Contractors that are looking to work in Germany will find there are several options when it comes to structuring contracts and choosing a business model. Like most countries, Germany has its own rules and standards when it comes to contractors that you will need to comply with. Otherwise, you could find yourself classified as an employee, bringing unexpected consequences for you and your client.
This guide will explain your options for working as an independent contractor in Germany. It will also explain the advantages and disadvantages of each choice. The first thing to know is that if you are an EU citizen, you will not need a work permit as an independent contractor in Germany. Non-EU citizens may be more limited on their options for working in Germany, requiring a third-party sponsor for a visa.
Self Employed
Offering services as a self-employed independent contractor in Germany has its benefits, provided that you can meet the German self-employment tests. This includes whether the type of work you offer qualifies, the planned geographical area and requirements for a residence permit.
Advantages and Disadvantages
The advantage of being self-employed is that you can contract directly with your client as an individual with no intermediary. As long as you can set up a verifiable project and payment method, this can be the simplest. Another unique advantage of contracting as a self-employed in Germany is that you don’t have to pay any social contributions, as long as you have adequate medical coverage while in the country.
The primary disadvantage is that Germany has fairly strict self-employment standards, and even if you are a valid self-employed in your home country, that may not be enough. If you don’t meet the test, you might be viewed as an employee, which would mean your client could be liable for social contributions as your employer, which defeats their purpose of hiring a contractor in the first place.
Taxes and Residence Rule
Even as a valid self-employed, if you stay and work in Germany for more than 183 days in a year, then you may become a tax resident. What this means is that you are liable for German taxes, in addition to taxes in your own country.
Germany does have tax treaties with many countries that allow for credits and offsets to avoid double taxation, and that should be researched in advance if you are considering working as a self-employed.
Limited Company/Personal Service Company
When you form your own limited or personal service company, it will operate as a separate business. While this can be straightforward in your home country, once you start contracting in Germany there may be a few challenges.
Advantages and Disadvantages
The advantage of contracting through a limited company is that it presents a credible and professional structure to clients, especially those in foreign countries who may not have dealt with you previously. There can also be some tax advantages and the ability to deduct certain expenses.
The downside is that you will have to meet any tax and corporate registration steps and business operating rules in Germany, just like any foreign company. This can all take time and may require local expertise to guide you unless you have worked internationally before. There is also the possibility that your company’s status at home could expire if you stay abroad long term.
Labor Leasing Act (AUG): What does it mean for contractors using a limited company?
There is also the Labor Leasing Act (AUG) in Germany to take into account when you have a limited company. This is because technically you are leasing yourself to the client as an employee of your company. If you do this in Germany, your limited company must have an AUG license. That is another step that has to be taken before beginning work.
Taxes
Taxes are another consideration when using a limited company in Germany. As a business, you may be subject to the permanent establishment and corporate tax. This also includes potential individual tax residency (183-day rule)
Umbrella Company
The final option is to use an umbrella company in Germany that is already set up and ready to support your contracting. The umbrella company is a third-party entity that works with both you and your client. They try to ensure smooth delivery of service, timely payment and withholding of taxes and contributions. You would, of course, be making required social contributions through the umbrella company.
Advantages and Disadvantages
The obvious advantage of using an umbrella company is that you don’t have to worry about all of the administrative or compliance tasks as a self-employed or limited company. This can be quite a relief if you are new to contracting and working in Germany. Also, you avoid the entire conundrum of qualifying as self-employed or needing an AUG license, as the umbrella company would already have an AUG.
The disadvantage for some contractors is that they prefer to be in control of their contracts. This includes invoicing, payment and withholding activities. It may be a new concept to involve a third party who will be interfacing with the contractor’s client. There is also a fee involved in using an umbrella company. However, it would be less than hiring German tax and legal experts as a self-employed or limited company.
Taxes
The only taxes you would have to pay are those for an individual if you exceed the 183-day rule. The umbrella company may withhold those regardless just to ensure you comply if you stay longer than 183 days.
If you need assistance in selecting an umbrella company, please contact Contractor Taxation to access our AUG-licensed partners in Germany.
