Management Consultant: Freelance or Commercial Activity?

There are two difficulties with the classification. First, the profession of management consultant is not clearly defined. Anyone may call themselves a management consultant, and the range of activities is correspondingly broad. Second, the classification depends on the specific services provided by a consultant. In some cases an individual assessment is required.

In the following sections we offer you valuable guidance. It is important that you correctly assess your activity yourself before setting up. Otherwise you risk serious adverse consequences at a later stage, such as a retrospective assessment to trade tax.

In § 18 para. 1 no. 1 of the Income Tax Act (EStG), the legislator lists catalogue professions: these are examples of the liberal professions. It also explicitly mentions advisory economists and business economists. At first glance the position seems clear — management consultants operate as freelancers!

The classification is, however, more complex. Case law has established three important conditions:

- Freelance management consultants must be able to demonstrate specialist knowledge. A completed degree in economics or business studies qualifies. The tax office also recognises self-study, provided you can additionally show practical professional experience.

- Your activity must cover a broad range within the field of management consultancy. You may not specialise in individual sub-areas such as personnel consulting.

- You must focus on advisory work. If, for example, you sell or broker products, this falls under trading activity.

Many management consultants work as freelancers — this applies to the majority of self-employed consultants. However, there are also some self-employed individuals who must register a trade, or where a borderline case exists. Let us look at three typical examples:

- You wish to specialise as a management consultant in PR consulting. You should assume that you will be regarded as a trader! Your activity is narrowly defined, and accordingly the tax office is likely to treat it as a commercial business.

- You set up a recruitment consultancy that supports companies with personnel management and also offers staff placement services. Your offering is limited to a specialist area, and in addition you earn money from placement services. You must register a trade!

- Your management consultancy focuses on an area such as marketing consulting, but you also deal with other fields. In this case an individual assessment is generally required.

The question of self-employed status can sometimes be difficult to answer — yet the answer matters greatly! There are significant differences between freelancers and traders. In the best case, you work as a freelance management consultant and benefit from advantages including the following:

- You do not need to register a trade. It is sufficient to submit the "Questionnaire for Tax Registration" to your tax office.

- As a member of the liberal professions, you do not pay trade tax.

When starting out in business, you carry out a self-assessment: the tax office will generally accept your classification as a freelancer or trader. A review may come at a later stage. There is also the risk that the trade licensing office (Gewerbeamt) questions your status as a freelancer years later.

It is therefore advisable to establish in advance which category your activity as a management consultant falls into. The experts at Guhr Steuerberatung will review your business plan or your existing self-employed activity and provide you with a well-founded assessment!

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