JANUARY 2006 NEWSLETTER
GERMAN TAX LAWS MADE SIMPLE!
If you've ever been tempted by the thought of freelancing in Germany, you might well have baulked at the tax implications before bidding Auf Wiedersehen to the whole idea. It's no secret that income is taxed quite severely - as much as 48% in some cases, with an additional 5.5% tax surcharge for 'solidarity tax' on top of that; not to mention the additional responsibility of a 50% contribution to social security. But before you tear up your boarding pass, and resign yourself to the 'wurst,' its worth knowing that Germany is still a best bet destination for freelancers. Why?
Well for one; things are changing. The Government are making every effort to reduce the burden on the tax payer - to the huge relief of the beleaguered workforce. Thanks to the Tax Relief Act, basic personal allowances have been increasing and rates of taxation have been reducing.
It's also worth remembering that the Germans have always striven to encourage foreign investment; the same corporate taxation rates apply to German businesses as to foreign firms. So there's just as much reason to invest in Germany as there ever was.
But if you're going it alone; how can you profit from working in Germany without being taxed so hard it hurts? You just need to be well prepared. Before you leave make sure you establish the basics: Do you need a residence permit and a work permit? Find out. You will need an employment agreement / assignment contract which, like a standard UK contract covers the terms and conditions of your assignment.
You might even find that the company policy caters for tax equalization as standard; so much the better. If it doesn't, you'll just need to negotiate a clause in the contract to cover you from inequitable tax; inequitable tax is always defined by comparison with your country of domicile. Otherwise you'll need a detailed account of the tax implications on your gross salary, along with the potential benefits and compensations, in order to gauge your likely net income.
On arrival in Germany, you'll probably want to make friends with a 'Steuerberater/in.' The 'Steuerberater/in' is a tax accountant, and one of the best allies you'll ever make. He/she will guide you through the ins, outs; obligations and exemptions. You'll also be required to register at your local tax office or 'Einwohnermeldeamt.' There, you'll be issued with a wage tax card. Simply give this to the payroll department and they'll take care of your various deductions.
What about the German Church Tax?
You'll soon discover that in addition to all the regulation
taxes, you might also be expected to pay the church tax, which
counts for a whole 9% of your income.
The church tax is a leftover from the nineteenth century and
was actually instituted to help recover losses to the Church
during the Napoleonic Wars! You can wriggle out of this responsibility,
but only if you can show that you're planning on being resident
in Germany for a period of less than 183 days, or if you truly
consider yourself to have no religious affiliation - provided
you can prove it! (In writing!) But beware: once you've turned
your back on religion, there's no going back; it means that
you will not be entitled to marry in church, have your children
baptized in church, or even register them with schools or
kindergartens, whilst on German soil. Something to consider
if you're planning a long stay!
But for the church goers among you and the potential apartment owners, and the long stay workers, you will be liable to pay the church tax. So you may just have to swallow any indignation and consider the benefits to the local churches, not to mention the inevitable heavenly rewards!
Other Considerations
Freelancing abroad need not necessarily put a crimp in your marital life; if your spouse decides to join you in German, just make sure you receive tax class 3, when submitting your tax wage card.
Wondering whether to buy or rent property? The state of the German housing market isn't your only consideration; house purchases are liable to non deductible real estate transfer tax of 3.5%. Beware agency fees too, which could be as high as 7%, depending on the property area.
There's certainly a lot to consider; but provided you enter
into it, eyes open and
Steuerberater/in' and CPM on your side, working in Germany
can be very rewarding. For all the tax implications, there
are enough get-out clauses and exemptions to ease the strain
on your pay packet. Even if you're taxed like a native, at
least you'll be treated like one; you'll enjoy the same rights
and privileges as German nationals.
HE'LL BE BACK!
Like the Terminator, the taxman just keeps on coming!
There was a time when death was the last great refuge from the taxman. Not any more! The Inland Revenue is instituting new procedures to ensure that the dearly departed paid up, before shutting up shop. If not, the estate gets it!
Fiddled taxes will be reclaimed retrospectively from the deceased's estate, making for easy pickings for the taxman. "The plan required something that felt no pity. No pain. No fear. Something unstoppable. They created 'THE TAXMAN!'"
NON RESIDENCY, NON COMMITTAL
The recent case of Sheherd v HMRC put a significant aspect of UK tax law to the test: non-residency. Non-residency has often been used as a get-out clause for itinerant workers and tax dodgers. This case challenged the non-residency rule on the grounds that Shepherd, who spent fewer than 90 days in the UK each year, did not demonstrate a 'distinct break' in lifestyle, and therefore did not qualify as a non-resident. Quite what constitutes a distinct break has yet to be made clear, but one imagines that the sale of property would be required to demonstrate one's true itinerant intentions.
SPANISH DODGE
The Spanish Government is cracking down on the established practice of property purchasers who partially pay for real estate with cash, as a means of avoiding their tax requirements. In the past this has enabled investors to slew off a chunk of tax money from the purchase price of their chosen property.
In order to curb the well worn dodge, tax identification numbers have been appended to property documents, effectively bringing an end to the old ways!
More bad news for investors: the Spanish Government is keen to back date their measures in an effort to reclaim the lost millions. British property investors, many of whom have profited from the old cash in hand tactic should be aware that they will not be immune.
ARCTIC SYSTEMS: SENSE PREVAILS
It's not all bad news this month! With the eyes of the world upon them, the UK Court of Appeal has overturned the High Court ruling in the Arctic Systems Case.
The case concerned a company owned by a husband and wife, but largely run by the husband. As is common in such situations, the wife, as well as the husband, received substantial dividends from the company. Her Majesty's Revenue and Customs (HMRC) argued that the husband did not take a market rate salary and had effected a settlement in favour of his wife. They argued that his wife's dividend income should be treated as her husband's and that he should be taxed accordingly, which would have substantially increased their combined tax bill.
Although the High Court decided in favour of HMRC, the UK Court of Appeal overturned the decision, to the relief of entrepreneurial husbands and wives everywhere! Indeed the case has become a benchmark for others to follow.
HMRC have now stated that businesses like Arctic should file
their tax returns in accordance with the findings of this
case. The Court of Appeal judgment should be taken as law,
and taxpayers in a similar situation are entitled to self
assess, or if necessary amend an existing self assessment
to take account of the High Court case.
HMRC have already announced that they intend to appeal; but
for now, at least, we can celebrate a ground breaking victory
for good sense.
NOWHERE TO HIDE?
More bad news for HMRC! They've been backed into a corner
and look set to apologize following an advertising campaign
that backfired on them. The advert depicted a plumber hiding
under the sink to try to avoid the taxman, with the tagline
'With your help, we'll make sure self employed people, who
don't pay their tax, have nowhere to hide.'
The Advertising Standards Agency is pursuing claims from the
Federation of Small Businesses that the advert was 'offensive'
and that it misrepresented the self employed as tax dodgers.
In their defence HMRC maintained that they "did not intend
to target any particular section of the small business community."
Moreover that the advert was "aimed squarely at the non-compliant
minority…we are not in any way suggesting that all or
even most small businesses fall into this category."
So if you're self employed, and you're hiding under a sink
somewhere trying to evade your responsibilities, you'd better
budge up; you might be getting some company!
MORE RIGHTS FOR THE TAXMAN
More powers have been granted to HMRC in their continuing
efforts to extract every last little bit of information about
taxpayers! The Special Commissioners have given them the powers
to extract information pertaining to customers' offshore bank
accounts in an arrangement that could net them another £347m
in revenue. (Source: Financial Times.)
The case that prompted the decision is believed to have involved
a prominent high street bank. The Commissioners waved away
the bank's claims that the request was in violation of the
Human Rights Act, claiming that many offshore investors failed
to declare the interest they earned from their savings,
thereby acquitting HMRC of any impropriety.
CORPORATES OUT AS ANTI AVOIDANCE
DRIVE PUSHES ON?
It is increasingly feared that the UK's tough stance on tax
avoidance could prompt many of our largest companies to move
overseas. Reportedly one FTSE100 company is already drawing
up plans to relocate to sunnier, tax light shores, with others
set to follow.
Some organizations have been so incensed by the zero tolerance
drive that they are refusing to cooperate with any of their
demands, much less try to see things from the taxman's point
of view.
What happens when an immovable force meets an unstoppable
object? We could be about to find out.