Germany remains one of the most appealing destinations for international business expansion with the forecasted GDP growth of 1.6% during 2020. It is the world’s fourth largest and one of the most efficient economies. A true global leader in tech and automotive industries, as well as pharmaceuticals and financial services.
Germany is the largest consumer market in the European Union with the population of 82.3 million people. The significance of the German marketplace goes well beyond its borders. The volume of trade, number of consumers, and Germany’s geographic location at the centre of the EU make it the starting point of European expansion strategies for many companies.
Challenges you may face
First of all, the process of moving your business to Germany can become rather expensive and time-consuming. This is mainly due to complex legislation and the government being extremely protective of established local companies.
In addition to this, as a result of incredibly high employment tares and rapidly ageing population, Germany is currently experiencing a severe skill shortage. Many firms are no longer in a position to source the skills within the domestic market and are actively seeking talents from abroad.
Another key challenge is keeping up on top of the country’s employment legislation. Germany has one of the most highly regulated labour markets in the world. With its labour law designed to protect employees.
Understanding German payroll
To Launch your business in Germany, first of all your company must complete all applicable registration to the country’s tax and social security authorities. That includes applying for an employer number. That is necessary in order to hire employees and register them for social and health insurance. The company must also apply for a dedicated tax number and for statutory accident insurance, known as ‘Berufsgenossenschaft’.
It can take up to six weeks for all such registration information to be fully processed. During that time, your organisation should set up a bank account. While it is not mandatory to pay employees from an in-country account, it is recommended for employers to have at least one German account where government entities can send any reimbursement payments. In agreement with your local work council, you must also determine the form, and timing of payments and payslips.
To start with, your employees must have a work permit,known as ‘Arbeitsgenehmiung’ or ‘Arbeitserlaubnis’. Or a residency permit that allows them to work. They also require a tax card ‘Lohnsteuerkarte’ and a social security number ‘Sozialversicherungsnummer’.
Every employee regardless if they are German citizens or a resident, is subject to income tax by the federal tax authority. It is employer’s responsibility to calculate the income tax amount for each employee and supply the withheld amount to the authorities. Individual tax rates, 2018 are:
Up to €9,000 – 0%
€9,000 – €54,949 – 14%
€54,949 – €260,532 – 42%
€260,533 and up – 45%
Additional 5.5% Solidarity Surcharge Tax ‘Solidaritaetszuschlag’ is being applied on top of the income tax.
The penalty for a late submission is a maximum 10% of the assessed tax, and interest due for a late payment is 6% per annum.
Social security contributions
Both, employers and employees are obliged to contribute to Germany’s statutory social insurance scheme:
✔️ Health Insurance. Contributions to health insurance are split equally between employers and employees. The basic contribution rate for public health insurance is 15.6% of the employees’s gross income.
✔️ Nursing Care. Employees are also required to carry long-term nursing care insurance, which is charged at 22.5% of their gross salary and split equally between the employer and employee. Childless employees are being charged extra 0.25% on top of their contributions.
✔️ Pension Insurance. 8.6% pension insurance is mandatory for all employees. Again, it is equally divided between the employee and employer and is automatically deducted from employee’s gross income.
✔️ Unemployment Insurance. A of 2013 compulsory unemployment insurance is 3% of the gross wage, split equally between the employer and the employee.
✔️ Work accident insurance. 11.9% occupational accident insurance covers accidents while working and is paid solely be the employer.
Not the easiest of countries to start your business in with so many rules and regulations in place. However, it should not stop you from benefiting from this abundant market.
Contacts us now to find out how Business Expansion PEO, Employee Mobilisation and Project Enablement can help you avoid the risks of international expansion.