How to escape German bureaucracy with an Estonian company

Hanna Meiners
Written by Hanna Meiners
on November 16, 2020

We all have different starts to our freelancing journeys, mine happened rather accidentally in 2014. 

I had been sent to India to do the groundwork for a new production facility of a German startup but lost my job unexpectedly after just four short and tumultuous months. 

I found myself sitting in a small room in South India with a valid visa, no big savings and zero clue what to do next. Simply flying back home with no job didn't seem an option.

That's when my old friend messaged me: “Why don't you try out freelancing? There are so many platforms that offer gigs online!”

A quick internet search and 24 hours later I had secured my first small project on Elance. It was not well paid, and the job was simple, but when the first payment reached my account a few days later I knew: This is an opportunity worth exploring! 

In fact, I had already registered a business shortly before my flight to India. I was in talks with two German entrepreneurs regarding a few projects. I was going to be away from Germany for several months and registered a small business in case. I wasn't going to let anything stand in the way of my digital nomad life. 

Looking back, I wish I had known much more about German company forms, rules, and taxes – and yes, even accounting software. As it turned out much later, I had unknowingly registered my business as Gewerbe which refers to a trade or a tradesperson, a category that did not apply to my profile and had a host of disadvantages.

I've decided to document the challenges an aspiring entrepreneur in Germany could come across and what they could learn from my personal experience, including my recent discovery of Estonian e-Residency. It looks to be a gamechanger for freelancers wanting to transform their work into a full-fledged online business. 

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Problem 1: Finding accurate information can be difficult

The first problem I and many of my freelance friends encountered was the lack (or abundance) of information. Of course, there are many official websites and blogs with information for founders, but finding (or even looking for) the right information can be challenging. 

In recent years, the amount of available information has consistently increased. I guess this is connected to the fact that startups and entrepreneurship have become more visible in the media. I would also argue that with the rise of coworking spaces Germany has become more aware of freelancers and small businesses.

Despite that, I only found out about my “wrong” business registration two years ago at a founder's meetup. I learned that as a freelance writer and content specialist I would fall in another category of freelancer. That would not only save me taxes but also qualify me to become a member of the artists' social security fund which in turn would cut my health insurance expenses in half!

I was baffled and booked a two-hour consultation with a business coach the following week. Immediately after that I corrected the status of my business with the authorities and prepared my application for the artist social security fund. This one change alone has helped me save hundreds of Euros per year.

Why didn't I know better? Because I got a lot of conflicting information from different sources and didn't know where to look for the right information.

Problem 2: Software challenges, mental blocks, and... taxes

After I finally got the basics right – I'm still grateful to the business coach for helping me out! – I started working with fintech companies and learned more about digital banking and accounting systems.

It took me quite some time to change my old traditional business bank account to a modern online one and synchronise it with cloud-based accounting software. I was afraid of the logistical part of it all. I had to inform all my customers about my new bank account, get accustomed to a new system and shift away from my amateurish Excel-sheets. I kept telling myself: I’ll shift next month… and almost a year went by. 

Today I know that I could have saved myself a whole lot of hassle and manual work, had I started using smart tools from the beginning. But to get to this realisation meant getting over many mental blocks. 

When I started using the new accounting system, I made a major blunder when setting up the client database. Due to this ONE mistake in the settings I had to later fix the accounting for the entire year together with a tax consultant as all invoices to other EU countries had been booked in the wrong category. This alone has cost me hours of work and consulting fees. 

Are you seeing a pattern here?  

I did things without proper knowledge naively thinking they would go right. In the end, fixing the mistake cost me countless hours and a two-hour fee for the tax consultant.

Problem 3: Challenges doing business internationally

Working within the European Union single market has plenty of perks and selling my services internationally has worked quite well thanks to the smart reverse-charge-mechanism within the EU. That makes sending invoices to other countries in Europe quite easy, especially when smart accounting software calculates everything automatically.

Despite that, I have faced some surprising challenges here and there over the years. 

This year a client told me that they only accept e-invoices in a particular format. My current accounting software does not yet support e-invoices. When it will, it will be a particular format that will soon be a standard in German government institutions. 

Unfortunately, it is not compatible with the format used by my Finnish customers. Another challenge was finding an accounting firm that uses the same cloud-based software as me. It turned out the closest option was 30 km away. That meant changing the accounting firm. 

The next challenge is a client in the UK. What will happen in January 2021 after Brexit? I'm yet to figure out the logistics of invoicing with my tax consultant. 

Another question that has been on my mind for quite some time: What would be the best way going forward if I want to grow my business beyond writing?

Is there a light at the end of the tunnel?

Some of my friends suggested I look into registering my business in Estonia and learn more about their e-Residency program, after all, Estonia has been ranked number one for tax competitiveness for six years running and should offer much more transparency than my home Bundesrepublik.

One of my clients is an Estonian fintech startup, so I've decided to learn more about e-Residency and its pros and cons. As I've embarked upon my research, a few reservations stood out in particular and drew a common theme.

We, in Germany, are often a little suspicious of things that are not local and familiar. So it's no surprise some of the people, particularly those a tad older, have suggested an Estonian business may not look trustworthy to their DACH clients.

Times change and so do people and countries. Having had the opportunity to reboot a country from scratch in 1991, Estonia has managed to avoid a lot of the constraints older EU members are still tied by, some dating back to the feudal times as is the case in Germany. Nowadays, Estonia boasts an impressive 31 startups per 100,000 inhabitants and knows a few things about doing business quickly and efficiently.

There may be question marks over tax complexity and some uncertainty over the credibility of tax and accounting fulfilment. It's logical and normal, we like to be safe, prepared and compliant. It came as a pleasant surprise that e-Residency offers German tax consultant services through its marketplace, convenient and importantly remote solution to a serious and delicate issue.

The two fears above seem to arise due to the lack of knowledge rather than the lack of solution. Starting a company in Estonia takes hours, it's perfect for those with an international clientele and most importantly avoids the inflexibility of German limited companies. There's also an added bonus of a 0% corporation tax rate, so you can invest your profits easier and grow your business faster. 

And when I look at the 3 problems I identified above in running a Germany company, e-Residency even has solutions for those:

  1. Finding information is simpler: e-Residency, its partners, and business experts have developed over time a wealth of information for e-residents looking to start a company in Estonia. 
  2. Business is all online and there are experts to support you: Accounting and declaring taxes can all be done online securely using Estonian e-governance services with minimal hassle or effort. Plus, a growing number of business service providers, like Xolo, offer tailored, expert support to e-residents setting up and maintaining their businesses. 
  3. E-Residency epitomises business without borders: it’ a flexible programme for startups as it allows companies to offer multiple business activities.  And while e-Residency cannot take away the uncertainty of Brexit, it is on the front foot in seeking out all the potential challenges and opportunities that might happen after the transition deadline.

There is light at the end of the tunnel after all, and I’m looking forward to exploring it further with e-Residency.

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