Contractors' Questions: How to go freelance in Germany?

Contractor's Question : I'm considering a 12-month contract in Germany. Whichever trading structure I adopt, I want it to be 100% compliant and have no 'grey areas' in the eyes of the tax authorities. But are there any pitfalls in becoming a freelancer in Germany in terms of tax?

I read there are certain criteria to meet when applying to be a freelancer (even down to wording on the application), but once approved as a freelancer, is it safe to assume that's the way I'll always be treated by the German tax system?

Is my status as a freelancer in Germany likely to be jeopardised by my working practices, length of time in one position, or a limited number of clients? And will the authorities look at these factors, and potentially cite them against me to quash my application as a freelancer, and the associated tax saving?

Expert's Answer : In order to work as a freelancer ('Freiberufler') in Germany, you have to be recognised as such by the tax office and, more importantly, by the social security authorities. You can apply to be recognised as a freelancer at the Deutsche Rentenversicherung. The status grants you not only certain tax advantages, as you point out, but also an exemption from all German social security requirements.

The main criteria the authorities apply include:
- turnover; number of clients: if five sixths of your turnover is generated by one client, you cannot be considered to be independent/freelance
- if you are integrated into the organisation of your client and depend on his instructions, you cannot be considered as a freelancer.

In our experience, it is quite easy to obtain Freiberufler status, and there are very few checks performed at the outset. At the end of the year, however, your tax return must demonstrate that the above criteria have been met. If it is deemed that you do not qualify for Freiberufler status, you may be exposed to extra tax and social security along with possible penalties.

The expert was Matt Walters, partner at Capital Tax Consulting, and author of CUK's IT Contracting in Germany – Money & Tax.

Tuesday 16th Feb 2010