Opting out of social welfare when self-employed - Germany

hi,

If i start a sole trader company in germany and earn 80k euros per year, can i opt out of the social welfare system to invest my money otherwise?

Cheers
Richard

Troll!

No you cannot. You can (sadly) choose a private insurance instead, but frankly, i'd advise against it. And not only because they are only cheap while you are young and/or healthy.

If you start a GmbH and have a controlling interest in the company and are the managing director, than yes. You must put down 25K EUR Stammkapital to get the GmbH rolling.

This will allow you avoid paying, Arbeistlosenversicherung & Rentenversicherung (unemployment and retirement insurances respectively).

Oh, and becoming an atheist saves you taxes in Germany as well...

Non Christian may be a better term

declared non-Christian even better...

I've been self-employed in Germany for the last two years. The only taxes that you are required to pay are Einkommensteuer and Solidaritätszuschlag. The amount of money you make plays no role (i.e., even if you made under €80k as a self-employed person, you are only required to pay these two taxes).

As far as health insurance goes, you most likely would have to go private, which, IMO is way better than the public Krankenkasse. I have premium coverage through DKV and it only costs €145 per month. The insurance covers everything and DKV has been great over the last few years with reimbursing me for all medical expenses, no questions asked.

What do you mean 'Troll!'

Thanks for all the answers! Starting a gmbh is not a problem so i'll look into that. It just seems, like in france, the social welfare costs are very high. I like the idea of being able to opt out so i can invest the money elsewhere.

Thanks for the medical tip..i'll check it out. At the moment i'm just waiting to hear back from the local business advice service about setting up a business in leipzig. Apparently they have documents in english! nice...try finding that in frogland!

Do i pay reunification tax if i live in the east too?

So, the church tax...who pays it and why?

Regards

Richard

Now look, if those 80k are your net profit before taxes, why not support the social welfare system a bit? Yes, you can opt out. And IMO you'd do your host country a better service if you did opt out and put some money into privately organised social schemes.
If you simply want to opt out and invest 80 k and then some for your own welfare only, gee, my sympathy dwindles like fog in sunlight and the idea of karma and reincarnation once again is rather appealing. FYI ants have a very unpleasant life.

Just a couple of short advises with regards to picking the right legal form for your business in Germany --- but be sure to use a tax consultant before you finally decide because there are some tax results that require good planning, better safe than sorry, so to say. Seems like a lot of TTners choose Thomas Zitzelsberger who advertises here at TT for similar reasons...

O.k., there are basically three groups of corporation you can choose:
1. eingetragener Kaufmann "eK" ( listed single person company), Gesellschaft bürgerlichen Rechts "GbR" (corporation according to civil law) , offene Handelsgesellschaft "OHG" (open trade society)
These are forms of corporation where you as owner or group of owner are liable with all your private fortune in case of bankruptcy. So your personal risk is high and you should consider special insurances for your business activity. On the other hand, income from these forms of company is directyl taxed as your personal income, which can make taxation simple.

2. Kommanditgesellschaft "KG": this is a form of corporation, where one owner, the "Komplimentär" is liable with all his private fortune while other owners, so called "Kommanditisten" are only liable with the money they have put into the capital of the company at corporation or later. Has been a well recognized corporation in the past but is loosing importance steeply over the recent years. There is a special form, the GmbH & Co KG (or even Ltd. & Co KG) which overs a couple of tax advantages and where the fully liable "Komplementär" is a GmbH or Ltd. and thus the liability is reduced (in theory) only to the capital of the Komplementär-GmbH or -Ltd. In the past this has been often considered as the form with the illest reputation, but in recent years especially since it became so interesting for tax reasons, it has become more widely accepted. There is even a KG aA which is a mixed form with Aktien (shares) but that does not need to concern anyone here I think.

3. Least but certainly not last there are the "Gesellschaft mit beschränkter Haftung" or "GmbH", a limited corporation where the liability is (in theory) for the owners only the capital the invested in its foundation, the Limited Corporation or Ltd., probably best know to most of the english speaking folks and the Aktiengesellschaft or "AG" a share holde corporation.
The GmbH can be founded by only 1 person and requires a certain amount of founding capital. Currently you have to cough up 25.000.- EUR for the creation of a GmbH but there is a change of law under discussion to be passed at the end of the year where a "kleine GmbH" with a founding capital of only 10.000.- EUR shall be possible. On top of this capital you will incure some costs for a lawyer to write out the founding contract and rules of the company, notary costs for the official creation of the company and costs for registering. On top of that it can take some time until you are finally registered and before you can legally safely start to act as corporation. Once you have been at the notary you can start to act as GmbH i.G. (in Gründung - in foundation) but during this time your continue to be fully personal liable for all businesses. I

have written above that as owner of the GmbH you are only in theory not liable with more than your paid in and registered capital. However this protection of your personal wealth has been made quite hollow over the last 1-2 decades in Germany. There are virtually hundreds of loopholes for creditors andothers to break through the protective umbrella once the company has declared insolvency. This starts with the registered capital: most founders believe that if the money is on an account at the day of registration/notarization, this is enough and they can use the money on the next day to buy furniture, pay salaries and expanses and so on. This is not the case and usually the first thing that court appointed insolvency managers/lawyers go after in their check up. Besides: even after tens of years you will still and always have to prove that the capital was there and available to the company. Furthermore, at any given time the company must declare insolvency when it would be unable to pay even only as much as 5 % of open invoices within the next couple of days from its cash flow and capital (which makes most of incorporated Germany practically permanently liable for procrastination of insolvency --- which allows creditors to make the general manager and the owners liable with their private fortune.
And there is much more...
I am writing this in so much details in order to warn people to open a GmbH without major legal support, the punishment being to loose all that you hold dear.

From the tax side, the GmbH has to pay "Körperschaftssteuer", a corporation tax plus local business tax and also the SOLI (German unification tax 5,5%). Attention: if you incorporate in Germany, your business income outside of Germany is taxable in Germany as well (if you use the corporation for the business that is). If you then turn out some money to you as a salary etc., you have to pay your personal income tax on top of that (plus welfare taxes depending on the amount of the gross salary). If you just pay out some money from time to time to you just so (as a premium for instance), you must record it as income with income taxation, at the same time you a drawing from your share of capital in the corporation. If the company goes bankrupt a couple of years later, the creditors and the insolvency manager might demand this money back from you. If the company is in trouble simply because some bad cash flow and you lend money to your company, retrieving it is also not so simple later on.

A cheaper and faster alternative is to found a Ltd. in england with a subsidiary in Germany. This is perfectly legal under EU-law and has become quite famous in recent years, I read that nearly 120.000 new LTds have been created by Germans for running business in Germany only. The foundation costs are much less and its definetly faster. You can have your own company up and running basic ally over night. There are a couple of companies specialized on doing all the paperwork for you, including some adminstrative work necessarry every year in Great Britain. You may want to check out this website: http://www.go-limited.de/
They appear to be the market leader in Germany for this service. I used them myself and was quite happy with the service so far. Taxwise it is like the GmbH, you pay the same taxes in Germany. You also have to file a tax note in the U.K. too, but as long as you don't do any business in the U.K., this is simple and can be done as service by providing companies like Go Ahead for a yearly fee.
Apart from the much faster and cheaper way for founding a Ltd. in comparison with the GmbH, what attracted me is that not all the crazy loopholes of the German insolvency law can be attached to the Ltd., only those that are also law in the U.K. Therefore it is no protection for people who default for bad business practice and fraud, but it protects the innocent owners and general managers against the legal traps in Germany which do not really help the creditors but rather make a lot of vulture-like lawyers rich and fat. I have seen it among some of my clients who have first been butt-f... by some major client, than by their banks and finally by those insolvency lawyers. Thats why I recommend the Ltd. if you want to go for incorporation. But check the tax issues first.

The Aktiengesellschaft or AG is a corporation based on shares. You need at least 5 people to found it. However there is already something like a "kleine AG" or small share based corporation where one person can be the founder and single owner of all shares, but the min. capital is 50.000.- EUR. The main problem here is that the organisation of the AG is much more complicated than the GmbH or Ltd. and that you have much more legal bodies to install. If this is a form of corporation you find atttractive, for instance because you believe your business may grow and attract some investors or even with the intention to go public some time, you will need to consult a good lawyer from the very beginning. Taxation is simmilar like GmbH, all profits are taxed within the company at corporation taxes, but the payment to the shareholders is easier (even though theses "Dividenden" are again taxable personal income for the shareholders).

so much about incorporating options in Germany in a broad and short overview. Since I am consulting a lot of entrepreneur clients in all banking and insurance issues due to my professional background and long experience, I will be happy to hint anyone in need to experienced legal and tax advise (both which I am not allowed to give by law) in Munich and southern Germany. If you live in other areas of Germany, I might be able to find some recommendation for you still.

One other questions was if you have to pay social welfare if you are incorporating yourself. Well, if you choose to incorporate as GmbH, Ltd. or AG the answer is definetly "No" on the profits of the corporation. However whenever you pay out money to yourself as salary or bonus/dividend, this money becomes taxable as personal income and you will have some of these costs again.
If you act simply as freelancer, you could still be liable to pay all welfare taxes including public pension if all or most of your income derive only from one source, one company. In this case it could be "unechte Selbständigkeit" or fake selfemployment. Therefore here again you might want to consult a tax advisor or business lawyer in order to help you to straigthen that out.

There are certainly rules and provisions to regard and follow all over the world if you are running your own business, but trust me, German rules are the most complicated, I can say having lived abroad for quite some time in my life ---- and you do not want to face them without good legal support, the consequences just being to costly and devastating. Which might you help to understand why there is such a low "entrepreneurial spirit" among a majority of Germans

Hope that was enough food for that, if you need more, just PM me,

Cheerio

Pat

Hi

Sorry i didnt want to be classed as a brutal capitalist...as many here in communist france are quick to.

But anyway, my parents were shafted by the UK pension system and i think many more will be...as a late 20 something i'm not going to make the same mistake. It's only the pension contributions i am worried about.

I'm just building intelligence about the system really...as part of our ongoing research into a move to Germany overall.

Pat, thanks for that mega-detailed answer. I am sure it goes deeper from there! There are a few off-shore setup's we're looking into which act in the same way as the one you detail in the Ltd company info. Interesting, complicated, possibly worth the trouble if done correctly.

I think we will move to Leipzig, Strasbourg is too expensive to invest in. Thanks for the answers everyone!

Richard

I agree that UK Ltd is a pretty good route. However the authorities and many suppliers are very suspicious of UK Ltd companies over here. They have this idea that the Ltds are only being run by criminals (I shit you not). They do not like them.

Within 10 days of registering my existing UK Ltd company over here I was sent a tax bill for the next 2 years. I have already had a German VAT inspection within the first 6 months, and now also have a Zoll inspection booked for next week (even though we only have 3 invoices for them!!!). I am VAT registered in the UK and Germany - but over here you have to the returns monthly.

So if it is important for you to have a good reputation with suppliers, customers etc then sometimes a UK Ltd is not ideal.

You can forget any ideas about "offshore" companies if you are living and working over here. Comes down to pretty much where the company is being CONTROLLED. If it is being CONTROLLED in Germany then it is 100% taxable over here and they will take a very dim view of people evading company tax.

For instance - as I am now living in Germany (and controlling the business) - I have to register the UK company as having "emigrated" to Germany, and pay all company tax here, even though 75% of the business is still in the UK. However if I have a large enough part of the organisation in the UK, then I can apply for a "permanent establishment" status in the UK at which point I can pay UK company tax on that % of the turnover that is directly attributable to the UK office.

Suffice to say this has been after discussions with 3 sets of German accountants, 2 UK accountants and the UK Inland Revenue direct.

It's a free market. If the German system is not good enough, you shop elsewhere - like anything in a free market. Actually I think opting-in is a pretty good option but not for any fluffy socialist charitable reasons. Nothing wrong with being a brutal capitalist - its good for the economy.

Richard: don't mention it! If you need more information to form a solid opinion before you consult a tax advisor and/or lawyer, contact me anytime by PM or via my add at TT.

My father has paid some 40-odd years as an entrepreneur into the state pension system as voluntary contribution and to have something safe for old age. The pension he is receiving now since one year however is such a joke that if he would have invested the money in some simple solid investment schemes like Templeton for instance, he would have today more than double his pension and still money to spare for spending it on social welfare. The problem is that state systems get so often overburdened with political costs that the original idea and sense get lost over time.

Therefore you do have all my sympathy for opting out of this particular system...

Cheerio

Pat

Jonny is correct when he says that people in Germany are still suspicious when it comes to Ltd. If someone is running a bakery or carpenter shop or any likewise conservative local businesses, it might still be frowned upon. However, things are evidently changing and have at least set the gov. in motion to think over the complexity and cost of founding a German GmbH (equivalent to Ltd.) and propose a "little GmbH" to be established by law soon. Still I do not see the sense in binding so much money for considerable time like you do with the invested capital in a GmbH.

When it comes to banks, both new GmbH and Ltd. will fair equally poorly. You will never receive a credit/loan on a newly founded enterprise in Germany from a German bank without the owners co-signing and taking over the liability in case of defaulting on the loan.

The problems with tax authorities sound strange, more like harrassment, Jonny. Maybe you can send me some more information because I use to feed this information to some friends in politics (Bundestag, Landtag etc.) who try to work for us small entrepreneurs against the overgrowing administration? Just a thought.

Pat

Pflegeversicherung - Long Term Care Insurance

This is a compulsory insurance in Germany - Please see my 'New Topic' entry on this and also my web site www.spectruminternational.eu (Latest News page - Long Term Care).

Rentenversicherung - State Pension

Some categories of self-employed (Teachers for example) also must contribute to the State Pension -

Solidarity Tax

All citizens (tax residents) East and West must contribute to the Solidarity Tax

Church tax

Depending on which story you prefer to believe, this either dates back to:

a. Tribal pre-christianisation of Germany as a means of funding for priests etc., of the various cults - OR
b. In medicaval history a way of resolving financial difference between the Emperor and the Pope - OR
c. In the 19th century introduced by the Prussians to allow Churches to impose the tax to help compensate for property sequestered during the Napoleonic Wars - OR
d. Introduced by Hitler to help fund his War budget!!

Any way - you can opt out of Church Tax at your local Ordnungsamt. It is not as difficult now as it was a few years ago when you had to go to Court to do so. Opting out basically means you are not entitled to the services of Clergy for example - if you die you will either be cremated or buried whichever is the most convenient, but without any Clergy in attendance (although it may be possible by local arrangement, more than likely for a fee!)