Germany: 186. Reform of Rules Affecting Tax and Social Insurance Status of"Sham" and "Quasi-Dependent" Freelancers

Last Updated: 12 January 2000
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.


1. Background

In article no. 170, we reported on legislative changes which may affect the tax and social insurance status of certain self-employed individuals, especially those who work primarily for a single client (principal). This legislation represents the German response to what is perceived to be unfair or undesirable avoidance of social insurance obligations by persons who, while nominally self-employed, are in point of fact either dependent employees or similar enough to employees to warrant bringing them within the social insurance system. With minor exceptions, persons who are truly self-employed are not subject to statutory pension, health, or unemployment insurance.

As a result of the criticism which followed enactment of the rules described in our previous article, the government appointed a commission to recommend improvements in the original scheme. This commission, headed by a former president of the Federal Labour Court, recommended a number of modifications, which were enacted in late 1999 (Law for the Promotion of Self-Employment of 20 December 1999 – BGBl I 2000, 2).

This article describes the changes made by the new legislation, which are retroactive to 1 January 1999, the effective date of the law which is being modified. The changes largely eliminate the potentially disastrous effects of retroactive reclassifications of freelancers as employees, at least for employers who take timely action.


2. "Sham" freelancers: determination of social insurance status

The original legislation raised a rebuttable presumption that a nominally independent contractor was in fact an employee for insurance purposes if any two of four specified tests were met. The relevant section of the Social Code (§ 7 (4) SGB IV) has been completely re-written by the new legislation. In addition, new §§ 7a - 7c SGB IV have been added to the Social Code.

2.1 Limitation of presumption to situations involving non-cooperation

The new § 7 (4) establishes a rebuttable presumption similar to that of the old § 7 (4), but more restricted in several important respects.

The new § 7 (4) states that the presumption it provides for can only arise with respect to individuals who fail to comply with their duties of cooperation under § 206 SGB V or § 196 (1) SGV VI. The presumption can therefore not operate against an individual who cooperates fully with an official investigation of his or her social insurance status. The status of persons from whom cooperation is forthcoming would thus continue to be determined solely with respect to the standard criteria for distinguishing between independent contractors and employees (such as right of direction and control, integration, economic dependence, working hours, etc.). Hence, it is these standard criteria which the social insurance authorities must apply as a general rule. A sentence added to § 7 (1) SGB IV provides that subjection to the control or direction of another person and integration into that person's work organisation are criteria indicative of dependent employment as a general matter.

2.2 Revised and expanded list of tests

Furthermore, the presumption under the new § 7 (4) SGB IV depends on five tests (instead of four), three of which must be met by an individual nominally working in a freelance capacity in order for the presumption to arise. The five tests are listed below. The first four are identical or similar to those under the original legislation. Italics identify changes in content and/or wording:

i. Within the scope of the relevant activity, the individual has no regular employees of his or her own who are subject to the public social insurance system and whose wages from this job consistently exceed DM 630 per month. Members of the individual's family are counted for purposes of this test.

ii. The individual works "essentially" for a single principal on a long-term basis. Under the prior law, the social insurance authorities stated that they would regard this test as met if five sixths of the individual's total income was earned from a single principal. Likewise, companies belonging to the same corporate group were to be treated as a single principal for purposes of this test. Whether the social insurance authorities will take different positions under the new law is unclear.

iii. The services in question are of a sort regularly rendered by dependent employees either to the individual's principal or to a comparable firm.

iv. The typical features of independent business activity are not discernible in the work in question.

v. There is a prima facie correspondence between the work in question and the work which the individual used to perform for the same principal in the context of an employment relationship.

2.3 Ruling request procedure

The new legislation also creates a procedure (new § 7a SGB IV) by which freelancers in doubt as to their social insurance status, or their clients, may request a binding ruling from the social insurance authorities. While this procedure is not new as such, it was not previously codified. Furthermore, jurisdiction to issue rulings under this procedure is now vested exclusively in the Federal Social Insurance Institution for Employees (Bundesversicherungsanstalt für Angestellte).

The clarification procedure may be initiated by the "parties" to the nominally independent employment relationship, that is, either by the freelancer or by his or her client (principal).

Where a request for status clarification is filed within one month after commencement of a nominally independent employment activity, any finding by the social insurance authorities that a dependent employment relationship subject to the social insurance laws in fact exists will have effect only from the date of the ruling if the following conditions are met:

• The employee consents, and

• For the period between commencement of the employment activity and the date of the ruling, the employee arranged health and pension insurance coverage equivalent to that under the statutory health and pension insurance schemes.

Otherwise, the standard statute of limitations period of four years applies (§ 65 SGB IV).

2.4 Transition provision

An important transition provision has been added to the law (new § 7c SGB IV). This provides that an adverse ruling pursuant to a ruling request procedure commenced prior to 30 June 2000 will have effect only from the date of the ruling unless either of the following applies:

• A social insurance agency has determined the employee's dependent status or initiated the relevant proceedings prior to the filing of the ruling request, or

• The employer's failure to comply with his obligations under the social insurance law was intentional or grossly negligent.

2.5 Retroactivity in other circumstances

Under new § 7b SGB IV, reclassifications of nominal freelancers as dependent employees other than in a ruling request procedure under § 7a SGB IV will likewise have only ex nunc effect (no retroactivity) if the following conditions are met:

• The employee consents, and

• For the period between commencement of the employment activity and the date of the ruling, the employee arranged health and pension insurance coverage equivalent to that under the statutory health and pension insurance schemes, and

• The improper classification as a freelance relationship was neither intentional nor grossly negligent on the part of either the employer or the employee.

2.6 Deferral of payment pending appeal

The new legislation further provides for deferral of payment of social insurance contributions for the duration of any appeal against an adverse classification ruling issued under the ruling request procedure. The law provides for an administrative appeal followed by judicial review against all adverse classification rulings.


3. Quasi-dependent freelancers

The changes in this area are relatively minor compared with those for so-called "sham" freelancers. Whereas a sham freelancer is in fact a dependent employee, the term "quasi-dependent freelancer" (arbeitnehmerähnlicher Selbständiger, literally, "self-employed person similar to an employee") refers to persons genuinely self-employed who resemble employees in certain respects.

The new legislation (which avoids using the term "quasi-dependent employee" because some found it pejorative) continues to require independent contractors who meet two conditions to pay statutory pension insurance contributions. The obligation to pay such contributions continues to fall entirely on the independent contractor. He or she has no obligation to pay unemployment or health insurance (and hence no benefits).

The two conditions have been modified only slightly (italics):

i. The freelancer has no regular employees of his or her own who are subject to the public social insurance system and whose wages from this job consistently exceed DM 630 per month. Members of the individual's family are counted for purposes of this test.


ii. The individual works "essentially" for a single principal on a long-term basis.

The above conditions are also included in the list of the now five tests for presumption of employee status (sec. 2.2 above).

The new legislation excludes independent contractors 58 years of age or over at the time they would otherwise first become liable to pay into the pension insurance system provided they were self-employed prior to this date (generally, 1 January 1999). Individuals starting new freelance businesses are excluded from the law for a period of three years. Finally, the date for opting out of the statutory pension insurance system has been extended for those who are eligible to do so (persons 50 years of age or more on 2 January 1999 and persons with a qualifying private retirement plan in place prior to 10 December 1998). The new deadline is 30 June 2000 or one year from the time of initial liability, whichever is later.


4. Tax status of sham freelancers and quasi-dependent freelancers

The above provisions refer solely to social insurance law. Reclassification of a "sham" freelancer as a dependent employee poses VAT and wage withholding issues for the employer. While the rebuttable presumption of employee status raised under social insurance law would not appear to apply for tax purposes, as a practical matter all persons reclassified as employees for social insurance purposes can expect at least close scrutiny from the tax authorities regarding their status for tax purposes.

It is more difficult to anticipate how the tax authorities will view quasi-dependent freelancers. Since a quasi-dependent freelancer is genuinely self-employed, and since the criteria for distinguishing self-employment from dependent employment for tax purposes resemble those for social insurance purposes (except for the new rebuttable presumption rule), there would appear to be no reason why the tax authorities should react merely because a freelancer is required to pay statutory pension contributions under the new law.


For further information, please send a fax or an e-mail stating your inquiry to KPMG Frankfurt, attn. Christian Looks: Fax +49-(0)69-9587-2262, e-mail You may also send an e-mail to KPMG Germany by clicking the Contact Contributor button on this screen.

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. 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”

Related Topics
Related Articles
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
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

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 or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq 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 of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

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