Illegal content such as defamation or hate speech must be deleted by the operators of social networks within 24 hours after receipt of a user complaint or one week of being posted.
"There can be just as little space on social networks for criminal acts as on the street", Justice Minister Heiko Maas said.
The proposed legislation says that "openly offensive" content should be deleted by social networks within 24 hours after being reported by users, while content whose nature is not clearly offensive should be examined and removed within a week if its illegality is confirmed.
The minister added that measures to combat hate speech and so-called fake news will ultimately have to be taken at the European level to be effective.
The new law, that is set to be approved by the German parliament in July, is created to help protect exploited minors, especially girls, by annulling foreign marriages. To do better, we owe the victims of hate criminality.
The reports, which should be provided every three months, must also include data on how many employees are tasked with dealing with offensive content in each social network company. "As experts have pointed out, this legislation would force private companies rather than the courts to become the judges of what is illegal in Germany", a Facebook spokesperson told VICE News.
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Executives of social media groups also risk individual fines of up to €5 million ($5.3 million) in case of non-compliance.
German officials have taken a deeper interest in concerns regarding hate speech and fake news afters watching the dramatic events in the 2016 United States Presidential Election.
Twitter didn't immediately comment on the announcement.
Maas said the government wants the bill to become law before the general election in September. He said the new bill would not restrict the freedom of expression, but intervene only when criminal hatred or intentionally false news are posted. Critics have said the deadlines and fines are not reasonable and could see sites removing too much content, limiting free speech.
Organisations representing digital companies, consumers and journalists, accused the government of rushing a law to parliament that could damage free speech. "Even repulsive and ugly utterances - even lies can be covered by freedom of expression", he said.