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Potential income boost may be on the way for freelancers in Germany

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The government in Germany is facing increased pressure to abolish the "solidarity tax" as groups rally to try to force its abolition in what may be a welcome boost to freelancers in Germany.

Very often contractors or freelancers going to contract in Germany ask us what the solidarity tax (colloquially known in Germany as the ‘Soli’) on our calculations of their NET income is for and if it legally has to be paid.

The background to the Soli

The rationale behind the Soli was to rebuild the Germany and its economy after the reunification of the east and west. Introduced in 1991, the Soli has traditionally been deducted (on top of income tax) at a rate of 5.5% - quite high by any standards, but particularly if one works on a contract basis. It is also mandatory that it be paid currently.

The future for the Soli is under increased scrutiny

The continued existence of the Soli 28 years on in 2019 is now causing divide between freelancers, employees, companies and government officials alike.

The government is now facing increased pressure to abolish the Soli. Cedric von der Hellen, a tax expert at the BDI German Federation, noted that the Soli was only ever intended as a temporary solution to the economic crisis caused by the fall of the Berlin wall. He noted that revenue from the Soli was now being pumped into the general budget as opposed to unification purposes.

Furthermore, Mario Ohoven, president of the BVMW lobby, has called the Soli “an assault on the German economy.” According to Ohoven, the government needs to “plan to reduce the tax burden on companies” at a time when Germany is trying to pull itself out of a technical recession.

Some government officials have defended the continued charging of the Soli to employees and contractors, including Finance Minister Olaf Scholz, who noted that the five eastern federal states still lag behind the west in terms of economic output and wages. Nonetheless, two separate cases, including one taken by the taxpayers’ association, await hearing in court. It is unlikely that the Soli would be found to be unconstitutional, as this would cost the government billions of Euro to repay taxpayers, however it may be rescinded moving forward.

Until the “Soli” situation is resolved in court, this tax will continue to be charged, however its potential abolition in the near future could prove a welcome boost to freelancers income in Germany - many would certainly hope so.

If you are working in Germany but are unsure of your obligations in relation to tax, or indeed if you have any questions about contracting in Germany, please contact us today. Our expert team are always happy to help.