Considering exploring the German market but not interested in making a huge commitment? In lieu of a formal presence, such as an entity or partnership, you may want to investigate setting up a payroll only, and operating as a nonresident employer (NRE).
NREs are a good option for companies looking to explore the opportunity in a country, through research and marketing activities, without the headaches of the entity setup or partner negotiation process. However, it’s not as simple as hiring an employee in Germany and sending him or her paychecks. There are several considerations to keep in mind when establishing a payroll only in Germany:
NREs cannot withhold income tax. German tax authorities do not allow NREs to withhold income taxes from the paychecks of employees working in country. The rationale behind this is that the authorities do not have any jurisdiction outside of the country. Therefore, the onus of making income tax payments falls on the employee. This means advance payments of tax must be made, usually quarterly, and filed in directly by the employee to the authorities. This places compliance obligations on the employee and may affect employee cash flow and other financial commitments.
Social security deductions are still applicable. Although income tax withholding by NREs is not allowed, social security is still an obligation, regardless of where the parent company is based. Both the NRE and employee are required to remit social security contributions regularly to the government through a payroll registered in Germany. A registered payroll in Germany is therefore a requirement, but still cannot be used for income taxes.
Employer’s liability insurance is required. Companies that employ staff in Germany, whether on-the-ground or overseas, are required to have liability coverage to protect employees in the event of at-work injury. However, the insurance that a parent company overseas has will not satisfy this requirement. Whether an entity or NRE, all organizations that employ in country must obtain liability insurance from a company that is based in Germany.
NREs still have corporate tax exposure. The NRE arrangement does not shelter the employer from risks of corporate tax exposure in Germany. Specific activities of the company and the employees will determine what type of tax risk exists. An office in Germany will also create a risk that may even extend to a home office.