I live in Germany and ride the Taxi regularly.
You can sit, wherever you want!
When I'm alone I usually sit in the front. A lot of Taxi-drivers are up for a chat, and usually know the city quite well so it can be useful when you are somewhere new.
When I have company, I usually sit in the back so we can talk to ourselves.
In other parts of the world, sitting in the back seems to be more common or even mandatory (London, New York). In general, you can't go wrong if you sit in the back. Also, if you are a foreigner, there is nothing wrong with just asking the driver on your first ride. I'm new, what's the protocol...
Other etiquette for Germany:
- Tipping is not mandatory, but also not uncommon. Just do however you feel. I usually do ~10%.
- Prices are fixed by the local government, and there should be a counter that displays the current fare. It has a starting price (~3€), and then a per km/minute price. Night rates are usually a little more expensive. That said, especially for longer trips you can often negotiate a cheaper fixed fare beforehand.
- If there are several taxis, you usually go to the one in the front. Exception: if you want to negotiate a fixed price, you can also ask the other ones.
- The taxi business is controlled quite tightly. Every taxi has a number in the back window. If you have any complaints, remember that number and the time at which the issue occurred.
- You are required to use your seatbelt (as in any car in Germany).