Germany’s social security system

The German social security system in general covers only employments. This means that it is important to determine when a manager of a corporation or a member of a partnership is deemed to be an employee and becomes liable to German social security contributions if this person continues to work for the company.

There are various traps for managers and other employees who work for their companies or partnerships to be aware of and to try to avoid.

General definition of the term “employment”

Employment in social security law means an occupation where the employee is obliged to follow the employer’s instructions and is locked into the work processes of enterprises. This applies if the employee is not entitled to decide about time, duration, place, or type of work. Contrary to that, self-employment is characterized by the compensation risk connected to their own activity, the free choice of workplace, duration, and organisation of work. For example, the following criteria indicate an employment:

• Fixed remunerations
• Vacation entitlement
• Sick payment
• Overtime payment
• No own business investments

Managers of companies

Managers of corporations are considered as employees of the company if they work for their company. This is not the case if the manager can prevent decisions which do not suit him. A manager is deemed to be a self-employed person if he has 50% or more of the voting rights or a “qualified” blocking minority. Qualified is a blocking minority if the shareholder can prevent all or any? relevant decisions concerning his duties as a manager.

If the manager does not have 50% of the voting rights or a qualified blocking minority it must be evaluated whether his activities can be deemed to be an “employment” as mentioned above.

The same applies for employees who are shareholders of a company but not managers.

International aspects

The before mentioned rules also apply for expatriates who relocate to Germany and continue to act as managers for foreign companies that they are shareholders of. If they own 50% or more of the share capital, they will not be liable to German social security contributions. However, there are exceptions to this general rule (see below).

Members of the management board of a German stock corporation (Aktiengesellschaft) are always exempt from membership in Germany’s social security system. This does not apply for members of the management board of similar forms of foreign corporations (e.g., incorporated companies in the Anglo-American world).

Members of the board of directors are common in the Anglo-American world. The board members can seldom be classified as employees. This is especially the case if their main duty is to supervise the management and being responsible for the business strategy.

Members of partnerships and sole proprietors

Sole proprietors can never be employed by their own business and can therefore never part of the social security system. However, under certain circumstances they can opt themselves into the system as voluntary member.

Partners of partnerships will also not be part of the social security system if they have unlimited liability for the enterprise’s depts. Limited liability partners can be part of the social security system and they and the partnership may be liable to social security contributions. This is always the case if there is an employment in the above-mentioned sense and the member has no dominant influence in the partnership.

International aspects

The payment of fixed remuneration is one indication for an “employment”being in existence. However, the payment of fixed amounts to a partner for his services alone will not indicate the actual existence of an employment. For example, the payment of “guaranteed payments” to a partner of a US partnership or to a member of a Limited Liability Company (LLC) will not result in a social security liability if the partner or member is tax resident and performs his work in Germany. Further information to guaranteed payments in https://www.irs.gov/publications/p541#en_US_202203_publink1000104261.

"Employee-like” workers

A self-employed person (contractual worker, freelancer) is liable to Germany’s pension insurance scheme if he does not employ a person with a salary of more than 450 Euro per month and he works essentially and for a considerable time only for one customer. This means that the self-employed person works (i) for a period of more than 3 month for a customer, (ii) the working relationship is set to be repeated on a regular basis and (iii) the payments equal the minimum of 5/6 of the self-employed persons total income.

Employee-like workers are not part of the other social security schemes. This type of person must be distinguished from so called “false” self-employed persons who are liable to contributions to all social security schemes (more information at https://scheller-international.com/blog-beitraege/freelancer-and-the-false-self-employed-phenomenon.html).

International aspects

The before mentioned consequences can also apply to controlling shareholders of a foreign company. If this company works for a considerable time and essentially only for one customer, the managing shareholder becomes liable to Germany’s pension insurance scheme if he is living and working in Germany and performs his work for the company.

A special scenario occurs if a sole member of an LLC performs his work for the LLC in Germany. In  this case the LLC is considered to be a disregarded entity (more information at https://www.irs.gov/businesses/small-businesses-self-employed/single-member-limited-liability-companies) and the sole member is taxed as a sole proprietor. If the LLC has only one (main) customer, the member becomes liable to Germany’s pension insurance scheme.

What is unsettled is the question in respect of when, in the light of Germany’s social security law, the member of an LLC is deemed to be a sole proprietor or a shareholder of a corporation. In income tax law the Federal Ministry of Finance published a statement concerning the classification of LLCs. There the ministry developed a classification system to determine whether the LLC can be classified as a partnership/sole proprietorship or as a corporation (more information at https://scheller-international.com/blog-beitraege/llc-limited-liability-company-and-german-taxation.html). This classification system applies for income tax purposes, and it is unclear whether it also applies for social security purposes.

Status determination procedure

Shareholders and partners who manage their companies or partnerships must take special care in determining whether they are liable to social security contributions or not. In this case, every person can apply for a decision by the clearing office of the Rentenversicherung Bund. The clearing office determines the social security status of the person and whether an occupational activity must be classified as a social security relevant employment or as a self-employment. The decision is binding for all social security schemes except the accident insurance.

Glossary

Autor: Peter Scheller, Steuerberater, Master of International Taxation, Fachberater für Zölle und Verbrauchsteuern

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