Germany is one of the most popular choices for foreigners from all around the world to find an occupation and settle. The country offers a wide range of opportunities to expats from starting your own business to freelancing. Which option is less tax for you? -And what are the differences between these two options?
You will find your answers regarding the legal aspects of freelancing and opening an LLC below:
Self-Employment in Germany
In Germany, there are 2 different types of self-employment:
Freiberuflich (Freelancer) – only people with the ability to do work from a comprehensive list of a number of professions can be entitled with this kind of self-employment in Germany. The list of such professions include scientists, scholars, teachers, artists, reporters, doctors, dentists, programmers, translators, consultants, lawyers etc according to the German law (EStG § 18). Freiberuflich is a relatively easier version of self-employment in Germany since it does not require registration of business.
Gewerbetreibende (businessperson/tradesperson): If you have a commercial profession that is not in the official list of freelancer jobs in Germany, you could qualify for this type of self-employment only. In this case, you will need to register your business at the Business Registration Authority in Germany (Gewerbeamt).
Although both titles prove you are not working for an employer, there are major differences between the two categories. The main difference is that a tradesperson can only perform his business under a brand name, while a freelancer doesn’t need this even if their job is not in the list of liberal professions. Moreover, freelancers pay fewer taxes compared to tradespersons.
According to German law, all foreigners can practise as a freelancer in Germany if they qualify for the legal requirements. Citizens of the EU, Switzerland, Norway, Iceland, and Liechtenstein can work in Germany without a freelancer visa/residence permit. Upon the start of their practice, they need to register at the Foreigner’s Office and also meet other legal requirements to become self-employed. Foreigners from other countries will need to obtain a freelancer visa for Germany and proceed with next steps to freelance legally.
If you do not have a residence permit in Germany already, you will need to submit your application for a freelancer visa for Germany at the German Embassy/Consulate in your country. The process is very similar to regular visa procedures exception of following extra documents:
- Confirmation of professional ability: for example, a licence proving your expertise in law.
- Previous work – examples of your previous freelancing experience
- Freelance plan
- Letters from your potential future employer/customers – to prove that they will need your services.
After successfully relocating to Germany, you will need to register your home address at the Foreigner’s Office.
Paying Taxes and other fees
The next step to take when starting the freelance job is paying taxes and other fees.
Freelancers are exempt from paying the trade taxes in Germany, but they are still subject to the income tax and the VAT (Value added tax).
The base rate for income tax is 14% in Germany, but the tax amount can go up to 42%. A solidarity charge of 5.5% is also included in this tax. You pay the income tax based on your yearly commercial activity. Solidarity tax is paid quarterly. Freelancers that make less than €9,169 are exempt from the income tax. The VAT tax can be from 7 % to 19% depending on the services the freelancer is offering. If your annual income is not over 17,500 € you do not need to charge VAT to your clients.
Germany has an electronic system called “ELektronische STeuerERklärung – ELSTER” or electronic tax declaration for freelancers to declare personal income and pay taxes.
Social Security Fee
Freelancers also need pay for Social Security if their net monthly income is over 450 euros. The rate of about 18% but during your first year as a freelancer, you can ask for a 50% discount.
Health Insurance Cost for Self-Employed Individuals and Freelancers in Germany
Getting health insurance that covers the whole period they need is also one of the most important steps. The cost of health insurance for self-employed individuals and freelancers largely depends on their income and if it is public/private insurance. Whether public or private, make sure you choose the health insurance for you. Regarding the cost of the public health insurance, the monthly minimum income of the freelancer is assumed to be approximately €1038.33. So even if your income is lower than this amount, you will still pay as if you are earning €1038.33. This means that self-employed individuals and freelancers pay a minimum of 160€ to 190€ per month.
Freelancers also need to open a bank account in a bank in Germany and obtain a tax ID from the Tax Registration Office (Finanzamt). The unique tax identification number will be used by you to make a charge for your services from the clients and also by the tax office to collect taxes.
Self-employed people need to be aware of some risks. Above all, their responsibility, when they are liable for any damage and business obligations with all their assets.
LLC in Germany
The most popular form of a company in Germany, entrepreneurs choose to start their business, is the limited liability company. It has a strong international reputation due to the raising of capital and entry in the commercial register. Furthermore, the shareholders are liable solely with the assets of the company while their private assets remain untouched. A German Limited is not restricted to German citizens, also foreigners may act as shareholders. But be aware, a managing director may have a residence permit. You can also appoint a third-party managing director who is not a shareholder.
The future business owners have two options to establish an LLC; UG and GmbH forms of business. The GmbH is opted by future business owners with a share capital of at least 25,000 euros per company and exactly half of this amount, 12,500 has to be deposited. The UG form also called a mini-GmbH is ideal for entrepreneurs with limited budgets. You could register your business for as little as 1 euro per share (however 1,000 euros and more is recommended).
In building up a company in Germany, the law makes no distinction between Germans and foreigners. Regardless of the nationalities of the shareholders, once a legal entity is registered and the management is based in Germany, the entity will be considered as a resident. However, nationals from outside the EU/EEA/Switzerland need a visa or work permit in order to legally reside and work as a managing director in Germany.
Below, we list the main taxes for limited liability companies in Germany:
- Corporate income tax: 15%, applicable to the worldwide income of a limited liability company in Germany; however, the effective rate is higher because other taxes add to it; in practice, it can range between 30 and 33%.
- Trade tax: this type of tax varies and has a value of 14 to 17% in major German cities.
- VAT: the standard rate of 19% with a reduced rate of 7% and the exemption for some types of transactions.
- Social security: LLCs with employees will pay 50% of the social security contributions which vary according to wage.
The following rates (2020) have to be applied against the gross salary, with the ceilings indicated
|Type of Insurance
|Paid by employer
|Paid by employee
The parties involved are not liable for their private assets. So you are not obliged to pay creditors with your private assets.
Working as a freelancer and opening a GMBH have their own advantages and disadvantages. For example, A freelancer pays no business tax – no matter how high the profit is, he does not need any costly double-entry bookkeeping set up, but can often do its income-surplus calculation himself/herself and provides no statutory minimum capital.
A GmbH, on the other hand, pays corporation tax with a lower uniform tax rate of 15% on the profit. In addition, there is the trade tax to which a GmbH is always subject, regardless of the type of activity. The amount of trade tax is based on the assessment rate, which varies depending on the company’s headquarters. As a rule, however, the amount of trade tax roughly corresponds to that of corporation tax. The GmbH pays almost max 30% income tax on the profit in general 42% as a freelancer.
Doing business through a limited liability company can be recommended especially if you have the compulsory minimum capital and you are interested in creating value and building a brand in the long term that will not depend on the skills of a single person. Creating an S.R.O. may be more expensive at the beginning but in the long-term, it brings more benefits. For example, expanding the scope of your business and to retain the opportunity to transfer business to your children or business partner in the future will be much easier. Equally important, If you want to sell your company in the future, you would definitely need an ‘LTC’. The Yeye Agency is partnering with Nexxlon to enable many foreign companies to start their operation in Germany.
If you are doing business as a freelancer with a smaller budget such as being a designer, programmer, translator…etc it is probably for the best to obtain a trade license. YeYe Agency can advise and support you in every stage of decision making and implementing. With the help of an expert, you can decide what is the best option for you and ease the process.