Setting Up a Business in Germany
Being self-employed in Germany is necessarily tied to residence. Without some sort of residence permit it will be difficult, if not impossible, for an individual to establish a business in which they are self-employed. (See the separate article on Residence Permits).
It is strongly advised to consult with experts in the field of residence permits and experts schooled in labor, business and tax laws before becoming self-employed in Germany.
Residence permits are usually easily granted for highly specialized professionals, e.g.: scientists, professional experts or specified senior mangers etc. But other qualified professionals can also be granted residence permits.
If you want to move to Germany and be self-employed and you meet certain criteria, then you most likely will be automatically issued a residence permit (for both you and your family) if you can show that your business will have a positive effect on the German economy.
This criteria would usually be related to the type of business, your qualifications and whether or not you may be doing something that could be done by a German national or some other qualified resident. The local Foreigners Office would most likely ask for certain documentation and then may well check with the local Chamber of Commerce or other organizations to see whether or not your business is specialized enough and economically viable. If your business is deemed acceptable you could be issued a residence permit. However, there may be limitations as to what you can do and where you can do it. In other words, your permit may restrict you to a certain type of self-employment in a certain geographical area. This decision is up to the local authorities.
There are a few additional steps that must be taken if you are the spouse or family member of an expatriate or otherwise considering working or setting up your own business in Germany. Once again, the residence permit enters into the equation. If you have a residence permit that restricts your work options, you must somehow have those restrictions lifted. It would be advisable get legal assistance to see whether or not the restrictions can be lifted or changed to allow you to start a business.
Something else you must be aware of if you are considering setting up your own business or working in Germany is the recognition of foreign qualifications in various professions. The best contact for information in this area is the German Federal government.
Once all the residence permit questions are sorted out, there are a number of steps that have to be taken to establish and register a business.
First of all, a determination must be made as to the exact classification of your work. Rules and regulations may vary depending on what sort of business you plan to engage in. Like the residence permits, this can be complicated. And, again, it is be advisable to get expert, professional help in finding out just exactly where your profession fits in.
Free-professionals (Freiberufler) are those who have academic training - lawyers, doctors, pharmacists etc. Other professions may be considered to be "trades". Then there are the "crafts" - such as butchers, barbers, florists etc. And then there are the "freelancers" - writers, artists, performers, independent consultants etc.
Your work classification is important because it may very well have an effect on your tax liability, the various certificates and licenses you may need to acquire and whether or not you may be required to be a member of a professional association or other "chamber".
For example, if you intend to engage in what may be classified as a "trade", you should check with the local Trades Office (Gewerbeamt). You will most likely be required to register your business and get a certificate of registration (Gewerbeschein). To get this certificate you will have to demonstrate that you are of reliable character and qualified to run your business. Having a Gewerbeschein obligates you to pay local trade tax (Gewerbesteuer) and requires that you become a member of the local Chamber of Commerce (Industrie- und Handelskammer - IHK) and to pay a yearly membership fee to them.
Free professionals may be exempt from certain registration procedures at the Gewerbeamt as may persons engaged in agriculture or forestry. But there may be other regulations and procedures that are required to be followed.
To engage in "Crafts" you may need the approval of a trade association and establish the fact that you meet German standards relating to specific qualifications for your chosen craft.
"Freelancers" fall into a category all their own and have yet a somewhat different set of regulations, laws and procedures that must be followed.
The importance of getting expert advice about being self-employed in Germany cannot be stressed enough. Laws, rules, regulations and procedures are always undergoing change. To avoid misunderstandings that may result in heartache and trouble with the authorities you should get professional assistance.
The German Federal Ministry of Economics and Technology has good information in English on starting up a business at this link: www.existenzgruender.de/englisch/.
Should your business flourish and reach a certain level of turnover or profitability you may want to consider incorporating in Germany.
Some individuals and companies that intend to engage in commercial activity in Germany may want to look into establishing some sort of corporate entity. The various forms of corporations are shown in the separate article on this page.
Companies that do not have any presence in Germany may want to designate an agent to operate on their behalf to help establish a corporation. Advice from business experts is essential in determining the best type of corporate structure.
Free agents (freie Mitarbeiter): are workers who take care of their own taxes and insurance. You or the company have the option of utilizing their services only when you need them, and paying them only if they do the agreed work. And the relationship is easy to terminate if things don't pan out.
A full or part-time employee (Angestellter): hiring these employees will place a number of obligations on you or the company. The employer must, among other things, deduct taxes and insurance premiums from their pay, give them a certain amount of vacation each year, and observe the laws that protect them from arbitrary dismissal. The premiums for the German national retirement, unemployment and health insurance programs are borne equally by the employer and the employee. Half of each premium is deducted from the employee's pay, the other half will be added to it by you and then sent to the appropriate agency and health insurance company.
Taxes and Premiums
Taxes of major concern include the municipal trade tax (Gewerbesteuer) and the value added tax (Mehrwertsteuer), plus the income tax, solidarity surcharge and church tax of your employees You also may be subject to the Corporate Tax (Körperschaftsteuer) if your business is incorporated.
The Gewerbesteuer is levied on business profits by the local authorities, and varies somewhat from community to community. It's usually around 18 percent.
The (Mehrwertsteuer or VAT) assesses a levy on each step in the production and delivery process. You will be expected to add it to whatever you charge for each item you sell to your customers and each service you perform for them, and send this money regularly to the tax office. The VAT is either 19% or 7%, depending on the item. Medical, bank and insurance services are generally exempt.
The "solidarity surcharge," amounting to 5.5% of a person's income tax, covers the costs of integrating the states of the former East Germany. The church tax, of 8% or 9%, need be paid only if the taxpayer opts to remain officially affiliated with one of Germany's established churches. You will be expected to deduct the income, solidarity and church taxes from the employees' pay and send it to the tax office.
You will be subject to the Körperschaftsteuer, now about 25% of earnings, only if you choose the AG or GmbH form of organization. There are some advantages to incorporation, notably a limitation of your liability for the business's debts. (See the box on business forms.) The Gewerbesteuer is considered one of your business expenses, and hence deductible from the Körperschaftsteuer.