LLC taxation in Germany and the EU

Recognition of an LLC as a sole proprietorship in Germany

One Individual member LLC (Limited Liability Company) cannot be registered in Germany as a Sole proprietorship be recognized. Here are the reasons:

1. Legal form of the LLC:
   • An LLC is a separate legal entity.
2. Tax treatment:
   • In the USA can be a Single / Multi Member LLC  treated as a "Disregarded Entity". However, this regulation has no direct effect in Germany.
3. German tax authorities:
   • The German tax authorities consider an LLC to be a separate taxable entity, either as a corporation or as an as a partnershipbut not as a sole proprietorship. Recognition as a partnership requires specific contractual arrangements.
4. Social contract:
   • If there is only one shareholder, the LLC remains an independent legal entity and cannot be qualified as a sole proprietorship.

LLC taxation: Income tax for German director of an LLC

LLCs are recognized as sole proprietorships in Germany and are tax-free in the USA!

To act as German director of an LLC only income tax in Germany the following steps must be observed:

1. Tax classification of the LLC:
   • The LLC must be recognized as a partnership, it should therefore be recognized as a Multi-Member LLC be registered. The articles of association must be drafted accordingly (transferability of shares, lifespan, profit allocation, decentralized management).
2. Tax treatment in the USA:
   • Treat LLC as a partnership or "disregarded entity" (profits are attributed to the shareholder). Use the "check-the-box" procedure (IRS Form 8832) - and do NOT have to pay taxes in the USA.
3. Avoidance of a US permanent establishment:
   • Ensure that the LLC no permanent establishment in the USA has. Management and decisions should be made in Germany, also avoid ETBUS.
4. Double taxation agreements (DTA):
   • Use of the regulations of the DTA between Germany and the USA.
5. Registration and disclosure:
   • register the participation in the LLC with the German tax office.
6. Income tax return:
   • Income from the LLC in the German income tax return (§ 15 EStG or § 18 EStG).
7. Professional advice:
   • Consultation with a tax advisor or lawyer.

Advantages of classifying an LLC as a partnership in Germany

The classification of a LLC as a partnership offers several tax advantages:

1. Avoiding the Double taxation:
   • Profits are attributed directly to the shareholders and are only taxed at their level.
2. Transparent taxation:
   • Profits of the LLC are attributed directly to the shareholders and declared in their personal income tax return.
3. Loss offsetting:
   • Losses of the LLC can be offset against other income of the partners.
4. No corporation tax:
   • No separate corporation tax at company level.
5. Simplified profit withdrawal:
   • Withdrawal of profits without formal distribution resolutions.
6. Flexibility in profit distribution:
   • Profit distribution can be freely determined in the articles of association.
7. Progression proviso:
   • Under certain circumstances, the income from the LLC can be excluded from the German tax base.

Tax treatment in Germany

Shareholders of an LLC resident in Germany can be taxed differently. The Federal Fiscal Court In a ruling dated August 20, 2008, the Federal Supreme Court classified a letter from the Federal Ministry of Finance from March 2004 and thus rejected a ruling by the Baden-Württemberg tax court.

In this letter dated March 19, 2004, the Ministry explains in detail that each individual LLC, regardless of its classification in the USA, must be decided on the basis of all factual circumstances as to how it should be classified under German tax law. (Our comment: the social contract is of great importance here)

The letter from the Federal Ministry of Finance dated March 19, 2004 states in simple terms that each Limited Liability Company (LLC) must be considered individually to determine how it is treated under German tax law. The decision as to whether an LLC is considered transparent or opaque for tax purposes depends on the actual circumstances and structure of the LLC, not solely on its legal classification in the US. This means that a separate assessment is required for each LLC to determine its tax treatment in Germany.

An LLC can therefore be treated as a partnership by the USA and as a corporation by Germany, as a corporation by the USA and as a partnership by Germany, or by both sides equally. On the one hand, for example, the profit of the LLC can be an assessment basis for income tax and on the other hand only Profit distributions with withholding tax in the USA. In addition, there are different effects of intergovernmental agreements.

You might still be interested:

• An LLC without emigrating - here's how!
• Corporate forms in the USA
• Detailed instructions on how to register an LLC as a sole proprietorship in Germany
• What is an LLC in Germany
• Customers in the USA and still pay no US tax

Official links:

• BFH, judgment of August 20, 2008 - Ref. I R 34/08. (NWB database)
  
• Complete letter - Federal Ministry of Finance: Tax classification of the Limited Liability Company established under the law of the federal states of the USA. (PDF; 127 kB)