Contracting in Germany

[AgentfromHell]

Management companies

I don't know if aybody is still interested in this topic, but considering that there are plenty of contractors still on contract in Germany and heading out there, I will add my story to the previous accounts.

I have worked with, or should better say, used to work with management companies from around the year 2000 onwards. as you might be able to tell by my nic I wasn't contracting but on the side that paid the contractor bills.

Until about 2003 there seemed to be no issue with contractors using so called "management companies" in Germany. Then something happened that initially appeared to only affect small pockets of contractors, particularly in Munich: The Finanzamt started taking an interest in several contractors that were working through the agency I was at and operating via management companies. Then things went quiet again for quite some time until the real bombshell hit in Bavaria and Baden-Würtemberg.
Not only did the Finanzamt take an interest in the contractors, but also in the agencies in germany that were dealing with management companies, i.e. paying the contractor fees to them. There were at least two raids by the Finanzamt at agency premises.

The "sqeaky clean" image of the management comanies started to crumble, when it became apparent that not only a handful, but hundreds of mainly British contractors were only declaring around 50K Euros a year, a pretty meager salary, and the rest of the money disappeared and was paid to the contractors through other means, channelled past the German fiscal authorities in one way or another. The most primitive approaches were to just pay the diffence to an off-shore acount.
The Finanzamt only had to put 1-and-1 together: One the one hand they had German contractors declaring their earnings of around 120K Euros per annum and on the other the "foreigners" were only declaring 50K Euros.
Great Scheme...

However, it appears that getting at the contractors was not that straightforward. So the Finanzamt came up with the "Letter Box" company status. A "Letter Box" company, i.e. a company that only has a name on a letterbox without actually having a active presence in a country, is not recognised as a legally trading entitiy in Germany. As luck had it for the German authorities,most of the management companies had "Letter Box" companies in places like Switherland, Luxembourg, Malta, Cyprus, etc.
Therefore the Finanzamt was able to declare a direct link between the agencies and the contractors (ie. by not recognising the management company) and thus could claim not only that income tax had been withheld, but also VAT as the services had been rendered by a contractor in Germany to agencies based in Germany.
In some cases, as with O2, even offices of end clients were raided.

What is the point of my posting? Well, I believe everybody here is old enough to make decisions of their own whether to use a management company. I know that quite a number of people went through and are going through hell at the moment as the Finanzamt can go back 10 years, to really screw people over. The "help" that the management companies give contractors, when they are being investigated is laughable, if you believe they will help you out.
From an agency point of view, I initially worked with management companies in good faith.
Now, I personally would stay well clear of them for a contract in Germany.

Happy contracting

[AgentfromUK]

As the owner of an international recruitment consultancy based in the UK, I read the entry from a German counterpart (AgentfromHell) hoping for a credible insight into the currently shambolic state of the contracting market in his country. He sadly follows the party line laid down by the German authorities, blaming all foreign “management companies” (presumably endorsed by their contracting parties – all foreign agencies and all their expatriate contractors) for an apparent loss of tax revenue. At this early juncture, I must readily acknowledge that, over recent years, some rogue companies have entered the insatiable German market for expatriate contractors and it is these companies and their rogue contractors that the German authorities should be targeting.

Like AgentfromHell, I have been dealing with “management companies” for many years – mainly because I was originally forced to by UK law – and have developed a deep understanding of their role and have certainly learnt how to route out the rogue traders amongst them. So, let me now fill in some of the gaps missed by AgentfromHell and correct some of the points made by him.

I know many UK agencies are experiencing, what seems to be, a conspiracy led by the German government to deny us all business in Germany. Certainly many of my German-based clients have been “encouraged” by their local tax offices to use local recruitment agencies instead of non-German ones – even if they are within the EU. We all know this is against EU law, but do any of us have the money and the time to take the German government to court?

Of course, as a German agent, AgentfromHell can easily steer clear of, what he terms, “management companies”. The law in Germany allows their agencies to make direct payments to contractors structured as ‘freiberuflers’, freelancers; whereas UK law makes it illegal for a UK agency to make a direct payment to a self-employed individual, wherever he or she is working in the world. But even if UK law was to change, there are sound reasons for recruitment agencies not wanting to pay direct. For example, my agency prefers a larger and superior organisation to take some responsibility for the contract rather than leave it with an individual contractor. German authorities need to understand that the contract chain is not enlarged solely for tax reasons but very much for commercial ones, such as allowing a contractor to operate in the same way as their German counterpart, as a ‘freiberufler’.

Instead of contracting with a, so-called, “management company”, my agency will only contract with an interim company (in fact, one that was included erroneously in AgenctfromHell’s “so-called” list) as that facilitates the contract chain. We also carry out due diligence to satisfy ourselves that all our contractors are declaring their worldwide income in the country in which they are tax resident.

Accordingly, our preferred interim company would never support the infamous “split solution”, whereby every month part of the payment is declared in Germany and the remainder is paid into the contractor’s personal offshore bank account and is not declared – that is 100% tax evasion. With EU governments now having access to personal bank accounts held by their citizens outside their home countries, it is only dumb contractors who continue with the split solution thinking they remain safe from a tax investigation.

Do not misunderstand me. If a contractor does not declare their worldwide income and they purposely defraud the German Tax Authority, they deserve the full weight of the law upon them.

However, not all interim companies are involved with this practice. It is the view of many UK agencies that disreputable tactics are being used by the German authorities to try and force legal interim companies and their contractors to admit to illegal acts which they have not committed. Surely, such aggression needs to be reviewed by an unbiased member of the European Parliament, without the interference of the German authorities.

Everyone knows the largest exponent of split solutions – strangely not mentioned by AgentfromHell – is a management company that claims access to tax solutions in over 80 countries, including Germany! My agency will never use them because they openly pay kick-backs to sales consultants for referrals; pay a small part of the gross contract income to the contractor in the host country; and pay the balance into a personal account opened for the contractor by the company at a bank in Switzerland. The company then arranges for the bank to issue the contractor with a VISA debit card knowing the contractor will access those funds 24x7 without declaration – this is clear tax evasion, definitely not tax planning!

AgentfromHell then continues with reference to the German party line that every “management company” is a, so-called, letterbox company. He clearly does not understand that by blindly blacklisting all interim companies in this way, the German authorities are discriminating against every foreign company attempting to supply services in Germany. Even the German authorities know this is an illegal restriction and transgression of European law, but which interim company has the time and money to take them to court?

Whilst it is clear the German economy is in a desperate state, it seems the tax authorities are embracing foul means to increase the public purse by extracting income taxes and VAT taxes that are not really due. Windfall VAT taxes maybe assessed where the services are rendered by an expatriate contractor in Germany to an agency based in Germany (as described by AgentfromHell). But VAT cannot be extracted where a UK agency is in the chain because it is VAT registered in the UK and, therefore, the contractors’ services become zero rated. So, VAT collection in Germany is certainly enhanced by the authorities ensuring German agencies are involved rather than UK ones. Interestingly, this practice is actually incorrect in German law where a non German interim company is involved, whether letterbox status or not.

On a final point, I need to correct another erroneous issue raised by AgentfromHell. The O2 offices were in fact raided because of practices conducted by O2. To improve its share price, O2 had decided to dispense with hundreds of expatriate employees on a Friday but re-engaged them as ‘freelancers’ on the following Monday – thereby, improving their profits by taking the staff overhead cost to ‘investments’ rather than ‘expenses’. Whilst the result of this action boosted O2’s share price and, as a by product, gave a social security saving benefit to the individual contractors concerned, the authorities were not at all happy with the loss of their PAYE revenue. It was unfortunate that a number of genuinely self-employed expatriate contractors who happened to be working at O2 at the same time had become caught up in the authorities’ fury. And so all these foreign expatriates were openly declared tax evaders and used by the image conscious tax authorities to deflect a public outcry against unfair and unrelated practices that those authorities were increasingly using on German tax payers.

As every day passes, it is becoming clearer the German government wants foreign workers out. This apparent dislike of foreigners (including agencies and contractors) is driving away highly desirable skill sets forcing end users to stop projects that, in turn, will negatively affect the German economy. My agency is one of a growing number becoming focussed on contracting needs outside that country.

[AgentfromHell]

@AgentfromUK
Having worked many years in the UK and delivering to the German market as well as having worked in Germany, I can only come to the conclusion that you are working at a "management company". You take what I have written far too personal to be an "agent", defending the "management companies" with far too much gusto, wanting to create a need where there is none.

The reasoning that you have brought up, may hold true for the company that you work for (I could take a guess which of the companies you are working at...). It is however not sound advice for a contractor who may be working in Germany.

You accuse me of "towing the party line" and naming only a select number of management companies and not mentioning others. The names mentioned are a small number of management companies that operate, some globally others pan-European, and is by no means exclusive. Too many people have set up "solutions" for contractors to name them all.

Your post reminds me very much of a letter that I received via a contractor, in which a representative of a management company tried to trivialise the actions of the German authorities and claim illegality to all actions by the Finanzamt.
It would have made me laugh, if it hadn't mocked the serious trouble that some contractors had got into, due to the fact that they had taken "advice" from that same management company.
The troubles for the contractors included raids on their private abodes in the early morning hours around dawn by tax investigators, technical specialists and police in uniform.

Maybe reason for the O2 was as you discribe, however the fall-out had little to do with what you wrote and it was by no means the trigger for the events that have affected contractors working through management companies.

Your last paragraph is laughable:
"As every day passes, it is becoming clearer the German government wants foreign workers out. This apparent dislike of foreigners (including agencies and contractors) is driving away highly desirable skill sets forcing end users to stop projects that, in turn, will negatively affect the German economy."
Having worked closely with German companies, immigration officers, tax authorities and local councils for years, I can say that what you have written is complete and utter b*llsh*t.

When I wrote "so called Management Companies" I didn't mean to sound negative about the term, but merely wanted to point out that they are not refered to as "umbrella companies".
Of course there is a lot at stake for management companies, so they are bound to defend their "legal" status at all cost and in the same way as AgentfromUK has done in the previous post.

[LilDarling]

AgentfromHell of his own making

Now now girls…… AgentfromHell of his own making, is at one and the same time, sticking two fingers up to reality and baring his sole, showing us exactly from which end his words are coming from.

If AgentfromUK is really a Management Company, surely AgentfromHell must be the code word for SpyfromGermany. I bet ContractorUK are rubbing their hands with glee knowing this is the chosen site for a showdown between good and evil. Will dawn raids give Herr Tax or Frau Tax an early victory or will the MC announce a solution to dumbfound the dmmkopf?

Being British, I’m siding with the underdog. From my previous entry, you know I’ve a spy in the camp who, after gentle probing, admits that under German tax law, it’s for the accused to prove innocence rather than the accuser to prove guilt.

Not only that but a contractor can elect for court action against the tax authorities but the case can take up to 4 years during which time the accused has to be able to bear prohibitive defence costs. And we can all forget EU law because EU non-Germans don’t have the same legal rights in Germany as German citizens.

But the bottom line is that if a contractor is naively not declaring his worldwide income, then he deserves to be s..t on by the taxman.

[AgentfromUK]

Thank goodness for websites such as this one where widely differing views on major contracting issues can be freely opened and dissected. Accordingly, I am very happy to continue the debate with AgentfromHell.

I make no apology for declaring my deep knowledge of so-called ‘management companies’ as they have often been a critical part of the contract chain. AgentfromHell is absolutely right to state I am taking his assertions very personally. After all, what these companies do directly affects my contractors, can affect my clients and potentially can have a major affect on my agency’s business.

Because contracting has been expanding at a rapid rate in recent years, we have all become aware of the increasing number of new companies entering the market pretending to be intermediaries promising compliance for contractors, security for agencies and safety for clients. It has become a key ongoing exercise for me and my FD to recognise what I term “virus entrants”. Like all professional agencies, we now have a strict vetting programme to sort the con artists from the genuine interim companies (as I call them) whose contracted performances we continually monitor to ensure we (and our clients) are getting real value for money. Whilst we use real interim companies to provide us with project teams and individual highly skilled consultants, we have recognised that some clients only want to deal directly with the interim to fulfil their project needs.

Despite having close ties to “German companies, immigration officers, tax authorities and local councils” and with a sound knowledge of “dawn raids by tax investigators, technical specialists and police in uniform”, AgentfromHell is sadly painting only part of the picture. Lawyers and accountants I have spoken to in Germany are worried that such raids are commonly carried out based on accusation with no actual evidence of wrongdoing.

On AgentfromHell’s final points, he and I will have to agree to disagree on our interpretations of the events at O2 as well as on our contrasting views of the outlook for expatriates contracting in Germany. Maybe I should have added that the diminishing tax take from relatively poor performing German businesses and the rocketing tax demands on German citizens, coupled with continually rising unemployment (all well publicised) is forcing the German government to use back door methods to squeeze easily identifiable scapegoats such as foreign workers (for example, expatriate contractors) and foreign businesses (e.g. UK agencies) until they hurt and are eased out - so, why not paint all expatriate contractors as tax evaders and “encourage” all German clients to only use German agencies? I know of UK agencies that have been delisted from German clients’ PSLs - not for commercial reasons but, as one client embarrassingly admitted, because his tax office had put pressure on him to make all future contracts with German agents only. On a wider level and even more worrying is what is represented by the highly publicised €5,000,000 paid last year to a corrupt and dismissed employee of a Liechtenstein bank for stolen information on German citizens. Such a criminal act shows the depths into which the German government is prepared to plunge in order to attack its own citizens. Perhaps this puts the authorities’ forced entry into a contractor’s home (a truly frightening experience for the wife and children) into perspective.

Unfortunately, much of my agency’s business is currently locked into Germany so, until I have built a replacement market elsewhere, I will continue to consider and stay knowledgeable on everything that impacts on my business in that country – including the decision to contract with interim companies to share the burden of contractual responsibilities, especially compliance.

[AgentfromHell]

Now now girls…… AgentfromHell of his own making, is at one and the same time, sticking two fingers up to reality and baring his sole, showing us exactly from which end his words are coming from.

Oh, I am going to burst out in tears.

Being British, I’m siding with the underdog. From my previous entry, you know I’ve a spy in the camp who, after gentle probing, admits that under German tax law, it’s for the accused to prove innocence rather than the accuser to prove guilt.

What your "spy" revealed is common knowledge in Germany, sorry to say. Also that tax investigators in Germany use the "Good cop, Bad cop" method is no news, often while their colleagues are rummaging through the wife's undergarment drawers ("Come clean now and it will be a lot cheaper for you... We can come to an agreement...")

And we can all forget EU law because EU non-Germans don’t have the same legal rights in Germany as German citizens.

Och, zee evel Jerman. Err, no. I think you have seen too many '50s war films.

But the bottom line is that if a contractor is naively not declaring his worldwide income, then he deserves to be s..t on by the taxman.

And to prevent that from happening contractors should go to a independent German Tax advisor and get counseling. If contractors want to use a management company they should get counseling from a German lawyer specialized in tax, that can detail the risks on any dosh set aside anywhere outside of the Vaterland.

@AgentfromUK (or should I call you Michael?)
How about this: Try to place German contractors, if you feel our fellow countrymen are being maltreated by the evil ancient German foe. Or doesn't that fit into your business model?

[Codejock]

Management Companies

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]

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]

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?

[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