EOR vs Local Entity in Germany: Which Model Fits in 2026?
Last updated: 29 September 2026. Figures reflect the minimum wage, contribution rates and immigration rules in force at that date.
You want to employ people in Germany and you have two realistic routes: set up your own German company, usually a GmbH, or employ through an Employer of Record (EOR). Choosing between an EOR vs local entity in Germany is not a question of which is cheaper on paper. It is a question of how long you plan to stay, how many people you will hire, and how the German rules on labour leasing apply to your situation.
Germany is different from most European markets on this point. An EOR arrangement here is generally treated as temporary agency work under the Arbeitnehmerüberlassungsgesetz (AÜG), the Temporary Agency Work Act. That brings a licence requirement, an 18-month cap on placing the same person with the same client, equal-treatment rules, and restrictions for some non-EU hires. None of this makes EOR unusable in Germany. It does make it a bridge rather than a permanent home for most roles.
This guide is for HR leaders, founders, and talent teams deciding how to employ their first or next people in Germany. It covers how each model works, what each costs, how long each takes, where the legal limits sit, and a practical way to decide.
What is the difference between an EOR and a local entity in Germany?
With a local entity, your own German company is the legal employer: it signs the employment contract, registers with the social security and tax authorities, runs payroll, and carries every employer obligation. With an Employer of Record, a third party that already has a German entity employs the person on your behalf, runs payroll and compliance, and you direct the day-to-day work under a service agreement.
The practical difference is who holds the employment relationship and the risk that comes with it. An entity gives you full control, a permanent legal presence, and the ability to sign customer contracts, invoice locally, and build a team without structural limits. An EOR gives you speed and keeps you from committing capital and administration to a market you have not yet proven.
There is a third route worth knowing about. A foreign company without a German entity can register as an employer in its own right, obtain a company number (Betriebsnummer) from the Federal Employment Agency, and run German payroll for its staff. This avoids incorporation, but you carry the full employer compliance load yourself, and the question of whether your German activity creates a permanent establishment (Betriebsstätte, section 12 of the Fiscal Code) still needs an answer. It suits some companies with a single senior hire and strong in-house payroll support. Most first-time employers in Germany choose between EOR and an entity.
How does an Employer of Record work in Germany under the AÜG?
In Germany, an EOR that employs a person who works under the direction of a client is generally treated as a lender of workers (Verleiher) and the client as the hirer (Entleiher) under the AÜG. That classification drives almost every rule that follows, so it is the first thing to understand before choosing an EOR vs local entity in Germany.
The AÜG licence requirement
Under section 1 of the AÜG, a company that lends workers to third parties in the course of its business activity needs a licence (Erlaubnis zur Arbeitnehmerüberlassung) from the Federal Employment Agency (Bundesagentur für Arbeit). The licence is issued for a limited period at first and can later become unlimited.
The consequences of using an unlicensed provider are serious for you, not only for the provider. Under section 9 of the AÜG the employment contract between an unlicensed lender and the worker is invalid, and under section 10 an employment relationship with the hirer is deemed to exist instead. In plain terms, the client company can become the legal employer without having planned for it, with the payroll, social security, and dismissal-protection consequences that follow. Before signing with any EOR in Germany, ask to see the licence.
The 18-month maximum assignment period
Section 1(1b) of the AÜG limits the placement of the same worker with the same client to 18 consecutive months. Earlier placements with the same client count toward the 18 months unless there has been a break of more than three months. A collective agreement in the client's industry can allow a different period, but for most companies hiring their first people in Germany, 18 months is the working limit.
This is the single biggest planning point in the EOR vs local entity decision in Germany. If you employ someone through an EOR today, you should plan to have your own entity, or another compliant arrangement, in place before that person reaches 18 months. Exceeding the limit can also lead to an employment relationship with the client being deemed to exist.
Equal treatment and equal pay
Section 8 of the AÜG sets the principle of equal treatment: a leased worker is entitled to the essential working conditions, including pay, that a comparable employee of the client would receive. A collective agreement for temporary agency work can deviate from equal pay, but only for the first nine months of an assignment, with limited exceptions for longer phase-in schemes. In practice, most companies hiring through an EOR in Germany pay a market salary from the start, so equal pay is rarely a cost surprise. It matters more when the client already has German employees in comparable roles.
The substance of the AÜG itself has not changed in 2026. The main change this year was on the collective-agreement side of the temporary work sector, not in the statute.
What the EOR handles day to day
A compliant German EOR drafts the employment contract under German law, registers the employee with the statutory health insurer and the other social insurance branches, withholds wage tax (Lohnsteuer) and social contributions, runs monthly payroll, issues payslips, manages sick-pay and leave administration, and handles the end of employment correctly. You set the work, the targets, and the day-to-day priorities. Learn more about Employer of Record services from Jackson & Frank.
What does it take to set up a local entity in Germany?
Most foreign companies employing staff in Germany use a GmbH (Gesellschaft mit beschränkter Haftung), the German limited liability company. A GmbH requires minimum share capital of 25,000 EUR under section 5 of the GmbH Act, of which at least half, 12,500 EUR, must be paid in before registration under section 7.
The alternative is the UG (haftungsbeschränkt), a mini-GmbH that can be formed with as little as 1 EUR of capital. The UG must retain a quarter of each year's net profit in a statutory reserve until it reaches the GmbH capital level (section 5a of the GmbH Act). It works, but many counterparties, landlords, and banks see it as a thinner company, so foreign groups usually choose the full GmbH. A branch office (Zweigniederlassung) is another option, though it leaves the foreign parent directly liable.
The setup steps
Setting up a GmbH to hire employees involves several stages, and the order matters:
- Draft the articles of association and have them notarised by a German notary, together with the list of shareholders.
- Open a German business bank account and pay in the share capital.
- File for registration in the commercial register (Handelsregister) through the notary.
- Register the business with the local trade office (Gewerbeamt) where the activity requires it.
- Register with the tax office (Finanzamt) for a tax number and VAT, and as an employer for wage tax.
- Obtain a company number (Betriebsnummer) from the Federal Employment Agency, which you need before registering any employee for social security.
- Register with the statutory accident insurance institution (Berufsgenossenschaft) for your sector.
Only after the employer registrations are complete can the company run German payroll. Timelines vary a great deal. The notarisation itself is quick; opening the bank account for a foreign-owned company, receiving the tax number, and completing identity checks on foreign shareholders and directors are usually the slowest parts. Plan for several weeks at a minimum and longer where shareholder documents need apostilles and translation.
The ongoing obligations of a German entity
Once the GmbH exists, it has continuing duties: statutory bookkeeping and annual financial statements filed with the company register, corporate income tax and trade tax returns, VAT returns, monthly payroll and social security reporting, and a managing director (Geschäftsführer) who carries personal legal responsibilities. Budget for a tax adviser (Steuerberater) and a payroll provider from the first month. Explore global payroll with Jackson & Frank.
How much does each model cost in Germany in 2026?
The employment cost of the person is broadly the same under both models. The difference sits in the fixed costs around the hire: an EOR charges a service fee per employee, while an entity carries setup costs, locked-up capital, and ongoing administration regardless of headcount.
Employer social contributions in 2026
German employer social security contributions come to roughly 21% of gross salary up to the contribution ceilings, before accident insurance and the statutory levies. The 2026 rates split between employer and employee are:
| Branch | Total rate 2026 | Employer share | Monthly ceiling 2026 |
|---|---|---|---|
| Pension insurance | 18.6% | 9.3% | 8,450 EUR |
| Unemployment insurance | 2.6% | 1.3% | 8,450 EUR |
| Health insurance (general rate) | 14.6% | 7.3% | 5,812.50 EUR |
| Health insurance additional contribution (average) | 2.9% | 1.45% | 5,812.50 EUR |
| Long-term care insurance | 3.6% | 1.8% | 5,812.50 EUR |
The additional health contribution varies by insurer; 2.9% is the official average for 2026. Childless employees aged 23 and over pay a care-insurance surcharge of 0.6%, which is borne by the employee alone. On top of these, the employer pays accident insurance to the Berufsgenossenschaft (the rate depends on the sector and risk class), the insolvency levy of 0.15%, and the U1 and U2 levies that fund sick-pay and maternity reimbursements, whose rates depend on the health insurer.
Because the health and care ceilings are lower than the pension ceiling, the effective employer rate falls as salaries rise above 5,812.50 EUR per month.
Worked example
For an employee on 60,000 EUR gross per year, which sits below both ceilings, the employer contributions in the table come to about 21.15%, or roughly 12,700 EUR. Adding accident insurance and the levies brings a realistic planning figure to around 13,000 to 14,000 EUR, so a loaded employer cost of about 73,000 to 74,000 EUR before benefits. Treat this as an estimate; your actual figure depends on the health insurer, the sector, and any company pension or other benefits.
Minimum wage in 2026
The statutory minimum wage in Germany is 13.90 EUR gross per hour from 1 January 2026, rising to 14.60 EUR from 1 January 2027. Collective agreements set higher minimums in many sectors.
What each model adds on top
| Cost item | Employer of Record | Local entity (GmbH) |
|---|---|---|
| Share capital | None | 25,000 EUR (12,500 EUR paid in at registration) |
| Notary and register fees | None | One-off, varies with the articles and capital |
| Tax adviser, bookkeeping, annual accounts | Not required, as you have no German company | Ongoing annual cost |
| Payroll administration | Included in the EOR fee | In-house or outsourced payroll provider |
| Management time and legal responsibility | Low | Managing director duties, corporate compliance |
| Per-employee service fee | Yes, monthly | No |
| Exit cost if you leave Germany | End the service agreement and employment lawfully | Dissolution and liquidation process |
The break-even point is not fixed, but the pattern is consistent. With one or two employees, the fixed cost of a GmbH usually outweighs the EOR fee. As headcount grows, the per-employee EOR fee adds up and the entity's fixed costs are spread across more people. The 18-month AÜG limit means cost is rarely the only trigger: timing usually forces the decision first. Try the employer cost calculator for a quick estimate.
How long does each option take?
An EOR is usually much faster. Where the candidate already has the right to work in Germany, a compliant EOR can often issue the contract and register the employee within a couple of weeks, subject to the notice period the candidate has to serve with their current employer.
A GmbH takes longer because the employer registrations cannot start until the company exists. Incorporation, the bank account, the tax number, the Betriebsnummer, and accident insurance registration all have to fall into place before the first payroll. For a foreign-owned company, a realistic plan allows for several weeks to a few months, depending on how quickly documents, the bank, and the tax office move.
For many companies, the answer is to use both: start the person through an EOR while the GmbH is being set up, then transfer the employment to the new entity.
What are the risks of each model in Germany?
Each model has its own risk profile. The EOR risks are mostly structural and legal; the entity risks are mostly administrative and financial.
Risks with an EOR in Germany
- An unlicensed provider. If the EOR does not hold an AÜG licence, the client can become the deemed employer. This is the most important check.
- The 18-month limit. An assignment that runs past 18 months without a plan creates the same deemed-employment risk.
- Non-EU hires. Where a residence permit requires the Federal Employment Agency's approval, section 40(1) No. 2 of the Residence Act requires that approval to be refused if the person is to work as a leased worker. Some permits, including certain EU Blue Card cases, do not need that approval, but this must be checked for each person before an offer is made.
- Permanent establishment. An EOR employs the person; it does not remove the tax question for your company. If the employee concludes contracts on your behalf or your German activity becomes a fixed place of business, your company may still have a German permanent establishment. Senior sales and country-manager roles need particular care.
Risks with a local entity
- Fixed cost before revenue. Capital, advisers, and management time are committed before the market is proven.
- Full employer compliance. The GmbH carries every obligation directly, from the written statement of terms under the Evidence Act (Nachweisgesetz) to payroll reporting and data protection.
- Employment protection and co-determination. Dismissal protection under the Protection Against Unfair Dismissal Act (Kündigungsschutzgesetz) applies once an employee has six months of service in a business with more than ten employees. Employees in a business with at least five permanent employees can elect a works council (Betriebsrat). Neither is a reason to avoid an entity, but both change how you manage a growing team.
- Exit cost. Closing a GmbH involves a formal liquidation and a waiting period, so leaving Germany takes longer than ending an EOR contract.
Should you hire contractors in Germany instead?
Engaging someone as a freelancer is only safe if the person is genuinely self-employed. Under section 7 of the Fourth Book of the Social Code (SGB IV), a person who works under your instructions and is integrated into your organisation is an employee, whatever the contract calls them. This is known as false self-employment (Scheinselbstständigkeit), and the consequences include backdated employer and employee social security contributions, which the employer bears.
The German Pension Insurance offers a status determination procedure (Statusfeststellungsverfahren) that gives legal certainty for a specific engagement. For anyone doing ongoing, directed work in a core role, an EOR or an entity is the safer route.
EOR or local entity in Germany: how do you decide?
Before choosing a hiring model, answer one question: are you testing the market, building a team, or committing long term? In Germany, the answer usually maps onto the models like this.
Choose an EOR when you are hiring one to a few people, testing demand, or need someone working within weeks. It is also the right bridge while a GmbH is being set up. Go in with a clear plan for what happens before the 18-month mark.
Choose a local entity when you are committed to Germany, plan to build a team of several people, will sign contracts and invoice locally, need to sponsor non-EU hires whose permits require Federal Employment Agency approval, or expect people to stay longer than 18 months in the same role.
Use both in sequence when you want to start now and stay long term. Employ the first hires through an EOR, set up the GmbH in parallel, then transfer employment to the entity. Plan the transfer carefully: service periods, notice, and benefits need to carry over properly so that employees do not lose protection or trust.
Many companies get this decision wrong in the same way. They treat an EOR in Germany as a permanent solution because it works well in other countries, and discover the 18-month limit only when a key employee approaches it. The better approach is to decide on day one whether the EOR is a test or a bridge, and to put a date in the plan for the entity decision. See how Jackson & Frank employs talent in Germany.
Is an Employer of Record legal in Germany?
Yes, provided it is structured correctly. In Germany an EOR arrangement is generally treated as temporary agency work under the AÜG, so the EOR needs a labour-leasing licence from the Federal Employment Agency. Using an unlicensed provider can make the client the deemed employer, so ask for proof of the licence before signing.
How long can I employ someone through an EOR in Germany?
The AÜG limits the placement of the same worker with the same client to 18 consecutive months, unless a collective agreement in the client's industry allows a different period. Earlier assignments count unless there was a break of more than three months. Plan to move the employee to your own entity, or another compliant arrangement, before that point.
How much does it cost to set up a GmbH in Germany?
A GmbH needs minimum share capital of 25,000 EUR, with at least 12,500 EUR paid in before registration. On top of that come notary and commercial register fees, a tax adviser, bookkeeping, and annual accounts. A UG can be formed with 1 EUR of capital but must build a reserve from profits.
What are employer social security contributions in Germany in 2026?
The employer share of statutory social contributions is roughly 21% of gross salary up to the contribution ceilings: 9.3% pension, 1.3% unemployment, 7.3% health plus half of the insurer's additional contribution (2.9% on average), and 1.8% long-term care. Accident insurance, the 0.15% insolvency levy, and the U1 and U2 levies come on top.
Can an EOR sponsor a non-EU employee in Germany?
It depends on the residence permit. Where the permit needs the Federal Employment Agency's approval, German law requires that approval to be refused if the person will work as a leased worker, which is how most EOR arrangements are classified. Some permits, including certain EU Blue Card cases, do not need that approval, so check each case before making an offer.
When should a company switch from an EOR to a German entity?
Most companies switch when they plan to keep employees in Germany beyond 18 months, grow beyond a handful of hires, start signing contracts and invoicing locally, or need to sponsor non-EU employees whose permits require approval. Starting the GmbH setup several months before the 18-month limit gives time for a smooth transfer.
Does using an EOR avoid permanent establishment risk in Germany?
Not entirely. An EOR takes on the employment relationship, but your company can still create a German permanent establishment through its own activity, for example if an employee regularly concludes contracts on your behalf. Senior sales and country-manager roles need tax advice before you rely on an EOR alone.
Conclusion
The choice between an EOR vs local entity in Germany comes down to time horizon and headcount. An EOR gets a compliant employee working in weeks without committing capital, but in Germany it operates under the AÜG, which means a licensed provider, an 18-month limit per client, equal-treatment rules, and care with non-EU hires. A GmbH costs more upfront and takes longer, but it is the right structure once you are committed to the market.
For most companies, the practical answer is sequential: start with an EOR, decide early whether it is a test or a bridge, and set up the entity in time to transfer employees before the 18-month mark.
If you are assessing your options for employing talent in Germany, Jackson & Frank's team can walk you through the specifics for your roles, timeline, and growth plans, from a compliant EOR start to setting up and running payroll for your own German entity. Get in touch with the team to talk it through.
Sources
- Gesetze im Internet, Arbeitnehmerüberlassungsgesetz section 1 - https://www.gesetze-im-internet.de/a_g/__1.html - licence requirement and 18-month maximum assignment period
- Gesetze im Internet, Arbeitnehmerüberlassungsgesetz section 8 - https://www.gesetze-im-internet.de/a_g/__8.html - equal treatment and the nine-month deviation by collective agreement
- Gesetze im Internet, Arbeitnehmerüberlassungsgesetz section 9 - https://www.gesetze-im-internet.de/a_g/__9.html - invalidity of contracts without a licence or beyond the maximum period
- Gesetze im Internet, Arbeitnehmerüberlassungsgesetz section 10 - https://www.gesetze-im-internet.de/a_g/__10.html - deemed employment relationship with the hirer
- Bundesagentur für Arbeit, Erlaubnis zur Arbeitnehmerüberlassung - https://www.arbeitsagentur.de/unternehmen/personalfragen/pflichten-arbeitgeber/arbeitnehmerueberlassung/erlaubnis-arbeitnehmerueberlassung - applying for a labour-leasing licence
- Gesetze im Internet, GmbH-Gesetz section 5 - https://www.gesetze-im-internet.de/gmbhg/__5.html - minimum share capital of 25,000 EUR
- Gesetze im Internet, GmbH-Gesetz section 7 - https://www.gesetze-im-internet.de/gmbhg/__7.html - capital to be paid in before registration
- Gesetze im Internet, GmbH-Gesetz section 5a - https://www.gesetze-im-internet.de/gmbhg/__5a.html - UG (haftungsbeschränkt) and the statutory reserve
- Gesetze im Internet, Abgabenordnung section 12 - https://www.gesetze-im-internet.de/ao_1977/__12.html - definition of a permanent establishment
- Gesetze im Internet, Aufenthaltsgesetz section 40 - https://www.gesetze-im-internet.de/aufenthg_2004/__40.html - refusal of Federal Employment Agency approval for leased workers
- Gesetze im Internet, SGB IV section 7 - https://www.gesetze-im-internet.de/sgb_4/__7.html - definition of employment and false self-employment
- Gesetze im Internet, Kündigungsschutzgesetz section 23 - https://www.gesetze-im-internet.de/kschg/__23.html - small-business threshold for dismissal protection
- Gesetze im Internet, Betriebsverfassungsgesetz section 1 - https://www.gesetze-im-internet.de/betrvg/__1.html - threshold for electing a works council
- Bundesregierung, Mindestlohn 2026 - https://www.bundesregierung.de/breg-de/aktuelles/mindestlohn-steigt-2391010 - minimum wage of 13.90 EUR from 1 January 2026 and 14.60 EUR from 2027
- Bundesregierung, Beitragsbemessungsgrenzen 2026 - https://www.bundesregierung.de/breg-de/aktuelles/beitragsgemessungsgrenzen-2386514 - 2026 contribution ceilings
- Bundesministerium für Gesundheit, Beiträge der gesetzlichen Krankenversicherung - https://www.bundesgesundheitsministerium.de/beitraege - health insurance rate and 2026 average additional contribution
Disclaimer: This article is for general guidance only and does not constitute legal, tax, or immigration advice. Employment regulations change regularly. Consult a qualified local expert before making hiring or compliance decisions.