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Freelancing in US vs. Germany
Thread poster: Sonya Gerisch

Sonya Gerisch  Identity Verified
Local time: 11:09
Member (2004)
German to English
Jan 30, 2006

Hello all,
First of all, I don't know if this should go in this forum, or in money matters, or somewhere else, so the moderator can feel free to move it elsewhere. I will post in the German forum as well.
My husband may have a job offer in Germany. I am familiar with some of the tax issues and have been doing some reading, but I am interested in getting an approx. percentage that my income will go down by this move to use as part of his negotiations. Even though this would seem like a great move since I am a German to English translator, the tax implications and the exchange rate will work against me. From what I understand, I will be subject to value-added tax at about 16.5 percent, plus normal income taxes. That doesn't even include the exchange rate difference at about 15% right now. From what I can tell, I am looking at about a 30% drop even if income tax remains the same. Does anyone have experience working as a freelancer in both countries and could give me some feedback?
Thank you,
Sonya


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Andy Lemminger  Identity Verified
Canada
Local time: 09:09
Member (2002)
English to German
Not that easy Jan 30, 2006

Hi Sonya,
If you are a freelance translator in Germany having German clients you have to charge them value-added tax but at the same time you can deduct the input taxes that you spend for your freelancing business. You don't have to charge value-added tax to your US-clients.
So only from a consumer perspective the value-added tax is an actual burden but there is sales tax in the US as well, though lower.
Did you also compare the purchasing power? It differs from city to city, in Germany as well as in the US and you have to look that up to make any comparisons.
Finally the income tax rates depend on your income level and there are various credits that have to be considered. You cannot just compare the highest tax rates.

All in all: That's a very difficult comparison.

Good luck

Andy
www.interlations.com

PS: My taxation professor loved this subject so I googled a bit and found one of his articles that might help: http://wiwi.uni-giessen.de/dl/showfile/Steuerlehre/7958/

[Edited at 2006-01-30 18:14]


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bohy  Identity Verified
France
Local time: 17:09
English to French
+ ...
US business or German business ? Jan 30, 2006

It rather depends on where you make business than on where you are physically. You must use some business entity, yours in the United States, or a new one in Germany.
If you want to continue to deal with your American customers, then why not continue with your existing business ?
You will simply have to report your income on the side where you are permanent resident (and the relocation entity of your husband's business will do the tax calculation for you, and should compensate if necessary). You may have to pay money to the IRS anyway, but there are compensation rules (should be deducted from your taxes in Germany).
Now, if you create your business in Germany, you get free of US IRS, but you have to comply with German rules. Once again, your reloacation entity should be able to do the math, if you provide your expected income (which may be less if you lose some customers ?). They will certainly take everything into account, including Health Insurance, retirement, etc. They also have indexes for the cost of living (provided by independant companies). It is wise to check all the costs beforehand, as you may have to check their figures and negociate (I speak from experience, I've been sent abroad by my company in the past).

However, this is not only a money concern.
If you want peace of mind, I would advise you to stick to your US business, but if you want to take this opportunity of starting something new, then start a German business!


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Kathi Stock  Identity Verified
United States
Local time: 10:09
Member (2002)
English to German
+ ...
Double taxation agreement between US and Germany Jan 30, 2006

If you spend more than 180 days per calendar year in either Germany or the US...you are subject of taxation in that particular country.

The bottom line is that you will find yourself paying more and higher taxes in Germany than in the US.

Kathi


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Sonya Gerisch  Identity Verified
Local time: 11:09
Member (2004)
German to English
TOPIC STARTER
Thanks to both of you Jan 30, 2006

Thank you both for your input. Andy, I will check out the link.
Bohy, yes, my preference would be to keep the business in the US by all means. But my understanding is that the German government decides if you are subject to taxation based on the physical location where the service is provided--the same as for the US. That is, if the service is being performed in Germany, then that service is subject to German tax rules. So, you can't really keep your business in one country and then physically perform it in another--even though that would be the easiest solution. Someone let me know if you know otherwise.
Thanks,
Sonya


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Sonya Gerisch  Identity Verified
Local time: 11:09
Member (2004)
German to English
TOPIC STARTER
Value-added tax question Jan 30, 2006

Hi Andy,
I don't have to put sales tax on my invoices in the US, so there really isn't a comparison there. You are right that only the German (or I guess European) customer invoices would be subject to it--but that is probably at least 1/2 my gross income right now. Some people are suggesting that it really won't affect me because I just add it to the invoice for the customer to pay it, but with all the pricing pressure, I don't see my clients being willing to eat that extra cost.

We are considering cost of living as well. And, we are realizing that it is extremely complicated. Thanks for your input,
Sonya

Andy Lemminger wrote:

Hi Sonya,
If you are a freelance translator in Germany having German clients you have to charge them value-added tax but at the same time you can deduct the input taxes that you spend for your freelancing business. You don't have to charge value-added tax to your US-clients.
So only from a consumer perspective the value-added tax is an actual burden but there is sales tax in the US as well, though lower.
Did you also compare the purchasing power? It differs from city to city, in Germany as well as in the US and you have to look that up to make any comparisons.
Finally the income tax rates depend on your income level and there are various credits that have to be considered. You cannot just compare the highest tax rates.

All in all: That's a very difficult comparison.

Good luck

Andy
www.interlations.com

PS: My taxation professor loved this subject so I googled a bit and found one of his articles that might help: http://wiwi.uni-giessen.de/dl/showfile/Steuerlehre/7958/

[Edited at 2006-01-30 18:14]


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bohy  Identity Verified
France
Local time: 17:09
English to French
+ ...
You won't be taxed twice on your business Jan 30, 2006

Maybe I've not been clear enough...
If you still own a US business and make business with US companies, the IRS will not forget you because you are non-resident : you will still have to pay taxes on this US-related business.
Now, when paying your income tax in Germany:
- theoretically, you should declare what you have earned on both sides, you should be taxed on the total MINUS what you have already paid to the US IRS.
- practically, I doubt that each side has any means of knowing what you have earned on the other side, so that you can probably declare the work performed on the side it belongs to. But the theory is as described above.
In any case, you won't be taxed twice for the same business!

When you say that you are subject to taxation where you physically perform the work... this may not be that true if you work on contracts. Although rules may differ, it depends mostly on where the two companies involved in the contract are located.


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xxxsarahl
Local time: 08:09
English to French
+ ...
How long will you be in Germany? Jan 30, 2006

If you plan on staying in Germany for the rest of your life, then by all means close your US business and register a business in Germany.

If you're only staying a couple years, you should probably keep your business in the US even though you'll be physically in Germany.

This is probably a plus in our line of business, our physical location doesn't really matter.


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Sonya Gerisch  Identity Verified
Local time: 11:09
Member (2004)
German to English
TOPIC STARTER
Location issue Jan 31, 2006

Hi Bohy,
What you are saying makes sense, but according to my tax advisor, in the US, you have declare all the income you make based on where you are physically. So, for example, I pay taxes to the US government on income earned from companies here in the US and companies in Germany. The IRS doesn't really care where your customers are located. You have to claim the income regardless. My understanding is that it would be the same in Germany if I physically resided in Germany. All income would be declared in Germany (and in the US too of course because I previously lived there, but there is a treaty that excempts up to 80,000 from double taxation). Both the CPA that set up my business and the accountant that does the ongoing have said the same thing on this matter. It might be different where you are. I appreciate your comments though--especially about the company doing the relocation. Very helpful.


bohy wrote:

Maybe I've not been clear enough...
If you still own a US business and make business with US companies, the IRS will not forget you because you are non-resident : you will still have to pay taxes on this US-related business.
Now, when paying your income tax in Germany:
- theoretically, you should declare what you have earned on both sides, you should be taxed on the total MINUS what you have already paid to the US IRS.
- practically, I doubt that each side has any means of knowing what you have earned on the other side, so that you can probably declare the work performed on the side it belongs to. But the theory is as described above.
In any case, you won't be taxed twice for the same business!

When you say that you are subject to taxation where you physically perform the work... this may not be that true if you work on contracts. Although rules may differ, it depends mostly on where the two companies involved in the contract are located.



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Sonya Gerisch  Identity Verified
Local time: 11:09
Member (2004)
German to English
TOPIC STARTER
No permanent relocation Jan 31, 2006

Hi Sarah, we are probably looking at 3-5 years, but not permanent relocation. Yes, my preference would be to keep everything here mainly for simplicity's sake, but I don't think I can legally do that. I will keep checking on it though.

sarahl wrote:

If you plan on staying in Germany for the rest of your life, then by all means close your US business and register a business in Germany.

If you're only staying a couple years, you should probably keep your business in the US even though you'll be physically in Germany.

This is probably a plus in our line of business, our physical location doesn't really matter.


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xxxMarc P  Identity Verified
Local time: 17:09
German to English
+ ...
Freelancing in US vs. Germany Jan 31, 2006

bohy wrote:

Now, when paying your income tax in Germany:
- theoretically, you should declare what you have earned on both sides, you should be taxed on the total MINUS what you have already paid to the US IRS.
- practically, I doubt that each side has any means of knowing what you have earned on the other side, so that you can probably declare the work performed on the side it belongs to. But the theory is as described above.


This is not described as "theoretically" vs. "practically", but "tax avoidance" (legal) vs "tax evasion" (illegal). If you are resident in Germany, you are liable in principle for income tax on all income, regardless of where it is earnt. There are proper procedures for avoiding dual taxation, and they need to be followed.

Marc


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RobinB  Identity Verified
Germany
Local time: 17:09
German to English
Comments Jan 31, 2006

Sonya,

Some comments on your questions/doubts.

1) VAT is a non-issue. If you deliver translations from the US to customers in Germany, they have to charge themselves import VAT on the invoice amount (provided they're operating legally, of course). At the same time, they can claim that VAT as input tax, effectively cancelling out the import VAT. If you deliver translations inside Germany to customers inside Germany, and you're above a certain revenue threshold, of course you'll have to charge VAT, which is then reclaimable by the customers as input tax. Remember please that VAT is a multi-stage tax, not a cascade tax like US sales tax. If you're based in Germany and delivering to other EU countries, the same basic principles as in sentences 1 and 2 above apply.

There is a myth in some sections of the translator community that translators outside any specific EU country have an advantage over translators within that EU country because the former don't charge VAT on the face of their invoice. This is completely irrelevant, for the reasons I explained above. The question of whether you charge VAT on the face of your invoice will never affect your chances of business from corporate clients or (unless they're breaking the law) agencies.

2) If you're tax-resident in Germany (and you most certainly will be), you'll be a German taxpayer, period. Contrary to even more myths, German personal income tax is not actually that high compared with many other countries. The top rate is still over 40%, and there's the solidarity surcharge to consider as well, but you have to be pretty badly advised to pay that top rate.

3) As a freelance in Germany, you are not subject to any social security payments whatsoever. Health insurance and pension arrangements are entirely up to you. Note, though, that any U.S. pension arrangements in place will not be portable to Germany.

4) Do not expect to get an immediate work permit allowing you to work on a self-employed basis, unless of course you are an EU national, in which case it isn't a problem at all. Until you get the relevant work permit, any freelance work you do here would be illegal, even if you run it under the cover of a U.S. business.

5) Although U.S. citizens are taxable on their worldwide income, the U.S.-German DTA rules out double taxation in the vast majority of cases. You'll have to file annually with the IRS, but you can assume that you won't have to pay any U.S. tax.

6) Overall, Germany has one of the most liberal regimes worldwide for freelance translators. It's worth taking advantage of if you have the opportunity.

Robin


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sylvie malich
Germany
Local time: 17:09
German to English
dual taxation and permanent contracts Jan 31, 2006

Sonya Gerisch wrote:

are probably looking at 3-5 years, but not permanent relocation.
[/quote]

My daughter's school "imports" American teachers and they tend to leave when 2 years are up. The reason: They are excluded from dual taxation for a two year assignment. After two years they are dual taxed *retroactively* mind you, from the first day of work onward. This didn't use to be the case, we have not been able to keep American teachers for longer than two years, some take a year's *break* and come back.

You might want to check this out. These are not freelance positions though, but work contracts with the German school system.

Just thought I'd give you this bit of information, might be helpful for your husband's negotiations with his own contract.

sylvie


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Sara Freitas
France
Local time: 17:09
French to English
Thought I was the only one squirming in my chair for a minute there... Jan 31, 2006

MarcPrior wrote:


This is not described as "theoretically" vs. "practically", but "tax avoidance" (legal) vs "tax evasion" (illegal). If you are resident in Germany, you are liable in principle for income tax on all income, regardless of where it is earnt. There are proper procedures for avoiding dual taxation, and they need to be followed.

Marc



Thank you, Marc.

If you could choose your tax home, then I definitely wouldn't be doing business in France, that's for sure.

For U.S. tax purposes, the physical presence test determines the source of the income. You can't work in Germany and decide that you are going to declare your income as U.S.-source income. At least not legally.

Regards,
Sara


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Sara Freitas
France
Local time: 17:09
French to English
Self-employment income Jan 31, 2006

bohy wrote:

Maybe I've not been clear enough...
If you still own a US business and make business with US companies, the IRS will not forget you because you are non-resident : you will still have to pay taxes on this US-related business.



This is not true for income from self-employment. The IRS considers the country where you are physically present when doing the work as the source of the income. It doesn't matter what your nationality is or where your customers are located. For the IRS, if you are in Germany when doing the work, then Germany is the source country for that income.

Regards,
Sara


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