As many contractors already 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 echoes what contractors say they want too – freedom of movement.
As a nation known for its high attention to detail, it might not surprise you to know that there are many legal and financial considerations to keep in mind to succeed when contracting in Europe’s largest nation.
It is a competitive field; Germany is estimated to have up to 400,000 ‘Freiberufler’ (independent contractors) working there already. Its highly valued contractor market is further strengthened by it also being a hotspot for many other foreign workers, numerous ‘Mittelstand’ companies, entrepreneurs and research houses. If it needed another plus point, it’s surely its comparative openness to workers arriving from overseas, many of whom go because of Germany’s burgeoning economy and stay because of this embracive approach.
Providing you have your affairs in order and seek professional advice where required, contracting in Germany can be a rewarding and enjoyable experience.
So, what are the options when contracting in Germany?
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 net pay, after these deductions.
As 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 the role must cease, or the individual must be offered direct employment by the client.
The 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.
An attractive and popular way to ‘go’ contracting in Germany is self-employment, due to its simplicity.
Unlike AüG , 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, the ‘Freiberufler’ (independent contractor) status has a major benefit for the contractor who is more concerned by how much money they take home, rather than their level of social benefits – i.e. provided that the self-employed contractor makes no claims on the state, they need pay no social charges in Germany.
When compared to the employed (AüG) option, where the contractor will bear (either directly or indirectly) the employer and employee social costs, which are considerable deductions, one can see the attraction of self-employment.
However, self-employment is not for everyone. Indeed, in certain instances, one may not be considered as self-employed in the eyes of the social security authorities in Germany (‘Sozialversicherungsbehörden’). To ease ones mind in this regard, 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 not an option.
While social security contributions may not be suffered under self-employment (as above) since 2009 it is a legal requirement that everyone living in Germany is covered by ‘adequate medical cover’. This exceeds what is provided by most travel or international health policies. There are three ways to meet this requirement, which are (in descending order of cost):
- By contributing to the health only elements of social security in Germany;
- By obtaining an A1 from your home country authority, if you qualify. The cost is equal to the level of contributions due back home (wherever this may be) and therefore varies by country;
- By taking out private medical insurance from an approved German provider which meets the ‘adequate’ criteria set in Germany. This can be found for approximately €100-110 a month, depending on the type of plan and cover.
Most people opt for the third choice.
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).
Self-employed taxes, an overview
To be a Freiberufler the contractor must be educated to degree or diploma level. If not, then he or she is considered to be a sole trader and is subject to a municipal tax of between 7-17%. This is not the end of the world, as this tax is itself tax-deductible yielding an overall tax burden that is only slightly worse than that of a Freiberufler.
There is also ‘Kirchensteuer’ or ‘Church tax’ that must be faced. This is charged 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.
The simultaneous registration for VAT was mentioned earlier. 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 and VAT returns must be submitted monthly, even if they are zero returns.
In Germany, for the self-employed, there are also provisions for the prepayment of taxes. The Finanzamt will normally contact the contractor and arrange a prepayment schedule.
One thing that often shocks UK contractors is that after residing 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.
Finally, at the end of the year, the contractor must submit an income tax return where he or she is free to claim various level of business expenses.
The 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.
Contracting in Germany via a Personal Services Company (PSC)
EU law does not permit discrimination against a company from another Member State. This fundamental right means that a contractor may, if they wish, use their own limited company to work through in Germany. The limited company does not have to be a German company (although it can be), it can be an existing company from another country (a UK limited company, for example).
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 easily made, unless the contractor is being guided with specialist support. If all the laws are respected and a local salary is declared in Germany, which can be justified to the tax authorities as being reasonable in the contractor’s circumstances, for the kind of work that they undertake, then they can contract this way compliantly.
If a contractor does not wish to be self-employed (but could be) and if the assignment will exceed 12-18 months, then operating through a PSC may be the best approach. However, it is strongly recommended that professional advice is sought to be able to do this without breaching the law.
The main benefits of this solution are that it provides a reasonably high retention and is fully compliant. This is of ever growing importance in today’s world, with increasing levels of automatic exchange pf information between tax authorities and with a new criminal offence in the UK for facilitating tax evasion.
The 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 a contractor from outside the EU?
A non-EU national cannot automatically work in Germany. But all is not lost. Germans are 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 enter Germany to work unless you hold a work visa. The only exceptions to this are for the citizens of the USA, Canada, Japan, South Korea, Israel, Australia and New Zealand – these citizens may apply when in Germany. However, at present we do not recommend this route as the waiting period is currently several months.
As shown above, out of the three options, working through a PSC in Germany provides an attractive retention rate for contractors, while ensuring that they are working compliantly and meeting all work and home country reporting obligations. Therefore, this may be the preferred method of operation for contractors with existing limited companies, or those considering the option of working via one.
Whether you are a contractor, or recruitment agency, if you would like to discuss the PSC solution (or indeed AüG, self-employment) in more detail, please do not hesitate to contact me: