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Starting up a business for the first time in a brand new country might include some barriers. The way you register yourself as a freelancer or trade and business is oftentimes very different from country to country. So, in order to give you a better understanding on what might be right for you while living here in Düsseldorf, we asked Christian Schmidt, Founder, Tax Advisor and Lawyer, at Rechts- und Steuerberatung Schmidt in Düsseldorf, to give you a better understanding of how it all works here in NRW.
Being self-employed in Germany – Freelancer or trade and business?
When you take that first step to become self-employed in Germany, the first question that often arises is ‘how do I register my business?’. This depends on the kind of self-employment you are looking at running, respectively the kind of performed activity. The following article specifies this topic as well as the pitfalls which have to be considered. This post specifically addresses expats who are self-employed, but not running a GmbH (we’ve got another post for that one).
How to distinguish between freelance activity and trade and business?
When self-employed in Germany, your income from freelance activity vs. your income from trade and business activity will greatly differ. Therefore, it is important to check which kind of job you are hoping to perform in order to proceed with the correct business registration to avoid any negative consequences.
Am I a freelancer or trade and business?
According to the German income tax law, freelance activities include independently performed positions such as academic, artistic, literary, teaching, or educational jobs. The German income tax law (§ 18 Einkommensteuergesetz) offers a detailed catalog of jobs which belong to freelance activity:
Extract of the catalog:
|Legal, economic and tax advice||Lawyer, Tax advisor, Notary, Accountant, Auditor, Patent lawyer, Consulting economists|
|Medical sector||Doctor, Dentist, Veterinarian, Physical Therapist|
|Culture||Journalist, Translator, Interpreter, Photojournalist|
|Technology, science||Engineer, Architect, Chemist|
According to the German income tax law, “similar jobs“ also belong to the freelance activity category. But how are “similar jobs” defined, what are their characteristics?
Characteristics are as follows:
- Special professional education (Longstanding professional experience can be sufficient in certain cases. The special skills can also be acquired in a self-study.)
- Independent, personal and professional delivery of services
- Services of high quality (e.g. business consultant with an economic university degree)
That’s why also artists and teachers who are performing their job independently are assigned to a freelance activity.
There are two main criteria to distinguish between freelance activity and trade and business:
- Freelancers are generally working in the service sector. To provide their services, they do not have to produce any products.
- The second criteria are that a freelance activity generally requires a university degree, special skills, and know-how or artistic talent.
All self-employed persons who do not perform an activity listed in the catalog or which do not belong to “similar jobs”, are assigned to trade and business. Typical trade and business activities are:
- Operator of a restaurant or hotel
- Owner of a (online) shop
- Craft activities (Exception: artists)
- Household-related services e.g. cleaning service
Creative jobs: Freelance activity or trade and business?
Especially in the field of creative jobs, it is difficult to decide whether a job belongs to a freelance activity or to trade and business. In this regard, the law is quite complex.
Basically, the following applies:
- Artists or publicists that mainly deal with music, visual or performing arts, journalism, or writing. These jobs belong to freelance activity.
- On the other hand, IT jobs such as graphic designers, ad writers, and designers can be seen as trade and business and as freelancers.
There is a very fine line, which is why it is so important to ensure you are registering for the correct business application.
What are the tax advantages and tax consequences?
Don’t let the word “taxes” scare you off of becoming self-employed! There are many easy online programs (even in English) where you can easily submit your taxes. There are also awesome online programs that help you organize your monthly VAT with the click of a button.
- Freelancers do not have to register their business at the trade office, they only have to register their business at the tax authorities
- Freelancers do not have to register their business in the commercial trade register
- Freelancers do not have to pay to the Chamber of Industry and Commerce (IHK)
- Freelancers do not have to pay a trade tax
- Freelancers do not have to publish a balance sheet
As a self-employed person, you might want to take a look at other posts such as “How to Make the Decision Between a Kleinunternehmer or an Unternehmer“, “The Easiest Way to File Your Monthly VAT“, “A Tax Guide for Freelance Expats“
As the distinction between freelance activity and trade and business is not always easy, and due to its complexity, we recommend to always check it in detail to avoid any negative consequences. If you have any questions, please contact Rechts- und Steuerberatung Schmidt.
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