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Comment by necovek | Hacker News Reader

Contracting work happening outside US territory by non-US citizens is not taxed in US.

From a US company perspective, you can do your work as an individual or a local registered business entity: you agree to gross terms, and that's what you get, and they have that as an expense.

However, many European countries require you to incorporate (at least a Ltd company) to gain proper "employment" and stop people from using contractor relationship as a tax loophole.

Depending on your country of residence, your tax rates will differ.

Estonia has started to offer completely digital companies, but I am unsure how that fits inwith your goals or legal requirements.

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> From a US company perspective, you can do your work as an individual or a local registered business entity: you agree to gross terms, and that's what you get, and they have that as an expense.

this seems the most sensible

> However, many European countries require you to incorporate (at least a Ltd company) to gain proper "employment" and stop people from using contractor relationship as a tax loophole.

I'm aware of UK's or Germany's regulation in this regard, the contracts have to be limited in duration and contracting for one customer for more than 1 year or so is prohibited, is this what you mean? Otherwise I'm not sure what the loophole would be, it's standard b2b relationship in my eyes...

As a regular PAYE employee your employer pays corporation tax too. If a US company gave an individual a lump sum, not a company, the government would lose out on this additional revenue.

They don't pay corporation tax on your salary. They do pay employer's NI, though.

> contracting for one customer for more than 1 year or so is prohibited

Why?

there is some abuse around long term employees acting as contractors in some parts of europe to get tax benefits. it depends on the country but generally speaking it is more beneficial to be a contractor because of high taxes on employee income in EU.

in germany for example, afaik, you can be considered employee if abusing this by providing services long term to a single customer (hence being considered dependent and not a free acting contractor), in austria the taxes for contractors are the same as for employees, this is my current experience.

in slovakia where I'm originally some people setup 1 person llc's and pay themselves dividends instead of drawing salary as an employee (dividends are taxed with much lower rates than salary income + there is no social or health care deductions on dividend income)

> generally speaking it is more beneficial to be a contractor because of high taxes on employee income in EU.

This is news to me. At least in Germany all income (except capital gains) is taxed more or less the same. The one thing that's different between employees and freelancers is social security.

I think your sibling comment got it right: The stipulations are in place to prevent companies from avoiding the responsibilities of employment.

> This is news to me.

It's definitely the case, in UK, that contractor pay can be significantly higher than regular employees' pay, because a) it lowers the tax burden for the hiring company, so they are willing to allocate some of that saving into pay, and b) it allows the contractor to optimize costs in tax-efficient ways.

The U.K. taxes income from work more than any other income.

If you got paid 150k gross you’d end up with 80k net in your bank account after paying both parts of NI (23k) and income tax (46k)

If you “earnt” 150k from renting out a property you only pay the income tax, so net 96k.

If you made 150k capital gains you net 108k.

> a) it lowers the tax burden for the hiring company, so they are willing to allocate some of that saving into pay

Is it really the tax burden or the social security burden?

> so they are willing to allocate some of that saving into pay

Sure, but as a contractor you will also have to take care of social security etc. yourself, which adds to your costs.

> b) it allows the contractor to optimize costs in tax-efficient ways.

I'd be interested in hearing what that would look like exactly! In Germany you have a bit of leeway but your overall taxes (at the LLC & personal level together) will still be comparable.

yeah I think Germany and Austria have it right. things that are possible in some eastern EU countries can be easily considered tax avoidance at best and deliberate holes in laws that benefit certain people, this is reason why some people there can make the same or more after tax income compared to western europe.

imo its a question of time when EU decides to clamp down on this if they can

paying 0 % tax on capital gains and 7% tax on dividends, no social and health care charges is quite a thing when you compare the laws that govern this in western europe

>yeah I think Germany and Austria have it right.

What do you mean by "do it right"? They tax you to death as a self employed contractor while you carry the risk and don't benefit from pension and any kind of state benefits like sick leave. You're basically fucked from both ends, you pay the same amount of taxes as an employee, and receive nothing from the state. That's absolutely mental.

>things that are possible in some eastern EU countries can be easily considered tax avoidance at best and deliberate holes in laws that benefit certain people

How is it tax avoidance when they're just following the local law? The law is made to tax self employed people less because they usually work more hours, receive less social benefits, and take on more risks than regular employees.

You want talk about tax avoidance? Ok, let's talk about the cash driven underground "Schwarzgeld' economies in Germany and Austria where family small business owners, especially in rural areas, don't issue receipts and pay no taxes on their business dealing in cash, while amassing missive wealth and real estate empires.

I was recently in some villager festival in Austria, it was 10 Euros for a cheap fast-food schnitzel served from a trailer, and 10 Euros for a cheese sausage that costs max 50 cents from Metro in bulk, basically over 1000% markups and all took only cash, and issued no receipt, while the family had several houses here and in Croatia and drove Porsches and other expensive sports cars.

Now that's tax avoidance, and the holes in the city/government budgets for welfare are taken out of the average salaried worker who can't do cash drive tax avoidance.

Ok, you raised some very good points. first things first, you do get unemployment and sick benefits if you insure yourself, as self employed this is voluntary in Germany and in Austria you do get some basic coverage with statutory insurance afaik.

The specific case you described is not tax avoidance but tax fraud and anyone can replicate it or report it depending on their preferred moral inclination.

I'm talking about tax avoidance, again, I'm from eastern Europe and I know a _lot_ of people who have dependant sources of income but act as independent contractors despite working countless years for one employer and as a result paying much less on taxes despite having 5x income of average employee and this is taken out of said average employees salary who don't have the opportunity to work in high demand IT field whether due to education or not having above average IQ.

Of course there are a lot of people like you described in food, entertainment, maintenance or house building service who take cash on hand and never report it, but as said this is fraud not avoidance.

>I'm talking about tax avoidance, again

How is working as a freelancer for a foreign entity tax avoidance, when your following the freelancing laws in your country and what you're doing is 10% legal? Just because you're working for a foreign company remotely because the company doesn't have an office here, doesn't mean you're a tax dodger.

It just reads like you have a personal vendetta against people working as freelancers for paying less taxes in some countries even though what they're doing is 100% legal.

Why are you so upset about some SW dev freelancing remotely for some foreign company to provide for his family, and not upset about all those mega-corporations who have perfected the art of tax avoidance down to a T, that they basically pay no taxes in your country because they siphon everything trough some Dutch/Irish/Luxemburgish funnel.

Who's to say they are not upset at megacorporations?

However, I don't see them being upset at anyone. In Serbia, I fully used similar benefits before they were forbidden, but I never considered this to be "fair": it was simply available for other reasons (avoid bookkeeping overhead for tiny businesses) and my foreign contractor (really, employment) relationship fit in just well. Yes, it was 100% legal, but it would be disingenious to claim how a local employee making similar tax and social security contributions was making roughly 5 times less net income is "fair". State was certainly benefiting from me exporting services, but not 5x as much.

When it became abused by local companies, those independence provisions were added in, effectively prohibiting it, but I wasn't "upset" even though it meant a larger tax burden and a more complicated setup (an LLC I am employed in).

In Poland you pay 12% revenue tax or 19% linear income tax + lowered social security. A lot of developers don't even consider companies which don't have arrangements like this because the difference is so high. A no-name company which allows B2B can outbid Google (which pays like shit in Warsaw anyway).

Ok, so you're a contractor and set up some LLC or something (which pays 12% on its profits) but then you (the company) pay yourself (the person) a salary on a regular basis. Won't you still need to pay personal income tax on that income?

Or did you mean to say that you (the person) only receive money from your LLC in the form of yearly dividends? In this case, however, it'd be 12% taxes at the LLC level + whatever the Polish tax rate is on capital gains.

It's a one person company, it doesn't have legal personhood. You are the company in that sense, you don't need to employ yourself, but there is no distinction between what company owns and what you do (sort of), so you have unlimited personal financial liability.

I see. I'm surprised to hear that this makes such a difference in Poland. In Germany your taxes in this case will be exactly the same.

Incorporating gives you a lot of options: pay eg. only 25% of your gross income as salary, the rest at the end of the year either as a bonus or as dividends. If there is a social security cap, it may even be beneficial to pay yourself out 25% first and second month and then 250% the third, depending on actual rates (social security contribution cap and progressive income rates). So in general, an LLC allows you a lot more flexibility to adapt to tax rules.

However, social security caps used to be much lower for self-employment or single-person entreprenuerships in some countries, which resulted in local companies asking de-facto employees to set up self-employment single-person businesses, and pretend to have a b2b relationship, with no employee protections and smaller taxes.

Because they don't want companies using it as a way to avoid the responsibilities that comes with real employment. The rule is to my knowledge however intended to keep companies in the same country from using it.

In Denmark(same rule) I contracted for a single foreign company for years and just got lump sum into my personal account every month, after which I paid the corresponding taxes. I specifically called the tax authorities to ask and that's how they said to do it.

But according to your own example, Danish rules are different than Germany, as you could freelance for multiple years to a single customer, as opposed to being limited to one year max.

Yes, that's what I mean: tax rates can sometimes be more favourable for "self-employment" (it is usually encouraged) and fewer employment protections are paid for. It will obviously differ by country.

If you incorporate, then it is a standard B2B relationship.

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