We recently had an inquiry from a contractor in Germany that wanted to work remotely as a software engineer for a UK company. The contractor was from South America but had permanent residency in Germany. They wanted to know how this could work as the UK company did not have a German office.
Remote contracting benefits both parties, allowing the UK company to access talent across borders. However, the software engineer contracting in Germany was concerned about tax rates and other costs of being a contractor versus an employee, so we shared the following information.
Contracting in Germany with a UK company for German Residents
A German resident contracting with a UK company will only have to comply with German business regulations. Once you have registered as an independent contractor (using one of four different structures) you will set up the contract. The UK company will remit payment directly on completion of projects or time milestones, using an agreed method.
The UK company does not have any German business compliance obligations. The contractor will have to follow some registration steps to make sure they meet German self-employment criteria, as well as meet tax withholding rules.
Non-residents: permit option
In the case of non-residents, you will need a work permit with a valid sponsor if you are not an EU-national. EU nationals will still need to secure a residency permit within 90 days of arrival.
Impact of Brexit
Brexit removed the UK from the EU, but that won’t have any impact on remote, cross-border contracting. The only issue could be if the German contractor needed to move to the UK at some point, which would require a work permit.
Does the UK company need to register for VAT?
VAT in Germany primarily applies to goods, and the UK company is simply contracting for remote IT services. The UK company would not have to register for VAT, but the German contractor might, depending on their business structure and earnings. This does add to the cost of being a contractor, but it could be passed on to the UK client.
What should I look out for when working for a UK company?
As with any new business relationship, you should be careful with contract terms and payment methods to avoid conflicts. The UK company’s expectations should be in writing, and you will want to confirm they are an registered entity. If the contract doesn’t work out, you won’t have much legal recourse across borders.
Misclassification risk: Employee vs. Contractor
Germany is aware that companies hire contractors to avoid the cost of employee benefits. But the company might still try to control the worker and pay them a salary, which brings misclassification risks for a contractor. This is less of a problem with remote work where the employer is abroad, but the UK company should be careful not to treat you like an employee. If they do, Germany could claim the UK client owes back contributions and penalties to continue the relationship in Germany.
Getting paid in GBP vs Euros
The UK company will probably want to set the contract rate in GPB, which you would then convert to Euros in Germany. If you set it up this way, the contract should contain a currency exchange clause. This allows for adjustment of your rates if the USD-Euro currency pair deviates from a fixed percentage.
Time zones in the UK vs Germany
There is only one hour difference in time zones between the UK and Germany, so that should not pose much of a problem. You will want to confirm the exact hours they can expect to reach you for any direct collaboration.
How much tax do I have to pay on my salary?
Contractors will pay 14%-45% income tax in Germany, plus a 3.5% municipal tax which employees do not pay. So, that does add some cost to being a contractor if you earn more than EUR 24,500 annually.
How do I contribute to social security?
Some categories of self-employed workers are not required to make social security contributions, but others will need to register and make regular contributions. If you earn more than EUR 64,500 you can opt-out and purchase private medical insurance.
How do I stay compliant while contracting in Germany?
The easiest way to stay compliant is to use a German umbrella company. The umbrella company withholds taxes and contributions and oversees the contract with your UK client. This can be helpful for new contractors dealing with an unfamiliar client located abroad, as the umbrella company will facilitate payments as well.
Because the umbrella company is experienced with German labour and business laws, the risk of non-compliance is eliminated. Although the umbrella company charges a fee, that can be shared with the UK client or factored into your rates.
How can Contractor Taxation help you as a contractor in Germany?
When you consider the compliance challenges facing you as a contractor, it can be helpful to have a partner to assist in Germany. Contractor Taxation has qualified umbrella companies in Germany who are well versed in facilitating contracts between contractors and their clients abroad. We can explain to you how taxes and contributions will be handled by the umbrella company, and other roles they can play to ensure a successful work experience.