IT Contracting in Germany - Money & Tax
Profile written by Matt Walters of Capital GES (updated September 2016).
Europe’s largest country, unsurprisingly, has a range of different attractions for the international contractor. The IT industry is extremely active, offering many contract opportunities, while other sectors are also very present.
Any individual taking a contract in Germany must be employed by a German payroll provider. Your employer (this provider) announces you to the relevant tax and social security authorities as soon as you start work.
An alternative structure for work in Germany is to obtain Freiberufler (self-employed) status, however it is of note that this status in Germany is subject to even more stringent regulations than the UK’s IR35, and must be approached with all due care and professional advice.
II. Taxation in Germany
The German tax year is the calendar year, and tax returns must be filed by May 31st of the following year. Tax rates are banded between 14% and 45% dependent on income.
i. Married allowance
There are significant allowances in Germany for married persons with only one income. A taxpayer who is an EEA national and whose spouse lives in another EEA country may also benefit from these allowances if the couple’s worldwide income not subject to German tax is less than EUR 16’008 per annum. In most cases this means that the spouse’s income should be less than EUR 16’008.
ii. Single persons allowance
Resident single taxpayers may claim a basic allowance of EUR 8’004.
iii. Children's allowances and deductions
For every dependant child of the taxpayer, the following deductions apply:
a. A child deduction of EUR 2’184 (double for jointly-assessed spouses)
b. A childcare deduction of EUR 1’320 (double for jointly-assessed spouses)
c. A single-parent taxpayer may claim an additional deduction of EUR 1’308 per year if at least one child lives in his household.
Alimony payments are tax-deductible up to EUR 13’805 for a resident spouse if the spouse agrees to be subject to tax on those payments.
Expenses for a taxpayer’s first professional or higher education are tax-deductible up to EUR 6’000 per year.
Mandatory contributions to health, accident, unemployment and liability insurances may be deducted up to a maximum deduction of EUR 2’800.
III. Social Security
Under the German social security system, employees contribute 8.2% (on average) for health insurance and 0.975% for disability insurance on a monthly salary up to EUR 3’825 as well as 9.8% for pension insurance and 1.5% unemployment insurance on a monthly salary up to EUR 5’600. Employers’ contributions are the same, and with the same salary caps, except for a slightly lower average percentage for health insurance (7.3%).
In addition to this requirement, State pension, unemployment and disability contributions must be paid on your salary in Germany unless your employer can detach you from another EU country by means of an E101 certificate. In this case, the detachment certificate would also be valid for health insurance. You would benefit from the State health system in Germany but continue to contribute outside of Germany (unless the social security system where you contribute does not include health insurance like in, for example, Switzerland).
Care must taken here, and it is worth taking advice, as detachment by means of an E101 may not be the best solution in all cases due to either a) the duration of your intended stay in the country, b) the level of cover provided, or c) the cost of said contributions. It is also worth noting that, under the EU social charter, social security contributions made within an EU country will count towards your pension time stamp for the UK.
IV. Work permits
Nationals of the EU/EEA (excluding Bulgaria and Romania) and Switzerland not need a work permit to work in Germany for less than three months. They must, however, get a residence permit, register with the authorities, and get a tax deduction card if they work for more than three months.
Citizens of Bulgaria and Romania must have a work permit to take up employment. The employer must prove that the position cannot be filled by a person from the local labour market nor by any of the EU/EEA countries. The laws are more relaxed, however, for highly skilled workers.
Citizens of all other countries must go through a full registration and work permit process. A work permit can only be obtained if no suitable candidate can be found in Germany or any other Member State of the EU. The German authorities welcome applications from highly skilled workers though.
Capital GES is an international payroll and contract-management company providing tailor-made tax planning services to contractors working overseas. For more detailed information on your personal situation, please contact Capital on +41 32 732 97 00.