This information almost entirely comes from Mary Fulbrook's excellent work A History of Germany 1918-2008. So the Allied powers had many debates during the course of the war over what a postwar Germany might look like, and how it was to be run. At the various conferences on postwar Europe (Teheran 1943, and Yalta 1945) there was a general consensus that Germany needed to be demilitarized, and that various zones of occupation would be established, one for each of the major Allied powers, (France would later be included in this plan at Yalta, at the expense of the American zone of occupation) with no formal German government, do the dismay of many democratic and anti-fascist Germans in Germany. At the Potsdam Conference at the end of the war, there was no formal Peace Treaty to delineate powers and control of territory, as there was no official German government with which to sign a treaty. Therefore only vague agreements were made on denazification and democratization, with no formal framework for the occupation zones.

So, after the Potsdam conference Germany is split into various occupation zones, British, American, French, and Soviet. There was really no consistent policy on administrating these zones, each zone adopted their own policies and utilized and prioritized different agendas, and used different agencies to achieve their goals.

So what about the Germans themselves you might ask? Well in the waning days of the Second World War German democratic and anti-fascist groups actually began armed uprisings in parts of the country, many were shot by the SS but there were some successes. When the Allies occupied the country however, they quickly moved to disarm these antifa groups. There would be no independent democratic German government as some of these groups had hoped, the Allies did not agree on much but they agreed on this. Now this is where the importance of the different zones of occupation become important. In the Soviet zone, almost immediately after the war the Soviets flew in German communist ex-pats like Walter Ulbricht and re-established and legalized the KPD, the German communist party. Many KPD officials were installed in local offices of political power, or were essentially the puppet masters of non-communists selected to put on a friendlier face to some German communities. That is not to say that the KPD was the only political party, many other democratic parties reformed and came out of hiding, like the German socialist party, or SPD. Indeed, the Soviets quickly realized the KPD would never enjoy widespread electoral success so they forced a merger between the SPD and KPD to form the SED in 1946. So essentially, Germans in the occupied zones were being put into local office, but with many caveats.

Now, on denazification, this is a very complex subject that also differed from zone to zone, the policies that were adopted immediately after the war would change out of necessity as the geopolitical realities of the Cold War began to take shape and Germany became the middle ground between the great powers. For example, how to balance getting rid of nazis and, for example, keeping schools and courts open when most of the judges and teachers are nazis? Indeed, the British encountered problems of Nazi officials being re elected to local offices once they had re-established local elections. The Nuremberg Trials sought to establish a clear moral and legal baseline, putting lead Nazis on trial for warcrimes, but questions of guilt for thousands of nazi party members remained.

In the Soviet zone, the Soviets had begun purging Nazis from government as they marched to Berlin, with the Red Army often shooting any Nazi party official of Mayor and above in retaliation for a similar order given to the Eisantzgruppen. The Soviets dismissed judges and teachers en masse and simply imported replacements, ill trained and ill equipped but not Nazis, which was good enough for them.

In the West, the Americans and British eventually came up with different classifications for culpability, essentially, a ranking system for how complicit the individual may have been in the regime. The US Army in 1946 issued several directives with "136 mandatory removal categories" and a more formal system was later introduced in the second half of 1946. This essentially consisted of a questionnaire (Frageboegen) to be distributed across the American and occupied zones. The questionnaire had a whole range of questions about an individual's activities during the Third Reich, and people were processed through a Tribunal and given a classification 1) Major offender, 2) offenders, 3) lesser offenders, 4) followers or fellow-travelers and 5) exonerated. If this sounds insanely bureaucratic and slow its because it was. The criteria also depended on what zone you were in. The Brits declared 90% of the people in their zone exonerated while the Americans only declared 1/3 to be and the French just over half.

Some Nazi party officials were allowed to keep their jobs, indeed, after 1946, many judges who were initially fired were rehired because the Allies couldn't get enough judges to run the judicial system. similar things occurred in many areas that required professional expertise, with the result that later, after the establishment of the Federal Republic, you had Nazi judges presiding over cases of anti-semitism or cases of Nazis caught years after the war. This was obviously a big problem and its one the Germans and Allies grappled with over the course of the 40s, 50s and 60s. Many debates at the time raged over how "denazified" the country was, something the Soviets took advantage of many times for propaganda purposes. And in some ways they were very right, many high level Nazis did escape, despite Allied efforts, often it was Nazi hunters like Simon Wiesenthal who alerted the government to Nazis who had slipped though the questionnaire or were being ignored by the government.

I hope this post was somewhat helpful, you asked a lot of questions, and I'm afraid I'm not as knowledgeable about the establishment of the Occupation zones and the Joint Powers agreement as I should be. Mary Fulbrook's book is great and there are plenty of other resources out there. If you have any more questions about denazification though I could be much more helpful, as it has been a part of my research.

Sources:

Fulbrook, Mary. A History of Germany, 1918-2008: The Divided Nation. Chichester, West Sussex, U.K.; Malden, MA: Wiley-Blackwell, 2009.

Turner, Ian D. Reconstruction in Post-War Germany: British Occupation Policy and the Western Zones, 1945-55. Oxford, UK; New York; New York: Berg; Distributed exclusively in the US and Canada by St. Martin’s Press, 1989.