The normal rules for Diplomacy are followed.
In the 2nd test run, Germany managed to puppet Belgium (after overrunning Her Eurpoean Holdings and annexing them with an event) This lead to Belgium Troops fighting the British & French in the Middle of Africa.
Norway was Puppeted by German the Day her Paras took her capital
I would advise, for those who aren't playing Germany and want to try this, to make Germany's ally not Hungary, who seems to use the Big Bad next to her as an excuse to reclaim old territories, but Bulgaria, who at the start is out of the way.
No offence