Meaning of Section 18 of the Income Tax Act

Meaning of Section 18 of the Income Tax Act

The German tax law is not only one of the most extensive of its kind in the world, but also one of the most complicated. This is not as important for an employee in a normal occupation subject to social insurance as it is, for example, for you as a self-employed person. A fundamental distinction is made here as to whether your activity is to be described as exercising a trade or whether you are a freelancer. In Section 18 of the Income Tax Act, a distinction is made between what is meant by income from self-employment.

What is § 18 EStG?

Section 18 of the Income Tax Act describes the tax delimitation of self-employed work compared to other types of income. This paragraph applies to income from professional activities. Section 18 of the Income Tax Act (EStG), paragraph 1, describes which professions and professional groups are to be recognized as freelancers and thus fall under this law with regard to taxation.

What is Freelance Income?

If you work as a freelance, this means first of all, roughly speaking, that you are selling to customers, clients or patients a service that you have created yourself. This is very different from a self-employed trader. As a freelancer, you have to provide evidence of training that entitles you to practice. This is usually not the case with a trade. As a freelancer, you are very dependent on your skills and knowledge. Therefore, in § 18 EStG, you are also granted that you incur fewer costs, i.e. taxes, than is the case with a commercial enterprise.

Which professions fall under the designation of freelancers?

18 EStG defines who is a freelancer from a tax law perspective. There is the so-called catalog of freelancers for this. In addition, it is stipulated that as a freelancer, if your profession is listed in this catalog, you do not have to draw up a balance sheet . You are also not obliged to pay trade tax and you are not a compulsory member of the Chamber of Commerce and Industry. The catalog of freelancers lists professions that are self-employed activities in the following areas:

  • scientific activities
  • writing activities
  • artistic activities
  • educational activities
  • teaching activities

Four groups, in which the catalog professions are classified, are derived from these areas. These four groups are:

  • Health professions
  • Legal and business advisory professions
  • Technical and scientific professions
  • Media and language professions

In plain language, this results in the following professions, which are considered freelance activities.

doctors Architects Dentists
dentists Commercial chemist Physiotherapists
Veterinarians Auditors Journalists
Lawyers tax consultant Photo reporter
Notaries Advisory business and economists interpreter
Patent attorneys Sworn accountants translator
Surveyors Tax agents Pilots
Engineers Naturopath Similar professions

What are similar professions?

You will now wonder what similar professions mean. This is not defined in § 18 EStG. In this case, the rule applies that it is checked in each individual case whether this similar occupation can be assigned to the catalog of freelancers. Both case law and an expert opinion can bring clarity here. For example, for a long time it was very controversial whether a computer scientist is also a freelancer. In the meantime, the law has developed some practical principles that are applied. The broader and deeper a completed training has taken place and can also be proven, the more chances there are of being recognized as a freelancer. For example, a qualified computer scientist has been a freelancer for a long time, even if he cannot be found in the catalog.

Who is a freelancer and who runs a business?

You will only be recognized as a freelancer if you, as an entrepreneur, meet the characteristics, without exception, that are also indicative of a catalog occupation. If this is not the case, the classification as a trader takes place. The definition from a legal point of view is that for a freelance activity there must be adequate professional training or a university degree.

Important! You are also freelance if you are assigned to a certain group and employ appropriately trained workers in your company. In this case, the prerequisite is that your specialist knowledge is correspondingly high, that you work in a managerial and independent manner. This means that you can also hire employees in your company as a freelancer.

The indicators for freelance work

In the Income Tax Act itself, there is no precise definition of liberal professions. As mentioned, only the catalog of freelancers is listed in § 18 EStG Paragraph 1. However, experts in tax and legal matters define liberal professions as follows. The freelancer must carry out his profession under the following conditions:

  • The basis for his activity is his special professional qualification or his special creative talent
  • he has to do it personally, in a managerial and responsible manner
  • he must be completely independent from a technical point of view.
criteria description
Professional qualification Tax law is linked to the professional code if it provides that you, as a freelancer, can submit a legal professional code such as an exam before you are allowed to carry out this activity and you are also allowed to use the corresponding professional title.
Creative talent With this criterion, it is not enough if you yourself are perhaps enthusiastic about your singing voice. Recognized artists usually decide whether they have a creative talent. There is a well-known definition by Joseph Beuys, who says that everyone can be an artist. However, it is not made that easy for you when classifying liberal professions.
Personal exercise To meet the requirements of a freelancer, your job performance must be paramount. It is not enough if you only bring capital into your company, as is possible with a commercial enterprise, for example. Nevertheless, you can of course hire employees to support you in your work.
Management and personal responsibility You have to be managerial and responsible at all times in your work. As already described, you can get employees on board. But you yourself have to remain the leading head. In the event of illness, for example, you can be represented, but only by a specialist with the appropriate qualifications.

What types of profit determination are there for the self-employed?

Note!

The determination of profits is always dependent on the accounting requirement for the self-employed .

Another criterion for determining profits is what is known as the type of profit income.

Type of profit determination Profits from § 13 EStG: Agriculture and forestry Profits from § 15 EStG: commercial enterprise Profits from § 18: independent work
Determination according to average rates Possible if there is no legal obligation to keep accounts
Business asset comparison In the event of a legal obligation to keep books or in the case of voluntary keeping of books With legal obligation Only if books are kept voluntarily. There is no statutory accounting requirement
Income surplus account If no books are kept, it is not required by law and the application of § 13a EStG is not given If there is no statutory accounting requirement and books are not kept voluntarily If there is no voluntary keeping of books

Use for secondary employment

If you do a freelance job that is only part of the job, § 18 EStG also applies in this case. The tax-relevant profit is also relevant here. From a tax point of view, it does not matter whether you generate your income from main or secondary employment. This is why there are no separate tax regulations for secondary employment in the liberal professions, as regulated in § 18 EStG.

How does § 18 EStG apply to partnerships?

With partnerships you have to pay particular attention to the validity of § 18 EStG. The rule here is that this paragraph only applies if ALL co-entrepreneurs also perform activities within the meaning of the freelance definition. If there is a co-entrepreneur who does not meet these requirements, the entire company is considered a commercial enterprise. As a partnership also is here GbR , the civil-law counted.

Summary

  • Section 18 of the Income Tax Act regulates which activities count as freelance activities
  • There is no obligation to keep accounts under Section 18 of the Income Tax Act. A simple EÜR is sufficient, which you can easily create with the help of an EÜR template .
  • The allocation of whether it is a freelance occupation is based on the catalog of freelancers defined in Section 18 of the Income Tax Act
  • Section 18 of the EStG also applies if the freelance activity is only carried out as a sideline.

Conclusion

Paragraph 18 of the Income Tax Act describes the differentiation between freelance work and self-employed work from a tax point of view. For you as the founder, it is important to know whether your profession fulfills the status of a freelance activity. This is also regulated in § 18 EstG. A so-called catalog of freelancers is available here to classify occupations. You will find freelance jobs mainly in the fields of business and law, media and language, technology and science and the medical profession.

Income Tax Act

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