Foreign Subcontractors on German Construction Sites

The use of foreign subcontractors in the construction sector is no longer the exception. For larger construction, fit-out, and assembly projects in particular, work is frequently organized across multiple parties and carried out through international contract chains. Companies from other EU member states are involved alongside firms from third countries and arrangements involving mixed teams.

This practice is not legally prohibited. It is only sustainable, however, when the involvement of the companies concerned is structured carefully. What matters on a construction site is not only what the contract says. How the collaboration actually operates in practice is equally decisive. Who issues instructions, who organizes personnel, who is responsible for delivering the agreed result, and who presents itself to authorities as the responsible employer — these are the factors that regularly determine how the arrangement is assessed under the law.

The construction sector is also subject to heightened inspection and documentation requirements. Customs authorities target this industry specifically. In many situations, workers are required to carry identity documents, and employers must be able to produce various records during inspections.

One of the first and most important questions is whether the individuals involved are actually authorized to work in Germany. A strict distinction must be drawn between nationals of EU, EEA, and Swiss member states on the one hand, and third-country nationals on the other.

EU, EEA, and Swiss nationals enjoy freedom of movement and do not require a residence permit or work authorization in Germany. Third-country nationals are in a different position: they generally require a visa before entering Germany, or a residence title (Aufenthaltstitel) after entry, that specifically permits the employment in question. Under Section 4a of the Residence Act (AufenthG), foreign nationals may only engage in employment if their residence title permits it. The Federal Employment Agency also notes that third-country nationals typically need a visa before taking up work in Germany.

In practice, errors are particularly common at this stage. It is often assumed that working on a construction site is permissible simply because an employment contract exists with a foreign company. This is not correct under German law. What matters is not only the employment relationship in the home country, but whether the specific activity in Germany is authorized under residence law. Cases where workers enter on the wrong type of visa, or hold a residence title that does not cover the work actually being performed, are equally problematic.

For companies, this means: before construction begins, it is always necessary to verify the nationality of the workers being deployed, their current residence status, and whether the specific work on the site in question is actually covered by that status.

Not every activity carried out by a foreign company in Germany automatically constitutes a classic posting. The legally decisive question is whether workers are being sent to Germany temporarily to perform a specific service — or whether the activity already has the characteristics of a permanent economic presence in Germany.

Under EU law, a posting — the temporary secondment of employees to another country to perform a specific service — typically occurs when workers are deployed in another member state and subsequently return to their usual place of work. During that period, certain minimum working conditions of the host state apply. A posting notification is also generally required. The A1 certificate plays a central role in maintaining the workers’ social security coverage in their home country.

The longer, larger in scale, and more organizationally entrenched the deployment in Germany becomes, however, the more seriously the question arises whether a permanent establishment — or at least a tax-relevant fixed place of business — should be assumed. Under Section 12 of the Fiscal Code (AO), a permanent establishment (Betriebsstätte) is any fixed place of business or installation through which a company carries out its activities. For long-running construction projects, established organizational structures, or permanently available facilities, this distinction can have significant tax consequences.

This classification matters greatly in practice because it affects not only immigration and notification obligations, but also social security contributions, payroll accounting, the construction withholding tax (Bauabzugsteuer), and tax registration requirements.

One of the most significant areas of legal risk on German construction sites is the distinction between a genuine works contract (Werkvertrag) and a temporary agency work arrangement subject to licensing requirements under the Act on Temporary Agency Work (AÜG).

A works contract requires the contractor to deliver a specific result. The focus is on the agreed outcome. The subcontractor organizes the work independently, deploys its own personnel on its own responsibility, and bears the commercial risk.

Temporary agency work, by contrast, applies when workers are integrated into the client’s operational structure and subject to the client’s instructions. These are precisely the criteria set out in Section 1 of the AÜG. Arrangements described on paper as works contracts can therefore quickly be reclassified as temporary agency work if the personnel are in practice managed like the client’s own site workers.

The situation becomes particularly serious when there are also grounds to suspect bogus self-employment (Scheinselbstständigkeit) or undisclosed temporary agency work. At that point, the issue is no longer a theoretical question of contractual classification — it involves significant liability and enforcement risks. Temporary agency work in Germany is, as a general rule, subject to a licensing requirement. Where the required license is absent, far-reaching legal consequences can follow. Customs authorities explicitly highlight the criminal and administrative penalty consequences of unlicensed temporary agency work arrangements.

In practice, this means: the contract heading does not determine how an arrangement is classified — the actual conduct on site does. Contract drafting and project management must therefore be considered together from the outset.

Construction sites have been among the most heavily inspected environments for years. The primary authority responsible is the Finanzkontrolle Schwarzarbeit (the customs unit responsible for undeclared work enforcement), with immigration authorities and other bodies also involved depending on the circumstances.

The Finanzkontrolle Schwarzarbeit examines in particular whether social security obligations are being met, whether social benefits are being claimed unlawfully, whether the conditions for receiving benefits are actually met, and whether there are violations of minimum working conditions, illegal employment, or unlicensed temporary agency work. The statutory powers of the authority are extensive. Employers and certain third parties are legally required to cooperate with and permit these inspections.

In the construction industry, authorities regularly request identity documents, registration data, proof of employment relationships, working time records, payroll documents, posting documentation, and — for cross-border deployments — records relating to residence status and social security. Customs authorities also note that workers in relevant sectors must carry identity documents at all times, and that employers are required to instruct their employees on this obligation in writing.

In practice, these inspections often take place at short notice — for example in the context of an audit by the main customs office (Hauptzollamt) — and directly on site. It quickly becomes clear whether a contractual arrangement was properly prepared or merely looked plausible on paper.

Errors in the integration of foreign subcontractors rarely go without consequence. Depending on the circumstances, employment law, social security law, tax law, administrative penalty law, and immigration law consequences can arise simultaneously.

Risks include in particular:

• Retroactive demands for social security contributions and wage components
• Fines for violations of notification, documentation, or minimum wage obligations
• Investigations for illegal employment or undeclared work
• Consequences arising from unlicensed temporary agency work
• Immigration law measures against third-country nationals deployed on site
• Liability exposure for German clients

For clients in particular, it is relevant that the Posted Workers Act (Arbeitnehmer-Entsendegesetz, AEntG) can make clients liable for minimum wage claims. Under Germany’s construction withholding tax rules, the Federal Central Tax Office (Bundeszentralamt für Steuern, BZSt) notes that certain clients are required to withhold and remit 15% of the contract sum plus VAT where no exemption certificate has been issued.

Incorrect classification can also be costly from a tax perspective. If a deployment is treated as a short-term activity when a fixed operational structure has in fact been established in Germany, questions about permanent establishment status, registration and filing obligations, and VAT treatment arise quickly.

International construction projects can be carried out on a legally sound basis — but only if the right legal groundwork is laid before construction begins. The key is an early assessment of how the project is actually going to be organized and what legal consequences follow from that.

This includes in particular:

• Establishing whether a genuine works contract is in place, or whether the actual execution points toward a temporary agency work arrangement
• Clarifying residence status, visa, and work authorization questions
• Reviewing posting arrangements, notification obligations, and the A1 certificate
• Preparing the documentation required for site inspections
• Determining the tax classification of the project with regard to permanent establishment status, the construction withholding tax, and VAT

Those who only address these questions when customs officers are already on site — or when a project is already underway — are usually acting too late. In practice, a forward-looking project review is almost always considerably less costly than defending against retroactive demands, fines, or criminal investigations after the fact.

The legal requirements involved in deploying foreign subcontractors on German construction sites are closely interconnected. Immigration law questions cannot regularly be separated from contract structuring, posting law, minimum working conditions, or tax classification. That is precisely why a coordinated legal review is so important.

For cross-border construction deployments, one principle applies above all: legal certainty does not happen by chance. It is the result of well-drafted contracts, clear lines of responsibility, and status questions addressed in good time. Contact us at any time using the form below.