Company registered in the USA, tax declaration in Germany.

[osunax 3]

Hi there,

 

I work in Germany as an employee and do not submit any tax declaration (salary is the only income).  I'm wondering, if I register a company in the USA, and that company is active and doing business there, and it also does its own tax declaration to the IRS. How would that affect my tax duties in Germany? Do I need to now submit a personal tax declaration in Germany? - Consider that the company is doing successful business and making profit in the USA, but I'm NOT (yet) receiving any personal salary, payment or return on investment of any kind from that company to my name or to my personal benefit.  Note: I'm neither a US or EU national, if that matters.

 

Could anyone help with this scenario?

 

Thanks in advance and have a nice day! :-)

[Straightpoop 676]

@osunax

 

A US domiciled corporation is taxable on its worldwide income - just like a US citizen is. 

 

If it is doing business only in the US and through a permanent establishment located in the USA, then Germany has no interest in its activities.

 

Whether the corporation's business activities will "flow through" to its owner (i.e. you) will depend upon what form the foreign owner elects "his" corporation to have:  a "C" Corporation (tax-intransparent, taxable as a corporation under IRC §11, max tax:  35%, after-tax profits taxable again to shareholder when distributed, etc.) or (in your case) a Single Member Limited Liability Corporation ("SMLLC") (taxed as if the corporate form did not exist, but otherwise with all the other legal attributes of a corporation, i.e. all profits and losses would flow to you individually as if you were a sole proprietor.)   If an SMLLC is chosen and the single member is a nonresident alien, the corporation's income will be variously taxed on its income "Effectively Connected with a US Trade or business ("ECI") or at a flat 30% (or more favorable) rate on its Fixed or Determinable Annual or Period Income ("FDAP").

 

If you elect SMLLC treatment but the Finanzamt thinks what you have is a "real" corporation (an entity known in US tax parlance as a "foreign reverse hybrid entity" - God knows what the Germans call it - then you may get taxed twice:  once when the US taxes you on your US profits and then again by the Germans when what is left after paying US taxes gets distributed to you here in Germany.  No foreign tax credits from either country.  Not good.

 

In either case, the US imposes complicated and viciously enforceable information return requirements on foreigners owning US corporations - almost as vicious as the ones it imposes on its own citizens for owning ANYTHING foreign.

 

This is not for amateurs and the points raised above are just skimming the surface of a deep, deep, dark well of potential problems - and expenses.

 

Figure out what it is you want to do and then seek guidance from a lawyer and/or tax expert  in ALL the countries affected by your decision to learn how best to accomplish it.

 

Unless you have some important economic reason for going to all this trouble you will likely soon discover that the "friction" costs of designing - and defending - some Rube Goldberg tax structure far outweigh any legitimate tax benefits.

 

[osunax 3]

Hello Straightpoop,

 

Many thanks indeed for the elaborate answer.

 

It does certainly sound like a complicated topic... What I mainly wanted to understand however is whether or not I would need to submit a tax declaration in Germany.

 

21 hours ago, Straightpoop said:

Whether the corporation's business activities will "flow through" to its owner (i.e. you) will depend upon what form the foreign owner elects "his" corporation to have:  a "C" Corporation (tax-intransparent, taxable as a corporation under IRC §11, max tax:  35%, after-tax profits taxable again to shareholder when distributed, etc.) or (in your case) a Single Member Limited Liability Corporation ("SMLLC") (taxed as if the corporate form did not exist, but otherwise with all the other legal attributes of a corporation, i.e. all profits and losses would flow to you individually as if you were a sole proprietor.)   If an SMLLC is chosen and the single member is a nonresident alien, the corporation's income will be variously taxed on its income "Effectively Connected with a US Trade or business ("ECI") or at a flat 30% (or more favorable) rate on its Fixed or Determinable Annual or Period Income ("FDAP").

 

SMLLC is definitely not going to be the case. Let's assume a "C" corporation (more than one member), my question is if I need to submit a tax declaration in Germany even if I do not receive any profit paid from the Corporation to me personally as an associate/shareholder. Or does the Finanzamt, from a tax-declaration viewpoint, care about my participation in this Corporation only when/if I make profit to my name? In practical terms: when/if the corporation sends money to a US bank account on my name?

 

Thanks once again!

[Straightpoop 676]

21 hours ago, osunax said:

Let's assume a "C" corporation (more than one member), my question is if I need to submit a tax declaration in Germany even if I do not receive any profit paid from the Corporation to me personally as an associate/shareholder. Or does the Finanzamt, from a tax-declaration viewpoint, care about my participation in this Corporation only when/if I make profit to my name? In practical terms: when/if the corporation sends money to a US bank account on my name?

 

Multiple shareholders do not necessitate a "C" Corp.  Single shareholder does not necessitate a "SMLCC". 

 

If a C corp - regardless of number of shareholders - the US will collect 35% of its profits in the form of corporate taxes (currently the highest nominal corporate tax rate in the world).

 

Germany will have no interest in the matter unless and until the C Corp makes a distribution - of its AFTER tax profits - to a shareholder residing in Germany.  The US will withhold the first 15% of those profits, the FA will levy a charge of 26.375% on the shareholder/resident and credit him or her with the tax paid to the US.

 

If no distribution to you from a US C corp then yes, you avoid necessity of filing a German tax return - if there is no other reason that compells it.  However, you will be filing an extraordinarily broad array of tax forms (Federal and probably state) and God knows what else until Doomsday as a result of creating a US C corp (or LLC for that matter).

 

Pick your poison.

 

PS

 

How, to where and in what form the Corporation ultimately pays you a dividend is of no relevance to your German tax obligation to declare it and be taxed on it.

[osunax 3]

Hi,

 

Many thanks again for the further clarification!

 

Just a couple more follow-up questions:

 

4 hours ago, Straightpoop said:

Germany will have no interest in the matter unless and until the C Corp makes a distribution - of its AFTER tax profits - to a shareholder residing in Germany.  The US will withhold the first 15% of those profits, the FA will levy a charge of 26.375% on the shareholder/resident and credit him or her with the tax paid to the US.

So that means in the end I would have to pay a total of 26.375% tax on shareholder profits; 15% to US and the rest to Germany, correct?

 

4 hours ago, Straightpoop said:

If no distribution to you from a US C corp then yes, you avoid necessity of filing a German tax return - if there is no other reason that compells it.  However, you will be filing an extraordinarily broad array of tax forms (Federal and probably state) and God knows what else until Doomsday as a result of creating a US C corp (or LLC for that matter).

You refer to tax forms to be filed in the US under the C corp's name, correct? And it sounds like an (SM)LLC won't make this much simpler...

 

4 hours ago, Straightpoop said:

How, to where and in what form the Corporation ultimately pays you a dividend is of no relevance to your German tax obligation to declare it and be taxed on it.

So, in practice, as soon as I as a shareholder receive any type of profit in any bank account under my name, I must declare so to the FA, right?

 

Thank you sooo much, really useful info and advice! :-)

[Straightpoop 676]

@osunax

 

Correct on all counts.

 

[osunax 3]

Hello @Straightpoop

 

Further to my previous inquiry above from a couple of years back: 

 

say I made some investments/business through this US C Corp or LLC with 100% initial capital directly from my personal savings (already taxed in Germany), in the future, if the corporation returns this capital (full amount) to a bank account on my personal name, would I also be taxed again on this capital money?

 

As a side question: I suppose when the corporation is created, the origin of the initial funding has to be declared and documented? Does this play a role for tax duties?

 

Thanks and regards!

[Straightpoop 676]

On 1/22/2021, 1:15:06, osunax said:

say I made some investments/business through this US C Corp or LLC with 100% initial capital directly from my personal savings (already taxed in Germany), in the future, if the corporation returns this capital (full amount) to a bank account on my personal name, would I also be taxed again on this capital money?

 

Return of capital invested is generally not a taxable event in either the US or Germany.  The sticking point may be demonstrating that the distribution is, in fact, a return of capital and not a) proceeds from a sale or liquidation of the investment  or b ) distribution of earnings and profits.

 

In the case of an LLC you have the additional complexity of figuring out whether the LLC is treated as a "C" corporation (Kapitalgesellschaft) or a tax-transparent entity (Personengesellschaft).

 

 

 

On 1/22/2021, 1:15:06, osunax said:

 

As a side question: I suppose when the corporation is created, the origin of the initial funding has to be declared and documented? Does this play a role for tax duties?

 

I am not aware of any German or US regulatory or tax reporting requirement for an initial investment, however, banks and other financial institutions may have a real or imagined regulatory duty or internal policy that would require disclosure to them as a way of protecting themselves under AML (Anti-Money Laundering) or KYC (Know Your Customer) rules.  (Example:  Charles Schwab in its brokerage account opening application asks the applicant to disclose the nature of the source(s) of the funds that will be held in the account, e.g. earnings, gift, inheritance, white slavery, drug dealing, insider trading etc.)  In addition, applicable state incorporation statutes may require such disclosure although I don't know of any off-hand. YMMV (Your Mileage May Vary).