The issue of tax compliance in Germany needs to be addressed from the perspective of both the end client and the agency. This is of paramount importance as ultimately the relationship between the client and the agency will depend on all aspects of the placement going smoothly. In Germany there are two compliant employment structures for contract workers.
- Labour lent out in Germany must be lent out by a company that possesses an AUG licence. To lend out without the Licence can incur serious penalties including fines and possible imprisonment
- Lending out through an AUG licence creates a civil agreement and as such does not create any employment relationship for the end Client
- If labour is lent out without a licence an employment relationship is created
- Previously AUG could only be used for limited duration but now time limit abolished
- Under AUG terms the AUG licence holder is the party that must bill the Client.
- The Contractor is liable for German tax and Social Security contributions (also provision will have to be made to cover the Employers Social security contributions out of the generated income if the cost is not covered by the client/agency)
- Retention rates vary between around 44% for a single person with no allowable expenses up to approximately 62% for a married person depending on claimable allowances and whether “married person’s” tax is being applied
- In addition a reserve for holiday and sick pay may have to be made reducing the monthly retention further (although paid back when holidays taken or sick days incurred). This can further affect contractor cash flow
- Registered as either a business person (Gewerbetreibender) or liberal profession (Freie Berufe). (as a business person, liability for trade tax (Gewerbesteuer) is incurred on top of the income tax).
- Tax liability is from commencement of contract
- Security registration for self-employed is not compulsory
- Self-employed should take out private health care as no state cover is available
- No PAYE taxation
- Higher retentions – From around 69% to 76% depending on expenses claimed and personal tax situation (single/married). The higher the monthly income the lower the retention as a higher proportion of income will fall into the top tax bracket.
- Could potentially be seen as disguised employment. This is more likely to occur the less skilled the individual is and the longer the individual supplies his services to one client at one site.
- Disguised employment may lead to the client being liable for social security contributions also the contractor might then push the client for an employment relationship. In our opinion this is more likely to occur with nationals rather than expatriates and also when market rates are in decline.
Personal Service Company (i.e. a UK Limited Company)
- An employee of a Personal Service Company (e.g. a UK or German Limited Company) requires a Licence to lend himself out unless the contract has been arranged directly between the PSC and the end Client (This is not then the case if an Agency or a Management Company is in the chain)
- The Limited Company route could be utilised over a maximum 6-month period but only if the work in Germany was very intermittent (i.e. working one week in Germany and three weeks outside). The risks, however, still exist. An employed person’s E101 would in any case be required even if this option was used even on short intermittent contracts
- A one man PSC may well be viewed as having moved its centre of economic activity to Germany and as such the PSC could then be considered liable for corporate tax and the employee liable for personal tax/social security
German Tax Authorities
- Probably the most vigilant in Europe and information is now freely exchanged between the various tax districts and with overseas tax authorities
- As part of the chain law, German Clients and German based Agencies declare amounts paid for services of contractors to the authorities
- The Tax Authorities will then have a declaration from German based Clients or Agencies showing the full amount paid for services. The authorities may, as a result, question contractors who declare a relatively small percentage of their income
- We aware of cases where contractors have received letters from the authorities “suggesting” that they have omitted to declare their full income on their tax returns. This can lead to further problems where one contractor on a project makes a full declaration and another does not.
There may be conflicting influences between the various parties in the recruitment chain however in our opinion there are now only two ways in which to compliantly manage Contractors in Germany.
Under an AUG (Labour Leasing) Licence – totally compliant and risk free but likely to cost more as Contractor retention levels will be lower and thus Client costs will be greater (or a balance between the two)
As a self-employed – fully compliant from a tax and social security perspective but may bring into question the possibility of “deemed employment”. An existing procedure (Statusfeststellungsverfahren) to assess the status of a contractor is still valid. The contractor could apply in writing at the social security authorities (Deutsche Rentenversicherung) to decide the status of the contractor as a self-employed or employee.
CXC would not advocate any Contractor utilising his Personal Service Company or being an employee of a UK Management Company due to both not possessing an AUG licence. The consequences of non-compliance for the Client and the Agency are severe. To limit this exposure the answer is to ensure that the Contractor is compliant at the commencement of the contract and remains so for the life of the contract.
About CXC Global
CXC Germany GmbH is part of the CXC Global network of overseas offices, and is one of the world’s leading providers of global workforce management solutions. Our office is based in Wangen i. Allg, which is just outside of Munich. Our experienced local staff provides the added benefit of on-the-ground support for all of your contractors needs. We will assist you through the registration process; handle all administration requirements as well as the more personal aspects of settling in a new country; such as the best banks, internet and mobile service providers and local healthcare facilities
For further details, please contact:
Tel: +44 (0) 20 7374 5011 or +44 (0) 20 7374 5032