Project Service Beta/International Tax Solutions

[Codejock]

Ok, ok, there's alot of talk about the situation in Germany regarding Management Companies, contractors and the like, and I think it's time for me to add my tuppence worth.

Let's get some things straight; an income split, under German tax law, is in and of itself not illegal. Payments made to offshore bank accounts held by contractors working in Germany is also not illegal. What, however, is illegal is not declaring these payments as income (in one form or another) on your end-of-year tax returns (in Germany).

Let's examine that for a moment. If a management company, whomsoever they may be named, offer a "split" solution to a client (contractor) whereby the split earnings are paid into a Swiss, IOM or Channel Island bank account, the management company themselves are not breaking the law. The responsibility is on the individual to ensure that they are legally compliant when completing tax returns. To that end, should any management company be investigated by the German Finanzamt, HMRC or a.n. other organisation, they have no real reason to obfusciate the manner of payments made to contractors. This means that potentially at the first sign of trouble, contractors in Germany may be offered up for sacrifice on the altar of S42.

For example, I personally am resident in Germany and own a property abroad (specifically in the UK) which is currently being let out to a paying tenant. The income from this property is declared both in the UK and here in Germany, but is, however, primarily subject to taxation by HMRC (not Angie). I am obliged to, (and do), declare this "worldwide income" in my Steuererklärungen to the Finanzamt. I am also able to demonstrate UK taxation on these "earnings" courtesy of my friendly neighbourhood UK tax office's tax statement.

Consequently, applying that philosophy to a "split" income, a contractor could theoretically follow the same model. Certainly there would be some benefit to a UK based income in so far as being able to exploit some less inefficient constructs, such as personal tax allowances, voluntary pension contributions, UK based tax liabilities etc. It is probably worth speaking with somebody at the tax office in the UK (not, repeat not, with the Finanzamt!), who I have always found to be very helpful, or for more confident advise with a UK based accountant. Do be aware that recent changes in FSA legislation in the UK to combat money laundering and terrorism mean that an FSA regulated advisor is obliged to report anything that is ultimately "highly dubious".

On the dark side, convictions for tax-evasion in Germany (not unlike the UK - Lestor Piggott) carry a possible jail term (five years, I think). There is also a "statute of limitation" (let's not get too excited just yet) whereby the Finanzamt have five full years after the offence is committed to prosecute for tax evasion. Following a recent large-scale exposure of tax evasion in Germany using banks based in Lichtenstein, this limit is due to be extended to ten years (probably to give the German beauracracy time to process all the paperwork without anyone slipping through the net).

Let us not also forget that not-so-recent changes in EU law prevent institutions within EU member states from withholding information from government departments within other EU member states; to wit information is openly and voluntarily shared between EU countries (including IOM and the Channel Islands).

Under German tax legislation, you are legally obliged to declare your worldwide earnings (not so liberal as HMRC who are only interested in UK based earnins). This does not necessarily mean that worldwide earnings will be subject to taxation if it can be demonstrated that tax has been paid on earnings generated abroad. Even if an offshore account is held by an individual that contains capital that was, at some point, taxed, one is also liable to declare, for tax purposes, interest earned on those funds. This is also true for interest paid on savings in Germany, although tax on interest is deducted at source (like in the UK).

Let us not forget that there is no such thing as "tax evasion" only tax deferral. At one point or another, someone is going to get wise to the dealings and you are going to have to pony up the cash.

[tim123]

Originally Posted by Codejock

On the dark side, convictions for tax-evasion in Germany (not unlike the UK - Lestor Piggott) carry a possible jail term (five years, I think). There is also a "statute of limitation" (let's not get too excited just yet) whereby the Finanzamt have five full years after the offence is committed to prosecute for tax evasion..

I have address this point before (perhaps even in this thread).

Whilst a jail sentence may be theoretically possible, the system in Germany is such that for a first offence (of any crime, not just tax evasion) you will not get a jail term for anything less than murder.

You will recall that Boris Becker was prosecuted for the evasion of 2 Million Euro (or was it DM?) and the sentence he received was two year's probation. This was treated with some surprise by non-germans and some thoughts of favouritism were expressed. So it had to be explained that this was a "normal" punishment for a crime at that level by a no-body.

For the sort of sum that the average contractor is going to manage to "evade", a penalty of about 6 months probation is the worse that can be expected (though don't blame me if they change the rules before they catch you!)

tim

[Codejock]

Originally Posted by tim123

Whilst a jail sentence may be theoretically possible, the system in Germany is such that for a first offence (of any crime, not just tax evasion) you will not get a jail term for anything less than murder.

It is also theoretically possible to have unprotected sex and not contract an STD, but who among us would knowingly commit such an act without taking the proper precautions?

[dr4m]

I was under impression that overseas contracting was supposed to be a terrific moment of all time for all IT contractors. But apparently it's not, not at all, at least for those who are contracting through British agencies and in consequence for management companies of their choice more or less. I keep wondering why honest well-skilled specialists with only good intentions have to feel just like felons while contracting abroad. Once delegated to the client for on-site work, they start to worry about the legality of the solution they have been given even though the management companies as their employer are obviously dealing with tax on their behalf. Do not omit the fact that expats are perpetually being deducted pretty much for service the management companies provide them with. Does anyone certify/authorize such companies? Andy why on earth contractors are the only ones that are being liable for everything? It just sounds preposterous to me.

[tim123]

Historically IME, overseas contracting has been seen by some as a way of working without paying any tax.

Some people did this by country-hopping and others by having their income channelled into an offshore scheme, others just billed gross locally and ran off before paying their due.

(and yes, believe me, these people do exist).

Eventually, the local tax authorities became wise to this and started to clamp down to stop it. This is why you are made to feel like a felon, it's because some of your peers were and until you have proved otherwise they can't tell the difference.

I don't understand the comment about "why is it only contractors who are liable for everything"? As opposed to who being liable?

tim

[MPwannadecentincome]

Originally Posted by Close2Bankrupt

I presonally would like to point out that I have nothing to do with, and want very little to do with the German government, with the exception of finding a safe and legal way for me as an Brit to contrcat in Germany.

I actually accepted a contract in Frankfurt and start tomorrow 7/4/08. As I could'nt find any clear information on PSB or any of the other management companies, to state whether they were 100% legit, then I have taken advice of a local accountant, and some colleagues that have also done stints in Germany, and have registered as Selbständige / Frieberüfler.

Supposedly as a Brit, there are a number of tax treaties etc, that will allow me to claim tax breaks for my stay in Germany such as dual housefold, so I should be able to reduce my taxes without and additional risks.

This is all a little worrying for someone who has just started a contract with a German client working through a UK umbrella company partly in the UK and partly on-site for meetings. I think I need to find out more - where do I start?

[The Lone Gunman]

Sorry to come late to this. I have direct and relevant experience. Not the bulltulip stated above by the "I am not sure crowd".

PSB. I used them for 2 years. It is legal as you state. They were efficient and helpful.
Reason I left was because they are a "tax with holding company" which means they extract the expected tax for the German authorities. They will pay it back to you once you have shown them your tax bill. As you dont have to settle for 18 months you can be left owed a big lump at end of contract.

I have recommended and another company (PM for details). They are also legit. They do not hang on to any of your money. They have an AUG licence shoudl you choose that route.

Dawn raids. It started in Munich due to 1 very dodgy agent. The tax man went after the agent, the contractors and the client. I know 1 contractor went bankrupt. The agent was looking at prison and it cost the client (mostly one client) a lot of money. The tax man spread his net due to the vast amount found to be taking the piss.
The tax man has recently backed off as German companies were struggling to find contractors.

You need to be Freiberuflich and you should go through a management company is the advice I keep getting.

I have recently heard that UK Ltds are now OK, but do not have any advice on how best to work this. I would appreciate advice from anyone who KNOWS the score.

[Codejock]

Interesting that you should bring this up as this is/was a route that I had contemplated.

I spoke with my Steuerberaterin concerning this and her advice was that this was all well and good however I would need to continue to declare [full] income on my German tax returns. The fact that I would be employed by a UK based company as opposed to any other company would make little or no difference.

My brother works for a large accountancy firm based in the UK and I asked him how this would work from a UK point of view to which he answered that the company would have a UK tax presence and therefore be a UK-based tax entity such that it would be liable for UK corporation tax. There is a bit of uncertainty regarding payment of bonues/dividends on shares where the dividend would be subject to German tax, but ACT payable to our Darling. The only advantage that I can see here is the fact that you would be paying a lower rate of income tax (Germany) on dividends than on income.

Now for the downside. As a "permanent" employee (of a UK based company) you will get into all sorts of difficulties regading Sozialversichering (German NI) or UK NI - which as I discovered when I was running my own UK company for contracting in the UK, is the killer. The main benefit of being Freiberuflich in Germany is that you are not liable to pay any German NI, and you can opt for private health insurance which is always cheaper than the Krankenkassen.

Unlike UK NI contributions (which ranks of fraud to me!) if I find myself unemployed in Germany, due to the fact that I will have paid 0 contributions, I would get 0 benefits (seems fair). However, under the NI scheme if you find yourself out of work (for any reason) then Darling says "Ha-ha and thanks for all the cash". So being Freelance here does have other benefits.

I realise, Gunman, that this is not a comprehensive answer, but hopefully puts you onto the right track. My advice, however, would be to not pursue it as what you may gain in tax breaks you are going to get shafted on with NI/Sozialversicherung payments.

Six and two-threes really.

[Codejock]

Oh, and at the moment I would say that contracting in Germany is definitely prefferrable to contracting in the UK.

If people are looking to come here and work without paying tax, then they are in for a potential shock. And yes, tax rates here are higher than in the UK. However there are other benefits:

1. NI - (see my previous post),
2. the fact that there are [currently] more jobs than contractors here,
3. cost of living is lower so although a German rate may be lower than a UK rate (ha!) spending/saving power is higher,
4. Recession??