Company based in UK while living in Germany, tax implications

[travelerworker 116]

Hi,

thank you, in advance, for your help. Dropping here a question to get as much info as possible while I wait for the appointment with the tax expert

 

The situation is as follows:

 A a british citizen setup a company in the UK in 2021, after moving to Germany in the same year, to sell online some technical documents he created. This is a very small, hobby like, company, doing it on the side of her job. 

She doesn't pay tax in the UK since the income is less than 12.000 (personal allowance aprox) per year.

My questions are:

- does she need to declare that income on Germany?

- will that income be taxed in Germany? how is that "contradicting" with the personal allowance in the UK?

-finally, does she need to setup a company or register herself as freelance also in Germany to be able to declare that income?

 

Any info will be appreciated.

[GaryC 366]

Leaving aside the cross-border tax consequences, you need to be clear about what you mean by the phrase "set up a company" because that will impact the UK tax treatment for UK residents and will also impact the German treatment and interaction with the double tax treaty.

 

A "company" is a separate legal entity, registered with Companies House, and subject to UK Corporation Tax (not Income Tax) on its profits. It is not impacted at all by the UK personal allowance which relates to personal Income Tax, so every £1 of its profit is taxable.  If you take money from that company it is taxable on you, either as employment income subject to PAYE and employee's and employer's NIC, or a as dividend.  Employment costs of the company are tax-deductible; dividends are not.  Employment income is that which you take for the work you do in the company; dividends are a return on your investment of capital in the company.  So, it is not an "either or" question of how you take money out of a company but a question based on the facts of what you are doing.  There are a number of anti-avoidance measures to ensure this difference is not manipulated.

 

If, on the other hand, you have started a self-employed business, then the profit it generates will be taxable on you and you will be subject to Class 2 and Class 4 NIC.

 

Whatever income you receive from the company, together with any other UK-taxable income would be added together to give your UK total taxable income for the year, from which the personal allowance is deducted before calculating the tax due.

 

Now move all of this into the cross-border situation and you need to consider how the double taxation treaty works to carve up how the UK amounts are taxed in Germany or the UK.  I'll leave the German tax experts to comment on that side of things.

 

[travelerworker 116]

2 hours ago, GaryC said:

Leaving aside the cross-border tax consequences, you need to be clear about what you mean by the phrase "set up a company" because that will impact the UK tax treatment for UK residents and will also impact the German treatment and interaction with the double tax treaty.

 

A "company" is a separate legal entity, registered with Companies House, and subject to UK Corporation Tax (not Income Tax) on its profits. It is not impacted at all by the UK personal allowance which relates to personal Income Tax, so every £1 of its profit is taxable.  If you take money from that company it is taxable on you, either as employment income subject to PAYE and employee's and employer's NIC, or a as dividend.  Employment costs of the company are tax-deductible; dividends are not.  Employment income is that which you take for the work you do in the company; dividends are a return on your investment of capital in the company.  So, it is not an "either or" question of how you take money out of a company but a question based on the facts of what you are doing.  There are a number of anti-avoidance measures to ensure this difference is not manipulated.

 

If, on the other hand, you have started a self-employed business, then the profit it generates will be taxable on you and you will be subject to Class 2 and Class 4 NIC.

 

Whatever income you receive from the company, together with any other UK-taxable income would be added together to give your UK total taxable income for the year, from which the personal allowance is deducted before calculating the tax due.

 

Now move all of this into the cross-border situation and you need to consider how the double taxation treaty works to carve up how the UK amounts are taxed in Germany or the UK.  I'll leave the German tax experts to comment on that side of things.

 

Hi, thank you for your help and info, yes, when I say company I mean a self employed business.

[GaryC 366]

I see.  Reading your post again, you appear to be saying that the timeline was, move to Germany then start a business creating and selling technical documents to customers outside, or currently outside, Germany.  If correct, is this not just a German business venture?  

[travelerworker 116]

2 minutes ago, GaryC said:

I see.  Reading your post again, you appear to be saying that the timeline was, move to Germany then start a business creating and selling technical documents to customers outside, or currently outside, Germany.  If correct, is this not just a German business venture?  

exactly, she first moved to Germany, once here had this idea to sell this technical documents, so started writing them and selling on a simple web site...at the beginning was only 1 or 2 per month (50 euros each) but now it is growing and she is asking herself what should be done to declare this income in a more "tidy" way. 

[Dai 16]

If she’s living here and working here I can see no alternative but to be registered and pay tax here. 

Get a Steuerberater, register as self employed and investigate the VAT laws. It’s got nothing to do with UK personal allowances. 
 

Since it’s been going on since last year I don’t know how the income from an unregistered business will be dealt with. That’s a question for the Steuerberater.