, severance pay must be provided. When severance is paid, it is calculated as half a month's pay for each year of employment.
Although a six-day workweek is possible in Germany, the standard workweek is five days, eight hours per day. Employees are not permitted to work more than 48 hours per week. Daily hours may be increased to ten hours per day if the employee does not work more than 40 hours per week on average over a 24-week period. This is often stated in the employment contract with the employer of record.
Workers in industries that require continuous operation (e.g., hospitality, hospital services, and power generation) may be scheduled to work Sundays and holidays, but most other workers do not. Employees who work on a Sunday or holiday when they normally do not are typically compensated with a paid day off within two weeks. Night work (between 11 p.m. and 6 a.m.) is typically compensated by a higher rate of pay or compensatory time off. A collective bargaining agreement or contract may specify how night work is compensated precisely by the employer of record.
Overtime is typically compensated through paid time off or a higher hourly rate, but the specific rules for a particular employer are typically determined by contract or collective bargaining agreement. Frequently, board members and certain management level employees are not compensated for overtime by their employer of record.
The minimum wage in Germany is currently at 9.60 EUR per hour. On January 1, 2022, the statutory minimum wage is set to increase to 9.82 euros. On July 1, 2022, the statutory minimum wage is set to increase to 10.45 euros. This is an important aspect for any employer of record in Germany.
Pension insurance, health insurance, unemployment insurance, nursing care insurance, accident insurance, maternity insurance, and insolvency insurance are the seven components of the German Social Security System. Except for accident, maternity, and insolvency insurance, which are covered solely by the employer, contributions to those insurances are split equally between the employer and the employee. In total, the employer can expect to contribute approximately 20.7 percent of the employee's salary to social security.
Social security contributions, on the other hand, are only deducted up to a certain amount. In 2021, the maximum amount for statutory pension and unemployment insurance is 7,083 € (West) and 6,667 € (East) per month, and the maximum amount for statutory health insurance is 4,837 €. These regulations are important for any PEO or employer of record entering the German market.
Furthermore, employers frequently provide additional supplementary insurance benefits. Companies provide supplemental benefits based on collective bargaining agreements, corporate culture, and the nature of the professions. These benefits make a significant difference to employees in Germany. Therefore, as a local PEO or employer of record, it is crucial to understand these rules and regulations. It's important to note that employees are entitled to these benefits as dictated by the employment contract. It's the responsibility of the employer of record to provide these benefits on behalf of the company.
Corporation tax is levied primarily on corporate businesses, namely public and private limited firms, as well as other corporations such as cooperatives, organizations, and foundations. Profits generated by sole proprietorships and partnerships are credited to their individual partners and taxed in the context of their personal income tax bills, rather than being subject to corporation tax.
Corporate tax Corporation tax, often referred to as corporate tax, is primarily levied on business corporations, such as public and private limited firms, as well as cooperatives, organizations, and foundations. This form of taxation impacts the employer of record who is responsible for tax filings on behalf of the company. Profits generated by sole proprietorships and partnerships are attributed to their individual partners and taxed as part of their personal income tax bills, instead of being subjected to corporation tax.
Corporations headquartered or operated in Germany are assumed to be subject to full corporate taxation. This means all their profits, whether domestic or international, are taxed in Germany. Charitable foundations, Church organizations, and sports clubs are exempt from company tax. Germany's corporate tax rate has been set at 15% since January 1, 2008. When considering the solidarity surcharge (5.5% of corporate tax) and trade tax (averaging 14% in 2008), the total corporate tax in Germany is just under 30%.
Corporations headquartered or operated in Germany are presumed to be subject to full corporate taxation. This implies that all of their profits, whether domestic and international, are taxed in Germany. Charitable foundations, Church organizations, and sports clubs, for example, are free from company tax.
Germany's corporate tax rate is 15% as of January 1, 2008. Taking into account both the solidarity surcharge (5.5 percent of company tax) and trade tax (averaging 14 percent in 2008), corporate tax in Germany is slightly under 30 percent.
In Germany, the income tax rate varies from 0 to 45 percent. The German income tax is progressive, which implies that the average tax rate (i.e., the tax-to-taxable-income ratio) rises monotonically as taxable income rises. Furthermore, the German tax system guarantees that an increase in taxable income will never result in a reduction in net income after taxes. The latter characteristic is owing to the fact that the marginal tax rate (the tax paid on one euro of extra taxable income) is always less than 100%.
Married couples filing jointly have their tax obligation evaluated on half of their entire income, and the result of applying the tax tariff is then multiplied by two. Because of the progressive tax system, this is always preferable than taxing each spouse individually. This splitting advantage grows in proportion to the income disparity between the two couples.
Another interesting aspect about the German income tax system is that it is based on an individual's or married couple's net income, which includes a deduction for the social security payments they make. In 2019, this amounts to about 19.7 percent of personal income. As a result, the marginal tax rates shown below only apply to +/- 80.3 percent of an individual's income up to 55,960 euros. This reduces the typical employee's income tax obligation by approximately 4%, but it is still feasible to pay an effective rate of almost 45 percent if your income is high enough. Finally, there is a tax refund that often amounts to about 1000 euros.
In general, the rate of value-added tax in Germany is 19 percent. A lower tax rate of 7% applies, for example, to the sale of certain goods, books and periodicals, and transportation.
Because of COVID-19, the government agreed to cut the rates to 16% (reduced: 5%) from 1 July 2020 to 31 December 2020.
Certain goods and services are legally exempt from VAT; this applies to both German and foreign businesses. The federal employment agency oversees the implementation of VAT exemptions, which include financial services, long-term real estate leasing, and cultural services provided to the public.
For example, the following are exempted from German value-added tax:
export deliveries
intra-community supply of goods
services provided by certain professional groups (e.g. doctors)
financial services (e.g. granting loans)
letting real estate in the long-term
cultural services provided to the public (e.g. by public theatres, museums, zoos, etc.),
value-added by certain institutions providing general education or vocational training
services provided in an honorary or voluntary capacity.
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In order to work in Germany, a long-term (national) German visa type D is required, as it allows foreigners to stay in the country for more than three months. The German laws on this changed in 2020 in terms of the necessary level of skills; it now requires a degree level of expertise, in addition to proficiency in German. The process to get such visas can be a lengthy one but as your employer of record, Rivermate would be able to streamline this process for you.
There are different types of visas including the EU Blue Card, Permanent Residence for Highly Qualified Personnel, General Employment Visa, and a Visa for Job Search. The EU Blue Card allows a worker to work in any European country, given they have a university degree, an employment contract, and earn a certain salary threshold.
The permanent residence criterion for valued personnel applies to renowned scientists, researchers, and academics. Highly qualified specialists in Germany could get a work visa if they have the necessary skills and an annual income of 86,400 EUR.
The General employment visa is the most common type of German work visa. It doesn't have stringent rules about education and specialization, and the profession must be in high demand at the time of application. To apply for a visa, you first have to verify your qualifications and have a signed employment contract.
The Visa for job search is a work visa for prospective employment in Germany. If granted, a person can stay in the country for a maximum of six months before they have to re-register or get a residence visa.
Fixed-term contracts must be in writing. An indefinite employment contract may be oral or written, but the written form is strongly recommended. At minimum, a written contract should state:
The identities and addresses of the parties
The date the employee will begin work
The term of the contract if it is for a fixed term
The workplace, and a clause stating that the employee may be transferred or relocated if this is a possibility
A brief job description
The amount of the employee’s salary and any other components of the employee’s compensation, and the intervals at which the employee will be paid
The employee’s working hours
The amount of annual leave the employee is entitled to
Notice periods for the termination of the employment relationship
The length of the probation period if there will be one. Probation periods may not be longer than six months
What collective agreement, company agreement, or other agreement applies to the contract
If there is no written contract, the employer must disclose this information to the employee in writing within one month of the employee’s first day of work
With Rivermate being your Employer of Record (EoR) in Germany, you do not have to worry about the employment contracts, as we take care of that.
In Germany, employment contracts are either indefinite or for a set period of time. Fixed-term contracts are generally limited to two years and may be extended or renewed up to two times, provided that the initial contracts, as well as subsequent extensions and renewals, do not exceed the two-year maximum. If there is a basis for a longer duration, the fixed-term contract might be for more than two years. Start-up enterprises, in instance, may engage staff on fixed-term contracts of up to four years without reason.
The payment currency in Germany is Euro (EUR).
Part of setting up a subsidiary in Germany involves completing all necessary registrations for Germany's tax and social security programs. Before hiring employees and registering them for health insurance, you need to apply for an employer number. This process may take up to six weeks. During this time, you should open bank accounts in Germany for potential government refunds.
According to German subsidiary laws, a subsidiary is a limited liability company with its own share capital, management, and accounting system separate from the parent company in the United States. You may still operate under the parent company's name.
It is crucial to stay updated on all subsidiary accounting regulations. Subsidiary laws in Germany require you to register with your local tax office online through the Federal German Fiscal Authority's Form Management System (FMS). The amount you owe will be determined by the tax office depending on the amount of profit you report on the registration documents. The next year, your tax returns are due on May 31.
