Contractors' Questions: Does the 183-day rule let me avoid tax?

Contractor's Question: I'm a UK taxpayer living in Germany approaching the 183-day mark. I've been here since April. My German client is possibly happy for me to work the remainder of the year from home, back in the UK, and return in the new-year when the German tax year begins. What's wrong with doing this, if anything? Or is there another obvious option I'm missing in order to minimise my tax bills?

Expert's Answer: Your central question stems from a misreading of the 183-day rule and its application to contractors. Let me begin by revisiting some of the ground rules.

If, as a contractor, you are working abroad, you should pay tax locally from day one.
The 183-day rule governs the change between being tax non-resident and tax resident: if you are tax non-resident you will only be taxed on your locally-sourced income, whereas as a tax resident you are deemed to be taxable on your worldwide income.

An exception to the 'locally-sourced income' rule is made where a permanent employee of a foreign company is working in Germany for under 183 days: under these circumstances tax may continue to be paid in the employee's normal country of work. It is this exception that is often misunderstood.

The 183-day rule does not apply in situations where a one-person limited company is the employer. As soon as the director of the company moves, the permanent establishment of the company moves with him. Contractors operating through UK-registered limited companies outside the UK are consequently running the risk of being liable not only for unpaid personal income tax, but also for corporate tax, having created a permanent establishment in the country where they are working.

To come back to your circumstances. Given the above rules, as a contractor in Germany, you need to be paying German tax. You cannot choose to pay UK tax for the sake of convenience.

There are many options for paying tax in Germany (such as a German limited company, or through a German umbrella company), so I would suggest seeking professional advice and rectifying your situation at your earliest opportunity.

The expert was Matt Walters, of overseas contracting specialists Capital Tax Consulting.

Related Reading:

The 183-day rule

Paying tax through your UK limited company abroad

Contractors' Questions: How to cut my multiple tax liabilities?