Another Self Employment Tax question

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Hello knowledgable TT people. I have a sort of specific and random tax question. I looked around on here and even used my amazing Google skills before posting another thread on an often covered topic but did not find an answer.

 

I am an American living here in Germany. I have no plans to return to the states to live. I have been researching opening an ecommerce business (a store) online for a while and am planning on biting the bullet this year and opening the store from here in Germany. I am more or less retired and dont need the profits from the store to live so I plan on saving any profits. I will be opening an LLC in the states, opening an American bank account and keeping any and all profits in said American bank account. The store will not ship to europe and I do not plan on wiring any of the profits to my German Sparkasse account.

 

I am wondering if I need to claim any profits with the Germans tax wise. I asked an American tax person who lives and operates here and files my American taxes and he believed I did not but he was not 100% sure. I know how the Germans operate and im sure if I ask the Finanzampt they will tell me yes of course I need to file because they want the money. Would this just fall under Progressionsvorbehalt? Do I need to claim it with them? I wanted to ask here first before I shell out a few hundred euros to a German/ American tax person for an answer.

 

Hypothetically (please dont lecture me on morality), say I did need to pay taxes on this money, what would be the chances of the germans finding out I ran a business in the states from here and was making an income if said income never showed up here? Does the IRS report American bank accounts to the Germans the same way they report my Sparkasse account to the Americans? Just curious. I know tax avoidance/ fraud is punished severely here. Thanks!

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If you are running the store from here then you will be taxed on the profits. 
As to the hypothetical question, I honestly have no idea but would be too paranoid about being caught to try it for myself 

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10 minutes ago, SusieT said:

If you are running the store from here then you will be taxed on the profits. 
As to the hypothetical question, I honestly have no idea but would be too paranoid about being caught to try it for myself 

 

Yeah I dont want to try it, just playing the what if game. Would I be taxed like a normal business here or would it be progressionsvorbehalt since I would be paying taxes stateside with it?

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Some observations:

 

1.  Generally speaking, in order for the owner(s) of a German owned business to escape German taxation on its profits earned in the USA, the business must qualify under the DBA-USA as a "Betriebstätte" or "permanent establishment".  This terminology has been around in tax treaties since Christ was a corporal and there is considerable debate about whether in the internet age it still has any utility. But there it is and you have to deal with it.

 

2.  Adding to the uncertainty is something called the Außensteuergesetz (AStG).  Functionally this German tax law has much in common with the notorious "Subpart F" of the US Internal Revenue Code which is designed to make some or all of the foreign profits of US owned corporations subject to taxation in the US.  I am by no means well acquainted with the AStG but it would behoove you to take a look at § 8 AStG which contains what I believe are provisions potentially most relevant to your plan. Its application and interpretation has apparently been fraught with controversy so beware of pat answers regarding its application to you.

 

3. And then there is the LLC.  In the US with its lax rules on entity classification, LLCs have become extremely popular.  They have the limited civil liability features common to a corporation under state law but many LLC "members" have "checked the box" to elect US income tax classification as a "pass-through" or in the case of a single-member LLC (SMLLC):  a "disregarded entity".   German law is having a devil of a time grappling with the problem of how to treat LLCs:  Personengesellschaft or Körperschaft?.  There is a leading BMF Schreiben from 2004 on the subject but hardly offers anything approaching certainty and the few tax cases that I am familiar with (none lately) are all over the map in terms of results.  The consequences can be significant.  If your SMLCC chooses to be treated in the US as a disregarded entity, then its profits will be your profits for US tax purposes and taxed in the year the profit is made.  If the Germans agree that the LLC is really nothing more than just you then there may be a serious question about the residence of such an operation and whether, without bricks & mortar or other criteria qualifying it as a permanent establishment the fact that its only manager, chief cook and bottle washer is a German tax resident may disqualify it as a US permanent establishment.  If your LLC is viewed by the Germans as a corporation, then the profits will not be taxed to you here in Germany as a Kapitalertrag until actually distributed in the form of a dividend.  That could be some years after the year in which they were earned - and taxed - to you by the USA or an individual state.  Possible result:  double taxation and still the problem of § 8 AStG looming over the whole business.

 

4.  You mention that your Internet-shop-to-be will not sell into the EU but will it sell throughout the USA?  If so, then you will have serious homework to do figuring out which US state is going to have a crack at your profits. In this regard you will share some of the same problems as Amazon and other online retailers.  The individual state tax authorities are especially anxious to collect their sales taxes, use taxes, excise taxes and income taxes from E-tailers and are getting increasingly aggressive about it.

 

So, no answers I'm afraid but some things to think about and explore before you take the leap.

 

.

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On 9/28/2020, 8:47:35, Petro6golf said:

Does the IRS report American bank accounts to the Germans the same way they report my Sparkasse account to the Americans?

 

No.

 

Except accidentally, US citizen owned US accounts and US source income is not provided to the German tax authorities regardless of their residence in Germany.

 

The United States does not do reciprocity under FATCA.

 

Only the INCOME of nonresident aliens resident in Germany that is subject to reporting under Chapter 3 of the IRC is provided under the Intergovernmental Agreement (IGA) between the IRS and the German government (i.e. Form 1042-S). None of the detailed information reporting about accounts required of the Germans under the IGA is required of the Americans.

 

The US is also not a signatory to the Common Reporting Standard (CRS) and has no intention of signing on to it. 

 

To do so would cost the US its position as the world's largest tax secrecy haven and the favorable capital flows that come with that status.

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1 hour ago, Straightpoop said:

Some observations:

 

1.  Generally speaking, in order for the owner(s) of a German owned business to escape German taxation on its profits earned in the USA, the business must qualify under the DBA-USA as a "Betriebstätte" or "permanent establishment".  This terminology has been around in tax treaties since Christ was a corporal and there is considerable debate about whether in the internet age it still has any utility. But there it is and you have to deal with it.

 

2.  Adding to the uncertainty is something called the Außensteuergesetz (AStG).  Functionally this German tax law has much in common with the notorious "Subpart F" of the US Internal Revenue Code which is designed to make some or all of the foreign profits of US owned corporations subject to taxation in the US.  I am by no means well acquainted with the AStG but it would behoove you to take a look at § 8 AStG which contains what I believe are provisions potentially most relevant to your plan. Its application and interpretation has apparently been fraught with controversy so beware of pat answers regarding its application to you.

 

3. And then there is the LLC.  In the US with its lax rules on entity classification, LLCs have become extremely popular.  They have the limited civil liability features common to a corporation under state law but many LLC "members" have "checked the box" to elect US income tax classification as a "pass-through" or in the case of a single-member LLC (SMLLC):  a "disregarded entity".   German law is having a devil of a time grappling with the problem of how to treat LLCs:  Personengesellschaft or Körperschaft?.  There is a leading BMF Schreiben from 2004 on the subject but hardly offers anything approaching certainty and the few tax cases that I am familiar with (none lately) are all over the map in terms of results.  The consequences can be significant.  If your SMLCC chooses to be treated in the US as a disregarded entity, then its profits will be your profits for US tax purposes and taxed in the year the profit is made.  If the Germans agree that the LLC is really nothing more than just you then there may be a serious question about the residence of such an operation and whether, without bricks & mortar or other criteria qualifying it as a permanent establishment the fact that its only manager, chief cook and bottle washer is a German tax resident may disqualify it as a US permanent establishment.  If your LLC is viewed by the Germans as a corporation, then the profits will not be taxed to you here in Germany as a Kapitalertrag until actually distributed in the form of a dividend.  That could be some years after the year in which they were earned - and taxed - to you by the USA or an individual state.  Possible result:  double taxation and still the problem of § 8 AStG looming over the whole business.

 

4.  You mention that your Internet-shop-to-be will not sell into the EU but will it sell throughout the USA?  If so, then you will have serious homework to do figuring out which US state is going to have a crack at your profits. In this regard you will share some of the same problems as Amazon and other online retailers.  The individual state tax authorities are especially anxious to collect their sales taxes, use taxes, excise taxes and income taxes from E-tailers and are getting increasingly aggressive about it.

 

So, no answers I'm afraid but some things to think about and explore before you take the leap.

 

.

 

Wow I really appreciate it. I will do some googleing and might possibly send you a private message in the near future if thats ok

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