It is not uncommon for our American clients to make a living not by working for somebody else, but working for themselves. This pertains to both regular Americans living and working in Germany but also the US Military spouse under SOFA working a home-based business (HBB).
While there can be quite the need to focus on details once established, there are four general tax areas which require attention all the same across the board. Those are as follows:
Tax registration:
The tax registration is different from any other registration – such as maybe the one which you need to conduct at your town hall. The tax registration is essentially a notification letter to the tax authorities where you inform them about your business coming into existence, what it is you plan to do and how quickly and large you expect your business to grow.
Depending on your responses the tax office might decide to impose tax instalments already.
- VAT Tax
Any German business is subject to the German VAT code. However, the (future) size of your business, the nature of your business and clients, as well as the location of the latter may have a significant impact on whether you need to charge VAT or not. The obligation to charge VAT obviously also has a severe impact of whether you can use the German small-business-rule or not along with corresponding filing requirements.
- Trade Tax
Trade tax is one of the few ways for your local community to drum up its own tax revenue. For this reason, it is important to determine whether the business you are operating qualifies as a trade or actual freelance work. The difference between the two being that a trade is typically more geared towards a fast-processed buy-/produce-and-sell activity, whereas a freelances is considered a “creative creator”. Obviously, the line can be blurry. However, if you cannot get out of the qualification as trade, you are obligated to file a separate trade tax return which comes with separate adjustments, deductions and exemptions. And if this was not bad enough in terms of additional compliance costs, you will also only get so much credit for a trade tax liability against your income tax liability, effectively leading to an increase in your overall tax position.
- Income
The actual after-expense profit of your business will be subject to German income taxation. While not every expense item may qualify for German deduction as well, it is also worth looking at a potential business infrastructure in the US. If your US business presence amounts to a so called “permanent establishment” we may be able to re-allocate some of your German tax base to the US. This effect could lead to an overall smaller tax liability in that the US might concede more deductions and also tax your profits at a lower rate, while Germany only considers your foreign profit for its own tax bracket rather than tax base.
As you can see starting your own business in Germany comes with a slew of tax tripwires. So, please let the taxperts help you get set up properly – in our experience any short-term cost saving by trying to figure this out yourself in the long-run never exceeds the expense for a professional having to undo the early-stage mistakes.
