Handbook. Rules on the supply of services or work under the freedom to provide services and the freedom of establishment

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1 Handbook Rules on the supply of services or work under the freedom to provide services and the freedom of establishment version 2012

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3 Handbook Rules on the supply of services or work under the freedom to provide services and the freedom of establishment version 2012

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5 Page 3 Index Page Foreword Definition of the fundamental freedoms Freedom of movement for workers Freedom to provide services Freedom of establishment Provision of cross-border services Legal framework Social security law Right of residence Work permits Supply of temporary workers Minimum work standards required under the Posted Workers Act Minimum work standards set out in collective agreements or ordinances issued pursuant to sections 7 an 11 of the AEntG Minimum work standards applying to all sectors International cooperation between liaison offices and monitoring authorities Tax law The obligation to pay wages tax in Germany Wages tax and liability for the tax Obligations of the employee and the employer Value added tax (VAT) Tax registration Trading law Law on trades and crafts Provision of cross-border services by a trade and crafts business Requirements for the issue of a special authorisation... 30

6 Page 4 Index 2.2 Consequences of non-compliance Social security law Right of residence Work permits Supply of temporary workers Posted Workers Act Administrative offences contrary to section 23 of the AEntG Exploitive wages Failure to comply with other provisions Tax law Trading law Law on trades and crafts Exclusion from public contracts Freedom of establishment Legal framework Tax law Trading law Law on trades and crafts Fake self-employment Criteria to distinguish self-employment from dependent employment Self-employed persons Partnerships Consequences of fake self-employment Workers Social security law The right of residence The law on work permits Posted Workers Act Tax law Employers Social security law Consequences with regard to the right of residence... 43

7 Page Work permits Supply of temporary workers Posted Workers Act Tax law Annexes Annex A Examples of documents Appendix 1: Form A1 Appendix 2: Form E 101 Appendix 3: Appendix 4: Application to establish social security status Application for a work permit for EU citizens Appendix 5: Permit to supply temporary workers 1 Appendix 6: Registration of a trade Annex B Appendix A to the Trade and Crafts Code 1 Following a change in the law, the scope of the Temporary Employment Act (AÜG) and the permit requirement under that law are extended from 1 December From that date, a firm supplying temporary workers will require a permit if that firm supplies such workers within the scope of its own business. Permits issued on or after 1 December 2011 will include a new wording to reflect that change.

8 Page 6 Abbreviations Abbreviations AEntG AO ArGV ASAV AÜG AufenthG BauBetrV BeschV BeschVerfV BGB BRTV EC ECJ EEC EEA EStG EU EU/EWR-HwV FreizügG/EU Arbeitnehmer-Entsendegesetz (Posting Workers Act) Abgabenordnung (Fiscal Code) Arbeitsgenehmigungsverordnung (Work Permits Ordinance) Anwerbestoppausnahmeverordnung (Ordinance on Work Permits for EU Workers) Arbeitnehmerüberlassungsgesetz (Temporary Employment Act) Aufenthaltsgesetz (Residence Act) Baubetriebe-Verordnung (Construction Industry Ordinance) Beschäftigungsverordnung (Ordinance on the Recruitment of Foreign Workers) Beschäftigungsverfahrensverordnung (Ordinance on the Procedure for the Recruitment of Foreign Workers) Bürgerliches Gesetzbuch (Civil Code) Bundesrahmentarifvertrag für das Baugewerbe (Framework collective agreement for the construction industry) European Community European Court of Justice European Economic Community European Economic Area Einkommensteuergesetz (Income Tax Act) European Union EU/EWR-Handwerk-Verordnung (Ordinance on the Exercise of Trades and Crafts by EU and EEA Nationals) Gesetz über die allgemeine Freizügigkeit von Unionsbürgern (Act on the Free Movement of Union Citizens)

9 Page 7 GbR Gesellschaft bürgerlichen Rechts (Partnership governed by civil law) GewO Gewerbeordnung (Trade Regulation Code) GWB Gesetz gegen Wettbewerbsbeschränkungen (Act Against Restraints of Competition) HwO Handwerksordnung (Trade and Crafts Code) LStDV Lohnsteuer-Durchführungsverordnung (Wages Tax Implementing Ordinance) NachwG Nachweisgesetz (Act on the Proof of an Employment Relationship) SchwarzArbG Schwarzarbeitsbekämpfungsgesetz (Act to Combat Illegal Employment) SGB III Sozialgesetzbuch Drittes Buch Arbeitsförderung (Social Security Code Book 3 Promotion of Employment) SGB IV Sozialgesetzbuch Viertes Buch Gemeinsame Vorschriften über die Sozialversicherung (Social Security Code Book 4 Common Provisions ) StGB Strafgesetzbuch (Criminal Code) TV Mindestlohn Bau TVG ULAK UStAE UStG ZVK Tarifvertrag zur Regelung eines Mindestlohns im Baugewerbe (Collective agreement on a minimum wage in the construction industry) Tarifvertragsgesetz (Collective Agreement Act) Urlaubs- und Lohnausgleichskasse der Bauwirtschaft (Paid leave fund for the construction industry) Umsatzsteuer-Anwendungserlass (VAT Application Ordinance) Umsatzsteuergesetz (Value Added Tax (VAT) Act) Zusatzversorgungskasse (Supplementary pension fund)

10 Page 8 Foreword Foreword Since 1 May 2004, the following countries have been Member States of the European Union: Cyprus, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia and Slovenia. On 1 January 2007, these were joined by Bulgaria and Romania. In accordance with the provisions of the accession treaties, the Federal Republic of Germany opted to restrict for a transitional period the freedom of movement for workers and in certain sectors (construction, cleaning services and interior design) the freedom to provide services. Since 1 May 2011, those restrictions have ceased to apply to nationals of the Member States which joined the EU in Nationals of those Member States are now entitled to make full use of their EU rights to free movement. For nationals of Bulgaria and Romania the restrictions apply until 31 December These restrictions may be extended for one further period until the end of Certain developments since these new Member States joined the EU suggest that existing rules on the freedom to provide cross-border services and on the freedom of establishment in another Member State are being circumvented by means of sham selfemployment and artificial postings of workers. There are also cases where temporary workers have been supplied contrary to the rules. This is not only harmful to official bodies such as the tax authorities and social security funds but also to workers from those Member States employed on terms below agreed standards and denied social security protection. It must not be forgotten that this behaviour also damages firms operating lawfully as they are undercut by the illegal competition. In response, the Federal Ministry of Finance and the Federal Ministry of Labour and Social Affairs have acted jointly with numerous measures to ensure that existing EU rules on the freedom to provide services and the freedom of establishment are observed. For example, in 2006 a first edition of this guide was produced. This has now been updated to reflect various changes in the law. The aim of the guide is to provide an overview of the complex rules which apply in connection with cross-border provision of services and establishment. It also indicates where more detailed information may be found. As with the previous edition, the guide is intended as a reference in particular for those actively involved in the economy. Its purpose is to help avoid uncertainties for individuals and firms from other EU Member States who wish to live, work and do business lawfully in Germany. In addition, it describes the legal consequences of not observing the rules.

11 Page 9 The guide should prove a useful contribution in ensuring that the correct legal approach is taken when providing cross-border services and in establishing a business on a cross-border basis and we hope that it will assist you in your everyday work. In light of recent changes in the law, I would encourage you in particular to read its content. It goes without saying that in the event of any doubt the guide is not intended and should not be seen as a substitute for professional advice. Hartmut Koschyk Parliamentary State Secretary at the Federal Ministry of Finance Dr Ralf Brauksiepe Parliamentary State Secretary at the Federal Ministry of Labour and Social Affairs

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13 Page Definition of the fundamental freedoms 1.1 Freedom of movement for workers The freedom of movement for workers pursuant to Articles 45 to 48 of the TFEU (Treaty on the Functioning of the European Union) means, first, that workers have the right to enter, stay and remain in the country where they are employed and, second, that these workers must be treated equally with national citizens in particular as regards employment, remuneration and other conditions of work and employment. The crucial distinction between this right and the freedom of establishment and freedom to provide services, which both relate to self-employed activities, is that the worker must be subject to the instruction or control of another and work for a wage in dependent employment. Workers from other European Union Member States are entitled to access the German labour market free of any restrictions. Since 1 May 2011, the same applies to European Union citizens from the following countries which joined the EU in 2004: the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovakia and Slovenia. Special rules continue to apply to nationals of Bulgaria and Romania. Transitional arrangements included in the accession treaties allowed the Federal Republic of Germany to postpone the introduction of freedom of movement for workers for an initial period of two years (until 31 December 2008) and subsequently for a further three years (until 31 December 2011). These transitional arrangements have been extended finally for two years (until 31 December 2013). This is sometimes referred to as the rule. Because the rules on freedom of movement for workers have not entered into force for Bulgarian and Romanian nationals, these workers remain subject to special provisions governing labour market access. In general, these workers will require a work permit (for further details see section of this guide). The substantive rules governing their labour market access are generally the same as those applying to nationals from non-eu countries. However, in certain areas, Bulgarian and Romanian nationals are treated more favourably than nationals from non-eu countries. For example, when it comes to accessing the German labour market, these workers are accorded priority over nationals from non-eu countries. In addition, once they have had an entitlement to work in Germany for a continuous period of twelve months or more, they will be granted a work permit (section 12a of the ArGV). Finally, special provisions in bilateral agreements may also apply. 1.2 Freedom to provide services The freedom to provide services means that providers of services may, in order to do so, temporarily pursue their activities in

14 Page 12 another Member State under the same conditions as are imposed by that state on its nationals. The freedom to provide services applies to the temporary exercise of a selfemployed activity in another Member State. Services within the meaning of Articles 56 to 62 of the TFEU are those which are provided on a cross-border basis and normally for remuneration. In contrast to the freedom of establishment, the freedom to provide services relates to a temporary and occasional activity, that is, an activity which is for a specific period and for the purpose of a specific task. A company which provides services will have its registered office in its home country or maintain a branch in that country. The freedom to provide services allows a service provider to provide both services governed by a contract for services (Dienstleistungsvertrag) and services governed by a contract for work (Werkvertrag) as defined in German civil law. Under a contract for services, the contractor agrees to provide a specific service without any obligation to achieve a specific outcome (for example, a contract with a medical practitioner). Under a contract for work, the contractor promises to achieve a specific outcome through the provision of a service (for example, cutting and packaging 100 tonnes of meat or the construction of a specific building). On the basis of the accession treaties with Bulgaria and Romania, the Federal Republic of Germany has placed restrictions on the posting of workers in the framework of the provision of services in certain sectors. Initially, these applied for a transitional period of two years (first transitional period until 31 December 2008) and were extended for a further three years (second transitional period until 31 December 2011). These transitional arrangements have been extended finally for a further two years (until 31 December 2013). This is sometimes known as the rule. Currently, there are transitional restrictions in force in the following sectors: Construction including related trades; Cleaning of buildings, plant and equipment and means of transport; Interior decoration. Services in these sectors may not be provided using workers from Bulgaria or Romania unless work permits for those workers have been issued and/or the works contract scheme (Werkvertragsverfahren) established in bilateral agreements with those countries applies. These agreements allow a certain number of workers, agreed in advance for each of those countries, to be posted to Germany. Before the workers can start work, a works contract (as defined in sections 631 to 651 of the BGB) must have been concluded between a company which has significant activities in the workers country of origin and a German company. In all other sectors, companies from Bulgaria and Romania can post their workers to Germany in the framework of the provisions of services without restriction and without any need for a work permit. However, it should be remembered that German professional and trading rules will apply to cross-border service providers in the same way as they do to domestic providers. For certain professions, these rules include the obligation, where required by

15 Page 13 legal or administrative provision, to notify the service provision in advance. For information on proof of professional qualifications see section 1.3 below. Section of this guide contains information on the supply of temporary workers. 1.3 Freedom of establishment The freedom of establishment pursuant to Articles 49 to 55 of the TFEU means that nationals of one Member State may take up and pursue activities as self-employed persons and set up and manage firms, branches and subsidiaries on the territory of another Member State. This means that people involved in trades and crafts, members of the liberal professions, traders and merchants can set up and operate a business in Germany. However, citizens of other EU Member States are subject to the same professional and trading rules as domestic citizens. These rules include an obligation on the person concerned to provide evidence of his professional qualification where, pursuant to legal or administrative provisions, this is required to access the relevant profession and/or exercise the professional activity. As regards the exercise of a craft, proof of qualification is necessary only in relation to those crafts for which a licence is required as listed in Appendix A to the Trade and Crafts Code (HwO) (see Annex B). The person concerned must apply to the relevant authority in Germany for recognition of qualifications awarded in another Member State. Recognition will be granted in accordance with the appropriate EU rules (Directive 2005/36 on the recognition of professional qualifications). The European Court of Justice (ECJ) defines establishment as the actual pursuit of an economic activity through a fixed establishment in another Member State for an indefinite period. It must involve a long-term (economic) activity in another Member State (in contrast to the temporary nature of the activity in the context of the provision of services). In other words, the activity must be pursued for an indefinite period and may not simply be of a temporary nature. In this regard, it is not only the duration of the activity which is important but also its frequency, regularity and continuity. The economic activity must be exercised using a fixed establishment (e.g. production facilities, store rooms or offices). This is to make it clear that more is required than simply registering the business with the chamber of crafts and trade or with the trading, registration or tax authorities and then allowing it to remain dormant. The freedom of establishment applies to citizens of the new Member States without any transitional arrangements.

16 Page Provision of cross-border services 2.1 Legal framework Social security law The Federal Republic of Germany has a social security system which is divided into separate branches: health, old-age care, accident and pension insurance. Employed and self-employed activities carried out in Germany are, as a rule, subject to social security contributions in the Federal Republic of Germany in accordance with the Social Security Code (this is known as the principle of territoriality). This also applies in general to workers who do not live in Germany or whose employer is established in another state (see section 3 of the SGB IV, Article 11(3) (a) of Regulation (EC) No 883/2004 and Article 13 (2) of Regulation (EEC) No 1408/71). 1 The social 1 On 1 May 2010, Council Regulation (EEC) No 1408/71 of 14 June 1971 on the application of social security schemes to employed persons and their families moving within the Community was replaced by Regulation (EC) No 883/2004 of the European Parliament and of the Council of 29 April 2004 on the coordination of social security systems. It applies to EU citizens, stateless persons and refugees residing in a Member State. Since 1 January 2011 this Regulation also applies to non- EU nationals not already covered by the Regulation solely on grounds of their nationality provided that they are legally resident in the territory of a Member State and are in a situation which is not confined in all respects within a single Member State (Regulation (EU) No 1231/2010 of 24 November 2010). In the case of a posting of workers or self-employed persons which began prior to 1 May 2010, for a transitional period of 10 years Regulation (EEC) No 1408/71 continues to apply provided that the relevant situation remains unchanged. The person concerned may request that the rules of the new regulation apply (Article 87 of Regulasecurity provisions on postings from Germany to another country (known as Ausstrahlung, governed by section 4 of the SGB IV) and on postings from another country to Germany (known as Einstrahlung, governed by section 5 of the SGB IV, Article 12(1) of Regulation (EC) No 883/2004 and Article 13(2) of Regulation (EEC) No 1408/71) set out the exceptions to the principle of territoriality. These apply uniformly to health, old-age care, accident, unemployment and pension insurance. Where international law agreements establish different rules, these take precedence over German social security law (section 6 of the SGB IV). An employer must register workers subject to compulsory insurance with the health insurance bodies, as these are the collecting agencies, and ensure that its total bill for social security contributions is paid to those bodies (sections 28a, 28e, 28h and 28i of the SGB IV). It must generate notifications and evidence of contributions using its own fullyautomated approved payroll software or an automated support program. 2 Under the definition of a posting for the purposes of social security law, where a person who performs an activity in one Member State on behalf of an employer which normally carries out its activities there and who is posted by that employer to another Member State to perform work on that employer s behalf, this person continues to be subject to the social security legislation of the first Member State, protion (EC) No 883/2004, as amended by Regulation (EC) No 988/2009). 2 Further information is available online:

17 Page 15 vided that the anticipated duration of such work does not exceed 24 months and this person is not sent to replace another worker (Article 12(1) of Regulation (EC) No 883/2004). 3 The European Commission s Administrative Commission on the Social Security of Migrant Workers has adopted a binding interpretation of the relevant provision and drawn up a practical guide 4 (see the Administrative Committee s Decision No A2 of 12 June 2009 concerning Article 12 of Regulation (EC) No 883/2004 and Decision No 181 of 13 December 2000 concerning Article 14 of Regulation (EEC) No 1408/71). The guidance indicates that account should be taken of the following matters. a. Characteristics of a posting The employer which posts the worker normally carries out its activities in the posting State Criteria for determining whether the posting company carries out substantial activities include: The fact that the posting company has its registered office and administration in the posting State. However, if in 3 Pursuant to Article 14(1)(a) of Regulation (EEC) No 1408/71, a person employed in the territory of a Member State by an employer to which he is normally attached who is posted by that employer to the territory of another Member State to perform work there for that employer continues to be subject to the legislation of the first Member State, provided that the anticipated duration of that work does not exceed twelve months and that he is not sent to replace another worker who has completed his term of posting. 4 This practical guide is available online: ec.europa.eu/social/blobservlet?docid=4944 &langid=en. the posting State only administrative staff are present, this will rule out the application of the rules on posting. The fact that the posted worker was hired in the posting State. The number of contracts with clients which the posting company has concluded in the posting State. The law applicable to the contracts which the posting company signs with its workers and clients. If German law is applicable to the contracts, this suggests that the rules on posting are unlikely to apply. Turnover: It can be assumed that significant activities are carried on in the posting State where 25% of total turnover is generated in the posting state. Where this share lies below 25%, each case must be examined on its merits. Genuine business activity in the posting State as a rule for no less than four months. The service provider must retain a link with the economy of its country of origin. The company s purpose cannot be simply to provide services in another Member State. Shell companies, that is, companies which do not carry on any business activities in the posting State and which are no more than recruitment offices cannot provide cross-border services and, as a result, are not allowed to post workers. Worker is normally employed by the posting employer before and after the posting It is immaterial whether someone is recruited for the purposes of posting provided that, immediately before the start of his or her posting, the person

18 Page 16 concerned has already been subject (for at least a month) to the legislation of the Member State in which the employer is established. 5 The posting is limited to a maximum of 24 months. 6 The posting is not intended to replace a worker whose posting period has finished. A direct relationship continues to exist between the posted worker and the posting employer Employment contract with the posting company; The posting company retains the power to determine the nature of the work performed; Both the right to terminate the contract and to impose disciplinary sanctions remains with the posting company; The posting company remains responsible for remuneration regardless of who actually processes the payment to the worker. 5 See Article 14(1) of Regulation (EC) No 987/2009 of the European Parliament and of the Council of 16 September 2009 laying down the procedure for implementing Regulation (EC) No 883/2004 on the coordination of social security systems and paragraph 1 of Decision No A2 of 12 June Pursuant to Article 12(1) of Regulation (EC) No 883/2004, the period of posting is limited to 24 months. This period cannot be extended. Pursuant to Article 14(1) (a) of Regulation (EEC) No 1408/71, the period of posting is limited to 12 months. Article 14(1) (b) of Regulation (EEC) No 1408/71 provides that this period may be extended for a maximum of 12 months. b. The posting provisions do not apply in the following cases Repeated loan: Company X posts the worker to company Y. In turn, company Y supplies this worker to company Z. It is immaterial in which country company Z has its registered office. Recruitment from a third country: A worker is recruited in Member State A for the purposes of posting by a company whose registered office is in Member State B to work for a company in Member State C. Employment of local staff: A worker is recruited in Member State A by a company whose registered office is in Member State B in order to carry on activities in Member State A. c. Documents relating to the posting Form A1 7 or E 101 should, as a rule, be issued before the posting begins. This form contains a declaration by the authorities of the posting State that during the period of a worker s posting to Germany the social security provisions of the posting State will continue to apply and, as a result, in light of the principle that double insurance must be avoided, excludes the application of German social security law. Annex A of this guide includes an example of Form A1 (Appendix 1) and Form E 101 (Appendix 2). The social security institutions of the posting State are obliged to check whether 7 Form A1 documents the existence of a posting within the meaning of Regulation (EC) No 883/2004. In practice, it has the same meaning and legal relevance as the previous Form E 101.

19 Page 17 the conditions for the issue of Form A1 or Form E 101 are met. Where Form A1 or Form E 101 has been issued, a worker is not required to join the German social security scheme. However, this also means that the worker is not entitled to claim any German social security benefits. Workers from other Member States who have not been issued with Form A1 or Form E 101 will be assessed, as a rule, in accordance with German social security law Right of residence EU citizens do not require a visa to enter or a residence permit to stay in Germany (section 2 (4) of the FreizügG/EU). This rule also applies to nationals of those Member States subject to restrictions on the freedom of movement for workers and the freedom to provide services. EU citizens must register with the authorities in accordance with the relevant provisions. This obligation applies to everyone, including Germans. The registration authority sends the information provided on registration concerning that person s right to free movement to the authorities responsible for non-nationals 8 which, under the present law, then automatically issues a certificate confirming that person s right of residence as an EU citizen (section 5 (1) of the FreizügG/EU). Citizens of Bulgaria and Romania will receive a certificate mentioning the requirement for a work permit (that is, until the transitional restrictions on the freedom of movement for workers no longer apply). Citizens of all other EU Member 8 These are the local offices for the affairs of non-nationals generally found at the level of the urban or rural district. States will receive the certificate without any reference to a work permit. Individuals from non-eu countries who are part of the family of an EU citizen (also known as family members) will receive a residence card proving their right to freedom of movement Work permits The freedom of movement for workers means that workers from EU Member States do not generally need a work permit. However, special rules apply to nationals of Bulgaria and Romania during the transitional period. These workers are only allowed to take up employment if they have a work permit for EU citizens (Arbeitsgenehmigung-EU) issued by the Federal Employment Agency (Bundesagentur für Arbeit) and employers cannot take these workers on unless they possess such a permit (see section 284 of the SGB III). Since 1 January 2012 such a permit is not necessary for workers with university degrees, who apply for positions according to their qualifications, apprentices and workers for seasonal jobs according to section 18 of the Ordinance on the Recruitment of Foreign Workers (Beschäftigungsverordnung - BeschV). The Work Permits Ordinance (ArGV) and the Ordinance on Work Permits for EU Workers (ASAV) continue to apply except in those cases where the Residence Act (AufenthG) and the related ordinances (BeschV and BeschVerfV) establish rules which are more favourable to workers. Work permits are also needed for workers posted to Germany in those sec-

20 Page 18 tors in which companies from Bulgaria and Romania are subject to restrictions on the provision of cross-border services (see section 1.2 of this guide). Bilateral agreements signed by Germany with Bulgaria and Romania establish the conditions under which workers may be posted for the purpose of providing those services. 9 In contrast, no work permit is needed for workers posted in sectors not subject to any restrictions. The work permit is usually issued by employment offices in the form of a work permit for EU citizens printed on yellow paper. 10 An example of the application form for the work permit and a specimen permit can be found in Annex A (Appendix 4). The bilateral agreements governing work contracts for the provision of services remain in force even though Bulgaria and Romania are now members of the EU. Some of their provisions, for example, on the number of workers who may be posted to Germany, were changed in line with the accession treaties. The Federal Employment Agency is responsible for the licensing of companies wanting to post workers to Germany. 11 It is important to note that 9 For more detail on the distinction between activities requiring a work permit and activities for which a work permit is not required see the guidance provided by the Federal Employment Agency in its leaflet: Beschäftigung ausländischer Arbeitnehmer im Rahmen von Werkverträgen EU- Dienstleistungsfreiheit und Übergangsregelung. This is available online: Arbeitsmarktzulassung Informationen für Arbeitgeber Werkvertragsverfahren. 10 For further information on the employment of foreign workers see leaflet 7 (Merkblatt 7) produced by the Federal Employment Agency. This is available online: Arbeitsmarktzulassung Rechtliche Bestimmungen Merkblätter. This website also has information concerning other groups of foreign workers. 11 For more information on the procedure for posting workers to Germany under a the authorisation issued to the company which has signed a work contract simply allows that company to post workers to Germany and to deploy these in carrying out the agreed work for the client. However, before these workers can actually start work, as nationals of Bulgaria and Romania, they must obtain a work permit for EU citizens as mentioned above Supply of temporary workers The supply of temporary workers is defined in section 1 (1), first sentence, of the AÜG as the temporary supply by an employer (the service provider) of its employees (temporary workers) to a third party (user company) for the purposes of carrying out work. The supply of temporary workers requires an official permit (section 1 of the AÜG). The permit will be issued automatically if the service provider can demonstrate that its company is reliable. The regional offices of the Federal Employment Agency are responsible for issuing these permits. Annex A contains an example of a permit authorising the supply of temporary workers (Appendix 5). 12 work contract and in particular the offices of the Federal Employment Agency which are responsible for this procedure, see leaflet 16a (Merkblatt 16a) produced by the Federal Employment Agency. This is available online: Arbeitsmarktzulassung Informationen für Arbeitgeber Werkvertragsverfahren Merkblätter. 12 Following amendments which entered into force on 1 December 2011, the scope of the Temporary Employment Act and the requirement for a permit have been extended. Under the new rules, where the service provider supplies within the scope of its business temporary workers to another a permit is required. The wording of the permit will be adjusted accordingly.

21 Page 19 Following amendments which entered into force on 30 April 2011, the Temporary Employment Act now includes rules allowing for the introduction of a minimum wage for temporary workers (section 3a of the AÜG). Following a joint request to the relevant minister by an employers association representing firms from the temporary labour industry and a trade union representing workers from the same industry, a minimum hourly wage for temporary workers established by collective agreement can be fixed by law as the minimum rate for the remuneration of periods when workers are on placement with a third party and periods when they are not. The Federal Ministry for Labour and Social Affairs will issue an ordinance setting out the minimum rate. Where a minimum rate for temporary workers is fixed in accordance with section 3a of the AÜG, this will apply both to domestic companies and to foreign companies supplying temporary labour to Germany on a cross-border basis. In that case, the customs authorities will have responsibility for ensuring that the minimum rate is observed. The task of ensuring compliance with all the other requirements of the Temporary Employment Act remains with the Federal Employment Agency which is also responsible for issuing and withdrawing the permits needed to supply temporary workers. Not every supply of temporary workers falls under the legislation. Where the supply is merely ancillary to the provision of another service, for example, where plant and equipment are hired together with staff to operate those machines and the value of the plant hire exceeds that of the staff, this is not regarded as the supply of temporary workers for the purposes of the legislation. Further exceptions to the law are provided for in section 1 (1), second sentence, and (3) of the AÜG. To determine whether a particular situation involving work for a third party qualifies as the supply of temporary workers or as a contract for carrying out works it is essential to look at the whole picture. The label chosen by the parties in describing the contract is irrelevant. Criteria suggesting that the transaction is a supply of temporary workers include the following: The third party with whom the workers are placed exercises for the most part the employer s power of control. The third party with whom the workers are placed provides the majority of the tools. The forms of liability for which service providers are generally responsible under other types of contracts, in particular work contracts, have been excluded or limited. The work performed by the workers placed with the third party is remunerated on a time basis. The supply of temporary workers constitutes a service with the meaning of Article 56 of the TFEU. This means that, in principle, companies with a registered office in another EU Member State are allowed to supply temporary workers to companies in Germany. This also applies to service providers from the new EU Member States. However, to supply workers to Germany these companies must hold a permit issued under the Temporary Employment Act. This requirement applies even if they are authorised to operate in their own country and supply their services in Germany simply on a cross-border basis exercising the freedom to provide services.

22 Page 20 There is a further condition which must be satisfied for a supply of temporary workers to be lawful. The temporary workers placed with a user company must comply with the rules on work permits. Workers who are nationals of an old EU Member State can be deployed as temporary workers without any further formalities (see Articles 45 to 48 of the TFEU in conjunction with the FreizügG/EU). However, for nationals of the new Member States of Bulgaria and Romania, the restrictions contained in section 6 (1) number 2 of the ArGV continue to apply during the transitional period. They will not be granted a work permit to work as a temporary worker. However, in certain exceptional cases it may be lawful to deploy such a worker. This applies where the worker from one of the new Member States has, in addition, as a dual national, the nationality of one of the old Member States or is already in possession of an authorisation to access the German labour market (for example, is the holder of a work permit for EU citizens). To qualify as a lawful supply of temporary workers one further condition has to be met. The terms and conditions of employment established in the Temporary Employment Act are mandatory and must be applied to temporary workers (section 2 number 4 of the AEntG). In turn, this means, for example, that the principle of equal treatment established in section 3 (1) number 3 of the AÜG applies. The conditions set out above apply where the supply of temporary workers is carried out on a cross-border basis. In contrast, none of these restrictions apply where the temporary workers are supplied in advance to the service provider in its home country (before any posting to Germany). This means that a service provider operating on a cross-border basis may deploy not only its own staff but also any temporary workers already on loan to that firm in its home country. In these cases, the transitional provisions on the freedom of movement for workers do not come into play. This is because the posted workers cannot be attributed to the German client either as employees or as worker which it has temporarily hired Minimum work standards required under the Posted Workers Act Minimum work standards set out in collective agreements or ordinances issued pursuant to sections 7 and 11 of the AEntG All employers operating in Germany must ensure that their workers enjoy the minimum work standards declared universally applicable in accordance with sections 3 to 13 of the AEntG. These minimum work standards must be ensured whether the employer has its registered office in Germany or elsewhere. Minimum work standards can be established under the Posted Workers Act in the following sectors (see section 4 of the AEntG): Construction sector 13 including assembly works on construction sites, Cleaning of premises, Provision of letter services, Security services, Provision of special mining services in collieries, 13 Sections 1 and 2 of the Construction Industry Ordinance (BauBetrV).

23 Page 21 Provision of laundry services to commercial clients, Waste services including street cleaning and winter service, Training services as defined in the Social Security Code, Personal care services (see sections 10 to 13 of the AEntG). The fact that a particular industry is listed in the Posted Workers Act does not mean that minimum work standards automatically apply to workers in that sector. Instead, there are several steps involved in establishing binding minimum work standards. With the exception of the personal care sector where different rules apply, 14 there needs to be a collective agreement, an request made by the parties to the collective agreement and an order issued by the Federal Minister for Labour and Social Affairs either in the form of a declaration of universal applicability pursuant to section 5 of the TVG or an ordinance pursuant to section 7 of the AEntG 15 in which the minimum work standards established by collective agreement are made binding on all employers and employees covered by the scope of the agreement. Where minimum work standards are established in a sector covered by the Posted Workers Act, these will continue to apply in the case of declarations of universal applicability for as long as the underlying collective agreement remains in force or as provided for in the relevant ordinance. As a result, the procedure set out above has to be repeated at regular inter- 14 On the procedure for establishing minimum work standards in the personal care sector, see sections 10 to 13 of the AEntG. 15 In exceptional cases the Federal Government is responsible for issuing the ordinance. vals when the relevant collective agreement or ordinance ceases to apply and new minimum work standards need to be established in the sector concerned. Details of the current minimum work standards applicable in the relevant sectors can be found on the website of the customs authority: The minimum work standards which can be made binding under the Posted Workers Act may cover the following matters: minimum rates of gross pay including overtime supplements, entitlement to paid leave and contributions to paid leave funds (see section 5 numbers 1 to 3 of the AEntG). A company s plant or an independent subdivision of a company s plant will be covered by a collective agreement made universally binding in accordance with the Posted Workers Act if more than half of the total annual working time of the workers employed there is spent on activities covered by the collective agreement concerned. Economic criteria such as turnover and earnings or criteria established under commercial and trade law are irrelevant in this respect. For these purposes, a plant (Betrieb) is understood to be the organisational unit within which the employer alone or together with its workforce and using technical and other means pursues certain work-related objectives. There is understood to be an independent subdivision of a plant (selbständige Betriebsabteilung) where from an external perspective that subdivision in terms of its staff, the space it occupies and its organisation is recognisably separate from the plant as a whole. An alternative definition of an independent subdivision of a plant applies in the construction industry. The construction industry framework collective agreement (BRTV) establishes that the entire workforce posted to a construction

24 Page 22 site will be regarded as an independent subdivision of a plant. As a result, it is immaterial whether at the employer s establishment abroad the majority of working hours are spent on activities related to construction or not. The minimum work standards which an employer has to observe are those set out in collective agreements which, following a declaration of universal applicability made pursuant to section 5 of the TVG or an ordinance issued pursuant to section 7 of the AEntG, apply to parties not originally bound by the agreement. The obligation on employers to ensure that certain minimum work standards are observed is the same whether the ordinance establishing these was issued under section 7 of the AEntG or in relation to the personal care sector under section 11 of the AEntG (see section 13 of the AEntG). In this context, the place where the work is actually carried out is decisive (section 8 (1) of the AEntG). This is particularly important if the collective agreement does not establish uniform terms and conditions applicable across the whole of Germany. It means that the terms and conditions which apply in the place where the work is carried out are those which must be granted to the worker. It is irrelevant where the employer has its registered office. The rule stating that the place where the work is actually carried out will be decisive applies also in the personal care sector (section 8 (1) and section 13 of the AEntG). Employers supplying one or more temporary workers to a user company are also under an obligation to ensure that minimum work standards are observed where the requirements of section 8 (3) and section 13 of the AEntG are met. Those employers must grant their workers the minimum work standards established under the Posted Workers Act if the user company uses those workers to perform activities covered by a collective agreement declared universally applicable in accordance with the requirements of section 4, section 5 numbers 1 to 3 and section 6 of the AEntG or an ordinance issued pursuant to section 7 of the AEntG. However, this will only apply if the user company s plant is covered by the scope of the collective agreement. 16 a. Payment of a minimum wage In calculating the minimum wage, the following rules apply. Supplements paid by an employer are included for the purposes of calculating the minimum wage unless they are paid for performance in excess of a rate established by collective agreement or for work involving special and difficult circumstances or burdens. Applying that rule, the following supplements and bonuses are not included in the calculation of the minimum wage: Supplements for work performed at special hours (for example, supplements for night work and work on Sundays and public holidays); Supplements for work performed under difficult or dangerous conditions (for example, supplements for dirty or dangerous work, work in very hot conditions, work in narrow shafts or tunnels and work which requires protective clothing to be worn); Piece-work bonuses (where more work is achieved in a set period of time) and performance bonuses (for performance which is above average). 16 Judgment of the Federal Labour Court (Bundesarbeitsgericht) of 21 October 2009 in case 5 AZR 951/08.

25 Page 23 One-off payments such as paid leave, Christmas or annual bonuses or longservice bonuses can be included only once in the calculation of the minimum wage, that is, at the date they are paid. However, if these bonuses are not paid on a one-off basis but included unconditionally on a pro-rata basis for each month of the posting and paid together with the worker s usual wage they will be included for the purposes of calculating the minimum monthly wage. Special rules apply to overtime supplements where the employer is obliged to pay these on the basis of a collective agreement as defined in section 3 of the AEntG (or in the personal care sector on the basis of an ordinance 17 issued in accordance with section 11 of the AEntG). In this case, an employer must simply ensure that a worker s actual pay including any overtime supplements paid is equal to or exceeds the total arrived at by adding together the minimum wage and the overtime supplement specified in the collective agreement. In calculating the minimum wage, the following allowances must always be included: The construction industry supplement. This is expressly included as part of the minimum wage (section 2 (1) of the TV Mindestlohn Bau). This construction industry supplement is a fixed component of the hourly wage specified in the collective agreement. This supplement must be paid to every worker covered by the collective agreement. For these purposes, it is irrelevant whether the worker concerned is affected by the inconveniences specified in section 2 (1) of the TV Mindestlohn Bau. 17 Bundesanzeiger of 27 July 2010, p A posting supplement. This supplement must be included if it is paid to compensate for the difference between the worker s contractual wage in his home country and the wage established pursuant to section 3 and section 5 number 1 of the AEntG in conjunction with the relevant minimum wage agreement (or in the personal care sector the ordinance 18 issued pursuant to section 11 of the AEntG). In relation to any allowances paid for food and accommodation (board and lodging), the following rules apply. In calculating the minimum wage, the following elements may not be included: Reimbursement of expenditure actually incurred on account of the posting such as expenditure on travel, board and lodging (see Article 3(7) of Directive 96/71 concerning the posting of workers in the framework of the provision of services); The value of benefits in kind provided by an employer in addition to wages (for example, provision of board and lodging). In certain cases deductions must be made for minimum wage purposes. If an employer pays a worker a global wage which includes an amount for the worker to cover expenditure on board and lodging, that wage must be adjusted by deducting the lowest allowance for board and lodging provided for in the Social Security (Remuneration) Ordinance. 19 In contrast, if 18 Ibid. 19 Payments in kind are benefits with a monetary value which an employer provides to a worker as remuneration for the worker s activities in addition to or in place of cash wages. These commonly include the provision of accommodation or goods either at a subsidised rate or free of charge. Benefits in kind are regarded as income for the pur-

26 Page 24 the employer makes a deduction from wages to cover its own expenditure on board and lodging, only the wages actually paid (after that deduction) count for the purposes of the minimum wage. b. Annual leave, remuneration for annual leave and additional allowances paid in that connection Employers and suppliers of temporary workers must ensure that all workers benefit from any provisions establishing the number of days of annual leave, the remuneration payable during such a period and additional allowances payable in connection with such leave established by collective agreement declared universally applicable or in an ordinance issued under section 7 of the AEntG. c. Compulsory membership in the scheme of paid leave funds Currently, only the construction industry is covered by a scheme of paid leave funds relevant in the context of the posting of workers. Foreign employers are required to pay contributions to the paid leave fund for the construction industry (ULAK) 20 on poses of wage tax and must be included for social security purposes. The Social Security (Remuneration) Ordinance establishes the value of benefits in kind for tax purposes. The current ordinance is available online: Service Gesetze Soziale Sicherung alle Dokumente zum Thema Gesetze Sozialversicherungsentgeltverordnung. 20 The existence of paid leave funds can be explained in the light of the rules on annual leave. Many workers employed in the construction industry do not work throughout the whole year for the same employer. In the absence of the paid leave funds scheme, these workers would never qualify for annual leave. The right to annual leave only applies to workers who have worked for the same employer for at least six months. For more information on the paid leave funds scheme the same basis as their domestic counterparts (section 5 number 3 of the AEntG). However, to avoid double contributions for foreign employers, this does not apply if throughout the period of posting the employer pays contributions to a comparable institution in its own country. In this connection, ULAK and the relevant Federal Ministry have concluded framework agreements with their counterparts in other countries on the mutual exemption of employers established in a different country. Currently, there are framework agreements in place with Belgium, France, Austria, Denmark and Italy. ULAK can also provide information on whether a particular employer from outside of Germany is required to pay contributions. Each construction industry worker has an account with ULAK through which leave and remuneration credits can be accumulated. The employer which grants a worker s request for paid leave receives a refund from ULAK for the remuneration paid for that period. d. Checks to ensure that minimum work standards are applied The customs authorities (main customs offices) are responsible for ensuring that employers observe the work standards specified in section 8 of the AEntG (see section 16 of the AEntG). To ensure that controls are effective, employers from outside of Germany whose activities are covered by work standards regarded as universally applicable for the purposes of the Posted Workers Act are required to register every worker posted to Germany see: SOKA-BAU is the umbrella brand incorporating the construction industry pension scheme (Zusatzversorgungskasse des Baugewerbes AG (ZVK)) and the construction industry paid leave fund (ULAK).

27 Page 25 before works commence (section 18 (1) of the AEntG). The registration must be lodged in German with the Federal Finance Office (West) (Bundesfinanzdirektion West) and include the information required by section 18 (1) of the AEntG. In addition, the employer must include a declaration confirming that it will observe the requirements of section 8 of the AEntG (see section 18 (2) of the AEntG). A user company which makes use of one or more temporary workers supplied by a service provider established outside of Germany to carry out activities covered by a collective agreement declared universally applicable as provided for in section 3, first sentence, of the AEntG or an ordinance issued pursuant to section 7 of the AEntG must register the workers as specified in section 18 (3) of the AEntG. The registration must be accompanied a declaration by the service provider confirming that it will observe the work standards specified in section 8 of the AEntG. As soon as the Federal Finance Office (West) receives a notification lodged in accordance with section 18 of the AEntG, it forwards copies of this notification to the main customs office responsible, ULAK and the tax office responsible for VAT collection. In addition, the employer must ensure that it has at hand at a location within Germany documentation written in German suitable for verifying that it has met its legal obligations (see section 19 (2) of the AEntG). In general, this will include the following documents: the employment contract or the proof of an employment relationship specified in section 2 of the NachwG or equivalent foreign legislation, working time records, pay notifications and receipts for the payment of wages. An employer is also obliged to submit other documents needed to verify compliance with work standards if requested to do so by the inspecting authority. This obligation to keep documentary records in Germany extends beyond the actual period of a worker s posting to Germany and continues to apply throughout the whole period of the construction works or service provision, subject to a maximum period of two years. The requirement to ensure that the relevant documents held are written in German has been upheld by the ECJ. 21 In addition, the employer is required to record for each worker on a daily basis when work begins and ends and hours worked each day and to retain these records for at least two years (see section 19 (1) of the AEntG). Firms involved in the cleaning of premises have different organisational structures to those in the construction industry. For that reason, these cleaning firms may produce monthly timesheets in place of daily working time records. These set out in advance the planned working time arrangements for the coming month (start and finish times, hours to be worked and job allocation). If the hours actually worked differ from those planned, the timesheet has a column for noting these differences and entering special remarks (for example, illness, overtime and one-off changes) Minimum work standards applying to all sectors Employers established outside of Germany must observe certain work standards provided for in German legislation and administrative provisions (section 2 of the AEntG). Unlike the minimum standards imposed under sections 3 to 13 of the 21 Case C-490/04 Commission v Germany [2007] ECR I-6095.

28 Page 26 AEntG, this requirement is not limited to certain sectors but applies to employment in every industry. In this connection, unlike the position under social security rules, it is immaterial whether these workers have been posted to Germany. All that is needed is that the work is carried out in Germany. The minimum standards referred to in section 2 of the AEntG are to be found in legislation, ordinances, administrative rules and workplace agreements. 22 In contrast, section 2 of the AEntG does not cover collective agreements, not even those which have been made universally applicable. However, as set out above in section of this guide, employment relationships between foreign employers and their workers are covered by universally applicable collective agreements where sections 3 to 13 of the AEntG apply. Different authorities are responsible for monitoring and enforcement of the work standards specified in section 2 of the AEntG depending on the standard at issue. Their powers are set out in the relevant legislation. For example, the health and safety inspectorates established by Länder authorities are responsible for ensuring that rules on workplace health and safety, including working time rules, are observed International cooperation between liaison offices and monitoring authorities The purpose of the Posted Workers Act is to implement Directive 96/71 concerning the posting of workers within the framework of the provision of services. To make sure that the rules are properly imple- mented, Article 4 of the Posted Workers Directive requires Member States to cooperate in the provision of information. Each Member State has designated liaison offices and national monitoring authorities. These are points of contact for authorities from other Member States, for companies involved in posting workers and for posted workers themselves. 23 Cooperation standards requiring liaison offices to answer enquiries from other Member States within a period of four weeks have been in place since April Tax law The obligation to pay wages tax in Germany Wages and salaries paid by a domestic employer for services provided under an employment relationship (in other words, income from employment) are generally subject to wage tax (as part of the German income tax). A domestic employer is defined in tax legislation as any person or body which is domiciled or habitually resident or has its management, registered office or a permanent establishment or representative in Germany. In the case of posted workers, where the user company resident in Germany is responsible in economic terms for the wage bill relating to the work done on its behalf, this company will be treated as a domestic employer. This will be presumed in particular where the wage bill paid by the other company is passed on to the German company, for example, where a foreign parent company posts a worker to 22 A list of the legislative and administrative provisions which apply to posted workers as provided for in section 2 of the AEntG is available at: 23 A list of the liaison offices and monitoring authorities is available on the Commission s website at: ec.europa.eu/youreurope/ citizens/work/contact/index_en.htm.

29 Page 27 its German subsidiary and is reimbursed for its wage bill. There is no requirement that the German company pays the wages in its own name or on its own account. Where the domestic company can expect to billed by the foreign company for the wages, wages tax liability arises as soon as wages are paid to a worker and the domestic company must withhold the tax at this time. Where a service provider based in another country supplies a temporary worker to Germany, that foreign company is treated for tax purposes as a domestic employer. From a tax perspective, it is immaterial whether the supply of temporary workers is regarded as lawful under the Temporary Employment Act Wages tax and liability for the tax Wages tax liability arises as soon as the wage is paid to the worker. The form and frequency of payment are immaterial. Wages tax must also be deducted from wages paid by a third party in connection with the employment relationship if the employer is aware or ought to be aware that such payments are being made. The person liable for (or who owes) the wage tax is the worker. This applies even where wages net of tax have been agreed. An employer is generally obliged to withhold wages tax. This applies regardless of whether the worker is assessed for income tax. The worker s nationality is of no relevance. An employer can be held liable both for the wages tax it is required to withhold and forward to the tax authorities and for the income tax (wages tax) underpaid as a result of errors in the wage account kept in its ledger or the certificate of deduction of wages tax. Where temporary workers have been supplied both the employer (service provider) and the user company can be held liable for the tax except where the provisions of section 1 (3) of the AÜG apply. The user company cannot be held liable if through no fault of its own it fails to appreciate that specific working arrangements are regarded as the supply of temporary labour. Liability is limited to the wages tax for the period in which the worker is deployed with that company Obligations of the employee and the employer To ensure wages tax can be deducted, employees subject to full income tax liability in Germany must give their employer a wages tax card before the start of each calendar year or on starting a new job. The wages tax card which currently applies is the wages tax card for 2010, issued by local authorities. It is planned to replace the wages tax card with information on wages tax deduction stored electronically to be compiled by the tax administration. From 2012 onwards, employers will be able to use a computerised procedure to access this electronic information. As local authorities have not issued wages tax cards for 2011, the wages tax card for 2010 remains valid for 2011 until the computerised system becomes available. If an individual needs a wages tax card for the first time in 2011, the tax office responsible for that person s tax affairs will issue a substitute certificate (certificate for wages tax deduction in 2011) to be used in place of a wages tax card. Where employees are subject only to limited income tax liability in Germany, they must give their employer in place of a wages tax card a certificate issued by the tax office responsible for that particular

30 Page 28 permanent establishment of the employer. The employer must keep hold of the wages tax card or certificate. The employer must maintain at the place of its permanent establishment for every employee and calendar year a wages account. This account must contain the information necessary for wages tax deduction. The information can be taken from the wages tax card or the certificate issued by the tax office whose district includes the permanent establishment (also known as the tax office responsible for the permanent establishment). The wage account must record the form and amount of each payment of wages including the amounts which are tax-free and the wages tax withheld or assumed by the employer. Employers must submit a tax declaration to the tax office responsible for their permanent establishment no later than the tenth day following each wages tax notification period stating the total wage tax to be withheld and assumed for that period (also known as the wages tax notification) and pay to that tax office the wages tax actually withheld and assumed for that period (section 41a (1), first sentence, of the EStG). The period for which wages tax must be notified is generally a calendar month (section 41a (2), first sentence, of the EStG). However, it can be for a quarter or a calendar year Value added tax (VAT) All businesses regarded as resident in Germany and which generate turnover in the country regardless of the nationality of the trader or where the business has its registered office must register for VAT with the tax office responsible for their tax affairs and submit regular VAT returns and/or a VAT declaration for the calendar year. A business is regarded as resident in Germany if it maintains in the Federal Republic of Germany with the exception of the area of Buesingen, the island of Heligoland and any of the other areas specified in section 1 (2), first sentence, of the UStG a domicile, registered office, its management or a branch office. All businesses resident abroad and which generate turnover in Germany for which they are liable for VAT must register with the central tax office responsible for their tax affairs and submit regular VAT returns and/or a VAT declaration for the calendar year Tax registration Companies registered in an EU Member State and providing work or services in Germany must observe the following reporting requirements. Taxable persons other than natural persons must notify the relevant tax office (determined in accordance with section 20 of the AO) and the local authorities responsible for levying property taxes of any circumstances relevant to registration for taxes. This includes, in particular, the founding of the business, its acquiring legal personality, changes to its legal form, any transfer of the place of its management or registered office and the winding-up of the business (section 137 of the AO). These events must be notified within a month of their occurrence. For a business with a management based in Germany, the relevant tax office is the office whose district includes the place where management is based (see section 20 of the AO). For a business with a management based abroad or where its place of management cannot be determined, the relevant tax office is the of-

31 Page 29 fice whose district includes the place where the taxable person has its registered office. Anyone opening a place of business or permanent establishment must notify the local authority in whose district the place of business or permanent establishment lies using the official form specified for that purpose (section 138 of the AO). The local authority will immediately notify that information to the relevant tax office Trading law Services provided on a cross-border basis do not have to be notified under section 14 of the GewO where these services are covered by the Services Directive (Directive 2006/123) (see section 4 (1) of the GewO). Certain services are excluded from the Services Directive (see Article 2 (2) of the Directive). These include: Financial services (insurance intermediaries and advisers pursuant to sections 34d and 34e of the GewO, financial investment intermediaries and advisers and loan intermediaries pursuant to section 34c (1), first sentence, numbers 1, 1a and 3 of the GewO), Pawnbroking (pursuant to section 34 of the GewO), Private security services (guarding services pursuant to section 34a of the GewO), Gambling activities (pursuant to sections 33c to 33i of the GewO), Healthcare services (private hospitals and clinics pursuant to section 30 of the GewO). For services excluded from the Services Directive, it is generally necessary to notify the relevant German authorities in accordance with section 14 of the GewO even if the cross-border services are provided only on a temporary basis. However, crossborder services provided on a one-off basis and for a short period are ignored for the purposes of trading law and do not have to be notified. Although such services provided for a short period are generally ignored, where these are provided repeatedly and concentrated in one or more locations, the obligation to notify the authorities in accordance with section 14 of the GewO will apply. Permission is generally required to provide cross-border services where, as a matter of German law, these are activities which must be licensed. Certain services normally requiring a licence may be provided on a cross-border basis without a licence (see section 4 (1) of the GewO). These activities covered by the Services Directive are auctioneer (section 34b (1) of the GewO), estate agent, property developer and property construction management (section 34c (1), first sentence, numbers 1 and 4 of the GewO) and itinerant trading (section 55 (2) and (3) of the GewO). The exemption for cross-border service providers from notification and licensing requirements (set out in section 4 (1) of the GewO) does not apply where services are provided from the territory of another EU or EEA State with the aim of circumventing notification and licensing requirements (section 4 (2) of the GewO). The purpose of this restriction set out in section 4 (2) of the GewO is to prevent abuse of the freedom to provide services. An activity will be regarded as an abuse of rights if a trader operates from the territory of another EU Member State or from an EEA State with a view to circumventing German notifica-

32 Page 30 tion and licensing rules and the trader s activities are aimed principally at customers in Germany (see section 4 (2), second sentence of the GewO). The competent authorities are those in whose jurisdiction the transaction requiring notification or licensing is carried out. The law of the individual Länder establishes which of the authorities is to exercise these powers. This can be a local authority, administrative district, trade licensing office, office for municipal affairs, etc Law on trades and crafts Provision of cross-border services in a particular licensed trade or craft from a fixed place of business is subject not only to the requirements of trading law but also to those of the law governing crafts. The trades and crafts which require a licence are listed in Appendix A to the Trade and Crafts Code (HwO), included as Annex B to this guide Provision of cross-border services by a trade and crafts business Citizens of EU and EEA States wishing to provide cross-border services in one of the trades and crafts listed in Appendix A to the Trade and Crafts Code (see Annex B) will not be entered on the register of persons qualified to provide trade and craft services (Handwerksrolle). Instead, these service providers must notify the relevant German authorities in advance of their intention to provide services (section 9 (1) of the HwO in conjunction with section 8 (1) of the EU/EWR-HwV) and provide evidence that they are lawfully established in their home State for the pursuit of that trade or craft (section 7 (1) of the EU/EWR- HwV). Anyone wishing to set up an establishment in Germany in order to pursue such a trade or craft requires special authorisation to be entered on the register of persons qualified to provide trade and craft services (section 9 (1) of the HwO in conjunction with the EU/EWR-HwV and for further detail see section of this guide) Requirements for the issue of a special authorisation EU and EEA nationals seeking special authorisation for entry on the register of persons qualified to provide trade and craft services (except in the trades and crafts listed under points 12 and 33 to 37 of Appendix A to the Trade and Crafts Code - see Annex B - for which different rules apply) require certification from the relevant authority in their home country evidencing the nature and duration of their exercise of that activity in their home country. Where the certification issued in the home country indicates that the applicant has carried out the activity for a consecutive period of six years or more as a self-employed person or in a management position, or for a consecutive period of three years or more as a self-employed person or in a management position having had three years or more of professional training in that job, or for a consecutive period of three years or more as a self-employed person and for five years or more as an employee, or for a consecutive period of five years or more in a managerial post of which three or more years were spent in a po-

33 Page 31 sition involving duties of a technical nature and with responsibility for one or more departments in the company after having had three years or more of professional training in that job and that this activity is a significant element of the craft or trade for which the application is made, the German authorities are required to issue the special authorisation requested (see section 9 of the HwO in conjunction with the EU/EWR- HwV). Professional experience is unnecessary where the applicant submits evidence of professional qualifications which have to be recognised in another Member State pursuant to the EU directives on recognition of professional qualifications (for example, a professional diploma or certificate). Evidence of professional qualifications is always necessary to exercise any of the trades and crafts in the health care sector listed in points 33 to 37 of Appendix A to the Trade and Crafts Code (see Annex B). In these cases, professional experience by itself is not enough. 2.2 Consequences of non-compliance Where certain arrangements fail to qualify as a posting, this may give rise, instead, to an employment relationship governed by German law Social security law Where a situation cannot be categorised as a posting (as defined in Regulation (EC) No 883/2004 and Regulation (EEC) No 1408/71), employment carried out on Germany territory triggers certain reporting, contribution and record-keeping obligations under social security law. A failure to meet those obligations will result in this being classified as undeclared work as defined in section 1 (2) number 1 of the SchwarzArbG. In addition, a failure to meet the reporting and contribution obligations may also constitute the criminal offence of nonpayment and misappropriation of wages contrary to section 266a of the StGB. To determine whether an employment relationship is subject to compulsory social security contributions it is the factual circumstances which count. Both the nonpayment of employee contributions and the failure to pay employer contributions constitute criminal offences. From the perspective of the collecting agency, the liability to ensure payment of employee contributions rests on the employer alone (section 28e of the SGB IV). It is the employer, too, which is under an obligation to notify the collecting agency of the employer-employee relationship (section 28a (1) of the SGB IV). Any would-be client taking advantage of a worker s services must be aware of the fact that it can be deemed to be that person s employer. In those circumstances, it will have to take on the social security obligations of an employer. Non-compliance with the reporting, contribution and record-keeping obligations may also be sanctioned with an administrative fine (section 111 of the SGB IV) Right of residence It is extremely rare for EU citizens to lose their right of residence as a result of a posting which does not follow the rules.

34 Page 32 During the first five years of an EU citizen s residence, the authorities responsible for non-nationals have the power to deprive that person of his residence right if he no longer meets the conditions (section 5 (5) of the FreizügG/EU). However, a review of a person s right of residence may only take place in exceptional circumstances. This could be the case, for example, if an EU citizen made incorrect statements about being in work and, instead, was claiming a large number of welfare benefits. A person can only very rarely be deprived of their right of residence on grounds of public order and public security (section 6 of the FreizügG/EU). The personal conduct of the EU citizen must constitute a sufficiently serious and present threat which affects the fundamental interests of the State. A criminal conviction is not enough. Instead, the authorities must examine the personal conduct of the individual concerned in the context of that offence in accordance with criteria established by the ECJ. A person may be considered a present threat, according to the definition established by the ECJ, only if an assessment by the authorities for nonresidents indicates that a renewed breach of public order or public security is likely. Wrongdoing arising from a posting contrary to the rules is generally subject to administrative sanctions and only in exceptional cases may be punished as a criminal offence (see the comments above and below on criminal and administrative offences). Where EU citizens are convicted of a criminal offence, it is for the authorities responsible for non-nationals to consider in light of the criteria established by the ECJ whether this warrants the loss of residence rights Work permits An employer which employs foreign workers not in possession of a residence permit allowing access to the labour market or not in possession of the work permit needed pursuant to section 284 (1) of the SGB III commits an administrative offence (see section 404 (2) number 3 of the SGB III). Where this act is committed wilfully and results in the employment of a large number of foreign workers and/or employment under terms and conditions considerably less favourable than those applicable to comparable German workers it may be prosecuted as a criminal offence (see sections 10 and 11 of the SchwarzArbG). Any foreign worker who starts work without obtaining an appropriate residence permit or any work permit necessary pursuant to section 284 (1) of the SGB III also commits an administrative offence (section 404 (2) number 4 of the SGB III). Where an employer or worker persistently and wilfully repeats the acts specified in section 404 (2) numbers 3 and 4 of the SGB III this will also constitute a criminal offence (section 11 of the Schwarz- ArbG). Sanctions are also provided for in the bilateral agreements on work contracts. Companies participating in the work contracts scheme which fail to comply with the standards provided for in the bilateral agreements (for example, payment of the agreed wage for the industry or a prohibition on supplying temporary workers) will be excluded from future work contracts Supply of temporary workers Where a posting of workers fails to comply with the rules, this may be constitute an

35 Page 33 unlawful supply of temporary workers if the service provider lacks the necessary permit. In these circumstances, the law deems the user company and temporary worker to have agreed a contract of employment governed by German law with all the attendant employer social security obligations of notification, contribution and record-keeping (section 10 (1) of the AÜG). Where a company supplying temporary workers does not have the permit required by section 1 of the AÜG, the contracts between the supplier and the user company and between the supplier and the temporary workers will be treated as void and unenforceable (section 9 number 1 of the AÜG). For the purposes of social security contributions due, the user company and the supplier of the temporary workers will be treated as jointly liable (section 28e (2), fourth sentence, of the SGB IV). The unauthorised supply of temporary workers is generally treated as an administrative offence (section 16 of the AÜG). However, a party which engages in the unauthorised supply of foreign workers not having a work permit is liable to criminal prosecution (section 15 of the AÜG). An unauthorised supply of temporary workers involving foreign workers not in possession of a work permit may have consequences for the user company. As this company is deemed to be the worker s employer (section 10 of the AÜG), this act of employment will constitute an administrative offence (section 404 (2) number 3 of the SGB III). Where, in addition, the wouldbe user company employs the worker on unfavourable terms, this company also commits a criminal offence (section 10 of the SchwarzArbG). A company which employs concurrently six or more foreign workers not in possession of a permit or which persistently and wilfully employs foreign workers not in possession of the necessary permit commits an additional offence contrary to section 11 of the SchwarzArbG. Where the supply of foreign temporary workers is authorised but the user company makes use of these workers in the absence of the necessary work permit and on unfavourable terms of employment, the user company commits a criminal offence contrary to section 15a of the AÜG Posted Workers Act Administrative offences contrary to section 23 of the AEntG Where an employer fails to meet its obligations under sections 8, 17, 18 or 19 of the AEntG, it may be liable to an administrative penalty under section 23 of the AEntG. German and foreign employers commit an administrative offence contrary to section 23 (1) of the AEntG where they fail to meet their obligations under section 8 of the AEntG (ensuring collectively agreed terms and conditions are observed and paying contributions to ULAK); fail to meet their obligations to cooperate and supply information under section 17, first sentence, of the AEntG in conjunction with the Act to Combat Illegal Employment; fail to meet their obligation to retain documents ready for inspection (section 19 (2) of the AEntG); fail to meet their obligations to keep records and/or to retain these records (section 19 (1) of the AEntG).

36 Page 34 fail to meet their obligations to notify (section 18 (1) and (3) of the AEntG) or to supply the necessary declaration (section 18 (2) and (4) of the AEntG). In addition, a business which commissions a significant volume of work or services commits an administrative offence where it commissions a contractor and knows or ought to know that in carrying out its work the latter will breach the requirements of section 8 of the AEntG or that the same party will use a subcontractor acting in breach of that section (section 23 (2) of the AEntG). The customs authorities (main customs offices) have the task of applying these administrative penalties (section 23 (4) and section 16 of the AEntG) Exploitative wages Regardless of any obligation to pay a minimum wage established by collective agreement, an employer which pays very low wages may commit a criminal offence of exploitation (usury) (section 291 (1) number 3 of the StGB). This crime involves, first, a serious discrepancy between the services provided by the employee and the wages paid in return. To determine whether such a discrepancy exists, the value of the services provided must be compared with the payment in return. The value of the employee s service is assessed by reference to the usual rate for this work. This is arrived at by examining the collectively agreed rates and the rates actually paid at local level in that industry. The discrepancy will be regarded as sufficiently serious if the rate at which wages are paid is below two thirds of the collectively agreed rate. 24 It is 24 See the judgment of the Federal Labour Court of 22 April 2009 in case 5AZR 436/08. immaterial whether this collectively agreed rate has been declared universally applicable. No account is taken of any benefits which the victim may have derived from the transaction (for example, the purchasing power of those wages in the worker s home country). In addition, the perpetrator must have exploited a weakness of the victim. This can include the victim s predicament or inexperience. In this context, a predicament means economic distress threatening that person s existence or involving or likely to involve serious financial hardship. Where a victim s knowledge and experience of business matters is well below that of the average person this will be regarded as inexperience. A victim s inability to fully speak or understand the language may also be relevant as this makes it more difficult to properly interpret the situation Failure to comply with other provisions The Posted Workers Act does not impose any specific criminal or administrative sanctions on employers which fail to ensure that their workers enjoy certain minimum working standards set out in law or administrative provisions (section 2 of the AEntG). Sanctions in respect of those standards are set out in the relevant legislation. In addition, every worker has the right to bring an action before a labour court to ensure that the standards set out in section 2 of the AEntG are observed Tax law Where the requirements for a posting are not met and, as a result, the law deems this to be an employer-employee relationship governed by German law, all wages paid

37 Page 35 are subject to wages tax (see section above). In this context, the offence of tax evasion contrary to section 370 of the AO may apply. Assuming a substantive liability to pay taxes, this offence is committed where a person knowingly provides the tax or other authorities with incorrect or incomplete information or wrongfully withholds tax-relevant information and, as a result, the tax bill is lower than it should be or a tax advantage is unjustly obtained for that person or a third party. Where this occurs as a result of a failure to take due care it will be regarded as an administrative offence contrary to section 378 of the AO (tax evasion through negligence) and is subject to a maximum fine of 50, Trading law Any person who wilfully or negligently fails to submit or submits an incorrect or incomplete notification required under section 14 of the GewO or is late in doing so commits an administrative offence contrary to section 146 (2) number 1 of the GewO. Any person who repeatedly commits such wrongdoing or as a result of that conduct endangers the life or health of another or jeopardises property of others of considerable value commits a criminal offence contrary to section 148 of the GewO. Moreover, any person who fails to notify the start of an independent business trading from a fixed location will be regarded as carrying on undeclared work (section 1 (2) number 4 of the SchwarzArbG). Where the volume of work or services carried out is substantial, this person commits an administrative offence (section 8 (1) number 1 letter (d) of the Schwarz- ArbG) Law on trades and crafts Any person who carries on a craft or trade listed in Appendix A to the Trade and Crafts Code (see Annex B) in an independent capacity trading from a fixed location in Germany but has not been entered on the register of persons qualified to provide trade and craft services commits an administrative offence contrary to section 117 (1) number 1 of the HwO. The same applies to a person who supplies cross-border services but is not in possession of the necessary certificate issued by the German authorities (section 9 (2) and section 4 of the EU/EWR-HwV). Moreover, any person who carries out a craft or trade for which a licence is required and trades in an independent capacity from a fixed location but has not been entered in the register of persons qualified to provide trade and craft services will be regarded as carrying out undeclared work (section 1 (2) number 5 of the SchwarzArbG). Where the volume of work or services carried out is substantial, this person commits an administrative offence (section 8 (1) number 1 letter (e) of the SchwarzArbG) Exclusion from public contracts Persons who have breached the rules on illegal employment and undeclared work will be excluded from public construction contracts for a period of up to three years (section 21 (1) of the SchwarzArbG). That exclusion will only applies to businesses or their authorised representa-

38 Page 36 tives who, following conviction for one of the offences specified in section 21 of the SchwarzArbG, have been sentenced to imprisonment for a period of more three months or to a financial penalty exceeding 90 units (where a unit is calculated in accordance with the offender s net income) or to an administrative fine of 2,500 or greater. Moreover, persons who have been fined 2,500 or more pursuant to section 23 of the AEntG will be excluded for an appropriate period from participation in the award of public contracts until they can be shown to have regained their reliability (section 21 of the AEntG). In an individual case, this exclusion can be imposed prior to criminal or administrative proceedings if, having regard to the evidence, there is no doubt that the offences mentioned above have been committed (see section 21 (1) of the SchwarzArbG and section 21 (1) of the AEntG). In those cases, the authorities responsible for detecting and prosecuting those offences are authorised to pass on to contract awarding bodies the necessary information (see section 21 (1) of the SchwarzArbG and section 21 (2) of the AEntG). Germany has a central register of trade and industry (Gewerbezentralregister) which contains the decisions, findings and facts specified in section 149 (2) of the GewO. 25 Courts and public authorities are required to submit that information for entry on the record pursuant to section 153a of the GewO and relevant provisions of other legislation (for example, section 20 (3) of the AEntG, section 12 (4) of the SchwarzArbG or section 405 (5) of the SGB III). Contract awarding bodies, that is, all the public bodies specified in section 98 of the GWB, are required in the course of that process to obtain current extracts from the register or to have bidders submit such extracts. Further rules on the exclusion from the contract award process can be found in specific legislation of the Länder The central register of trade and industry is maintained by the Federal Office of Justice (Bundesamt für Justiz). For more information (in German) see Gewerbezentralregister. 26 See, for example, the Bavarian Act on the Award of Construction Contracts (Bayerisches Bauaufträge-Vergabegesetz) or the Hamburg Act on the Award of Public Contracts (Hamburgisches Vergabegesetz).

39 Page The freedom of establishment 3.1 Legal framework Tax law The revenue authorities of the Länder are responsible for verifying that tax requirements (as defined in section 1 (2), second sentence, of the SchwarzArbG, see also section of this guide on wages tax and VAT) are met (section 2 (1), second sentence, of the SchwarzArbG). The customs authorities (main customs offices) are entitled to participate in these checks (section 2 (1), third sentence, of the SchwarzArbG). In addition, in light of their obligation to cooperate and share information, the customs authorities also carry out checks to establish whether there are grounds for suspecting that tax obligations arising from work and service contracts have not been met (section 6 (1), first sentence, and (3) number 4 of the SchwarzArbG) Trading law In accordance with EU rules, traders from other EU Member States seeking to establish a business in Germany are subject to the same requirements as domestic traders. Notice must be given to the relevant authority when starting an independent business operating from a fixed location or when establishing a branch or other premises (this is known as a trading notice pursuant to section 14 of the GewO). Notice must also be given of any transfer of business operations to another location, to a change or a broadening of business purposes and when trading ceases. Annex A includes a specimen of the official form for submission of a trading notice (Appendix 6). This form contains all the important information, the trader s name and address, the object of the business and the date on which trading began. Additional requirements must be met if the business requires a licence. In this case, a German licence is required. The licensing procedure generally involves checks on the trader s reliability. Evidence of a relevant qualification is required for certain activities. In accordance with the Professional Qualifications Directive (Directive 2005/36), qualifications from other EU Member States or EEA States will be recognised where these are regarded as equivalent to German qualifications. The authorities competent in these matters are those in whose jurisdiction the activity requiring notification or licensing is carried out. The laws of the individual Länder establish which of the authorities is to exercise these powers. This can be a local authority, administrative district, trade licensing office, office for municipal affairs, etc.

40 Page Law on trades and crafts Establishment of a business operating from a fixed location in a trade or craft subject to licensing requirements means that the trader must satisfy not only trading law but also the law governing crafts. The trades and crafts which require a licence are listed in Appendix A to the Trade and Crafts Code (HwO) which is included as Annex B to this guide. Citizens of an EU Member State or an EEA State who wish to set up an establishment in Germany in order to pursue a trade or craft specified in Appendix A to the Trade and Crafts Code (see Annex B) from a fixed location require special authorisation to be entered on the register of persons qualified to provide trade and craft services (see section 9 (1) of the HwO together with the EU/EWR-HwV). For more information on this special authorisation see section of this guide. Following changes which entered into force in 2005, chambers of crafts (Handwerkskammer) now have additional powers with which to detect fake selfemployment. 3.2 Fake self-employment Criteria to distinguish self-employment fromdependent employment The courts have developed criteria to distinguish self-employment from dependent employment. They define a self-employed person as someone who is generally free to determine their activities and working time at their own discretion. Selfemployment is also characterised by the assumption of entrepreneurial risk, dealing in one s own name and on one s own account and the freedom to take business decisions. Social security law, tax law and employment law all use very similar criteria to distinguish self-employment from employee status. Social security law (section 7 (1) of the SGB IV) defines employment as working as a dependent worker in particular in an employer-employee relationship. In this context, an individual is regarded as an employee where that person at the direction of another performs contractually agreed services within a work organisation controlled by his employer. The decisive criterion is the extent to which the worker is personally dependent on the employer, that is, the extent to which the employer can control the content, hours, duration and place of work. In determining whether a worker is self-employed or an employee the label applied by the parties to the relationship is irrelevant. Rather it is a question of the specific nature of the work and its actual performance. Depending on the circumstances of the case, the following criteria may indicate dependent labour (employee status): Personal dependency: Subject to an employer s control as regards Place of work, i.e. an obligation to appear regularly at the place of work or at the employer s premises Hours of work, i.e. incorporation in the roster or schedule. In contrast, where working time is not fixed and a worker is free to determine start and finish times, this suggests that the employer has no control over hours of work. Nature of the work;

41 Page 39 Obligation to be available for work at all times; Fixed salary; paid overtime; hourly wages; Right to paid annual leave and paid sick leave; Right to other social benefits; Incorporation within the employer s business: Incorporation of the worker within work processes controlled by another; Use of the employer s facilities (tools and equipment); Inclusion of the worker within the organisation and hierarchy of the employer; Close regular cooperation with the employer s other workers; Obligation to provide labour (contract of service) and not the achievement of a specific result (contract for services); Work cannot be organised or carried out independently; Work consists of simple tasks for which instruction and employer control is the norm; Similar work for the employer is generally carried out by its employees; The work performed appears to be the same as that performed by the worker for the same employer under a previous contract of employment; Work is performed mainly for one employer on a long-term basis; The fact that the worker performs limited activities for one or more other client does not undermine the presumption of an employer-employee relationship; Where work for a single employer accounts for at least five sixths of the worker s total earnings the worker will generally be deemed to work to a substantial extent for that employer; There are no obvious characteristics of entrepreneurial behaviour: The worker does not bear any entrepreneurial risk, has no entrepreneurial freedom and does not guarantee the quality of the work; The worker is not active in the market as a business; The worker does not have a permanent establishment; The worker cannot choose how to allocate his own labour; The worker does not have to provide own tools and equipment; No capital investment is required; The worker is not free to take independent decisions on the purchase of materials, hiring of staff, use of capital and equipment; Both from a legal and practical point of view, the worker must provide the services personally. Unlike a self-employed person, an employee is generally not permitted to substitute the services of another person for his own but is required to perform personally. The authority to determine (for social security purposes) whether an activity is performed on a self-employed basis or as an employee rests with the social security institutions alone. In this connection, the decision is taken either by the relevant health insurance body as agency responsible for collecting the contributions for the different branches of social security (section 28h of the SGB IV), by a pension insur-

42 Page 40 ance body in the context of its regular checks on employers (section 28p of the SGB IV) or by the clearing unit of the pension insurance body (Deutsche Rentenversicherung Bund) in a formal procedure to determine social security status (section 7a of the SGB IV). 27 Should legal proceedings be brought in this connection, the matter will be decided by a social court. Annex A contains a specimen application form for determination of social security status (Appendix 3). The decision on self-employment / employee status for tax purposes is a matter for the regional tax authorities and the tax courts Self-employed persons The criteria listed above are also used to determine whether a person acting as a service provider is indeed self-employed or is in a dependent employment relationship with the would-be client who is in factual terms the employer. Simply the fact that a service provider has registered a trade with the authorities or been entered on the commercial register does not mean that the person is actually self-employed Partnerships The question of whether or not a person is self-employed can arise where the entity commissioned to provide services is, in formal terms, a partnership. Within a partnership, too, relationships may need 27 For further information (in German) see: berufsgruppen/03_statusfeststellung/ statusfeststellung.html?nn= to be examined to determine whether all the partners are self-employed. Particular care should be taken in the following situations involving partnerships as they may disguise fake selfemployment. 28 Individuals join together to found a partnership (GbR) under German law or a comparable entity under foreign law with a view to providing services to a client. However, the would-be partners of that partnership should more properly be classified as employees of the client firm. To determine whether the individuals concerned are partners in a partnership or dependent employees the criteria set out in of this guide apply. Moreover, there are increasing numbers of cases where, although the legal requirements to establish a partnership are not met, a partnership (whether governed by German or foreign law) has been formed involving a head partner together with numerous unskilled or poorly skilled workers. In such cases, it must be assessed whether these workers are, in fact, partners or dependent employees of the head partner of the German or foreign partnership. One of the conditions which have to be met to form a partnership is that all partners pursue a common objective 28 For further information (in German) on the distinction between employee and selfemployed status for the purposes of social security law and with details concerning specific jobs see the joint circular of 13 April 2010 issued by the national organisations of the various social security bodies available online at: Angebote für spezielle Zielgruppen Arbeitgeber & Steuerberater Publikationen Rundschreiben Gemeinsame Rundschreiben 2010 Rundschreiben zur Statusfeststellung von Erwerbstätigen.

43 Page 41 and are aware of such. In contrast, dependent employment is characterised by the fact that each party pursues its own objective and performs an obligation towards the other. In this case, too, the assessment must be made using the criteria set out in section of this guide. Even in those cases where the requirements for a partnership are met, certain individual partners may, in addition to their status as partner, also have an employment relationship subject to compulsory social security contributions and potentially also requiring a work permit with the partnership itself or with the head partner. This is the case where the nature of the employment reflects that of a typical employer-employee relationship. Further indicators of employee status include, for example, a minimal contribution to the capital of the partnership and a requirement to observe fixed working hours. In addition to these situations involving a GbR, more recent variations on this theme have been observed using other forms of partnership. For example, a limited partnership (Kommanditgesellschaft) is formed in which workers become, in formal terms, limited partners and contribute to the partnership s capital through the provision of their labour. However, the need to assess this situation according to the criteria set out in section remains the same. 3.3 Consequences of fake self-employment Workers Social security law For the purposes of social security law, a person whose self-employment is a sham is regarded as an employee (section 7 (1) of the SGB IV) and, as a result, subject to compulsory social security contributions in all branches of the social security system The right of residence An individual s right of residence can be withdrawn if the authorities responsible for non-nationals determine that the individual no longer qualifies for residence based on the exercise of rights to free movement (see section 5 (5) of the FreizügG/EU and section of this guide). Given the strict requirements which must be met to deprive EU citizens of their residence rights on grounds of public order and public security (section 6 of the FreizügG/EU), these cannot be used in the case of individuals whose self-employment is found to be a sham, as, from a worker s perspective, this conduct is sanctioned only as an administrative offence (see below) The law on work permits If, in light of the criteria set out above, the activities of a Bulgarian or Romanian national as a citizen of new EU Member State are classified as fake self-employment this will not be covered by the freedom of

44 Page 42 establishment. Instead, this is dependent employment for which, in light of the restrictions on free movement for workers, a work permit is required (section 284 (1) of the SGB III). If the foreign worker has started work without obtaining a work permit for EU citizens, this will constitute an administrative offence (section 404 (2) number 4 of the SGB III) Posted Workers Act Workers whose activities are covered by the Posted Workers Act are entitled to certain minimum work standards (see section of this guide) Tax law If, in light of the above criteria, a person s self-employment is regarded as a sham and, as a consequence, they are treated as an employee of an employer in Germany, as a rule this will constitute an employeremployee relationship for the purposes of tax law. This means that the wages paid to that person are generally subject to wages tax (see section of this guide). In this connection, it is immaterial what form the wages take, what the remuneration is called (for example, a fee) and whether it is paid on a regular or one-off basis. As the self-employed status of natural persons has to be assessed according to the same principles for the purposes of VAT, income tax and trade tax (section 2.2 (2) of the UStAE), a person whose selfemployment is found to be a sham cannot at the same time be a trader for the purposes of section 2 of the UStG. A person whose self-employment is found to be a sham and who has issued invoices in which VAT is separately mentioned will be liable for the amount mentioned (section 14c (2) of the UStG). The VAT amount mentioned does not entitle the recipient of the invoice to deduct input tax (section 14c.2 (7) and section 15.2 (1) of the UStAE) Employers The following section of the guide sets out rules for employers. In this context, depending on the circumstances of the case, employer can mean either the domestic client which has hired the relevant services or the head partner of a GbR or a comparable entity under foreign law Social security law If a person s self-employment is found to be a sham, the party which hired that person is deemed to be the employer with all the attendant social security obligations. The employer must calculate and pay to the collecting agency the total monthly social security contributions for that person. In addition, it is liable for the arrears of contributions and, where applicable, penalties for late payment for previous employment periods. The remuneration to be used for the purposes of calculating contributions includes all regular and oneoff income received from that employment irrespective of the name given to that remuneration or the form it took (section 14 of the SGB IV). It includes further all payments made under the would-be contract for services and withdrawals by a partner from partnership funds. In this context, the law deems the parties to have agreed wages which are net of tax and social security contributions (section 14 (2), second sentence, of the SGB IV). The employer is regarded as sole debtor of the

45 Page 43 total amount due in social security contributions. In addition, the employer or would-be client may have committed criminal offences contrary to sections 266a (1) and (2) of the StGB (for more detail see section of this guide). A failure to comply with employer obligations under social security law is punishable with an administrative fine (section 111 of the SGB IV) Consequences with regard to the right of residence Only in exceptional cases might an employer who is a national of another EU Member State have to face consequences with regard to the right of residence in connection with the hiring of a person whose self-employment is found to be a sham (see section of this guide for the conditions necessary). Where a national of another EU Member State is convicted of an offence specified in section of this guide, the authorities must consider, having regard to the criteria laid down by the ECJ, whether that conduct warrants the withdrawal of the right of residence that the individual enjoys under the rules on free movement Work permits An employer which employs foreign workers not in possession of the necessary residence permit or, as the case may be, the work permit necessary pursuant to section 284 (1) of the SGB III commits an administrative offence (see section 404 (2) number 3 of the SGB III). In certain circumstances, this may also constitute a criminal offence contrary to sections 10 and 11 of the SchwarzArbG Supply of temporary workers If the contractor providing services is a partnership and the would-be partners are, in fact, deemed dependent workers (see section of this guide), the head partner of that partnership may be regarded as engaging in the unauthorised provision of temporary workers to that client. In assessing whether the situation should be classified as a supply of temporary workers the crucial factors to be considered are the terms of the contract agreed between the partnership and the client company and the extent to which the workers are incorporated in the client s organisation. If the provider of the temporary workers (i.e. the head partner of the partnership) is not in possession of the permit necessary pursuant to section 1 of the AÜG, both the contract between the provider of temporary workers and the user company and the contractual arrangements between the provider of temporary workers and those workers as such are deemed void and unenforceable (section 9 number 1 of the AÜG). Instead, the law deems there to be an employer-employee relationship between the user company and the temporary worker (section 10 (1) of the AÜG). Despite this legal fiction, for the purposes of social security contributions, both the provider of the temporary workers and the user company are regarded jointly liable as employers (section 10 (3) of the AÜG and section 28e (2) of the SGB IV). The unauthorised supply of temporary workers is punishable with an administrative fine (section 16 of the AÜG). The unauthorised supply of foreign temporary workers not in possession of a work permit or the necessary residence permit constitutes a criminal offence contrary to section

46 Page of the AÜG (for detail, see section of this guide) Posted Workers Act Where in light of the criteria set out above a would-be self-employed worker is deemed an employee and that person works in an industry covered by the Posted Workers Act (see sections 4 and 10 of the AEntG), the minimum work standards for the industry laid down in that legislation will apply. Regardless of the fact that a supply of temporary workers is regarded as unauthorised, the supplier of the temporary workers and the user company are both considered the employer and under an obligation to pay the minimum wage agreed for the industry (section 10 (1) and (3), second sentence, of the AÜG). In addition, this may also constitute an administrative offence contrary to section 23 (2) of the AEntG (engaging a subcontractor not paying the minimum wage). The customs authorities (main customs offices) have the task of applying these administrative penalties (see section 23 (4) and section 16 of the AEntG) Tax law The employer for tax purposes having regard to the definition of an employee provided for in section 1 (1) and (2) of the LStDV is generally the person for whom an employee is obliged to work and who supervises or controls that work. In that regard, it is generally immaterial who has the obligation to pay the wages or against whom claims for wages can be made. The fact that a third party pays the wages is generally also irrelevant (see section of this guide). A person will also be regarded as an employer where as a service provider it supplies temporary workers to a third party (user company). For these purposes, it is irrelevant whether the supply of temporary workers is regarded as lawful under the Temporary Employment Act. If the supply of temporary workers is unauthorised and, in place of the service provider, the user company pays the workers directly in its own name and for its own account and, as a result, the three-way relationship agreed is ignored, the user company will generally be regarded as the employer for tax purposes. Important note: Any doubts whether a particular situation involves employment subject to compulsory social security contributions and German taxation, whether a trade needs to be registered, etc. may be clarified by contacting the authority concerned. Legal advice may be provided by the authorities and the federal ministries only where the law allows this. Individual advice on legal and tax matters is available from authorised professionals (for example, lawyers and tax consultants). In addition, the Legal Aid Act (Beratungshilfegesetz) ensures that persons with limited financial resources may access legal advice from a lawyer, legal adviser or advice centre established by the authorities of the Länder.

47 Page 45 Annexes Annex A Examples of documents Appendix 1: Form A1 Appendix 2: Form E 101 Appendix 3: Appendix 4: Appendix 5: Appendix 6: Application to establish social security status Application for a work permit for EU citizens Permit to supply temporary workers Registration of a trade Annex B Appendix A to the Trade and Crafts Code

48 Annex A Appendix 1

49

50

51 Annex A Appendix 2

52

53

54

55 Annex A Appendix 3

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61 Annex A Appendix 4 Application for a work permit for an EU citizen

CABINET OFFICE THE CIVIL SERVICE NATIONALITY RULES

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