Resources Contractor Solutions in Germany

Contractor Solutions in Germany

Both independent contractors and hiring companies face complex cross border rules if they are located in different countries.  Because of this we have created our ‘Contractor Solutions’ series with actual circumstances brought to us by our international clients.  

The first article was a solution for a French company hiring a contractor in the Netherlands, and the second article addressed questions from a contractor wanting to move to Portugal.  

The third article dealt with four different scenarios in Spain, with questions from both hiring companies and contractors.  The fourth article in the series addressed questions from foreign contractors looking to work with Belgium companies.

This article deals with the complexities of self-employment in Germany, and how to work in compliance through an umbrella company and contracting companies in Germany.

We have compiled all these questions so Campbell Curtis, our Solutions Expert, can address them. We hope you find what you need here!

And if you don’t, drop us a comment below so we’d get back to you!

How to Work as an Independent Contractor in Germany

We had been approached by an EU citizen who was living in Germany and had been offered a freelance contract with a company based in Switzerland.

I am a former employee of a company in Nyon, Switzerland. I now live in Germany but have been offered a freelance contract for some upcoming events with the company starting 27 May to 11 June.

As I am not registered as an independent freelancer, I have been advised to contact an umbrella company for a solution.

Can you please advise if this is possible, what information is needed and what the next steps may be? FYI, I am an Irish citizen but no longer have my B permit In Switzerland. The freelance work will take place in Hungary and Turkey.”

Campbell:  Thanks for your inquiry!  Let me summarise your situation, and then explain to you our contractor solutions in Germany:

See also  Contractor Solutions in Belgium

You don’t want to register as an independent freelancer (“Freien Beruf) in Germany for a short term contract. But you need a registered entity to invoice your client and a way to pay tax (Einkommensteuer”) and social security (“Sozialversicherungssystem”) in Germany.

First, you are wise to be wary of trying to register as a German self-employed.  It is well known that criteria for German contractors are more strict than most countries, regardless of whether you are an EU citizen.  Also, the short term contract makes it even less viable.

This is where an umbrella company in Germany can solve your problems easily.  You don’t have to register at all, and you don’t need a work permit.  You essentially become an ‘employee’ of the umbrella company and they will withhold German tax and social security for you.

The umbrella company will handle all this and provide you with the required general liability, public liability and professional indemnity insurance that you need to sign the contract with his client.  As you can see, this is a one stop, full service solution that is ideal for a temporary contract gig.

Information Needed and Next Steps

What we will need from you are your personal details, tax ID number, compensation and time frame, which we will forward to the umbrella company.  Then they will confirm with the hiring company that they are ready to move forward, and the umbrella company will onboard you in Germany.

The Swiss company doesn’t need to worry about a hiring solution, and will only have to forward your gross payment to the umbrella company.  You will be issued a payslip with your net pay to an account of your choice.  We are ready to get started when you are!

Should I use an umbrella company if contracting in Germany?

Campbell: We recommend it as the simplest of all contractor solutions in Germany, as you are assured of being in compliance with the strict independent contractor German law.

“What if I don’t want to register as an independent freelancer in Germany because of a short term contract? Is this possible?

Campbell: Yes it is, and an umbrella company can hire you legally even for a temporary contract.  No registration is required and we take care of all the withholding and contributions for you.

See also  Contractor Solutions in Netherlands

Misclassification Risk: Employee vs Independent Contractor

The next question is from a French company looking to hire a German contractor to work in Germany.  They are concerned about misclassification of the contractor, where they might be deemed an actual employee.

“I am contacting you as I have an SAS company in France.  I am currently planning to select a German freelancer for a customer (based in the UK), to work at the final customer base in Germany.

I would like to ensure I am not under employee misclassification risk in Germany. (scheinselbstständig).

Campbell:  Thanks for reaching out!  I believe I can offer you some guidance on your hiring plans.

You are right to be concerned about misclassification in Germany, as many countries have begun to scrutinise contractor hiring.  In Germany, it’s even worse with strict self-employment criteria when registering as a contractor.

But we have a solution that bypasses all the registration requirements, by using an umbrella company in Germany.  Your contractor essentially becomes an ‘employee’ of the umbrella company, which is really a secondment arrangement.  

They will perform all of their work for the local SAS customer, but the umbrella company will handle all tax, social security and insurance administration.

The client simply forwards monthly payment to the umbrella company, and they handle the rest.

“How using an umbrella company prevents employee misclassification (scheinselbstständig) when hiring German freelancers to work as contractors?

Campbell: The reason is that at no time is the contractor in a legal hiring relationship with you or your customer/client in Germany.  The sole relationship is with the umbrella company, which is technically employment, but still preserves their autonomy to perform services.  

The freelancer/self-employment criteria are never triggered when the umbrella company is the hiring legal entity in Germany.

Taxation Challenges for International Contractors

The final question concerns taxation of income in Germany for foreign sourced earnings.

See also  Contractor Solutions in Spain
“I have recently changed my employment arrangement with my company in the UK from being full-time employee. I now do consultancy work for them as self-employed in the UK.

I plan to move to Germany (Munich), and continue working as a freelance consultant for my UK-based company with my only income being from the UK. I will become a resident in Germany. 

Reading the double taxation agreement between Germany and the UK, my understanding was that I would need to pay tax to the country where my income is from (i.e. the UK). 

However, when I contacted HMRC, they said that if I become a German resident, I do not need to register as a sole trader in the UK and instead I should contact local financial authorities.

Based on your experience, could you please let me know in which country I would likely be taxed and if it would be possible for me to choose (as there are some substantial differences, e.g. in terms of VAT and national insurance obligations)?

Campbell: International taxation is indeed a tricky subject for any contractor to figure out.  We can help you!  

The concept that you need to grasp is that of tax residency.  This is different from actual residency, and just determines which country has the right to tax your earnings.

Once you have spent six months in Germany, you will be deemed a tax resident.  This means that you have tax liability on income worldwide, including the UK.  

Because you are still technically a tax resident in the UK as well (assuming you are a UK citizen), you are subject to potential double taxation.  But fortunately, there is a double taxation treaty between the two countries that allows credits for excess taxes owed.

If you choose to use our contractor solutions in Germany with an umbrella company, their tax experts will calculate all of this for you.  They will withhold the correct amount for German tax, and guide you in applying the tax treaty.

“How can UK citizens based in Germany work as a self employed / freelance consultant for a UK company using an umbrella company?

Campbell:  When you use an umbrella company as a freelancer, you are viewed as an employee of the umbrella company.  They are basically leasing you to the client. That solves the self-employment criteria dilemma, and introduces a third party to your relationship with the UK company. 

“What is the effect of becoming a German resident?

Campbell:  Once you are a German tax resident, you must declare pay tax on worldwide income.  This is where the double tax treaty between the UK and Germany is crucial.

“Do I still need to register as a sole trader in the UK?

Campbell:  I would trust the HMRC’s advice that you don’t have to register, since you are not really working inside the UK.  That does not affect your UK tax liability if you are a citizen.

“Can I choose the country that has the lowest VAT, income tax and national insurance obligations?

Campbell:  You don’t really have a choice, as that is all spelled out in the tax treaties on which country will be elected for taxation.  You will probably pay national insurance in Germany, but the umbrella company will advise you on that.

“Is there an issue with changing from a full-time employee to a self -employed consultant?

Campbell:  It doesn’t really matter once you are in Germany, as you will be hired by the umbrella company.  This saves you the trouble of trying to meet German self-employment criteria.

“Should I be paying tax where my income is from or where I am resident?

Campbell:  Usually you will pay tax where you are resident, but in your case as a UK citizen, tax might be due in both countries.  The source of income is not as important as your residency.

Contractor Taxation: Experts in Contractor Compliance

Contractor Taxation has fully vetted umbrella companies around the globe that specialise in contractor compliance.  If you have an inquiry about our independent contractor solutions in Germany (or any country) please contact us!  

Here are a few more questions from contractors looking to work abroad.

Can I work as a contractor in Germany?

There are many contractor jobs in Germany.  But working as a true self-employed contractor in Germany is not easy on your own.  You are better off working through an umbrella company, rather than trying to meet the self-employment criteria on your own.

How do I find international contracts?

You can search contractor job boards or go through recruitment agencies.  In this article, there are some tips for you about job hunting as an international contractor.

As a 1099 independent contractor how hard is it to get your work visa in Germany while working for a US company?

Once you are working in Germany, you are no longer a 1099 independent contractor in the US.  You can use an umbrella company in Germany to sponsor your work visa, as getting it on your own may not be possible.

If I live in the US and work for a German company remotely do I have to pay German taxes?

No you don’t, unless you are a German citizen with tax residency.  You only have to pay taxes in the US.

Can a US Citizen working for a US company work remotely in another country without any tax implications in the new country?

Unless you are working in a foreign country under a digital nomad visa with a tax exemption, you will have to pay tax as a temporary tax resident (usually over 6 months).

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