Germany: 170. Tax and Social Insurance Status of "Sham" and "Quasi-Dependent" Freelancers

Last Updated: 2 June 1999
KPMG Germany Webpage
Click on the above link to visit the KPMG Germany webpage on the Mondaq website

For disclaimer and copyright see end of this article.

With effect from 1 January 1999, the new government of Social Democrats and Greens has enacted legislation which threatens to have considerable negative impact on certain self-employed individuals, especially those who work for a single principle client (Law for Correction of the Social Insurance System and the Protection of Employee Rights of 19 December 1998). Like the changes made in the field of low-paying jobs, the new rules have encountered stiff opposition from industry and the affected individuals.

In considering the new rules, it is important to bear in mind that Germany has no provisions equivalent to the "self-employment tax" in the United States and, with minor exceptions, does not require self-employed individuals to pay into any statutory pension plan.

The new rules will not apply to individuals covered by the social security system of a foreign country with which Germany has a social insurance treaty or to individuals who are subject to the social security jurisdiction of another EU member state by the terms of EU Ordinance 1408/71.

1. Rebuttable presumption of dependent employment of nominal freelancers

A provision in the laws governing the social insurance system (sec. 7 (4) SGB IV) has been changed to raise a rebuttable presumption that individuals nominally working on a freelance basis for a client are in fact the latter's dependent employees if any two of the following four tests are met:

  • The individual does not have any dependent employees of his or her own who are subject to the public social insurance system. Members of the individual's extended family are disregarded for purposes of this test.
  • The individual works "regularly and essentially" (regelmässig und im wesentlichen) for a single client. This requirement is met if five sixths of the individual's total income is earned from a single client. Companies belonging to the same corporate group are treated as a single client for purposes of this test.
  • The work performed is of the sort typically performed by dependent employees.
  • The individual does not offer his or her services on the general market as would an independent entrepreneur.

The above rules do not apply to commercial representatives (Handelsvertreter as defined in sec. 84 HGB) who organise their own activities independently for the most part and are able to fix their own working hours.

No change has been made in the underlying substantive legal distinction between a dependent employee and a freelancer. Instead, by raising a rebuttable presumption, the law shifts the burden of proof on this issue to the individual (and his or her clients) under the circumstances set forth above. While it is still possible in theory to rebut the presumption by presenting evidence of all relevant facts and circumstances, the expectation is that the presumption will be difficult to rebut in practice wherever it arises.

Persons nominally working as freelancers who are in fact dependent employees are commonly referred to as "sham freelancers" (Scheinselbständige).

2. Social insurance consequences of reclassification as a dependent employee

The consequences of reclassification of a nominal freelancer as a dependent employee are highly disadvantageous for the person who, by reason of the reclassification, is regarded as the individual's employer for social insurance purposes. In situations in which the individual has worked for a single client, this client is the person who risks being treated as the individual's employer. If the nominal freelancer has worked for several clients, but nevertheless is reclassified as a dependent employee, he or she would appear to be the dependent employee of several employers at the same time. Hence, the negative consequences would be suffered by several employers.

Essentially, a client found in retrospect to have been the employer of an individual improperly treated as a freelancer is required to pay social insurance contributions on the individual's behalf not only in the future, but for the past as well. The obligation can extend backwards in time for several years and applies not only to the contributions which the employer would have owed had the relationship been treated properly from its inception, but also to the contributions owed by the employee, i.e. half of total contributions. Since total contributions currently exceed 40 % of an employee's wages, the back payments can be very substantial indeed.

Even if the employment relationship still continues, the employer's ability to pass half of this cost along to the employee is limited by law, generally to what can be deducted from the employee's salary in the three months following recognition of the misclassification. If the employment relationship has already terminated, the employer has no recourse whatsoever and can, in particular, not sue the employee for reimbursement of half of the social insurance arrearages paid by the employer.

Typically the employer bears virtually the full cost in such situations. The employee enjoys a windfall benefit at least with regard to the pension insurance payments made on his or her behalf, as these lead to accrual of pension insurance claims.

3. Tax consequences of reclassification as a dependent employee

The distinction between dependent and independent employment is significant for tax purposes as well. A freelancer is generally required to remit VAT with regard to sums invoiced to his or her clients. Clients are generally entitled to an input tax credit for this VAT, if separately invoiced, which is almost invariably the case. If the individual is discovered to have been a dependent employee, the input tax credit is forfeited retroactively by the client, who is now seen as an employer. The individual remains obligated to remit to the tax authorities all VAT separately invoiced. The net result is that the employer loses the input tax credit and hence has additional cost in this amount, whereas the employee is probably no worse off than before.

While there is no legal prohibition on seeking to recover the VAT amount from the employee, the legal grounds of such an action are unclear. No claim for unjust enrichment would appear to lie as long as the employee has paid the VAT invoiced to the tax authorities, because in this case there is no net enrichment of the employee. In any event, recourse against the employee is often impossible as a practical matter.

A case is currently pending before the European Court of Justice posing the issue of whether forfeiture of the input tax credit in this and other situations is compatible with EU law.

Besides the negative VAT consequences, the client/employer may also be liable for failure to withhold income tax (wage tax) from the sums paid to the sham freelance employee. This liability is relevant whenever the employee has not paid the income tax owing on such amounts. Once again, the employer's exposure is potentially considerable.

4. Relation of the rebuttable presumption under social insurance law to tax law

It is not clear whether the rebuttable presumption raised for social insurance law purposes also applies for tax purposes. Since distinct bodies of law involved, this would not appear to be the case. The tax risk as a practical matter remains high, however, since reclassification for social insurance purposes seems likely to prompt close scrutiny for tax purposes as well.

It is not clear whether the tax and social insurance authorities will exchange information with each other in this regard.

5. Entry into force of the rebuttable presumption under social insurance law

It is not clear whether the rebuttable presumption raised under the new law first applies to periods from 1999 onwards or to prior years as well. Since the change is procedural in nature, not substantive, the reversal of the burden of proof may well apply to years prior to 1999.

6. Defence strategies

Before assigning work to small freelancers, especially those who have no dependent employees of their own and are likely to fulfil two or more of the tests set forth above, clients should consider their chances of rebutting a presumption of a sham freelance arrangement. Even if these appear good, it is important to document the factors indicative of a genuine freelance arrangement from the start. For instance, information on the extent to which a freelancer works for other clients and is visible on the general market should be gathered prior to issuance of a contract. Non-competition clauses should probably not be included in contracts with small freelancers.

A procedure also exists whereby freelancers who have doubts as to their status may request a ruling from the appropriate social insurance authorities. Clients may wish to consider requiring certain of their freelancers to obtain such a ruling.

7. Political outlook

A reasonable chance appears to exist that changes will be made in the social insurance legislation in response to the considerable political protest. Certain industries, e.g. the software programming industry, have argued that the effects of the law in its present form will be devastating for their businesses. The government has indicated willingness to correct its legislation if undesired consequences become evident.

It is still too soon, however, to speculate as to what revisions might be made.

8. Quasi-dependent freelancers

The term "quasi-dependent freelancer" must be distinguished from that of "sham freelancer". "Quasi-dependent freelancer" (arbeitnehmerähnlicher Selbständiger) refers to individuals working in an independent (self-employed) capacity who meet both of the following tests:

  • They have no dependent employees of their own who are subject to the public social insurance system, except for family members; and
  • They work regularly and essentially for a single client.

It should be noted that individuals who meet the above two tests will also be presumed to be dependent employees under the rules set forth in sec. 1 above. Hence, the classification as "quasi-dependent freelancer" can only occur in cases in which the presumption has been rebutted, since otherwise the basic requirement of working in an independent capacity would not be met.

9. Consequences of classification as a quasi-dependent freelancer

The consequences of classification as a quasi-dependent freelancer differ greatly from those of classification as a sham freelancer. Quasi-dependent freelancers are required to pay into the statutory pension insurance system at the standard rate, currently 19.5 % of annual income up to an income ceiling which is adjusted each year (currently DM 102,000 / DM 86,400 per year in the old and new German states respectively).

The clients of quasi-dependent freelancers are not treated as employers. They have no withholding obligations. The pension insurance contributions are owed solely by the freelancer.

The new law contains opt-out provisions for freelancers who were in business prior to 1 January 1999. Freelancers 50 years of age and older on 2 January 1999 may opt out of the new rules unconditionally.

Freelancers under this age are permitted to opt out provided they had contractual pension insurance (such as whole life insurance) with a public or private insurance carrier on 10 December 1998. If such insurance is not equivalent to public pension insurance, additional insurance must be taken out by 30 June 1999. Equivalence is determined in part with respect to the cost of this contractual pension insurance, which must be at least equal to the payments which would be required under the public pension insurance system.

The election to opt out must be exercised in both cases by 30 June 1999 by application to the public pension insurance authorities.

10. Perspective

The statutory changes discussed in this article are regarded by some as stopgap measures constituting a poor substitute for the lack of a statutory self-employment tax or compulsory membership of all self-employed individuals in the general public pension insurance system. However, there is no apparent willingness to take such a radical step at this time.

The new legislation is harshly criticised and may be revised in certain respects in the foreseeable future. It may also be challenged on constitutional grounds.

Disclaimer and Copyright

This article treats the subjects covered in condensed form. It is intended to provide a general guide to the subject matter and should not be relied on as a basis for business decisions. Specialist advice must be sought with respect to your individual circumstances. We in particular insist that the tax law and other sources on which the article is based be consulted in the original, whether or not such sources are named in the article. Please note as well that later versions of this article or other articles on related topics may have since appeared on this database or elsewhere and should also be searched for and consulted. While our articles are carefully reviewed, we can accept no responsibility in the event of any inaccuracy or omission. Please note the date of each article and that subsequent related developments are not necessarily reported on in later articles. Any claims nevertheless raised on the basis of this article are subject to German substantive law and, to the extent permissible thereunder, to the exclusive jurisdiction of the courts in Frankfurt am Main, Germany. This article is the intellectual property of KPMG Deutsche Treuhand-Gesellschaft AG (KPMG Germany). Distribution to third persons is prohibited without our express written consent in advance.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions