Germany: EOR or a German entity
Last reviewed
The short answer
A German entity gives direct control of the employment relationship at the cost of capital and permanence. A GmbH needs EUR 25,000 of share capital. Before registration a quarter of the nominal amount of each share must be paid in, and cash paid in plus the nominal value of any shares covered by contributions in kind must together reach EUR 12,500, so a cash-only formation needs EUR 12,500 in cash. A UG can be formed below that threshold but cannot take contributions in kind, must have its capital paid up in full before registration and must put a quarter of each year's surplus, after deducting any loss carried forward, into a statutory reserve.
The employer of record route avoids incorporation, but in Germany the classification follows what happens on the ground: where the worker is integrated into the client's organisation and works under its instructions, section 1(1) sentence 2 treats the arrangement as employee leasing whatever the parties call it. That brings a permit requirement, an 18-month default limit on any one placement, a wage floor set by regulation and an equal-treatment rule referenced to the hirer's own pay scales but subject to the collective-agreement derogation in section 8(4). The choice turns on how long the people are needed, how many there will be and whether the company is willing to hold German employer obligations directly.
Aspirock supports companies through that decision and coordinates the route they choose, including a later move to their own entity.
What is actually being decided?
The choice is not between employing people and not employing them. It is between holding German employer obligations directly and placing them with someone who already holds the registrations.
It helps to be precise about what the second route is under German law, because the commercial description and the legal classification are not the same thing. Where a worker is integrated into the client's organisation and works under its instructions, section 1(1) sentence 2 of the Arbeitnehmerüberlassungsgesetz treats the arrangement as employee leasing whatever the parties call it. That classification is not a criticism of the model and it does not make the arrangement unlawful. It simply means a specific regulatory regime attaches: a permit, a default limit on how long one placement can run and a rule about what the worker is paid. Those are set out on the AÜG licence page.
A company that already holds a German entity is answering a different question, namely whether to run payroll itself or outsource the payroll function and that comparison is made in payroll-only or EOR when you already hold an entity.
What does forming a German entity actually require?
- 01
Choose the vehicle
A GmbH needs EUR 25,000 of share capital. A UG can be formed below that threshold, but it cannot take contributions in kind and its capital must be paid up in full before registration.
- 02
Fund the capital
Before a GmbH is registered, a quarter of the nominal amount of each share must be paid in, and cash paid in plus the nominal value of any shares covered by contributions in kind must together reach EUR 12,500. On a cash-only formation that means EUR 12,500 in cash.
- 03
Execute the deed
The articles of association require notarial form. Notarial fees are fixed by statute rather than quoted, so they follow the capital and the formation route rather than a negotiation.
- 04
Register in the Handelsregister
The court fee is EUR 225, or EUR 360 where at least one contribution in kind is made. Until registration the company does not exist as a GmbH.
- 05
Take on the employer obligations
Register as an employer, run German payroll, withhold wage tax and pay contributions to each employee's chosen health fund.
Two details in that sequence catch people out. The capital test is not a single number: the per-share quarter and the EUR 12,500 aggregate are separate requirements and on a mixed formation the cash actually transferred can be well below EUR 12,500 because the nominal value of shares covered by contributions in kind counts towards the aggregate. And the UG's lower entry price carries a standing obligation: a quarter of each year's surplus, after deducting any loss carried forward, must go to a statutory reserve and that duty ends only if the company later increases its share capital to at least EUR 25,000, not when the reserve balance happens to reach that figure.
What obligations come with holding the entity?
Direct employment means German employment law applies to the company rather than to a provider and two thresholds arrive at small team sizes. They are easy to conflate and they are different numbers.
| Obligation | Threshold | Detail |
|---|---|---|
| Works council | Five employees | A works council may be elected in an establishment with at least five permanent employees entitled to vote, three of whom are eligible for election |
| Dismissal protection | More than ten employees | The general statutory protection applies above ten; part-timers count as 0.5 up to 20 hours a week and 0.75 up to 30 and trainees are not counted |
| Notice periods | From day one | Four weeks to the 15th or month-end, lengthening for employer notice to one month at two years' service and by steps to seven months at twenty. During an agreed probation period of up to six months, two weeks applies instead |
| Sick pay | After four weeks | Six weeks at full pay, after which the employee's health fund pays a sickness benefit |
The works council threshold is the one that surprises. Five people is a small team and the right to elect arises at that point rather than at some later scale. Dismissal protection arrives separately, above ten employees and an employee must also have been with the company more than six months before relying on it.
Who withholds wage tax?
The intuition that no entity means no German tax obligation is wrong in the case most relevant here.
Section 38(1) sentence 1 of the Income Tax Act defines who must deduct wage tax. Under number 1 that is an employer with a domestic base: a residence, place of management, seat, permanent establishment or permanent representative in Germany. Under number 2 it also reaches a business with none of those, where that business supplies workers to a third party, in the course of trade, for work in Germany. So a withholding obligation can arise from the supply of workers alone, without any German permanent establishment.
A separate rule in sentence 2 covers international secondments, which is a different fact pattern and should not be merged with the first. There, the German receiving company is treated as the domestic employer where it economically bears the wage cost, or would have had to bear it under the arm's-length principle.
The practical reading for a company weighing the two routes is that neither one makes German wage tax somebody else's problem by default. Which party accounts for it is fixed by section 38(1) on the structure rather than chosen by the parties, so it is a position to establish before the contract is signed rather than a term to negotiate into it.
Which route fits which situation?
The answer turns on three variables and none of them is price.
Duration. The employee leasing route carries a default limit of 18 consecutive months for the same worker with the same hirer. That default is not fixed: a collective agreement in the hirer's own sector can set a different maximum and a works agreement made under one can reach 24 months for a hirer not itself bound. Earlier placements aggregate where gaps are three months or less, including placements made through a different provider. The limit that actually applies is therefore a question about the hirer's sector and it is worth establishing at the outset rather than discovering once someone is in post.
Headcount. An entity carries EUR 25,000 of capital, a notarial formation and a standing German filing obligation whether it employs one person or fifty, so the fixed cost weighs differently at each end of that range. A team approaching the works council threshold is a different proposition again, because at that point the company is acquiring German employment obligations in substance whichever route it uses.
Where the obligations should sit. An entity puts dismissal protection, works council rights, notice periods and the contribution history on the company's own books. The leasing route places them with a provider, at the cost of the permit question and the pay rule and with the consequence that a provider's compliance failure reaches the client under section 10(1).
The provider
About Aspirock
Aspirock is an Employer of Record and payroll provider operating across 70+ countries from six global offices, founded on more than 22 years of operational EOR experience and supporting more than 5,000 workers. Every client works with a named account team that owns the deployment end to end, so contracts, payroll, visas, and compliance filings in each market are handled by people accountable for the outcome.
For hires in Germany that means German payroll with wage tax withheld and contributions paid to the employee's chosen health fund, the two contribution ceilings applied at the right points, statutory notice and holiday under the Civil Code and the Federal Holiday Act and the employee leasing rules in the Arbeitnehmerüberlassungsgesetz where the arrangement falls inside them.
Common questions
Frequently asked questions
Last reviewed
It depends on duration and headcount. A GmbH suits a committed presence: it requires EUR 25,000 of share capital, with a quarter of each share paid in and at least EUR 12,500 covered before registration, a notarial deed and registration and it leaves the company holding German employer obligations directly, including the dismissal-protection regime above ten employees and works council rights from five. An employer of record route places people without incorporating, but where the client directs the work it falls within the employee leasing rules, so it carries a permit requirement, an 18-month default cap on any single placement, a statutory wage floor for supplied workers and pay referenced to comparable staff at the hirer subject to the collective-agreement derogation in section 8(4).
The statutory capital is fixed and the court fee is published; the notarial cost is not a quote. A GmbH requires share capital of EUR 25,000 under section 5 of the GmbH Act and section 7 requires a quarter of the nominal amount of each share to be paid in, with cash plus the nominal value of any contributions in kind reaching EUR 12,500, before the company is registered. Registration costs EUR 225 in court fees, or EUR 360 where at least one contribution in kind is made. Notarial fees are fixed by statute rather than negotiated, so they vary with the capital and the formation route. A UG can be formed with less, but contributions in kind are excluded, the capital must be paid in full before registration and a quarter of each year's surplus after any loss carried forward goes to a statutory reserve, a duty that ends only if the company later increases its share capital to at least EUR 25,000.
It can do. Section 38(1) sentence 1 number 2 of the Income Tax Act treats a foreign business that supplies employees to a third party in the course of trade for work in Germany, without otherwise being a domestic employer, as the party liable to deduct wage tax. So a withholding obligation can arise from the supply of workers alone, without a permanent establishment. A separate rule in sentence 2 covers international secondments, where the German receiving company is treated as the domestic employer if it economically bears the wage cost or would have had to bear it under the arm's-length principle.
Two different thresholds apply and they are easy to conflate. The general statutory dismissal protection under section 23(1) of the Dismissal Protection Act applies in establishments with more than ten employees, with part-timers counted as 0.5 up to 20 hours a week and 0.75 up to 30 and section 1(1) adds a six-month waiting period before an employee can rely on it. A works council can be elected far earlier, from five permanent employees entitled to vote of whom three are eligible for election, under section 1(1) of the Works Constitution Act.
Aspirock supports companies that need people at work in Germany ahead of, or instead of, incorporating and coordinates the engagement through a named account team. Where a client later forms its own German entity, the same account team manages the move across, so the start date under the new entity, accrued holiday and the timing of the first payroll are settled before the change rather than reconstructed after it. Service with a previous employer counts towards German notice and dismissal-protection thresholds only where the new contract provides for it, which is a term to agree at the point of the move. The regulatory position that governs the pre-entity route, including the permit regime and the 18-month default, is set out on this cluster's licensing page.
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General guidance on Germany employment rules, reviewed 5 August 2026. Rates and rules change. This is not legal or tax advice for a specific situation.