Contractor's guide to contracting in Germany
As IT contractors and now Radio 4 listeners know, Germany is no longer “the sick man of Europe.”
On the contrary, Germany’s currently healthy companies have got what IT contractors will regard as the right outlook on Brexit; they want an easier transition for Britain and that smacks of what contractors say they want too -- freedom of movement.
But what about working in Germany as a UK contractor before the fateful March 31st 2019 cut-off point, asks Petra Litty and Dhruv Nagpal of Deutsche Tax.
As a nation known for its meticulousness, it might not surprise you to know that there are many (many) legal and financial considerations to keep in mind to succeed at contracting in Europe’s largest nation.
For a start, it’s competitive. It is estimated to have up to 400,000 ‘Freiberufler’ or independent contractors working there already. And it’s very important contractor market is strengthened by also being a hotspot for many other foreign workers, numerous ‘Mittelstand’ companies, entrepreneurs and research houses. If it needed anther magnet, it’s surely its comparative openness to workers arriving from overseas, many of whom go because of Germany’s burgeoning economy but stay because of this embracive approach.
At the same time, Germany runs its tax-gathering institutions with the same care -- and thoroughness -- as you might expect. It is vital to ensure that you don’t fall foul of the legislation and face demands for unpaid, tax, social security, penalties, interest and, even, in extreme cases, imprisonment for non-payment.
So let’s look at the three most common methods of working legally as a UK contractor in Germany and the relative merits and demerits of each.
The most attractive and popular way to ‘go’ contracting in Germany is self-employment. In fact, self-employment is simple in Germany, just as social security is also an efficient and a remunerative way to operate. We estimate that this is the preferred choice for over 90% of contractors in Germany and the reasons are not hard to fathom.
Unlike AüG (outlined further down), with self-employment there is no need for the management company to bill the German client. This is essential because there is no economic employer in self-employment. In Germany, this Freiberufler status has one major benefit for the contractor who is concerned by how much money they take home, rather than the level of social benefits that they enjoy. The reason for this is that provided the self-employed make no claims on the state, they need pay no social charges in Germany.
Contrast this to the employed option, where the contractor must bear directly or indirectly, as you choose to look at it, the employer and employee social costs faced by employees. These deductions are considerable and if they can be avoided, one can see the attraction.
Before we get too excited, self-employment is not for everyone. You may simply not be self-employed in the eyes of the social security authorities in Germany (‘Sozialversicherungsbehörden’).
It is possible to apply to the authorities for a ruling so that your self-employed status as a contractor can be unchallenged for up to three years. Of course, if the ruling is negative then self-employment is out, yet at least one knows where one stands and the risk of getting it wrong are avoided!
While social security contributions may be out, it is a legal requirement since 2009 that everyone living in Germany is covered by what the Germans consider ‘adequate medical cover,’ and this exceeds what is provided by most travel or international health policies. There are three ways to meet this requirement in descending order of cost. These are:
- Contribution to the health only elements of social security and this costs about 15% of taxable income.
- Obtaining an A1 from your home authorities. The cost is the cost of contributions back home and are therefore vary by country
- The costs of private medical insurance from an approved German provider and that meets the ‘adequate’ criteria. This can be had for some €100-110 a month or more, depending on the plan.
Most people would opt for the third choice.
There are a few other facts that need to be known.
Contractors must register at the commune where they live. They must also register for tax (and simultaneously VAT), which can be done online with the ‘Finanzamt’ (Tax Office).
To be a Freiberufler (independent contractor), the contractor must be educated to degree or diploma level. If not, then he or she is designated a sole trader and is subject to a municipal tax of 7-17%. This is not the end of the world, as this tax is itself tax-deductible yielding an overall tax that is only slightly worse than that of a Freiberufler.
There is also ‘Kirchensteuer’ or Church tax that must be faced. This runs at 8-9% and to be relieved of this you must inform the authorities that you are not an adherent to one of the principal churches in Germany.
We mentioned VAT. If the agency or client is VAT-registered, then the contractor must issue VAT invoices to them. Input tax on expenses incurred by the contractor for business purposes can be recovered. VAT returns must be submitted monthly even if they are zero returns.
There are provisions for the prepayment of taxes. The Finanzamt will normally contact the contractor and arrange a prepayment schedule.
One thing, in our experience, that often shocks UK contractors is that they find that after a residence in Germany for more than 183 days, the German authorities start to ask about the contractor’s foreign income before and during the contract, and seek to tax it in Germany. This is quite normal in most OECD countries and it is strictly followed in Germany.
At the end of the year, the contractor must submit an income tax return where he or she is free to claim business expenses.
Contractors, your bottom line! A typical retention for a self-employed contractor on a rate of €500 a day for a year will be in the range of 65-72%, dependent on circumstances.
AüG or Arbeitnehmerüberlassung (Leased employee)
In Germany, the provision of leased-labour is regulated by the ‘Arbeitnehmerüberlassung’ or AüG. This is where an employer lends an individual to work under the control of someone who is not their legal employer. The rules are strict and include:
- The management company (economic employer) must invoice the using client in Germany directly
- The economic employer must employ the contractor directly and not via a third-party
- The employer must deduct and withhold employer social costs, employee social costs and direct tax. The contractor will receive a payslip and pay net of these deductions.
Since medical cover is included within the social charges, the contractor, now an employee, does not need to hold private health cover.
Since April 1st 2017, the period under which an individual can be provided to a client has been reduced from three years to 18 months, after which time the role must cease or the person be offered direct employment by the client.
To find out more on this, the German-British Chamber of Commerce have prepared a document.
Contractors, your bottom line! A typical retention for an AüG contractor on a rate of €500 a day for a year will be in the range of 41-52%, dependent on circumstances.
Personal Services Company (PSC)
If a contractor operates through his or her own company, it is their right to continue to do so and this is enshrined in EU law.
That said, it must be noted that the contractor and their company must both abide by German law in its entirety. This is neither simple nor straightforward since this includes:
- Employment law
- Labour-leasing law
- Local registrations
- Corporate income tax
- Income tax
- Immigration law
Mistakes made on any of these fronts can be costly and unless you are being guided properly with specialist support, the PSC route is not usually recommendable for most contractors.
However, if a contractor is not desirous of being self-employed (but could be) and if the assignment will exceed 18 months, then operating through a PSC could be the best approach. But if you do, it is strongly recommended that you seek competent professional advice to be able to do this without breaching the law.
The contractor should always bear in mind the overall retention once they return home if they continue to be tax resident there. They will not be taxed twice on the same income, but they will end up paying tax at rates in Germany or where they are normally resident, whichever are higher.
Contractors, your bottom line! A typical retention for a UK-based PSC contractor on a rate of €500 a day for a year will be in the range of 64-75%, dependent on circumstances.
What if I’m from outside of the EU?
If you are not an EU national, then you cannot automatically work in Germany. But all is not lost. Germans are a pragmatic people and they want to draw in those who can contribute to their society and economy. This is a complicated matter and if a contractor is interested in obtaining a work permit for Germany then the first port of call should be the website of the German Consular Office or Embassy in his or her home country.
It is worth pointing out that you cannot come to Germany to work unless you hold a work visa on entering the country. The only exceptions to this are for the citizens of the USA, Canada, Japan, South Korea, Israel, Australia and New Zealand, and these citizens may apply when in Germany. However, at present we do not recommend this route as the waiting period is currently several months.
So there we are -- the three most popular ways to legally contract in Germany as a Briton, plus the all-important bottom line estimations of your take-home pay. Viel Glück!