You can contract with companies wherever you want as a company but you can only have an employment contract with a company based where the employment laws of your country applies.
It's not that complicated. The rules are relatively easy: as soon as you're embedded into the organization of the client (aka, you get laptops/desktops from them, get directed by their staff what you have to do) and/or the dominant part of your time / income is one single client, the assumption is that the client only does "contracting" to avoid the obligations (in wages, social security contributions and employee protection laws) that regular employment would bring with it.
The only issue that I have with the current regulatory framework is that the individual "sole proprietors" are held financially accountable for the social security contributions, not those who actually profit from this kind of abuse.
People should be free to contract if they want. Obviously that means they are now acting company-like and have to pay social contribution like a company would but that should be on the contractor not on the client. That’s how things work everywhere in Europe I had to deal with contracting.
Germany really is a puzzling country.
The main goal is to prevent contracting with a single client as means for companies to get rid of employees and their social security responsabilities.
Anyone contracting with a single client can eventually go to court and demand to be employed by the client, proving that the relationship has been one of employee/employeer, even though the contract was a freelance one.
It's specific for "sole proprietor" contractors. Multi-person operations, consultancies and bodyshops are exempt as long as the employees get their contributions paid.
> Obviously that means they are now acting company-like and have to pay social contribution like a company would but that should be on the contractor not on the client.
That is possible, indeed, you can voluntarily pay pension contributions (and that's the stuff that the pension fund claws back). You can also voluntarily contribute to the unemployment benefits.
As long as you at least pay the pension contributions, you're fine. The unemployment benefits is voluntary, no penalties if you don't pay these, but also, no payouts when you gotta close down shop.
The problem is, good luck finding a client willing to pay appropriate rates - too much unfair competition from those who just hope that neither they nor the client end up in a colonoscopy-level tax audit in 10 years (the time frame in which the statute of limitations for tax crimes expires), and the sad reality is that this gamble often enough pays off.
That's by design of our employment laws. We are the ones whose social security system will have to pay up when the employer closes down shop or fires their remote employees over night, and we are the ones whose health system has to take care when people burn out from being overworked, so we demand that employers create a local subsidiary with people and bank accounts we can hold accountable when laws are being violated.
Oh, and we also want to make sure that people and companies pay their taxes.