The most important law to consider for contracting in Germany is that relating to Labour Leasing Licenses. It is a legal requirement that any company or other entity (with the exception of one-man limited companies) ‘hiring out’ personnel to a German organisation holds such a license. It is quite expensive in terms of professional fees to obtain this license but some agencies and end-user clients will refuse to deal with you unless you (as a company) or your employer have obtained one. You should contact a German accountant or tax lawyer in this respect and details of such people can be provided if required.
Tax Residence in Germany
All tax resident individuals are taxed on their worldwide income, regardless of the source. This would include salary, dividends etc that you earn from your limited company. Generally, individuals are deemed to be tax resident if they are physically present in Germany for more than six months in any one calendar year or for a consecutive period of six months over a calendar year-end. This ruling is applied retrospectively so presence in Germany from, say, 1 March to 30 November would make you German tax resident and therefore subject to German tax on your worldwide income for the entire period rather than just from the beginning of the seventh month.
An individual can also be deemed tax resident if they acquire an abode in Germany. This can include renting, as opposed to purchasing, a property but only if the duration of the lease is deemed to be more than temporary. For this reason, to avoid German tax residency, short-term (e.g., three months) should be taken out wherever possible.
Non-resident individuals are taxed on German-source income only. In the case of salary and benefits from your limited company, the source is German since the duties of the employment are being performed in Germany. However, dividends from your limited company (assuming this is not deemed to have a permanent establishment in Germany – see below) would be from a non-German source regardless of where the dividends are received. There is therefore scope for tax mitigation here in the event you do not become a German tax resident (although non-German taxes may also need to be considered).
Double Tax Treaties
If you are in Germany for less than a relevant 183 day (approximately six months) period and are tax resident (and paying taxes on your salary/benefits) elsewhere then it may be possible and desirable for you to claim tax relief under a particular Double Tax Treaty. The relevant 183 day period is either 183 days in a calendar year or in any period of 12 months, depending upon the particular treaty involved. The Double Tax Treaty with the UK, for example, looks at a period of 183 days in the German tax (which is a calendar) year.
So, for example, you could work in Germany from 1 September through to the following 30 May and, whilst being tax resident in Germany (through being there for more than six months), could claim to be exempt from German tax under a Double Tax Treaty. This is on the basis that, during the period, you were tax resident in another country and paying taxes on your salary and benefits there. Unfortunately, the same approach will not work with regard to any dividends you receive.
In some cases, it would be beneficial, from a tax standpoint, to claim exemption under a Double Tax Treaty, i.e., if your other country of tax residence levies much lower taxes. In other cases, whilst the tax liability may be broadly similar (e.g., as with the UK and Germany), claiming exemption under a Double Tax Treaty offers administrative convenience and savings in professional fees (payroll bureau, tax return filing etc). In Germany, if the criteria of a relevant Double Tax Treaty are satisfied then there is no requirement to submit a formal claim for relief; rather, exemption may simply be assumed. The other criteria are that you are paid by a non-German company and that the costs of your employment are borne by a non-German company. You should not, generally, have a problem satisfying these criteria.
If you are receiving a salary for working in Germany and that salary is subject to German tax, i.e., relief under a Double Tax Treaty is not available or desirable, you (as a company) or your employer is obliged to deduct a German withholding tax and pay this over to the German Revenue authorities on a regular basis. You will need to seek professional advice in Germany as to the calculation, regularity and transmission of these payments and contact details can be provided if required.
As an employee of a non-German limited company seconded to Germany, depending upon the country of residence of your company and your own nationality, it may be possible to remain within your home country social security scheme for a period of up to five years. This will cover the contributions of both employer and employee. It will be necessary for you to apply for the appropriate certificate from the organisation dealing with social security in your home country. This will enable you (as employer and employee) to continue to pay into your home social security scheme and thereby protects your entitlement, as an individual, to social security benefits, particularly pensions. At the same time, you would normally apply for a certificate to cover you for publicly-available health care in Germany.
If you are an EC National, the certificates are the E101 and E128. If you are a non-EC National but your country of nationality has an agreement with Germany, you would obtain a ‘Certificate of Coverage’ for both pensions and state medical coverage. In either case, you should seek professional help in making the appropriate application. If your home country contributions are higher than in Germany, e.g., as in France, it could be that you would prefer to pay social security in Germany instead. In this case, you would not make an application for a certificate to keep you in your home country scheme but would withhold German social security contributions together with the tax withholding.
Corporate Tax Considerations
Your company will only be liable to German corporation tax if it has a permanent establishment in Germany. Whilst this is generally an office or branch, a permanent establishment can also be deemed to exist if the actual operations take place in Germany. To avoid this deeming provision, you should draw up and sign contracts outside of Germany and also avoid having German letterhead, business cards, name plate etc. Aside from the fact that German corporation tax may be more than in your home country, there are a number of other obligations you would have to meet as a Germany company and you would wish to avoid these if at all possible.
Individual Tax Rates and Allowances
Since tax rates and allowances generally change on a calendar year basis, it is best to obtain specific advice from a German accountant or tax lawyer at the appropriate time. This also affects the tax-deductibility of expenses, which may be more or less generous than what you have been used to. The main taxes are income tax, income tax surcharge and Church tax. The latter is applicable for members of officially recognised churches and therefore can be seen as a voluntary tax.
German tax rates have decreased in recent years and, for moderately high income (C£80,000), the average rate is around the same as in UK and less than in France. Social security contribution levels have also decreased in recent years but remain, usually (but depending upon the level of income), more expensive for the individual but perhaps less expensive for the employer, also depending upon the level of income. This is because there is a capped maximum amount payable by each party.