Germany at a Glance

The terms of the employment (for example, working hours, remuneration, holidays, and benefits) are usually agreed on in a written employment agreement. Except for fixed-term employment and non-compete obligations (which must be in writing), verbal agreements are also permissible, but are not recommended. In addition, the employer is obliged to provide a written statement of the employment terms to the employee within one month of the commencement of employment. The written statement must include, in particular:

• Start date of the employment,
• Usual work location
• Brief job description
• Salary and other elements of the remuneration, and the due dates of such payments
• Working hours
• Rest times
• Annual holidays
• Notice period
• Applicable collective agreements
• Procedures in the event of termination

For definite-term contracts, there must be documentation showing evidence of wet signature prior to the start date of the employee.

Employment agreements often include additional provisions, such as:

• The flexibility to assign other comparable duties,
• Confidentiality provisions,
• Non-compete requirements for approval of other occupations,
• Provisions regarding the return of company property, and
• Deadlines to claim rights based on the employment relationship.

The terms of the employment contract may not provide for lesser conditions than any minimum legal entitlements established in employment legislation or by applicable collective agreement.

Fixed term contracts are only permissible for objective and material reasons. However, contracts with a term of 2 years or less are exempt from this ruling. Within this period the maximum number of successive fixed term contracts is 4. Fixed term contracts and contracts under AüG license must be signed in original, hard copy, wet signature.

Probation periods are permitted up to 6 months in length. During the probation period both parties are entitled to give 2 weeks’ notice of termination.

An average working week is considered to be 38-40. Workdays are typically 8 hours and should not exceed 10 hours. There is a statutory maximum of 48 work hours per week as average in any 6-month period. There must always be an uninterrupted minimum break of 11 hours after every workday. Work on Sundays and official holidays requires special permission.

No overtime rate set forth by statute, instead subject to contractual agreement, which is largely regulated by standard contract term provisions. The agreement needs to be fair; any provision incorporating overtime into overall wages needs to be related to a defined amount of overtime.

In most instances the Dismissal Protection Act (“Kundigungsschutzgesetz”) will be applicable (once the employee is employed for more than six months) and this act states a termination is only effective on the following grounds:

• conduct related (malperformance or misconduct)
• personal (such as longstanding illness) or
• operational reasons.

Certain employee groups enjoy special protection against dismissal (such as pregnant employees and mothers within four months after the birth of the child, employees during parental leave or care-giver leave, severely disabled employees, works council members, data protection officers). The dismissal notification must be given in writing (i.e. signed in wet ink by a duly authorized representative of the employer) but does not have to state the reasons for the dismissal. The dismissal letter must be delivered to the employee in its original form. Where there is a dispute, the employer is required to evidence the proper and timely delivery of the dismissal notification.

The Employer is obliged to give the Employee the following notice:

The Employee is obliged to give the Employer the following notice:

Must be in writing. Those that protect the employer’s legitimate business interests can generally be enforced if reasonable.

Non-competes – Typically no longer than 6-12 months, with a statutory maximum of 2 years. Compensation of 50% of the employee’s wages is required during the non-compete period.

Customer non-solicits – Permissible only in narrow circumstances.

Employee non-solicits – Permissible only if related to illegal poaching; an agreement not to hire employees from a certain business is not enforceable.

Requirements of setting up a Subsidiary:

• At least one individual or legal entity is required as a shareholder.
• For a UG/Mini-GmbH, the minimum paid-up capital is just 1 euro. However, it’s important to note that the company will need to retain a portion of its profits until it reaches a capital reserve of 25,000 euros. For a GmbH, the minimum paid-up share capital is 25,000 euros, with at least half of it required to be paid in at the time of incorporation.
• At least one director is required to manage the company.

Requirements of setting up a Branch:

• No shareholders are necessary as the branch is considered part of the parent company and does not have its own legal entity.
• Share capital requirements do not apply as it is part of the parent company.
• No directors are needed as it operates under the management of the parent company.

While a resident director is not legally required in Germany, having one with a local address can simplify interactions with banks, tax authorities, and other local agencies. However, a non-resident director can also be appointed if preferred.

The type of insurance required will depend on the nature of the business and its sector. Common mandatory insurances include:

• Property Insurance
• Liability Insurance
• Professional Indemnity Insurance
• Workers’ Compensation Insurance

These insurances are often necessary to ensure the business is compliant with local laws and to protect the company against potential risks. Local brokers can provide assistance in identifying and acquiring the right insurance policies for your business.

While a physical office is not required to make the entity operational, a registered business address is mandatory. This registered address is where official communications and legal notices will be sent. Many businesses opt for virtual office services or shared workspaces, which can fulfil this requirement without needing a full physical office.

Opening a business bank account in Germany typically takes one to two weeks. However, it requires submitting necessary documentation either in person or online, depending on the bank. Key documents include proof of address, identification, and the registration certificate (Anmeldung). It’s important to be prepared with all the necessary paperwork to avoid delays.

In Germany, business profits are subject to two primary taxes:

• Corporate Tax: The flat rate for corporate tax is 15%. An additional solidarity surcharge of 5.5% is applied to the corporate tax amount, bringing the effective corporate tax rate to 15.825%.
• Trade Tax: This tax varies depending on the municipality in which the business operates. The rate is calculated as a percentage of 3.5% of the trade tax base, and municipal rates typically range from 200% to 600%. The average trade tax rate is 407%, resulting in an effective trade tax rate of approximately 14.245%.

Specific rules exist for calculating the trade tax base, which can vary based on the nature of the business.

Germany imposes a Value Added Tax (VAT) on goods and services. The standard VAT rate is 19%, while a reduced rate of 7% applies to specific items, such as food and medical products.

The deadline for filing corporate income tax and trade tax returns is July 31 of the year following the fiscal year. Extensions can be granted with proper justification. Additionally, companies must make quarterly tax instalments due on the 10th of March, June, September, and December.

Profit repatriation applies primarily to subsidiaries. There are legal and procedural requirements that must be followed for transferring profits abroad. This typically involves tax considerations and may require approvals from local tax authorities. Consulting with a legal or financial expert can ensure compliance with German tax laws and regulations.

Foreign companies operating in Germany are not required to appoint a tax representative. However, they should ensure they comply with local tax obligations and file returns as required.

Personal income in Germany is taxed at a progressive rate, ranging from 14% to 45% depending on the employee’s annual earnings. This means the higher the income, the higher the tax rate.

Income tax in Germany is calculated by applying a progressive tax rate schedule to taxable income as follows:

* Figures in brackets denote a married couple filing a joint return

In addition to the rates above, the following taxes and surcharges are levied on all types of income:

• Solidarity surcharge: 5.5% of the income tax if the income tax exceeds EUR 19,950 (single/separately assessed taxpayers) or EUR 39,900 (married/joint tax assessment)
• Church tax: 8 or 9 % of the income tax – church tax is only levied if the taxpayer is a member of a church that is recognized for church tax purposes.

The following categories of income are exempt from tax:

• certain payments from health or accident insurance
• certain social security benefits including unemployment benefits and maternity grants
• kindergarten fees if certain conditions are met.

In case a secondary household is established in Germany for business purposes, the following payments are exempt under certain circumstances:

• home trips (once per week)
• meal allowances up to certain amounts and subject to certain time limits
• rent at the place of work (actual costs but limited to EUR – 1,000 per month).
• If certain other conditions are met, rental cost incurred for the employee, meal allowances and commuting expenses can be reimbursed tax-free, in general.
• Wage tax is due monthly and must be withheld on salary by the employer. Other categories of income where prepayments may be due will be assessed by the authorities and paid by the individual.
• Interests, dividends and capital gains on stocks are subject to a flat tax of 25% plus a solidarity charge.

Companies are responsible for ensuring that social security contributions are properly withheld and submitted on time.

Social security contributions in Germany cover key areas such as healthcare, long-term care, pensions, and unemployment benefits. These contributions are divided between the employee and employer, with the employer often handling the remittance of the total amount.

Employment income in Germany is subject to various mandatory social security contributions. These include:

• Pension Insurance: 18.60% of the employee’s gross salary, split equally between the employer and employee.
• Unemployment Insurance: 2.40%, also split equally between the employer and employee.
• Health Insurance: 14.60% (up to an income ceiling of €58,050 annually), split equally between employer and employee.
• Long-Term Care Insurance: 3.05% (up to an income ceiling of €58,050 annually), again shared equally between employer and employee.
• Insolvency Contribution: 0.09% (up to an income ceiling of €84,600 annually), paid solely by the employer.
• Work Accident Scheme: The rate varies depending on the industry and is paid entirely by the employer.

The employer is obligated to make the social security contributions as follows:

* The Continued remuneration insurance (U1, U2, U3) consists of contributions for Disability insurance (U1), Maternity insurance (U2), and Insolvency insurance (U3). The percentage is subject to change depending on the employing entity.

** 1.80% is for employees with one child. For employees without children, the rate is 2.4%. Employees with several children are relieved of 0.25 points per child from the 2nd child up to the 5th child. The reduction applies until the end of the month in which the child reaches the age of 25 in each case. After that, the discount will no longer apply to these children.

Note: The above rates serve as a broad guideline. Actual rates charged will differ.

Bonuses are common but care should be taken to ensure clear and objective language in the contract or an addendum to the contract. For example, schemes may refer to a bonus as entirely discretionary, in practice as soon as a bonus has any relation to performance it is very difficult for the employer to make it entirely discretionary.

In certain cases, employers may be required to provide severance payments. The amount depends on factors such as the employee’s length of service and the nature of their contract.

No statutory severance. A valid dismissal will end the employment without compensation, unless it is part of a collective restructuring covered by a social plan agreed with the works council. Invalid dismissal leads to enforced reinstatement by the labour courts, unless the parties settle the dispute. Settlements are standard; the general formula is between 0.5 and 1.5 monthly salaries per year of service. There is no maximum threshold on settlements.

No statutory right to pay in lieu of notice. As to garden leave, the right depends on contract terms and merits of the case, applying a weighting of interests between both parties. Garden leave is common for senior employees.

The gross salary is the amount an employer pays to an employee before any deductions. It varies based on the employee’s position, skills, experience, and the industry in which they work.

Normally paid monthly on or around the last workday of the month, payment must be made by electronic transfer.

If an employee has an employment contract, then a written salary advice showing gross payments and full details of deductions is a legal requirement.

Employers are required to track the actual working time of their employees. This means that the start, end, and duration of working hours, including overtime and breaks, must be accurately recorded. If this obligation is delegated to the employees, the employer must provide the tools necessary for the employees to fulfill this obligation.

Employees are entitled to paid vacation days, and employers must observe public holidays. Employees working on public holidays are generally entitled to higher pay, which adds to the overall cost of employment.

There is a minimum entitlement of 20 days per annum (full time employees). However, many employees are provided with a greater number of days; 25-30 days is common practice amongst white collar employees.

Holiday should under normal circumstances be used in the same year. Carry over is only permissible if urgent to the business operation or for urgent personal reasons for the employee. However, all carry over must be agreed by both the employer and the employee and must be used within the first 3 months of new holiday year.

Employees are entitled to receive the full remuneration from their employer for up to six weeks of sickness, subject to certain conditions. Afterwards they can apply for sick pay with the statutory (or voluntary private) health insurance for up to 72 weeks.

Women must not work for a period of six weeks before giving birth and eight to twelve weeks after.

A woman is entitled to 14 weeks maternity pay which is equal to the last salary and funded by the employer with a contribution from the employee’s health insurance.

Mothers and fathers are entitled to parental leave of up to three years. Parental leave paid by the state for 12 months (14 months if the other parent takes at least 2 months) with a 67% net payment rate. Further 24 months of unpaid parental leave possible with full protection of the workplace and right to return to work.

While on parental leave and subject to certain conditions, the employee is entitled to take up part-time employment of up to 30 hours per week either with the original or with a different employer (in the latter case the permission of the original employer is required). At the end of parental leave the employee is entitled to return to work on their original terms and conditions.

Employees who are pregnant or on maternity or parental leave have additional protection against dismissal.

Employees who need to provide acute care for a child or adult dependent are entitled to up to 15 days caregiver leave from the employer. Employers may be obliged to continue salary payment if notice of this exists in a bargaining agreement or the employment contract. If not paid, employees can claim subsidy from the state under the Nursing Insurance social provision.

Compassionate and Bereavement Leave

Any leave, other than the above-mentioned statutory leaves (e.g. compassionate leaves, leave when moving) is generally subject to individual negotiations or may be part of collective bargaining agreements/works council agreements.

German public holidays, between 9 and 12 days, are determined by each federal state (except German Unity day). There is in principle a ban on working on public holidays, to which there are only a few exceptions. Holidays are normally observed on their calendar day.

Social security contributions underwrite an excellent social provision in Germany ranging from unemployment benefit of up to 67% of previously received net salary to one of the best and most comprehensive health care systems in the world, providing its residents with health, sick pay and long-term nursing care insurance coverage.

The employee can choose between different statutory health insurances. Only employees with an income exceeding the annual remuneration thresholds are exempt. They can become members of private health insurances. In both cases, the contributions are shared equally by the employer and the employee.

Statutory accident insurance offers protection for employees who suffer an accident while working. In principle, this protection also applies when working from home, but there are a few important aspects to bear in mind.

Accidents that occur during working hours in the home office are generally covered by accident insurance as long as they are directly related to the professional activity. This means that accidents that occur during work or on the way to a home office workplace are generally covered.

However, private activities that take place during working hours in the home office are not covered by statutory accident insurance. It is therefore important to draw clear boundaries between professional and private activities.

In order to be covered in the event of an accident while working from home, employees should ensure that their workstation is ergonomically designed and that they take regular breaks. In the event of an accident, it is advisable to report it immediately and seek medical advice if necessary.

In summary, it can be said that statutory accident insurance also applies when working from home as long as the accidents are related to work-related activities.

• Employers often provide additional benefits to employees, such as bonuses, meal allowances, and transportation subsidies. These benefits can vary based on company policies and the norms within specific industries.
• There are no mandatory extra payment obligations for employers in Germany, although additional voluntary payments can be made based on company policy or employee contracts.
• Depending on the sector or specific collective bargaining agreements, companies may incur additional costs related to benefits or legal obligations. These could include allowances for meals, transportation, training, and private insurance.

Different types of bonus payments and other benefits are common, all of which have to be negotiated individually or are typically part of collective bargaining agreements/works council agreements, such as company car, car allowances, gym memberships, group accident insurances, “Jobticket” (subsidised commuter passes) , childcare arrangements or allowances, or additional allowance for sick pay.

If an employee’s role requires a lot of business travel and a company car is not provided, it is common practice to pay a car allowance.

The car allowance is a normal taxable amount like gross salary.

The amount can be dependent on how many business trips the private car will be used for, which kind of car will be used etc. Typical allowances range from €500 to €800 per month but can also be as high as €1,400 per month in certain circumstances.

Please note, that the employer is still allowed to pay an additional mileage rate of €0.30 per km for all business-related kilometers driven with the private car. This mileage rate is tax free.