The German market attracts by its stability, size and geographical proximity. However, there are some special obligations you need to consider in advance.
Withholding tax on construction work
According to German legislation, if you act as a contractor on construction works, the recipient of your services is obliged to deduct withholding tax (Bauabzugsteuer) from the invoices issued by you.
The tax rate is 15% from the invoiced amount including VAT. It means that, as a contractor, you only receive payment for part of your invoice. Your customer then pays the withholding tax directly to the respective tax office.
The term ‘construction work’ is defined relatively broadly for the purposes of withholding tax. Mainly it is considered to be a work on real estate, but it is assessed whether the result of the activity is firmly connected with real estate. For example, the assembly of built-in furniture is also considered construction work.
The above-described deduction serves as a deposit to the German Tax Authorities for the cases that you are required to file the income tax return in Germany. However, you will only have this obligation if you have been carried out a gainful activity in one place continuously for more than twelve consecutive months.
Is it possible to avoid withholding tax?
As the amount concerned is not negligible, there are several ways how to avoid loosing such funds. The first option is to apply for a refund of withholding tax. The disadvantage of this procedure is that you can do so only after the end of the calendar year in which the withholding tax was paid. The process can thus be long. It is also necessary to attach a confirmation from the customer to the application.
If you want to completely avoid withholding tax, the solution is to register with the German Tax Office and arrange for an exemption from withholding tax, the so-called Freistellung or Freistellungsbescheinigung. To qualify for the exemption, you need to prove that you will be able to fulfil your legal obligations.
It is often required to appoint a representative who will be authorized to receive correspondence from the German Tax Office on your behalf. In order to avoid withholding tax, this exemption must be valid at the moment the invoice is paid at the latest.
The same principle applies to your subcontractors. If they have not arranged for the exemption from withholding tax, it will be your responsibility to deduct construction withholding tax from their invoices and pay it to the German Tax Office.
Strict rules on employee vacation when posting to construction work
If you are sending your employees to Germany for construction work, special rules for the provision and payment of vacation days apply to you as an employer. The aim is to equalize German and foreign companies and ensure fair competition while ensuring the fundamental rights of employees.
On German construction sites, the German minimum wage applies as well to incoming workers, and the right for vacation days has also been harmonized. If you send employees to Germany for construction work, you are obliged to register them in the so-called SOKA BAU holiday fund, which is intended to compensate employees’ holidays and salaries.
How does the SOKA BAU holiday fund work?
The first step is to make a registration with SOKA BAU, where you will be assigned a specific employer number. Subsequently, you submit monthly electronic reports and pay contributions calculated from the employee’s salary (15.3%). These contributions may in no case be deducted from the employees´ salary. SOKA BAU calculates the employee’s entitlement to paid leave days and if the prescribed conditions are met, it will re-pay to the employer the compensation for already paid leave. Upon completion of the posting, the employee may request payment of the remaining entitlement.
In practice, this obligation is often circumvented and construction contracts are carried out by self-employed workers rather than official employees. However, the powers of the SOKA BAU administration are broad enough and it monitors similar cases. The Office is able to trace employers and prove that workers do not have the truly independent status required for the self-employed. Many cases end up before German administrative court.
How can we help you?
Don’t be discouraged by the increased administrative burden. Contact us and we will, in connection with our German partners, reliably handle all registrations and communication with the authorities on your behalf. We also provide processing of German wages according to the relevant legislation.
We are your connection for business in Germany
In our team you will find experienced specialists with knowledge of the specifics of the German market and especially customer needs. In cooperation with our proven partners in Germany, we will provide you with a comprehensive consulting service and take care of the coordination of the entire project.
Our services in Germany
- Accounting and reporting
- Payroll and HR administration
- Tax advisory
- Legal advisory
- Transaction advisory
Read more about our services in Germany here