Company in UK, customers in DE, where to pay tax?

Hello,
I am new to this forum and have found the posts on taxation and company registration very helpful. I found several which nearly applied to my situation, but not 100%. Maybe someone could tell me where I am liable for taxation with the following situation: I have been a self-employed teacher in Germany for the past 10 years. I will de-register in Germany soon as I am now returning to the UK and intend to set up a limited there for similar services. A freelancer will be freelancing for me in Germany, ie the clients will still pay me and I will pay her an "Honorar". When I will initially set up my limited in the UK, all of my income will be from Germany (until I find new business here), generated from my freelancer (who pays her tax in Germany). Some say I am liable in the UK as I am resident here and all admin comes from here. Some say I am liable in Germany as the revenue is generated there. Can anyone enlighten me?
Thank you for your time,
In-Situ

If you are setting up a limited company in the UK then there is no "I" in the taxation equation. The limited company receives invoices from the freelancer and income from the German customer(s) - presumably outgoings are less than income so the company entity makes a profit. YOU (I imagine) are an employee and possibly a director of the UK company so earn your income from direct salary or profit distribution or both. As the UK Company is based and trading in (or out of) the UK and you are also resident there then this income is clearly taxable in the UK. As your company services are delivered in Germany, you may be required to submit German VAT returns. If your Freelancers(s) are themselves registered for VAT, as their services are provided in Germany they must levy German VAT on their invoices to you which you may be entitled to reclaim, and equally, might be required to pass this on on your invoices to clients.

Thanks for the quick reply.
I have a VAT exemption in Germany until 2010 from the Staatliche Schulamt so I am VAT free in Germany. The same applies to the freelancer too. I guess that would mean no paperwork in Germany? :-) I intend to make sure I don't earn more than the threshhold of 64.000 GBP in the UK, thus exempting me from VAT in the UK.
So even though the company is making nearly all of its revenue in Germany the Headquarters are in England, thus all income is taxable in England? This is what I presumed but my tax advisor told me otherwise - He gave the example of Sainsbury's. They have their Headquarters in London but if they open a branch in Germany they are liable for tax in Germany. Do you know the difference between the two situations?
Thanks so much,
Im-Situ

I agree that this area can indeed be a nightmare of conflicting advice.


That may be so but as YL6 clearly pointed out, once you set up a new UK Ltd company this is 100% separate from your personal affairs or historical arrangements. Therefore any VAT exemption you may have personally DOES NOT apply to the new UK Ltd.

First tax on PROFITS:

You have two potential "tax" issues now. The 1st is any income your personally receive FROM XYZ Ltd either in the form of salary or dividends. As you will be resident in the UK then this income is UK taxable and none of this is personally taxable in Germany. So theoretically if you take out 100% of the profit as salary from the company then XYZ Ltd would make zero profit and the next part of the discussion is a non-issue. Same as if you owned shares in Sony or Nintendo and received a share dividend whilst living in the UK - doesn't matter where the company makes its money.

More *possibly* tricky is the question of the company tax situation. I have discussed these things at length in the past with both UK and German advisors (my situation is different however). The "default" position for a UK company is that it is taxable in the UK. However the position changes when you have the equivalent of a "permanent establishment" in another European country. It can also change based on the physical location of the controllers (normally but not always the Directors of the Company). In the latter case you will personally be based in the UK so this does not alter the outlook.

I would therefore DISAGREE with your German advisor (would not be the first time, and also not the first time I have been correct, despite being qualified in **** all). His example is fine for Sainsburys because they have the equivalent of a "permanent establishment" in Germany. See here from the official UK Inland Revenue website in relation to the treaty with Germany (but pretty much the same for all European countries):

http://www.hmrc.gov.uk/manuals/dtmanual/DT8002.htm

You are welcome to go and look up what qualifies as a "permanent establishment" but in general this means something like having an office, with staff, generating sales in the local area, and the profits generated by this local branch is taxed locally. So in the Sainsburys example this is a no-brainer, but from your explanation there is no way you would qualify for a "permanent establishment" here in Germany.
I do not know the term for "permanent establishment" in German but it is NOT a pure UK term and is used in all the dual tax agreements, so you advisor should be aware of the equivalent.

So your company is DIFFERENT from Sainsburys because it does not have the equivalent of a "permanent establishment" in Germany and the controllers of the company are also NOT located in Germany (the latter can trigger an issue).

I think you advisor is therefore incorrect. I look forward to hearing his grovelling agreement in future. But it should piss you off hopefully that a total stranger, with no qualifications on a random internet site, is needed to correct his paid and crap advice. In a nutshell, unless you have a permanent establishment in Germany the profits are taxable in the UK (which is cheaper than here).

Happy New Year.

Secondly - the VAT issue.

This is easier I think. You are selling goods or services into Germany. For any European country, regardless of where you or your sales operation is based, as soon as you sell (or expect to sell) above the VAT threshold in that country you must register for VAT.

So if "Adolf & Eva Gmbh" (based in Germany) sells widgets into France, they must register for French VAT in France as soon as they look like they will triggger the French limit.

So your new UK based XYZ Ltd that is invoicing German customers will need to register here if TURNOVER (not profits) is gonna bust the German limits.

We discuss the current limits here:

When to add Mehrwertsteuer to your invoices


You may need to seek advice if you expect turnover to be BETWEEN the €17,500 and €50,000 here in Germany. Below the 17,500 no need to register and above 50,000 (even expected) you MUST register. I am not sure if XYZ Ltd as a new UK company would trigger the special first year limit...but of course 99% of new UK companies would ignore this issue and fly under the wire. As many German citizens legally use UK Ltd companies to trade here in Germany (with no desire to use outside the country) my guess is that the 17,500 first year limit applies. Under European law a Gmbh or Ltd is much the same in every country (much to the distaste of the German authorities).

It will be a pain in the arse for XYZ Ltd because as a new company you must do the German VAT returns EVERY month and within 10 days of the month end (you can apply for an extension). But that said it might be easier just to register from the start and get into the good habits, assuming your business will continue and grow in Germany. Especially as in Year 2 your previous years turnover in Germany will have been ABOVE the €17,500 and therefore trigger the requirement to register regardless, and technically if you "expect" the Year 1 turnover to be above 17,500 you probably have to register.

Finally:


It would be helpful to know WHY you and your friend have this VAT FREE status in Germany, and also WHY it is important to you?

This is because if your clients are regular businesses, and VAT registered themselves, then it makes no difference to them if you invoice them with or without VAT as it makes no cost difference to them on a cost basis (they just reclaim VAT on VATABLE invoices). If your clients are "end users" and NOT VAT registered then it certainly does make a difference, as they will see the extra 19% as a pure cost.

However if you are saying that the Staatliche Schulamt have decided that the services you guys offer should be VAT free in Germany, then you may need to reapply to them, proving to them that XYZ Ltd is your new trading company and getting the VAT free status transferred to XYZ Ltd. (sounds like fun - not).

The other area you can therefore explore (which may not suit for several reasons) is getting your friend to invoice the clients direct. You can then invoice your friend for the "profit" only element and possibly save yourself some german VAT dramas. But clearly quite a few reasons why you might not want to do this!

Laugh! It is usually the "total strangers with xxxx all qualifications" who do know best I think! There seems to be so much to know about German tax law that the qualified "Experts" cannot know it all and people who have researched their own area usually know more than the experts do! Thanks so much for the advice. It makes perfect sense.

The VAT exemption is available to those who provide "qualifications" Thus the exemption. I have several students who are not companies and who have difficulties claiming the VAT back so it is just an extra cost for them so I am happy to be VAT free!

I am much happier to pay tax in the UK! That was what I wanted to hear. I am definitely going to challenge my tax advisor on that!

And with the freelancer paying me, yes, I could do this on a "Inter Company licence agreement" basis (licence fees are definitely tax free in Germany)! But not for more than five years or so as then the state would then ask why. But it is definitely worth considering as obviously there would be less to tax.

I don't suppose you know anything about self-employed status in the UK do you? This seems like the simpler option for me in the short term but I probably couldn't take on freelancers if I were self-employed right?

Happy new year to you too!

In-Situ

Of course you can. Freelancers are not employed by you, but simply suppliers to you. This assumes, of course that the freelancers also offer and sell their services to others, otherwise (in both Germany and UK) you could be accused of attempting to circumvent employment regulations. You should be careful that you are not simply contracting freelancers in then contracting them out at as you then could be considered more a skills service (aka body shop) which has other implications. You need to prove evidence of added value in your supply of services to the end customer.

Self-employed you can do pretty much ANYTHING a Ltd company can do in terms of business. For a small trader it used to be a bit swings and roundabouts on possible tax savings. The pendulum has for the last few years been slightly in favour of having a Ltd company because the first £10,000 of profit for the company was tax free (but that has just changed this year - so now taxable) and there can be a National Insurance saving if you are a 100% shareholder because you take Dividends rather than salary and do not pay NI on dividends. Against that has always been the slight extra costs and aggro of running a Ltd company.

However...

Having been through the odd scrape over the years I would personally only ever go Ltd. That is because even in a seemingly harmless business like teaching you could still unwittingly get yourself in a legal/financial mess. Suppose a big customer goes bust on you leaving your business with unpaid tax, unpaid staff, unpaid advertising bills etc - better to be able to regretfully let the company go bust than to go bankrupt yourself. Or perhaps a disgruntled employee decides to sue the company for unfair dismissal and wins a huge payout - worst case scenario is you let the company go down the tubes.

I am not for a moment advocating that you should be reckless in business, or be anything less than 100% attentive to good business practise - but regretfully I have seen friends running seemingly safe businesses as sole traders and screw up. It's not nice but it happens. Better that you don't personally go down with the ship, so go Ltd.

I will investigate Self-employment and LTD in more detail. But that is a whole new topic! Thanks very much for the advice which I have been looking for for the past year among "experts"!
In-Situ